A rising gold price is a vote of reduced confidence in fiat money
- 04 Dicembre 2018
- by Blogger
Gold initially becomes the favored money metal because of the decisions of individuals. The division of labor is not the product of State sovereignty over money. It is the product of the rule of law. Government officials then see that gold coins circulate. They intervene, mandating that all coins be stamped with the State’s seal. The State comes in the name of its own sovereignty to bask in the light of a free market institution: the gold standard. It is like a species of bird that lays its eggs in another species’ nests. It has to fool the other birds. So does the State have to fool the public. “Money is an attribute of the state’s sovereignty!” Not initially, it isn’t.
The State then offers to store coins for free and issues receipts: IOU’s. A free service! How wonderful! Something for nothing! But the offer is bogus. The State’s goal is to get the public to start using IOU’s for gold coins rather than actual coins. The State can then more easily confiscate these coins: nothing for something! There is no long-run limit on the State when the State controls the coinage. The traditional gold standard is a paper standard, revocable at will by politicians. The government can and will change the gold contract law during an emergency.
When money fails, legitimacy is lost, too. Gold’s price is a test of political legitimacy: the value of a national currency. A rising gold price is a vote of reduced confidence in the State’s money. This is why governments since World War I have done everything they could to remove gold coins from circulation. Politicians want no public referendum on the legitimacy of the State. They allow political voting. Political voting can be controlled. Gold coins cannot be controlled. So, they are abolished by law. This is why governments sell off gold. It de-legitimizes gold and legitimizes government currency. But this can go only for as long as central banks sell their confiscated gold.
As Fed Rethinks Path for Rates, Gold's Poised to Jump in `19
Gold may be poised to rally as speculation mounts that the Federal Reserve will hit the pause button on interest rate hikes in 2019.
After lift-off in late 2015 followed by a rise a year later, the central bank has since steadily raised benchmark rates and is widely expected to do so again this month. But the path after that is clouded after Chairman Jerome Powell said Wednesday rates are “just below” estimates of the so-called neutral level, which markets took to mean a softer stance than previous comments.
It was “getting pretty obvious that at some point Powell would have to flinch,” said Trey Reik, senior money manager at the U.S. unit of Sprott Inc., which oversees $7.6 billion. “Once you get to the consensus view that the Fed may be done, the dollar may come under severe pressure. Gold will erupt.”
While bullion was weighed down in the second and third quarters by a stronger dollar and rising borrowing costs, the dynamic may now be shifting as doubts build over the Fed’s tightening path in 2019. Drivers that favor further gains in bullion include a steady build-up in exchange-traded fund holdings as well as votes of confidence from top banks.
Goldman Sachs Group Inc. recommends an outright long gold position into next year. “If U.S. growth slows down next year, as expected, gold would benefit from higher demand,” analysts including Jeffrey Currie said in a Nov. 26 note that endorsed bullion as one of its top-10 trade ideas for commodities. “The market has already priced in 10 out of the 12 rate hikes that we expect.”
Last week, futures capped the first back-to-back monthly gain since January, and on Monday they traded at $1,228 an ounce. That uptick followed two quarters of declines through to September, with prices hitting a 19-month low in August. So far this year, bullion’s still down more than 6 percent.
On Wednesday, Powell offered few explicit clues on how many hikes will be necessary in 2019, but repeated his view that the Fed will have to be especially responsive to the data. Minutes the next day, which covered the Fed’s last meeting, signaled policy makers will adopt a more flexible approach in 2019.
Powell had earlier stirred a debate over tightening when he flagged potential headwinds to the economy amid a sell-off in equities and concerns over slowing global growth. On Wednesday, he remained upbeat, forecasting continued solid growth, inflation near the 2 percent target and low unemployment.
‘Cue to Buy’
Joblessness stood at 3.7 percent in October, well below the rate the Fed sees as sustainable in the longer run. Any tick up in unemployment next year could see a pricing out of hike expectations, according to Chris Weston, head of research at Pepperstone Group Ltd. in Melbourne.
“If people get a sense that unemployment’s going up, heaven forbid, we’re going to see great volatility in 2019,” Weston said by phone on Nov. 29. “That’s going to be a cue to sell the dollar, and that’s going to be a cue to buy gold in much bigger size.”
Higher rates are seen to weigh on bullion, which doesn’t bear interest. Yet in the two most recent U.S. hiking cycles, gold has risen even as equities climbed because the Fed lagged inflation, which meant that cash in the bank lost purchasing power, making gold a more appealing store of value, said Adrian Ash, research director at London-based BullionVault Ltd.
“By themselves, Fed rate hikes aren’t always bad for gold and cuts aren’t always good,” said Ash. “Across longer periods, what the Fed does matters less to gold than why it changes policy and how the stock market reacts.”
During the previous tightening cycle from mid-2004 to 2006, when borrowing costs rose to 5.25 percent, gold surged more than 50 percent. Since December 2015, bullion’s up about 15 percent, although it’s lost ground this year.
Still, some say the Fed will continue hiking. Powell’s speech essentially said the economy is doing well, and asset prices are not in a bubble, but that rates are close to ‘neutral’ although people dispute what that is, according to Nicholas Frappell, global general manager at Sydney-based ABC Bullion.
“Gold may struggle to rally,” Frappell said. “Gold will face a longer period of Fed tightening before the interest-rate cycle turns in 2019.” U.S.-China trade issues could also dominate the Fed’s narrative, he added.
All eyes will now be on the Federal Open Market Committee’s final gathering of this year on Dec. 18-19 to glean further clues on what may happen. In language following that policy meeting, officials may convey “sufficient softening of future expectations,” said Sprott’s Reik, who’s expecting the central bank to halt rate hikes next year. He sees gold prices climbing to $1,360 in the first half and potentially hitting $1,525 in 2019, a level last seen in 2013.
This article does not constitute investment advice and is not a solicitation for investment. Auromoney does not render general or specific investment advice and the information on this article should not be considered a recommendation to buy or sell gold or precious metals. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.