Gold has risen to new record nominal highs in British pounds and is consolidating just below recent record nominal highs in U.S. dollars, euros and other currencies. The ECB’s rate decision and Trichet’s ‘signals’ saw the euro fall sharply against the dollar and against gold with gold in euro terms quickly rising from €1,050/oz to over €1,065/oz.
Cross Currency Rates
The fact that these new record highs are just nominal and not more important adjusted for inflation highs is a crucial fact not acknowledged by many commentators and analysts. As ever, it is important to realise that the inflation adjusted high for gold in 1980 is over $2,400/oz.
The ECB, like the Bank of England, left interest rates near historically low levels. Trichet signaled that interest rates may rise by 25 basis points in July but that ECB monetary policy will remain extraordinarily accommodative. Markets scaled back expectations of rate rises beyond July which is bullish for gold.
Gold Bullion in Euros – 30 Days (Tick)
Trichet was also vehement in his opposition to a restructuring deal for Greek debt which may have contributed to peripheral eurozone bonds yields rising sharply again (see Bloomberg European Debt Crisis Monitor).
Monetary policies by the ECB, Bank of England, Federal Reserve and all central banks remain ultra loose despite talk of tightening.
As long as exceptionally accommodative monetary policies continue, gold and silver’s secular bull markets will almost certainly continue.
Gold Bullion in British Pounds – 30 Days (Tick)
It is only when interest rates rise above the real rate of inflation and savers, pensioners and those dependent on fixed income are given a real return on their capital that gold and silver’s multiyear rise may come to a halt.
This will not happen in the short term as central banks know that any meaningful increase in interest rates will lead to a double dip recession and risks a sustained, long-term downturn in economic activity globally.
It could also lead to further banking crises and contagion in the already vulnerable international financial and monetary system.
Bloomberg European Debt Crisis Monitor
When interest rates do rise, central banks will have to make them very gradual. With inflation and stagflation deepening, negative real interest rates are likely to remain with us for some time which bodes well for gold (and silver).
The Titanic analogy grows increasingly apt. The various major currencies all face real challenges and are like various floors on the Titanic. The massive ship is holed and water is flowing into it, gradually affecting all floors of the boat.
Gold represents the lifeboat.
When the passengers on the various currency floors (the dollar, euro and pound floors) realise that the ship is going down there will be a scramble to get into the golden lifeboat.
Gold and silver bullion remain tiny markets vis-à-vis equity, bond and currency markets and are thus like lifeboats which can only fit so many passengers.
As the ship of the international monetary system flounders and denial is replaced by a realisation that the ship is going down, investors and savers (retail and institutional) and central banks, will “pile” into gold.
Gold bullion remains owned by a tiny percentage of retail and institutional investors and there has not been any “piling into gold” yet – contrary to some sensationalist reporting. The risks posed to all fiat currencies and the real risk of an international monetary crisis will likely lead to a gold mania phase when investors and savers do actually pile into gold.
This is when gold will likely go parabolic in price as it did in the 1970s when it rose 24 times in 9 years.
Gold’s gradual rise in recent years is in stark contrast to its parabolic rise in the 1970s – particularly in 1972, 1973, 1974 and 1979.
Gold Bullion in US Dollars – 1971 to June 2011
Gold surged by 49.7% in 1972, 73.5% in 1973 and by 60.1% in 1974. In the final phase of the bull market in 1979, gold surged 140% in one year. Gold’s recent rise has been tame in comparison with the animal spirits remaining subdued and media coverage remaining very limited and sceptical – especially in the UK and Ireland.
As ever, it remains prudent to hope for the best monetary and economic outcomes but be prepared for less benign scenarios.
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