The gold price continues to baffle investors globally, as physical demand in a lot of regions seems quite robust, yet the price continues to struggle around the USD $1,650 mark, in a seemingly oblivious state as to what’s happening in the world.
US inflation is out of control, the stock market is having a reasonably terrible time, and the war in Ukraine rages on. All of these factors combine to give an environment that would usually be quite positive for the gold price. Investors are scratching their heads in disbelief as gold continues its weak performance this year. So, what’s happening!?
Has gold lost its charm for good? Or is this just another puzzling point in time for the yellow metal and a potential low point?
Firstly, let’s look at the US Dollar gold price and cover why we think this is one of the better opportunities of the past few years for contrarians.
Gold Price in $USD – the peak in USD strength?
Since the Ukraine invasion highs of February/March this year, the gold price in USD has failed to kick on to new highs, as investors rush towards the US dollar as a ‘safe haven’. All paper is ultimately worth nothing, but some bits of paper are safer than others, is the theory.
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With interest rates rising into the largest debt pile in history, it seems pretty clear that we are at the beginning stages of a major financial crisis. But I want to stress the word ‘beginning’. We are at the stage where cracks are starting to show in property markets, as well as equities and bonds, but we are not at the full-blown panic stages that we see in the middle of a major crisis.
For those that are not new to the gold market, they may remember back in the days of the Global Financial Crisis (GFC) of 2008/2009, where things started to go pear shaped. Yes, those who bought gold around that time for about $800 an ounce might remember the bull market which took prices to $1,900. But what happened in the beginning stages of the GFC?
Well, the environment today is strikingly similar. During the 2008 stock market crash, money flowed out of just about every asset class on the planet into the US Dollar in a flight to safety. Gold actually dropped 30% from the peak in 2008 to a low of $680 per ounce in October. The move was primarily due to excessive US Dollar strength and the fact that many investors were margin called and forced to sell anything they could. At the same time, the media were blasting gold for losing its safe-haven status, as gold was expected to behave positively in such environments.
Gold Price During the GFC
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Sure enough, the lows of 2008 were never seen again, as the gold market quickly recovered on the back of The Federal Reserve’s response to the crisis. Let’s also not forget that it was the Federal Reserve’s rapid interest rate hikes between 2004 and 2008 that popped the debt bubble at that time, which was largely in residential property. The similarities between then and now are uncanny.
If we fast forward to today, we have all central banks raising interest rates into an even bigger debt bubble than the GFC. As cracks are beginning to show across economies and markets the flight has once again headed into the safest looking piece of paper: the US dollar. The US Dollar Index which tracks the performance again a basket of other currencies has had a sharp rise since the start of 2021, which has hampered gold performance.
Peak USD Index?
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We can see in the below chart, the performance of various asset classes in calendar year 2022 has been disappointing to say the least. The only two winners thus far have been commodity prices (thanks to Russia) and the US dollar. Gold in retrospect has held up a lot better than many others and we can see gold mining equities even underperforming other equities.
Note to reader: Do not think of gold mining stocks or cryptocurrencies as defensive asset classes.
Gold VS Other Asset Classes – 2022
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Bitcoin is a clear standout here at -60% year-to-date; really showing itself off as a speculation and not a safe haven asset. Who would have thought the US dollar would outperform Bitcoin by 60% in the most inflationary environment since the 1970’s? To understand why this makes sense, you may have to let go of deeply held beliefs about the intrinsic value of crypto currencies, or lack thereof.
Just remember, most people that really made a killing in the crypto space are the ones that wrote the whitepapers and did the ICO’s. Over 21,500 individual crypto currencies have been created and shilled to investors to date. So ask yourself, where is the scarcity?
Gold Performance Year to Date:
- AUD Gold +3.4%
- EUR Gold +4.1%
- JPY Gold +17%
Given gold has held up better than both bonds and equities, you would still have some advantage over the standard 60/40 portfolio this year. In other currencies it is a different story entirely.
In fact, in most currencies apart from US dollars, gold investors should be quite happy with the performance relative to other asset classes this year. 2022 has been an absolute shocker of a year for investing.
But what about crypto? Isn’t that supposed to be a hedge against inflation?
Short answer: No. The shills that were selling crypto as an inflation hedge simply do not understand speculative bubbles, or were in the business of selling worthless digital tokens that are no better than fiat currency, or potentially a lot worse. The crypto market has always been a speculative bubble. It just got so mainstream that investors actually believed that the Bitcoin and Ethereum copycats were legitimately a safe investment and the next phase of money as we know it. Note, we’re not bashing Bitcoin specifically, but more the market that followed.
Part of gold’s weak performance in recent years is somewhat due to the crypto market inflows. Since the peak of the crypto market in late 2021 (around the same time as the Matt Damon and Larry David crypto ads) the market has evaporated almost $2 Trillion US dollars. Although the crypto market as a whole has gone through 80% corrections along the way, it has never experienced the losses in dollar terms of this most recent period of wealth destruction.
We can see during its first real test of runaway inflation, the crypto market has been the worst performer of the bunch, not the best.
Crypto Market Peak
When it comes to gold’s expected recovery from the dead once again, the story is pretty simple and so is the question: when will the US dollar rally peak? And the answer to this will tell you when the gold market has bottomed. Investors are watching and waiting to see the great rotation out of the US dollar and into gold once again.
There are too many similarities between the early stages of the GFC and now to ignore gold’s role in a well-diversified portfolio. I would argue it’s hard to imagine anything else performing well in the next 12 months, when you consider there is still some central bank tightening left to come. Rising interest rate environments are a great burden on equities, bonds and property prices.
The age of excessively easy monetary policy and great speculation is behind us for now. It is time to tighten the belt and play defense, as the current crisis is yet to truly play out.
Guardian Gold
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