27.01.2020 – Special Report. A minor bloodbath on the stock market – fear of the corona virus in China has sent share prices in global trading plummeting. In contrast, gold, calculated in euros, has just reached a new all-time high. Once again its status as a safe haven in times of crisis is taking effect. And with international monetary policy, there is another, longer-term, massive buying argument.
Red numbers everywhere in the free real time prices – on the trading platform a feast was prepared for the bears. Saxobank said the stock market had just realised that the 2019-nCoV virus would have a significant economic impact as the quarantine in China now affects around 56 million people. In fact, initial hopes that the government in Beijing would get the disease under control had been severely dampened over the weekend – the number of deaths and reported cases of the disease has soared. The financial blog ZeroHedge has, as always, presented this in an exemplary manner in a pretty chart.
Escape into gold
One reaction of investors: they bought gold. Calculated in Euro, the yellow metal just reached an all-time high at 1,437 Euro. Already in the course of the tensions between Iran and the USA at the beginning of the year, gold in dollars had risen to as high as $1,595 in January. This had been the highest level since the beginning of 2013. That might not have been the end of the story. For apart from acute crises, it is above all the monetary policy of the major central banks that should further boost demand for precious metals.
Here comes the tide
According to the blog Goldmoney.com, in the last quarter of 2019 the Federal Reserve began to aggressively pump fresh money into a surprisingly illiquid banking system. We recall our special reports on the subject of repurchase agreements and the threat of a reocalypse in the frozen US banking market. Given the lack of foreign demand for US Treasuries and a rising savings rate, the US budget deficit can only be eliminated through monetary inflation.
Furthermore, the European Central Bank resumed its quantitative easing in November; the ECB will probably also provide new liquidity for ecological issues. Furthermore, the Bank of Japan is prepared to further ease its monetary policy if the inflation target of 2% is jeopardized. All in all, in view of the international flood of money, paper money is likely to lose even more of its purchasing power, which has apparently long been the case with gold anyway.
Another conclusion from Goldmoney.com: The markets are in more trouble than ever before, as negative interest rates and negative bond yields proved. A major systemic crisis in the market is only a matter of time, and soon one or more major banks will probably have to be rescued. “Monetary chaos promises to be greater than anything seen heretofore, and it will engulf all western welfare-dependent economies and those that trade with them. If this prophecy is correct, the next crisis is imminent and should provide fresh demand for gold.
Precious metals as stragglers
The thoughts of financial advisor Evergreen Gavekal go in the same direction – the investment boutique sees gold as a latecomer. It was one of the shocking surprises of the decade that has just ended that inflation has fallen but not risen despite a wave of artificially created money of around 15 trillion dollars. And unlike US equities and global bonds and real estate, gold and the other precious metals did not attract equivalently.
We add restrictively: with the exception of palladium, which recently reached an all-time high of $2,501. Which leads us to suspect that there may still be room for improvement in other precious metals with industrial uses – i.e. platinum and silver.
Central banks and private individuals buy
Goldmoney.com also looked at the demand side for gold. The central banks had bought about 4,400 tonnes of gold since 2008 – all reserves currently amount to 34,500 tonnes. Buyers are mainly Asian, Eastern and Central European central banks. Russia, for example, is replacing its dollar reserves with gold. We think: The central banks themselves are best placed to assess the impact of inflationary monetary policy.
There is more to it than that: the private sector in China in particular has so far bought 17,000 tonnes, the sum is derived from the figures of the Shanghai Gold Exchange, Goldmoney continued. And according to the World Gold Council, private individuals in India have so far hoarded 24,000 tonnes. This means that people in two countries who have already had some negative experiences with the devaluation of paper money are buying particularly heavily.
Apropos: It could well be that not only the Bundestag will make it more difficult to buy gold in future, but also other countries that are busy pumping air money into the system. In this connection we remind you of the over-the-counter transactions in Germany – the exemption limit was reduced from 10,000 to 2,000 Euros on 1st January. Naturally, a buying frenzy set in before the end of the year.
The blog SafeHaven.com speculated that this probably had nothing to do with the vanishingly small number of money laundering cases. But perhaps with these three reasons:
1) The government fears an economic collapse due to the high savings rate: Berlin wants to make saving more difficult and stimulate consumption.)
2) The government is building up an information base for the later confiscation of gold.
3) The government does not want its own citizens to own unknown gold, because otherwise it lacks information about the financial situation of its subjects (we add: Because without knowledge of the financial situation the government cannot collect money specifically through new taxes, as is the case for example through the land registry for real estate).
We further suspect: While the central banks themselves are buying in order to increase their reserves, the government must prevent the flight of private individuals from paper money into gold. This would mean that politicians would lose control over their own money – which is to be further devalued by zero and negative interest rates so that states can somehow repay their debts. Those who follow our thesis keep gold on the long side in their sights.
The Bernstein-Bank wishes successful trades and investments!
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