The age of the unthinkable

Two quick items to kick off with today. First, gold had its best first half of the year since 1980, according to the World Gold Council. It was up 25% in US dollar terms. The WGC says investment demand from mostly Western countries was 1,064 tonnes – 16% higher than the first half of 2009, when the financial storm raged.

By the way, in July of 2009, you could buy an ounce of gold for £567. It peaked in August of 2011. That’s a gain of 97.5% between the surge in investment demand and gold’s all-time high in GBP. And as a reminder of how stagnant the British interest rates have been for the last seven years – the Bank of England’s bank rate was 0.5% in July 2009 and August of 2011.

One more “by the way” on gold. The last time gold had this good of a first half was in 1980, as the WGC pointed out. But back then, the gold price topped out at £334 in January 1980. That was a few months after official UK interest rates peaked at… get this… wait for it… sit down… hold on to your hat… take a deep breath… 17%!!!

It was a whole different monetary era, wasn’t it? Remember, US president Richard Nixon closed the gold window and ended the convertibility of US dollars into gold on 15 August 1971. The world effectively went on a dollar standard at that moment. A few years later, the gold price in GBP languished at £27.42/oz.

As the British public realised a new monetary world order had dawned, inflation rose and gold with it. A decade of stagflation and misery ensued, in which growth was low and inflation high. Gold loved it. By the time it hit the 1980 high, it had risen 1,120%.

Now, am I saying it’s the same this time? Definitely not. We’re in such bizarre unchartered territory that past performance is clearly of limited use. So what do we know about gold and interest rates and money now that is useful?

Well, as Charlie Morris has pointed out all year, gold likes inflation. If we don’t HAVE MUCH inflation, price gains in gold may be hard to come by. That doesn’t mean gold doesn’t have value in other ways. It means price speculators may be disappointed if they buy now expecting a golden melt up.

But we also know that the monetary authorities are less credible than they’ve ever been. US Fed chairman Paul Volcker was one of the last central bankers to realise that higher interest rates promote confidence. They reward savers, squeeze out bad credits, and restore sound money to economic planning.

Today we have the opposite. We have the Bank of England run by a Canadian serial housing bubble blower who’s waging an undeclared war on British savers. That hardly promotes confidence in the future. It does promote cash hoarding. And for the cash averse that fear financial asset inflation in general, it probably promotes gold buying (especially on the dips.)

Government auctions debt a negative real yield

Not sure what to make of this second note. But I saw on Twitter that the UK Debt Management Office has auctioned £820 million worth of 20-year index linked bonds with a negative real yield of 1.7%. It certainly has something to do with pressure on pension funds to meet future obligations in a low-interest rate world.

It’s not even the first time it’s happened. In late July, the Financial Times reported the following:

The UK has sold £2.5bn of 50-year debt at a record low rate. Shaking off concerns that investors might be dissuaded from buying British government bonds in the wake of Brexit, the sale of inflation-linked debt drew orders of £10.1bn, allowing the UK to price the bond at a negative real yield, reports Elaine Moore in London. The sale of so-called “linkers” was dominated by domestic buyers, who took 93 per cent of the total allocation. Long-dated, index-linked bonds are popular with pension funds and insurance companies in the UK keen to invest in assets that will guard against inflation and enable them to meet future payment obligations. Coupon payments on the bonds are linked to the UK’s retail price index measure of inflation, currently at 1.6 per cent.

If you sense a great disturbance in the financial force, you are not alone. Things are getting weird. And dangerous. I wrote about it in depth today for Money Morning. That article has been posted online and you can read it here.

For now, I can tell you from my mail box that the British public – at least the ones that write to me – are not prepared to take a world of endless QE and negative rates lying down. More tomorrow on what we’re doing about it.

Category: Economics

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