Wednesday, July 13, 2016

Owning Gold in a basket of currencies could make sense

Gold has been on the rise for the past six months, leading to some recent speculation by traders and economists that it may be due for a pullback.

We are not "gold bugs" here at The Gartman Letter. We do not believe that Western culture is doomed to fail. We are not of the mindset that the world is coming to some inglorious end; indeed, we are not even certain that a recession is on the near-term horizon.

Further still, we don't think the dollar is in any danger of ceasing to be the world's reserve currency. We are convinced that with the confusion caused by the British vote to leave the European Union that the U.S. dollar shall be even more firmly entrenched as the world's reserve currency.

"Gold is the currency for the ages, having been around for centuries and having always been a metal that civilizations are enamored with." 

And, we are actually convinced that this is a better world in which we live presently than at any time in man's history; the number of wars is reduced to the fewest in history; the battles are the least bloody; men and women are living longer; diseases are being conquered. It is indeed the best of times.

That would usually mean that we are not bullish on gold, but, in fact, we are – and have been for quite a long time.

The problem is that we "see" gold as nothing more than a currency as well as some sort of "store of value." We see gold as the same as the dollar, euro, pound, etc. — but with "value" incumbent in it. Gold is the currency for the ages, having been around for centuries and having always been a metal that civilizations are enamored with. As such, and as foreign-currency traders, we tend to view one currency in terms of others; that is, just as the euro is "priced" in terms of the dollar or yen… gold can be and should be "priced" according to how many dollars are needed to buy one ounce of gold, or euros, yen, pounds, etc.

In terms of the euro, for example, gold has been in a bull market with higher interim highs and higher interim lows for two and a half years, even though, in dollar terms, it has been rising for only a bit more than six months. Since early 2014, gold has risen 40 percent if you measure it in euros but only 14 percent in dollar terms and 8.4 percent in yen terms. When you average that out, gold has risen about 21 percent relative to the world's three most important currencies since early 2014.

Why is this important? It is indicative of the fact that the world's central bankers are all, in unison, increasing the supply of reserves — the supply of money — to their banking systems, ostensibly to strengthen then economies, through the transmission of higher equity prices and through an eventual hoped-for inflation. And not only are theFederal Reserve, European Central Bank and the Bank of Japan acting in this fashion, but so, too, the People's Bank of China, the Reserve Bank of Russia, the central bank of Brazil and most central banks around the world. This is a process that shall not change anytime soon, for all of the world's major central banks are trying to create inflations and/or are at least fighting mightily to defeat deflationary forces that are extant and unwanted.

We are bullish, then, of gold relative to most other currencies. We see gold as the most stable of currencies, likely to continue to rise in value relative to the euro, yen, U.S. dollar and, indeed, relative to the ruble, pound, Brazilian real, Indian rupee, et al.

If one believes that the monetary authorities around the world will continue to inject reserves into their systems at a heady pace, then ownership of gold in several currency terms makes all the more sense. Indeed, in light of the fact that the Bank of Japan and the ECB are almost certain to embark upon new experiments in quantitative easing, while the U.S. Federal Reserve Bank shall be a good deal more reticent about doing so, owning gold in euro and yen terms is far more fundamentally warranted that owning gold in dollar terms.