Gold – The Hedge Against Government Failure

In The Case for Gold published in mid October 2015 we wrote that:

Gold will not fall below US $1,100/oz

Gold will benefit from the imminent weakening of US equities

Gold will benefit from imminent currency market volatility

US dollar does not need to fall for gold to rise

Long-term view on gold remains bullish because of unresolved economic, financial and political issues facing the world, which will continue to drive long term investors towards gold

Gold equities typically offer exposure to gold at a greater discount often making them very attractive for investors.

In mid October gold was trading at $1,150/oz dipping as low as $1,050 end of November through to the end of December. The metal rose as high as $1,246 since the beginning of 2016, and is currently trading at around $1,225, which represents a 6.5% gain since mid October, and a 16.7% gain since the year-end lows.

In the broader context, our forecasts were rooted in the view that the Quantitative Easing experiment was failing and that was soon to become painfully apparent.

Unraveling Keynesian Failure

The Keynesian model dictated that in order to avoid inefficient macroeconomic outcomes, particularly in times of recession the public sector (Government) should interfere with policies – the Central Bank with monetary policy and the Government by fiscal policies.

Keynes probably never would have imagined the scale to which his theories would be extended after the unraveling of private debt during 2007-2008.. 637 rate cuts and $12.3 trillion in global quantitative easing later, monetary growth did not bring about the awaited real growth in the US economy. We are seeing severe asset deflation globally (declining real prices), central banks around the world are increasingly entering or going deeper into the negative interest rates space in a desperate attempt to re-inflate the markets.

The end of 2015 to many resembled the early stages of the financial crisis of 2007-2008 and the markets are becoming increasingly volatile. The 16% rise in the bullion price this year is a reflection of that.

Cipher’s October Forecast verses Market Performance

Gold will not fall below US $1,100/oz: Our expectation was supported by strong fundamentals indicating $950-$1000 to be the price at which supply and demand will balance with no investor purchases.

Gold will benefit from the imminent weakening of US equities: Our expectation of imminent weakening of US equities was based on the following argument: We had determined that expectations for possible increase in interest rate were already built into the gold price; on the other hand we believed that those expectations were not yet built into US equities. The Price-to-Earnings Ratios were nearing the levels they had reached in May 2007 before the last major correction. Only two other times in history had P/E ratios had been higher: