Gold: Open Letter to LBMA Board of Directors

29 Jan 2020 / Corporate research

Dear Sir/Madam,

This is gold’s chance to shine, if you’ll pardon the pun, more than seven years after the price reached its all-time high, before plunging into the prolonged bear market.

Numerous factors are converging to cement gold’s investment case at this time.

Catalysts for the explosive gold bull market of 1968-80 were a loss of US monetary and fiscal policy discipline, tensions between major economic powers and a wave of gold buying, led by central banks. We are seeing a repetition of similar events, with:

  • the capitulation in hawkish Fed rate policy and resumption of QE/unconventional monetary policy;
  • trillion-dollar US budget deficits in prospect for at least the next decade, if not indefinitely;
  • periodic US/China trade tensions and a schism in economic thinking (Trump-style nationalism vs. globalism); and
  • central banks purchased the most gold in 2018 since 1967, with another strong year expected for 2019, when the final data are released.

There are other, equally important, factors in today’s global macro and geo-political picture ‒ aside from the recent US/Iran flare-up ‒ which are very gold-positive:

  • gold has always outperformed in the late stages of previous debt cycles – all of the way back to the late 18th century and the Industrial Revolution;
  • the current debt bubble is unprecedented, with global debt surpassing $250tr and more than 320% of global GDP; and
  • when we look at financial markets, we see QE/ZIRP-driven asset bubbles in bonds, stocks and real estate, and the US economic expansion is now the longest in the post-war period.

Historical drivers for the gold price dovetail with today’s risks, since gold is the only financial asset that:

  • has no counterparty risk; and
  • outperforms in both deflation and inflation ‒ resolution of this global debt cycle will require an intensification of one, or perhaps both (sequentially).

Gold should function as a signalling device, acting as a warning sign and stabilising influence for a global financial system that has overstretched itself. This one has, with the need for unconventional monetary policy passing the point of no return.

The gold price is being held back ‒ potentially increasing moral hazard across the entire global financial system ‒ which is where reforms by the London Bullion Market Association (LBMA) can play a role.

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