Tuesday, September 5, 2017

When Goldman Sachs starts pushing gold over stocks, you know the world is in serious financial and geo-political trouble

Over the past few months news emerged that Goldman Sachs was suddenly going long on gold, which was a completely opposite trade that the cartel of bullion banks had been doing as a whole since 2011.  And now on Sept. 5, the bank which virtually controls the country's financial authority, is publicly telling clients and investors that owning gold is a vital safe haven for what is both occurring now, and what could potentially occur in the near future.

This dynamic is captured by a negative correlation between gold prices and real interest rates. As the central bank prints more currency, the price of the currency as measured by the real interest rate declines. The lower real interest rate, in turn, reduces the opportunity cost of holding a real asset like gold, leading the market to bid up gold prices. So at the core, gold is a hedge against debasement, which is why we have termed it the “currency of last resort.” This also explains why gold can be a good inflation hedge but is not always one. If debasement leads to inflation, then gold will serve as an inflation hedge. But as we saw over the past decade, debasement doesn’t always lead to inflation, and is not the only source of it, either. 
We find that gold can effectively hedge against geopolitical risk if the geopolitical event is extreme enough that it leads to some sort of currency debasement, and especially if the gold price move is much sharper than the move in real rates or the dollar. For these events, gold essentially serves as a call option and can therefore be thought of as a “geopolitical hedge of last resort.” For example, gold served as an effective hedge after the events of September 11, 2001 when the US Federal Reserve substantially increased dollar liquidity, debasing the US dollar. Gold also proved an effective hedge during the Gulf Wars as governments printed money. That said, it is interesting to note that the oil supply disruptions created by Gulf War I led oil to act as a better hedge than gold, which has been the case during several geopolitical events centered around oil-producing nations. However, during Gulf War II, when supply disruptions were minimized, gold acted as the better hedge. - Zerohedge


Post a Comment