The fall in the gold price is saying something scary about the world

Chris Bailey

‘I believe in the Golden Rule – The Man with the Gold… Rules’ – Mr. T

Gold divides opinions. Some build their portfolios around it whilst others see it as a ‘barbarous relic’. One aspect is true today however: gold has dropped to its lowest level since May and is down a cool 7% plus since confirmation of Donald Trump’s Presidency. So why is this scary for anyone interested in the financial markets?

Most professional investors will concur that gold is a defensive investment. Its role as a medium of exchange over time, difficulty in being destroyed and limited new supply each year via the mining industry has made it a popular asset for individuals to central banks over the last one thousand years plus. When gold in the vaults backed cash in circulation in an economy the ability of bankers or politicians to meddle disastrously was much reduced. Inevitably this has led consistently since Roman times to periodic de-basing of gold backed currency regimes with the ripping up of the Gold Standard in the early 1970s being the latest occurrence.

So why worry if a defensive investment is out of favour? The fall in the gold price is just another way of saying that the good times are back with Donald Trump pro-growth and pro-hope. Just look at the rise in bond yields and all three of the major US indices pushing near highs…

Those who have seen a few business cycles will probably be smiling now. The great hope of a new political regime was very apparent eight years ago with the ascension of Barrack Obama and multiple other politicians over the years. Now let’s not get too nihilist about it. Some politicians do make a positive impact and Donald Trump and the other members of the ruling political class of 2017 and the next few years could be that grouping but what is truly amazing to me is how quickly the financial markets have gone from this being a potential opportunity to this being a near-certainty.

A week ago I asked whether Donald Trump was an investors’ best friend or not (link https://uk.finance.yahoo.com/news/is-donald-trump-an-investors-best-friend-094755139.html ) concluding that for active UK investors who ‘use volatility as an opportunity to buy and euphoria as one to take profits’ it could well be. However I said that an important transmission mechanism for all this was a lower US dollar which I perceive as critical for the successful imposition of Trump’s policies.

And yet was has happened? Via enthusiasm for Trump’s to date Presidential stance (versus low expectations) and Federal Reserve head Janet Yellen hinting again that US interest rates will be tweaked higher in December the US dollar has romped with the trade weighted index at its highest level since March 2003 and, as I write, is eyeing a tenth straight day of gains, which would be the longest winning streak since 2012.

You can see the impacts of this everywhere. Japan and Europe like the sound of their currencies being weaker as they boost the capability to export…but all this does is accentuate trade tensions and reduce any incentives to reform their domestic/regional economies. For emerging markets it puts pressure on dollar denominated debts and exchange rate pegs like the one China has. And it also tends to push down the price of dollar denominated commodities which includes gold.

In short the optimism which has pushed markets up and gold down is resting on the uncertain foundation of dollar strength. And every time you unpick that optimism a little and markets gets a little more varied then expect the greenback to fade and gold to go up.

For investors it seems clear to me. My primary investment allocation remains that active selection of global equities. My second investment is certainly not poor value bonds nor ultra-low yielding cash but out-of-favour gold. Again, sell euphoria and buy fear.

Don’t forget to include considering something shiny in your investment portfolio allocations.

Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis.

The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment