Gold Price Climbs, But Not Because Of Trade Wars

Gold is moving higher and steadily so. It’s hold north of $1,400 is impressive and worrying at the same time. We have seen record flows of late, with long term safe haven demand rising a pace. It was Germany last week and China this week, the flow of disappointing indicators is now gathering pace. 

China recorded the worst quarterly GDP number in 27 years. Gross Domestic Product (a poor measure of anything TBH) quarterly growth came in at just 6.2%, from 6.4% in the first quarter. German sentiment plummeted last week as inflation fears started to permeate throughout the economy.

China’s GDP growth problems are significant especially in light of the enormous debt load that has been built up there over the past 20 years. Her debt has grown to enormous proportions and all this while her economy is still heavily reliant on foreign demand. Domestic consumer demand is still languishing in the 40% of economic output range whereas more advanced economies, such as the US, have domestic demand up at 70%. This situation reminds us of that Buffet gem, “You only find out who is swimming naked when the tide goes out.”

As polarising as Trump and his trade-war with China are seen, his logic in taking China to task might actually be the US’s best move, especially if China’s ascendancy is allowed to develop unchecked, the thinking being it is better to act now while they can as opposed to later when they can’t.
But one can not help but see much of the trade-war debacle as part of a manufactured narrative to distract elements of the worlds nodding donkey like press away from the uncomfortable fact that our modern global economy is almost wholly based on a 10 -20 year old monetary experiment go awry; that is the global coordinated currency debasement by many of the worlds central banks – where interest rates are closely managed, money is freely printed and pumped, via opaque official sector operations, into debt and equity markets at record levels.

For example the Swiss Central Bank recorded a $55 Billion profit in 2017 and a $15 billion loss in 2018. Their balance of payments is a mere $1.7 billion, dwarfed by this perverse gain. They now have foreign assets of $700 billion, which roughly equates to their entire GDP. Circa 20% of these monies are invested in stocks such as Apple ($3.5 billion), Amazon ($2.6 Billion), and Microsoft ($2.7 Billion). The Japanese Central bank make the Swiss look like amateurs – they are now expected to be the largest single shareholder of their domestic stock market.

Ultimately you are witnessing a massive expropriation of wealth from the middle classes to the wealthiest – 40% of the bank of England’s money printing programme benefited the top 5%. These flows obfuscate the real demand and supply dynamics of the market – central banks are the baddest of bad actors. Using printed money to bid up the assets of the rich in order to mange outcomes is an utter perversion of capitalism. It blinds us to the opportunity cost of economic participation – real cost of borrowing, real expected returns. Worse still is that the money they use is created by devaluing taxpayers after tax savings – is effectively like a second tax. What happens when the market starts to fall, will these feckless un-elected central bankers be buying falling stocks? How will taxpayers react to their money being printed to buy assets that are falling? How would taxpayers like if they received a statement indicating how much money has been printed and the amount they have personally provided. This is not a victim-less crime.

So yes the trade war, while important, is in my humble opinion a mere distraction. Gold is being accumulated, by the wisest among us, as a safe haven asset to buffet the expected effects of a very ugly contraction, one that is man made in every respect. The dogs in the street look worried, and so they should be.

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