The following is the comment I had made on John Authers’ column that included a comment on the recent decline in the price of gold.
This is not investment advice. Period.
I read your comments on Gold with a great deal of interest. As an investment advisor, I have been recommending Gold but as an insurance. How much of insurance to hold will depend on one’s risk aversion. But, the question is what does it insure? It turns out that it is not insuring against the risk of global systemic instability or inflation, unless these risks are also reflected in U.S. dollar weakness. In other words, gold in the end responds negatively to dollar and everything else becomes secondary.
In the Eighties, when dollar soared, gold crashed. Then, gold recovered briefly from USD300 to USD500 as the US dollar crashed. Then, from late Eighties to mid-Nineties, both of them were range-bound. From the mid-Nineties, the dollar strengthened. From 2002 onwards, until about September 2011, gold rallied, except for the second half of 2008, when the two ‘assets’ that performed well was US dollar and U.S. Treasuries. After that, the US dollar stopped falling. Almost until end-2015 or early 2016. Then, as the dollar declined again for two years, gold attempted a recovery. Now, since February or March of this year, the US dollar has arrested its two-year decline and in recent weeks, its strength has gathered momentum. Hence, the decline in gold too has accelerated and it broke below USD1300 per ounce.
Of course, we should note here that it is only in the new millennium that the world had glimpsed unconvetional monetary policies. The Federal Reserve sent the Federal Funds rate to 1.0% and the Bank of Japan attempted QE for the first time.
Until the current monetary regime – exemplified by the near-polar status of the US dollar – proves itself unable to cope with the frailties it has thrown up – gold will underperform. Naturally, such a break is so cataclysmic that sovereign governments will be determined to prevent it. Further, America will not be keen to lose the US dollar’s pre-eminence status.
Those who believe that the world is sufficiently and durably repaired will probably see no insurance value in gold. Those who believe that the policy experiments since 2008 have not even remotely addressed the underlying issues, that the world, if anything, has become more fragile since then and that a final donouement still awaits, should hang on to their gold. It is quite likely that such a denouement will also result in or be used as an opportunity to end the hegemony of the US dollar in global trade, capital markets and much else.