There are three things that typically move the price of gold higher: 1. Geo-political tensions 2. Natural disasters 3. Threat of U.S. government insolvency.
Last week provided a strong dose of all three.
North Korea detonated a hydrogen bomb. Texas and Florida were both hit with catastrophic weather events. President Donald Trump booted the debt ceiling crisis three feet down the road.
Not surprisingly, gold was on the move.
But precious metals were not the week’s biggest winners.
That honour belongs to orange juice futures, which jumped 6% on fears that Hurricane Irma would turn Florida orange groves into pulp.
Those fears are well founded. The National Hurricane Center (NHC) tweeted, “Irma is the strongest hurricane in the Atlantic basin outside of the Caribbean Sea & Gulf of Mexico in NHC records.”
The President of the American Restaurant Association stated, “most of the production is in the middle of Florida south and north of Orlando. High winds could damage trees and shorten output for the next crop.”
In fact, The Florida citrus industry was already struggling before Hurricane Irma swept in. A disease, called “citrus greening” – which is spread by insects – leaves the fruit bitter and unsaleable. Because of citrus greening Florida orange production has declined by 50% in the last half decade.
Even at half-power, the state’s citrus industry employs 50,000 people and generates $8 billion in sales.
The dramatic orange juice price movement underlines an important investment fundamental: unless you are seasoned momentum-trader, it’s risky to trade short-term price movements in commodities – including gold.
It’s also risky to trust the collective wisdom of global corporate investment managers.
Last week, Goldman Sachs – which recently lost $100 million on a natural gas derivative bet – released a statement opining that North Korea tensions are not causing gold prices to go up.
“The events in Washington over the past two months play a far larger role in the recent gold rally,” stated Goldman.
Barring a full out war with North Korea, Goldman is sticking with its Q4, 2017 gold forecast of $1,250 an ounce.
“North Korea is unlikely to give up nuclear capabilities as it sees them as a guarantee of its safety,” stated Goldman, “As a result, from a game theory perspective [our emphasis], it is a stable equilibrium.”
Game theory is “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers“.
U.S psychoanalysts have diagnosed President Trump as a “malignant narcissist who compulsively lies because of sociopathic tendencies.” While Kim Jong-un is “a psychopath with an inability to feel remorse and a tendency to display violent behavior.”
The Equity Guru team gently suggests to the Goldman Sach’s brain trust that “game theory” may not be the most relevant analytical model for predicting the spot price of gold.
In fact, for gold investors the most significant event last week was the meeting of The European Central Bank (ECB) which elected to leave interest rates unchanged – at zero.
After the decision, the euro rose to $1.20 pushing the US dollar down to a 30-month low.
There had been speculation that the ECB would begin a stimulus wind-down. But ECB President Mario Draghi stated that he may increase the European asset purchase program (bond buying).
“The Governing Council confirms that the net asset purchases, at the current monthly pace of 60 billion euro, are intended to run until the end of December 2017, or beyond,” stated Draghi – a rich elderly white man – who received enthusiastic applause from his colleagues (19 other rich elderly white men).
The most compelling reason to buy gold is global money printing. Since the 2008 financial crisis, central banks have printed (“quantitatively eased”) $11 trillion dollars.
In the mainstream financial markets, this dramatic increase in money supply has had no immediate effect. But it will. A day of reckoning is coming. How do we know? Because it’s not orange juice, it’s not weather, it’s not game theory – it’s math.
The numbers are so big it jams the brain, but the underlying concept is simple.
Let’s say, instead of the global economy, it’s your household finances.
Your monthly costs are $3,000. Your income is $2,000. At the end of every month, you borrow a $1,000 on your credit card – plus the interest to service the growing credit card debt.
That is how the global economy is being run. That can work for 1 year, 2 years, 3 years…but at some point it stops working.
Factoring in currencies such as bank notes, coins, and money deposited in savings accounts, the total money supply is about $75 trillion.
The total global DEBT is $190 trillion, with 28% of it borrowed since the 2008 financial crisis.
- The United States constitutes 23% of the world economy but 30% of world debt.
- Japan makes up only 6% of total economic production, but has 20% of global debt.
- China accounts for 13.9% of production. They only have 6.25% of world debt.
- 7 of the 15 countries with the most total debt are European. Together, excluding Russia, the European continent holds over 26% of total world debt.
Last week, bullion gained 2% bringing the YTD gains to 17%. Other precious metals followed suit. Silver was up 2.2%. Platinum was 1.2% higher. At $1,343 – gold is now at it’s highest level since August 2016.
Don’t day trade it.
Don’t listen to Goldman Sachs.
Use your common sense.
Full Disclosure: Equity Guru owns gold bullion. We also own shares in publicly traded gold explorers and precious metals streaming companies.