September 12, 2019

Gold Again Proves its Mettle​

​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. 

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