The following is a list of the ten most important factors likely to affect gold in 2019. I have grouped them under two broad headings, economic developments, and factors affecting gold itself.
Possible economic developments to look for
- It’s late in the credit cycle, and it appears the end of the expansion phase is in sight. This being the case, we can see that government deficits are going to increase, due to lower tax receipts and higher welfare commitments as economic activity contracts. This will be covered by an increase in the rate of monetary inflation, which we are already seeing.
- International trade flows have slowed sharply, as can be seen from China’s slump in demand. There can be no doubt that US tariff policies are having what could turn out to be a catastrophic effect on international trade.
- Besides the decline in global trade being a clear signal that the global economy is in trouble, the budget deficit in the US will rise and therefore the trade deficit will tend to rise as well. If not, an increase in the savings rate must occur, which I think we can rule out, or there has to be a contraction in bank credit. In other words, contracting international trade can be expected to propel the US and other domestic economies into a slump. This is bound to provoke the Fed into financing the US government deficit through yet more QE.
- The main economies in Asia (China, Russia, India and Iran) are all turning their backs on the dollar for trade settlement. This will have a profound effect on central bank reserves not just in Asia, but elsewhere as well, with the dollar being sold. Some countries, notably Russia, are buying gold instead.
- Foreign ownership of dollar assets and cash exceeds US GDP: $18.412 plus $4.22bn equals $22.6tn. This is the highest rate relative to GDP ever seen. When the dollar and US securities markets begin to fall in earnest measured in declining dollars, there is bound to be massive foreign selling of dollars and dollar assets.
Factors directly affecting gold
- Geopolitics – Asia, and Russia publicly, have swapped reserve dollars for gold. Given Russia is the world’s largest energy exporter, she will continue to have dollars to sell for gold. Also, Central Europeans, notably Hungary and Poland, are accumulating gold reserves. It is clear which way the Asian wind is blowing, and the Asians know gold is America’s weak point.
- Price inflation has been badly misrepresented by CPI figures and have been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap.
- Monetary inflation post-Lehman crisis has not been fully absorbed. FMQ is still over $5tn above the pre-Lehman long-term expansion trend, and the Fed is unable to bring it down. Rather, they are likely to increase the fiat money quantity to save the government from having to borrow at market rates as the recession bites.
- These are exactly the conditions faced by the German government between 1918 and 1923, and the likely response by the Fed will be the same. Print money to fund government deficits. Result, wealth transferred from the productive economy to be destroyed in government spending. The only difference is US and other welfare states have a stronger tax base than post-war Germany, so the rate of monetary expansion relative to the size of the economy will be less. Nevertheless, we are on the slippery slope to currency destruction and it will take much more political courage to address the inflation issue than the current political class appear to be capable of.
- Gold is massively under-owned in the west.
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