9 Reasons For Gold This Year

by: Han Jun Low


Much has happened over the last year, and I would like to address these issues without repeating any of the still-valid reasons that I had mentioned previously.

These issues range from political instability to the poor GDP the US has had recently.

Although disparate, these factors are all linked to gold and affect it on some level.

I have written extensively about the reasons for gold, and these reasons still stand; I don't believe in repeating myself, instead I shall explore the more recent phenomena that ought to bode well for gold, despite the apparent underwhelming positive reaction in the market. Has gold peaked? I would argue that it has not.

1) Stagflation becomes a real possibility when your GDP starts out at 0.1%, becomes -1% and then morphs into -2.9% in the first quarter, all while inflation is rising. Such a large deviation between the figures suggests a strange inability to make accurate calculations. Even if the second quarter is as rosy as the Fed projects (they seem strangely confident, despite having made the enormous error of mistaking a negative for a positive and a decimal that should be 29 times larger) and the US technically avoids entering a recession, a -2.9% growth rate is hardly something that should be shrugged off. Yet this is exactly what has happened in stocks, rising rather than falling. Expectations of the future have come to replace proof of the present, a sign of irrational exuberance or at the very least an ability to see the future.

2) Rising consumer prices in Japan comes on the heels of reduced consumer spending, which has fallen 8%. The average Japanese consumer is hurting, and this is but the beginning of their pain as inflation in prices finally takes hold, while wage inflation remains strangely unaffected. I find this desire for higher prices rather than higher wages to be a strange trait indeed.

3) Greek unemployment is at a record high of 27.8%, and most of the unemployed have been unemployed for more than a year. Although unemployment is slightly lower across the Eurozone than the year previous, there is a similar rise in long-term unemployment.

4) Negative deposit rates have been imposed by the European Central Bank (ECB). As any economist worth his salt will tell you, negative interest is an impossibility in economics, which is why Quantitative Easing was vaunted as the only way to properly steal from, I mean stimulate, the economy. Negative rate in this case only applies to banks that had deposited money in the ECB. Banks were already trying their hardest to find people to lend to; it is rather doubtful that any bank would choose not to receive returns on cash they had lying around, unless they were particularly fearful that they could lose it all. A negative rate would cause them to practically give out cash on the side-walk, hardly a cause for celebration seeing as this would encourage irresponsible lending.... Beyond the irresponsible lending that occurs at zero interest rate anyway.

5) Iraq, Syria, Ukraine and now back to Iraq. It seems there is a rise in unrest, particularly where US/Russian interests are shared to some extent. A few months ago I had pointed out to a reader that conflicts often became more expensive and destructive than most people estimate. This was when Ukrainians in Kiev had only been protesting semi-violently, and he had predicted that it would not escalate further. It seems a deposed president and a protracted civil war were outside of his calculations. It should go without saying that war conveys gold significant safe-haven appeal.

6) There is a recession in Russia due to a -0.5% and a possible -0.1% consecutive negative GDP growth. I would hypothesize that thus far the US has been worse hit by its own sanctions than its intended target, seeing as a -2.9% GDP could hardly have sprung up from thin air. Or, cold weather... which also sets a 'chilling' precedent for blaming any and all economic ills on factors outside of a country's control. I digress.

7) Shares are at overvalued levels with the Nasdaq's P/E at 22.75, the S&P's at 19.32 and the Dow's at a more reasonable 16.47; although they are not extremely overvalued, P/E can change should earnings head further south. The Russell 2000 is at 84.41 though, so it seems small-caps are not doing nearly as well due to the poor performance of the domestic economy. The international exposure of large-caps might be keeping their earnings relatively high, but with a globally diversified portfolio, one is still exposed to systematic shocks.

8) There is an alarming move on the part of Italy towards a Black-Market GDP. Horrifyingly, this move is allowed and even supported under new EU guidelines, suggesting that all future GDP calculations from the EU as a whole will become questionable. GDP will reflect what policy makers hope to show, rather than the true strength of the economy. I explain in greater detail why this is the case in another article.

9) A year ago, Germany had requested the repatriation of all of its gold reserves held in the US. So far, about 10% has been returned. Unfortunately, it would seem that Germany has decided that it would no longer pursue repatriation, apparently it trusted the US (which implies that it did not trust the US before now... apparently they are terribly forgetful) to still have its gold safely hidden somewhere. I doubt the US has suddenly gained Germany's trust; rather, the Chancellor has probably come to the opposite conclusion and does not see any reason to pursue the matter any further. She is apparently not keen on straining ties between the two countries, or has at least come to some realization that it would not profit her personally to press the matter. It seems she has already forgotten about that NSA spying incident. How forgiving of her.

It is unfortunate that the curious among us shall never know for sure if the US really has all of Germany's gold. Ironically, this debacle has increased the probability (at least in my mind) that it does not have the gold.

Disclosure: The author is long GDX, GDXJ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.