Gold Price Cools, ASX down and USD up — Where Next?
Stocks on the S&P/ASX 200 [XJO] have slipped by more than 1.20% in early trade after mixed results in the US overnight.
The price of gold took a tumble, shedding 0.38% and is currently trading at US$1,696 an ounce.
There was also weakness for big Aussie miners.
South32 Ltd [ASX:S32] fell sharply. The miner is down 4.42% to $1.84, at time of writing.
Its bigger peers didn’t fare much better: BHP Group Ltd [ASX:BHP] fell 2.76% to $30.68 and Rio Tinto Ltd [ASX:RIO] shed $1.34, or 1.60%, to $82.65.
The US dollar has also weighed upon the Aussie overnight. One Australian dollar bought 64.45 US cents at time of writing, down from 65.40 at the close of trade on Monday.
The chart above shows the gold price in USD (blue) against the AUD (orange). You can see the recent sideways trading as fears surrounding COVID-19 begin to ease.
Is the gold boom over or just beginning?
It’s been a great year so far for gold, with the price climbing over 40% in Aussie dollar terms, thanks to a strong USD.
It’s hard to say this is the end of the run though.
We could be in for a dip in demand over the short-term, but when we begin to realise the impacts from the unprecedented amount of stimulus, who knows where the price of gold could head.
What does history tell us?
The chart above shows spot currency returns of three major reserve currencies in relation to gold since 1600 — a long way back, I know.
What it shows is devaluations of currency typically manifest as relatively sudden declines during debt crises.
These are separated by periods of currency stability during periods of prosperity — certainly not something we are experiencing now.
Here we get a closer look at how currencies have devalued against gold.
Note what happened in 1971 (point 5 on the chart).
That is, excessive spending and debt creation required the breaking of the link with gold.
That led to a shift to a dollar-based fiat monetary system that fuelled the inflation of the 1970s and led to the debt crisis of the 1980s.
In short, since 2000, the value of currencies has fallen in relation to the value of gold due to interest rate changes and inflationary pressures.
More debt on the way
Before COVID-19, Australia was set to turn a $5 billion surplus.
Now we’re on track to record a ~$130 billion deficit this year and the next.
As we’ve seen, the value of currencies globally has been severely hit by the increasing amounts of debt.
Since the fiat currency era (1912–present), holding government bonds (which in some ways is equivalent to holding currency) has averaged a return of -0.2%, while gold has averaged at 2.2% return.
Now, this is over a 100-plus-year span and returns can obviously dramatically vary over this time.
However, I think this perspective is meaningful when you compare the impacts of yesteryear’s monetary policy to today’s: take on more debt and print more money to lessen the burden.
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