At the current moment, we see unprecedented prices for Gold. While other economic crises have occurred, the situation that is being seen on the Gold markets has stunned experts. There are some reassuring reasons that we see this difference from the last economic recession/depression. However, this reassurance gives way when a detailed look at how this purchase of gold is occurring. What is being seen in the markets has the potential to shake the very foundation and assumptions used in models and investors strategies. Some have already noticed this. Knowing about this pivot may be every bit as important as understanding the latest moves in technology and artificial intelligence.
Returning To Glory Days:
Gold used to back the entire western world’s economies. Kings and priests sort the gold to make sure that they could maintain power. Nations who could get ahold of the precious metal could order swords and services from across Europe and even beyond. As those European nations explored the New World, they found a large influx of gold and seized it from the native populations. Even with some changes in value, the system using gold as a bedrock survived the rises of Empires and the rapid industrialisation of the world. Many people could not see the world moving away from precious metals as a source of value behind the numerous currencies that were created to represent the value.
To simplify, those glory days came to an end when the US found itself the world superpower and facing a communist superpower that did not use the standard systems. Continuing the process to remove gold as that bedrock it had embarked on since the great depression it slowly would make the world move away from the gold standard and shift to the US petrodollar that now is used heavily. Some currencies, such as the British Pound have managed to maintain, and a certain level of value as newly independent states adopted the use of them. Despite this gold, markets turned to jewellery and Eastern markets to continue to trade. It seemed that from now on fiat currency and bonds would rule.
Home For The Nervous
As the tech bubble burst and then the GFC gold has managed to find itself a new niche in western markets. That is to be able to hold value as the broader economy and society falls around it. If you can no longer pick the winners on the stock market, then moving towards gold can preserve your value better then even turning the position into US dollars. As we have headed into more uncertain time, gold has been a decent gauge for how nervous investors are. With pandemics and all sectors having to change how they operate, it is not surprising that many people have moved towards gold.
For Eastern markets, different goals have been seen. Many figures outside of the West have wished to remove the US foundational status. This has seen Russia and China purchase large sums of gold as other countries have sold off their reserves. For China, it appears that many private individuals wished to exchange the government currency for items of gold with speculation being that this means they can be used outside of the Peoples Republic of China. However, institutions that a growing warier of American sanctions have also wanted to have these reserves. Rumours of an alternative process have been around for decades now, and gold was often mentioned.
Surge To Gold:
As stated before, COVID has rattled numerous markets. The concern is growing that already strained sectors are now going to go under. Retail is of particular interest due to the large amount of employment it provides and also its cash flow issues that have been firmly around for decades. However, it is in the financial markets that more people are studying the state carefully. Rumours of mortgage backed securities are now creating nightmares for investors. The memories of the global financial crisis are still strong. Substantial government intervention is not going to fix that. The government intervention itself could make a problem as seen in our past article.
However, what is different about the news coming out about the gold surge is that it appears that big firms are getting involved. While the individual investor is often more willing to go and pivot to gold major trading firms are leaving the US dollar to join the party in the gold markets. While crypto has officially remained fringe and personal investor territory gold is becoming more acceptable to invest in. This has seen market leaders not only admit that they are moving to hold gold assets but also encouragement for a move to be started.
Problems Growing Larger With Pivot:
Before the Austrian school followers or those who are a bit more old fashion celebrate this pivot back to gold has some concerning elements. This was unplanned by all governments and firms in financial services. The amount of gold that is being sold is becoming harder to process and also work out the impact of. This means that mistakes can occur and also confusion around its worth compared to other assets are growing. Our current system is more designed to answer questions comparing assets to dollars and not treating dollars as a type of asset. Preparation, when any complex system is being changed is important, changing quickly in unusual circumstances raises risks of errors. These are the conditions that we are currently finding ourselves within.
Influence in other markets is also an element that needs to be watched. The current situation in stock markets is confused and on a knife edge. Influence from the US election and other world events is already not ideal for a return to normal. Gold is not meant to have a sudden increase in value, and also it has been numerous decades since it was a serious part of peoples portfolios. With no governments officially using it, it enters very different territory to the one that gold historically held. Some have labelled it similar status to cryptocurrency with more acceptance. If this becomes a substantial part of the asset pool, then its impact on values as far away as real estate is unpredictable.
There is a chance, however, that gold reclaiming a place in the serious investing world can stem some of the damage that is being seen. Real estate values and other elements of the system have taken a beating. A return to gold could save some portfolio’s losing more and could build back some confidence that has been lost. With the way that 2020 has been, there are more rogue variables to lose sleep over. The fiat system has always had its problems, and that remains true during this crisis. Gold and precious metals returning add an exciting element to the fight for currency legitimacy that is only heating up.