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Somehow the case for gold makes it into the Financial Times
9:25a ET Monday, August 8, 2016
Dear Friend of GATA and Gold:
There's nothing terribly profound or incisive about the commentary in today's Financial Times that is appended here. But simply that the FT published something making the obvious case for gold is nearly astounding. What's next -- the capture of the Loch Ness monster, UFOs landing at Stonehenge, or an FT reporter committing actual journalism by putting an inconvenient question to a central banker about surreptitious intervention in the gold market?
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
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The Victory for Gold Bulls Is Only Just Beginning
By Diego Parrilla
Financial Times, London
Monday, August 8, 2016
http://www.ft.com/cms/s/0/79a88890-5b09-11e6-8d05-4eaa66292c32.html
Gold prices have rallied more than 30 per cent since the lift-off in US interest rates in December. A sharp reversal in pricing, sentiment and positioning driven by a myriad macro and micro factors has left the gold bears and bulls as polarised as ever.
... Dispatch continues below ...
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The bearish camp, which has featured prominent and respected analysts like Goldman Sachs, tends to have a constructive view on the US dollar, the ability to raise interest rates, normalise global monetary policy, and generally a benign view on the global economy and inflationary risks.
The bullish camp, which I subscribe to, tends to have a more pessimistic view on the global economy and the unintended consequences of monetary policy without limits, and sees the recent price action as the beginning of a multiyear bull run in gold.
My view that there is a perfect storm for gold is based on three closely interrelated dynamics, whereby central banks and global markets are both testing the limits of monetary policy and credit markets as well as the boundaries of fiat currencies.
Firstly, the limits of monetary policy: In response to the Lehman crisis and in order to combat the threat of deflation, central banks have deployed a wide range of unconventional monetary policies. Quantitative easing and negative interest rates have been game changers and have dramatically distorted the valuation of government bonds, breaking the theoretical ceiling in prices, squeezing shorts and underweight positions, and feeding what, in my view, is one of the largest financial bubbles in history.
The epicentre of the problem is the central banks, but investors and savers around the world, faced with extraordinarily low and even negative yields in their cash and fixed income, have been incentivised -- if not forced -- to increase the duration in their portfolios, increasing the risk of capital losses, liquidity and volatility beyond what they may be intending or able to tolerate.
Then there's examining the edges of credit markets. The bubble in government bonds and duration has incentivised risk-taking across equity and credit markets, lending to weaker and weaker credits, often ignoring or underplaying the risk of capital losses, liquidity and volatility. It's a bull market that feeds on itself and benefits the weakest players most, such as emerging markets or high yield.
In a world with limited investment opportunities, excessive risk-taking can lead to speculation and, of course, bubbles.
The current path of monetary and credit expansion is unsustainable and will eventually burst, leaving investors struggling for "the return of their capital, instead of return on their capital," an extremely bullish scenario for gold and other real assets.
Thirdly, the limits of fiat currencies are being tested. Unlike the global financial crisis of 2008, this time there won't be any monetary bullets left. Interest rates are already at record lows, asset purchases suffer from the law of diminishing returns, and competitive currency devaluations only increase underlying problems and global imbalances. A dangerous slippery slope that paper cures miss is that they "eventually converge to their intrinsic value: paper", as Voltaire warned.
Over the past few years we have witnessed the first stage of Gresham's law whereby "bad money displaces good money", and are now at the early stages of the second and final phase, whereby "good money displaces bad money".
Gold and the US dollar are best placed to play the role of good money, which could result in a substantial appreciation against the bad money currencies. But inability or unwillingness of the US to normalise its monetary policy leaves the door wide open for gold to retake its reserve currency status and put an end to the monetary supercycle that started in 1971 with the end of Bretton Woods. It's a period that has seen the outstanding volume of paper money grow disproportionately relative to the amount of gold that once upon a time backed it.
Time will tell if central banks and governments will be able to engineer a smooth solution to the challenges ahead, or if the remedy will be worse than the disease.
Monetary policy without limits will lead to a very wild and bumpy ride and a larger crisis than the one we have been trying to resolve: a perfect storm for gold.
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Diego Parrilla is co-author of "The Energy World is Flat" and a precious metals specialist.
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