Europe Tiring of Austerity Is Good for Gold In Both Euro and Dollar Terms

Last August, I mentioned in a post (I forget which one) that when gold hit $1900, I was a seller.  In late September, I suggested that municipal bonds were better buys than gold, and indeed muni yields have collapsed.  Meanwhile, gold has churned for months. 

In today’s world, gold is a political metal.  When “policy-makers” want to “fight recession”, they engineer negative real interest rates.  When, as is now the case, European technocrats and what-nots are finally getting around to emphasizing growth, and authoritative journals such as the Financial Times are preparing us for a massive new “LTRO” (Long-Term Refinancing Operation), I think that austerity has peaked in Europe.  Gentlemen, monsieurs, madames, frauleins, etc., start your (monetary) engines.   And of course, the U.K. never stopped doing that ever since the financial crisis hit.

In and of itself, that “should” mean that for an American, it would be like watching someone implode their currency, reflecting greater American competitiveness and thus this trend “should” be gold-friendly for the euro but not for the dollar.

However, the latest pronouncements from the Fed make it appear as though the U.S. wants to concede no more market share to the Europeans.  So that would mean a parallel dollar devaluation.

The futures board is a sea of green this morning, and I have no focus on short-term timing.  As I suggested in last night’s DocComment, stocks are not the leaders in this sea of green, though we can expect they will move in the same general direction as gold if the austerity movement has indeed peaked.  Rather, gold and oil are.  If economic fundamentals continue to be challenging in many parts of the world, my guess is that gold will outperform stocks as was the case in 2007-9.  Underpinning this move upward is only a tiny sell-off in Treasurys, which are holding most of yesterday’s price gains; meaning that negative real interest rates are being voted on as here to stay.

Given the moves in bonds and stocks, gold now looks to me to be the best relative value amongst the standard asset classes I follow, though it will be prone to sell-offs if a recession is recognized to occur in the U.S.  So, as always this may not be the best price one could buy gold at in the days and months ahead, but for long-term holders, the opportunity cost vs. interest rates is so low that it again is not just a linchpin of a portfolio but again is a compelling buy-and-hold asset for uncommitted capital from my standpoint.