September 12, 2019
Amid crazy times in markets, I have mostly avoided talking about gold. It seems to inevitably lead to a lot of end-times theories and comparisons to cryptocurrency.
Even so, an article on the topic from Bloomberg caught my eye this week. Who would have thought that Russia's central bank would appear to be one of the greatest investors of 2019? With a 42 percent increase in the value of its reserves, the Central Bank of the Russian Federation is doing just that.
Russia's switch into gold is primarily to diversify out of U.S. dollars. Sure, there is a bit of a political statement there, but maybe Russia is also seeing, and perhaps even at the forefront, of a financial-market trend taking shape.
This year, gold gained as much as 20 percent, before backing off a slight bit in the last few days. What is really strange is seeing gold mirror the U.S. dollar, which has been moving slowly in the last few months, but still ascending higher.
This normally does not happen. With gold priced in dollars, the two assets tend to have an inverse relationship. The same holds true with inflation, as gold is seen as a hard currency with a fixed supply, which guards against too much gold circulating and its devaluation from inflation.
But clearly inflation is not an issue. Central banks globally are trying to generate price inflation, of course, with little success in recent years.
So what is going on? One theory is that there are just not many safe havens left anymore. Clearly there has been a pile of money thrown at bonds of all types, and modest strength in traditional safe haven currencies like the U.S. dollar, Japanese yen and Swiss franc, but between negative yield bonds and the global economy increasingly looking fragile, gold seems to be one of the last safe havens around.
My View: As much as I would like to, I can't argue with the market on this one. Granted, you can't actually spend gold like other safe haven currencies, but for now it remains liquid and an established safe haven, and one that is out of reach of central bankers.
The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate.
This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader's specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment.
City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.