Is the Gold Boom Out of Control? Or Just Beginning?

Is the Gold Boom Out of Control? Or Just Beginning?

Just in case you needed one, today’s Daily Reckoning Australia gives you another reason to be thankful you’re not an American.

It also explains why the gold price is skyrocketing. The two are closely related, you see.

First, the basics. All commodities are priced in US dollars. The Aussie dollar gold price is the US dollar gold price converted at the exchange rate.

What this means is that the exchange rate is half the equation for gold investors. They also have to consider their currency. Is it going up or down, and is the gold price going up or down?

Now, I’ve got family who think in four different currencies. So, when I tell them the gold price has just hit an all-time high in US dollars, I get four different reactions in response. ‘It did ages ago,’ ‘Not in my home currency, it didn’t,’ ‘It went down, not up,’ and ‘Yes, even in yen it’s at all-time highs!’

The whole thing is a confusing mess.

Adding to the confusion is that the US dollar and the gold price have certain things in common. When there’s a crisis, people buy those two assets more than anything else. They’re both ‘safe’, or at least they’re thought to be.

But consider what this means for an American gold investor. If the gold price surges during a financial crisis, but the US dollar goes up too, that undermines the gold price gains, pun intended.

Because of this crisis correlation, investing in gold in anticipation of a crisis is asking for disappointment, if you’re an American investor.

But it’s a great scenario for us Aussies. We get the gold gains and the currency gains, just when we need them — during a crisis. The Aussie dollar plunges and the gold price goes up.

But the poor American gold investors are left with subpar returns as their dollar surges. It always makes me chuckle when this occurs because the biggest source of information and analysis about why you should own gold in a crisis comes from US analysts.

Gold driven by falling US dollar

There were plenty such chuckles to be had over the past few months as gold prices hit all-time highs in the four currencies my family counts in, but not in US dollars. In fact, the US dollar gold price was one of the last to finally break out. The COVID-19 crisis put my discussion of all the above on a live feed for you, but I hope you’ve got a better understanding of the ‘why’ now. Why the US dollar gold price underperforms in a crisis.

Until about two weeks ago, that is. Suddenly, the US dollar began to weaken. This is like waving a golden flag to an American gold bull. Suddenly they get both the gold gains and the US dollar’s weakening gains. The gains us un-Americans have been onto for much of the COVID-19 crisis.

And so, the rush into gold took off in the US too. Anyone wanting to protect their wealth had to buy gold, not falling US dollars. The US gold futures exchange went from a paper speculation market to suddenly delivering record amounts of physical gold. Some of it had to come from Perth to meet demand!

In other words, what you’re seeing now in gold markets is a gold price driven by a falling US dollar and a surging gold price. For now, the gold price is outperforming the US dollar, so us Aussie gold investors benefit too. But it’s like driving with the handbrake on because our currency is rising.

The Americans are chuckling now. The more articles about gold hitting all-time highs you read from US news sources instead of Aussie ones, the less the Aussie dollar gold price is going up. Because it’s the US dollar that’s moving. The two dollar gold prices were not created equal.

What changed to make the US dollar turn down? It happened just as many clever people predicted the COVID-19 second wave would get worse and anticipated the US dollar would spike again as a result. They got the first bit right, but the US dollar did the opposite to what it’s supposed to.

Well, I’m not so sure why the US dollar is suddenly falling. But consider just how big the drop is, from Reuters:

The dollar index, which measures the greenback against a basket of leading currencies, lost more than 4% in July, its biggest monthly drop since September 2010. It is down 10% from its peak in March.

That’s a huge move for the US Dollar Index because it’s against a basket of currencies. It suggests it really is the US dollar weakening, not everyone else getting stronger.

With this latest US dollar plunge driving it on, the gold price is now up eight weeks in a row and accelerating. It’s left the broad-based Goldman Sachs Commodity Index for dead.

There are two ways you can interpret this. The first is to worry about a pullback in gold in the short term. The second is ‘uh-oh’. Because a surge in precious metals that isn’t tracked by other commodities signals something worse than inflation.

Normally, the gold price goes up when people worry about inflation. Especially when inflation is above interest rates. That’s because this scenario makes gold look better than cash savings — the other opt out from the financial system. Gold might not pay interests, but when interest is below inflation, gold is better.

However, we seem to have a gold rally on our hands that isn’t matched by inflation in other commodities broadly. This draws out the possibility of the other reason the gold price might surge. A deflationary shock. A crisis.

People buy gold like mad when they don’t trust institutions. That’s because gold is one of the only assets which doesn’t rely on those institutions.

Your stockbroker’s website could go down. Your bank could fail or limit ATM withdrawals. Your home could be slapped with a wealth tax like the one in Spain.

But physical gold in your possession is a lot harder to get at. It’s the opt out of the financial system that doesn’t have a counterparty to default on you.

Discover why this gold expert is predicting a HUGE spike in Aussie gold stock prices. Download your free report now.

That’s why Jim Rickards has been writing about gold for so long. And why he predicted the current bull market. He’s worried about institutional and counterparty risk in a crisis.

But, lately, he’s been predicting a surge in the gold price for the opposite reason to his fellow gold believers. He is expecting another economic shock to strike before the inflation that usually motivates gold buyers.

The twist here is that Jim is also predicting the US dollar will remain the ‘go-to option’ in a crisis. That it’ll spike if COVID-19 delivers an economic crash. For the reasons discussed above, this means his American readers won’t benefit nearly as much as his Australian ones if his predictions are right.

Sure, the US dollar gold price will spike. But so will the US dollar. The Aussie dollar meanwhile will tumble, leveraging gold’s gains for Aussie dollar users.

In the bonus chapter to Jim’s book A New Case for Gold, I explain all this in a particular way. The ‘gold quadrants’ describe the four scenarios which gold investors can face. A rising and falling gold price, and a rising and falling currency. That’s four possible combinations, or quadrants.

Jim is predicting the quadrant which benefits Aussie gold investors most of all to play out. A deflationary shock that makes the US dollar spike, and a surging gold price.

If you’re wondering why Jim sees the economy taking another hit, try and go to Victoria. Or, if you’re in Victoria, try and go to Queensland.

Or, if you’re not inclined to do either during a pandemic outbreak, click here to discover why you need to buy gold now, and get yourself a copy of Jim’s book about gold’s new bull market — with my bonus chapter about why you should thank your lucky southern stars you’re not an American gold investor.

Until next time,

Nick Hubble Signature

Nickolai Hubble,
Editor, The Daily Reckoning Australia

Nick is also editor of Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events.