Market Overview

Global stock indexes continued their moderately positive trend in the first half of the day after last week's high close, while American shares are not trading today due to Memorial Day, and many currency and commodity instruments are quiet because of the Spring Bank Holiday in the UK and Muslim Eid al-Fitr in many countries. This looks like the proper time for strategic investment discussions. Gold prices perform very attractive somersaults during the coronavirus crisis, and that is probably why gold assets have become the public focus of attention for at least two financial giants, which are JPMorgan Chase and Goldman Sachs. 

Unprecedented monetary and fiscal measures unleashed around the world could weaken long-term growth and weaken all the major currencies, and that fact may support gold prices, according to JP Morgan Chase & Co report. "The risk of currency debasement may heighten next year, and will show in the value of Japanese yen or gold rather than the dollar", JP Morgan strategists John Normand and Federico Manicardi wrote last week. "The reductions in interest rates across Group-of-10 countries in response to the pandemic-induced halt to their economies left most currencies yielding close to zero on a nominal basis, though real interest-rate gaps were higher in Japan, the euro zone and Switzerland," they said. 

The main idea of their analysis is that if the United States continues to suck in capital and fiscal deficits, which overstate the risks to external financing, the payback via G-10 currencies will concentrate on those with above average real-rate advantages to the US, such as the Yen and the Swiss franc. The strategists shared the view that it's too early to hedge against a rise inflation and higher bond yields as well as wider spreads from sovereign ratings downgrades. The focus now should be directed at currency debasement, which had a “high likelihood,” given the huge financing burdening carried by the US. An inquisitorial view to the problem, since 1970 until now, is given by the authors of the JP Morgan Chase report is shown below in Pic 1.

Pic 1. US Dollar and Deutsche Mark exchange rate direction depends on the relative return on capital as well as the US financial burden

Source: Bloomberg.com

"The risk of a surge in inflation will remain trivial in 2020 and stay subdued over the next two years", they remarked at the same time. This could be important, since traditionally gold is considered to be an instrument that is used to escape inflation, which is not relevant even with "helicopter money" when global and national demand is suppressed. That is, they were not necessarily talking about some urgent need to consider investing in gold in the horizon of just a few nearest months. But "those who see in the major currencies just different shades of the same long-term liabilities should simply remain long the world’s legacy reserve currency – gold,” the JPMorgan Chase strategists concluded. 

At the same time, Goldman Sachs’ next client conference call set for May 27 will include gold as one of its main subjects. Prior an invitation to investors, the famous investment bank is holding a client call on “US Economic Outlook & Implications of Current Policies for Inflation, Gold and Bitcoin.” Sharmin Mossavar-Rhami, a Chief Investment Officer at Goldman, will host the call alongside Jason Furman, an economics professor at the Harvard Kennedy Business school and Jan Hatzius, a Chief Economist and Head of Global Research at Goldman Sachs. It's interesting that Goldman Sachs is no more relegating Bitcoin to the back-burner of their attention, although in 2018 Mossavar-Rhami said that he saw no value in Bitcoin or other cryptocurrencies. 

Colin Harper, a freelance journalist, commented in his article in Forbes, "the invitation did not reveal any further information on the contents of the call outside of the headline. Per this title, though, the call’s ostensible aim is to discuss how current central bank policy and the risk of monetary inflation could impact assets like Bitcoin and gold. In 2020, the Federal Reserve has printed over $3 trillion through a mixture of QE and fiscal programs like the Cares Act, expanding its balance sheet nearly two fold in the first quarter of the new decade alone. (Other central banks around the world are taking similar actions)... This backdrop, hard money advocates argue, has set the stage for inflation; a climate that scarce assets like bitcoin and gold should thrive in". The Financial Times took the invitation more literally, writing an article under the headline "Goldman Sachs tells clients it is time to buy gold". 

A philanthropist and investing luminary Paul Tudor Jones wrote about a future expectation of inflation wave, about a month ago: “The Great Monetary Inflation will be an unprecedented expansion of every form of money unlike anything the developed world has ever seen." But it is evident that everyone who talks about inflation or even hyperinflation or "the Great Monetary inflation", in connection with the central banks' money printing presses operating at full capacity, is not talking about the inflation this year. Respectively, everyone who shares this concept seems to have enough time to look at the dynamics of spot gold or gold futures prices. 

Gold price movements this year show extremely interesting comparisons with the dynamics of gold in the period around the crisis of 2008-2009. Price areas enclosed in a circle and an oval (see Pic 2) form similar patterns with high volatility of price spikes, where first several spikes were downward and next spikes shows the recovery in prices, which were preceded by a three-year of acute price growth, and which were again followed by an additional wave of even faster price growth in 2009-2011.

Pic.2. Gold Spot in 2018-2020 vs 2005-2009 period

Source: TeleTrade own comparisons

In monetary terms, the fundamental background of the last crisis was the same: trillions of printed money during various rounds of quantitative easing (QE), when the US Federal Reserve, European central bank and other national regulators poured money again and again into the fire of the crisis. So, why could a similar price development not become the base scenario for 2021 and subsequent years this time, just as in 2011 when gold prices reached the $1,900 mark and even rose higher due to the depreciation of both the US Dollar, the single European currency, and all other currencies of the world's largest economies? 

When planning any specific actions with gold instruments on the market, the significant fluctuations of gold in the course of movement should be always kept in mind. The markets have already seen this spring, how gold quotes were tossed at $1,700 in March, then to $1,450 in the same month, then again to $1,700 in April and even higher in May. This makes it extremely relevant to strictly adhere to the principles of general and personal money management in any case, no matter what long-term concepts the investor is guided by. It is wise to remember that in crisis periods gold tends not to grow immediately, but rather to fall in price at first along with the declines in stock indexes. Gold grew mainly along with the recovery of the markets - this was the case in the 2008-09 crisis, and so far it's also happened during this crisis. In general, for many investors gold is not so much a "safe haven" tool as a risk-balancing supplement or hedge addition to other investment assets in the portfolio, which also may become a secondary base for smart middle-term speculations managed by some active-mind traders. 

But, as it is proposed, even American billionaire funds that are usually distinguished by patriotism and an increased level of optimism to US Treasuries, because this is at least a kind of obligation to their social status, now strongly doubt the bright future of their own financial system and are looking to bet more on gold. If large investment bankers are trying to make their clients at least think about monetary risks and recommend them to look at gold rather than Dollar assets, despite the seemingly successful fight against the economic crisis in the execution of the Federal Reserve and its US Dollar oriented printing press, then this is not just water under the bridge. It is possible that in the coming turbulent years, American bankers may see gold as less vulnerable than green bills with portraits of American presidents.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.