This week we were asked if we would be buying gold at current prices? Our answer to that question is, “yes”, over the long-term, but, “no”, near-term. Why? See our reasoning below.
Over the long term, we believe that gold is a necessary component of any investment portfolio as long as the U.S. government is attempting to stimulate economic growth by printing massive quantities of dollars and purposefully devaluing the dollar. We believe this policy is a fool’s errand and the best defense is to allocate part of an investment portfolio to gold as a way of preserving wealth.
In the near term, however, gold is subject to the vicissitudes of the market which at times will value the dollar over other forms of money, particularly during times of global financial stress. In the past four months, the Eurozone debt crisis has increased global financial stress significantly. As a result, market participants are scampering to the dollar as a safe haven. In this environment of fear, demand for the dollar increases while demand for gold decreases.
But there is another reason why the price of gold has declined and that is because banks in the Eurozone have increased their gold leasing program – swapping gold for dollars. The result is not gold sales but a short term financial “leasing” arrangement to raise dollars for immediate cash flow needs. This action temporarily increases the supply of gold and depresses prices. At some point, this trade will reverse and the downward pressure on the price of gold from this source of stress will cease. We suspect that the reversal of this trade may occur sometime in Q1 2012.
From a big picture standpoint, we believe the “Whack-a-Mole” solution to the Eurozone debt crisis is rapidly approaching its “Game Over” time limit. Seventeen emergency EU meetings have yet to produce a credible solution to the crisis that market participants are willing to accept. The market is currently mulling over the latest ECB’s stance of providing unlimited three year funding for Eurozone financial institutions. It is not certain this solution will work, but it will certainly buy time for insolvent banks to attempt to rearrange their finances.
In the near term, as the market sorts out the efficacy of this latest solution to the Eurozone debt crisis, the price of gold and other precious metals will likely remain under pressure. Longer term, we believe that ECB policy of allowing the Eurozone banks to rearrange the deck chairs on the Titanic is not going to change the outcome.
In sum, longer-term, we believe the price of gold and other precious metals will benefit from central bank policies of printing massive quantities of fiat currencies, just not now.
Madeline Schnapp
Director of Macroeconomic Research
TrimTabs Investment Research
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