Gold detractors are both right, and terribly wrong.
It is true, gold doesn’t do a thing. It sits there, immutable and unchanging. It doesn’t generate revenue.
However, this argument against it completely, and conveniently, ignores exactly why gold is so important.
Gold is a great investment because it does nothing, while the people at the helm of the global fiat currency and economic systems manipulate everything else.
It follows a simple equation of supply and demand. While shorts can push the market price around, reality inevitably prevails.
Gold, the “barbarous relic” as it is pilloried, is far from being a thing of the past. In fact, it is finding new importance right now.
We’re seeing the classic supply and demand equation supporting higher gold and silver prices already, and a new variable emerge from the latest economic abominations that will only support it further.
The Standard Equation
The gold market is defined by supply, demand, production costs, and currency values.
The value of the U.S. dollar has always had an inverse relationship to gold prices for obvious reasons. If a dollar is worth more, it can buy more gold, thus the same amount of gold is worth less in dollars.
This has been the defining force behind sinking prices since 2014:
However, only a fraction of gold is priced in U.S. dollars. Roughly 90% of gold demand comes from the rest of the world, and gold prices were stable or went up around the globe in 2015 when priced in local currencies, including the most important markets — India and China.
That demand, coupled with sinking currencies, and emerging market and Chinese economic weakness, is only climbing. However, supply isn’t easily matched to demand.
While demand can change quickly, supply cannot. Mining is capital intensive, and it often takes 20 years or more for gold in the ground to actually make it to the market:
Production is going to start trending down, and most estimates put 2014 and 2015 as the peak of production for many years to come.
Add in the debt burden of mining companies and the overly high cost of pulling gold out of the ground for major producers — most major miners have all-in sustaining costs around or $1,000 per ounce — and there isn’t much chance to find financing or free up cash for capital investment.
So, to sum it up, outside of suppressed prices in U.S. dollars, gold prices are trending up in the global market, demand remains strong, yet supply is going to be hindered for years to come due to falling production and lack of capital.
The standard gold metrics support higher prices. Then there is the new variable being added to the equation.
The New Variable
Gold doesn’t change, but people and the tools they use to manipulate things to their advantage sure do.
That is where our new variable comes in, the one that is proving that gold is far from a “barbarous relic.”
Thanks to central bank intervention lasting so long, we’re looking at another downward cycle in the global economy with no traditional monetary policy tricks remaining to manipulate investor behavior.
As a result, we’re now well into uncharted territory, with many major central banks pushing even deeper.
Mario Draghi, head of the European Central Bank, is at the vanguard of this behavior, pushing European interest rates and bonds even deeper into negative rates.
The headline interest rate for the Eurozone was cut to zero, and the ECB quantitative easing program now includes four-year loans to banks that allow them to borrow from the ECB at negative interest rates.
There is no room in a sane world for there to be any demand to lose control of money for years, then to receive less of it back in the end, yet this is happening now on a massive scale.
Fully 75% of German bonds, for example, now sport negative yields. Draghi doubled down on this abomination.
The Swiss are doing it, and Japan just issued its first negative interest rate 10-year bonds a couple weeks ago.
As of February of this year, over $7 trillion in bonds worldwide will lose money for anyone who owns them.
The Only Solution
Not only are savers being punished for retaining any money for themselves in countries forcing negative interest rates, but their taxes are being funneled into banks in the hope that the banks will throw money into contracting companies and economies.
It wasn’t long ago that everyone, including ECB central bankers, agreed that negative interest rates were not on the table, and in fact, probably couldn’t exist because no one would consider playing along.
Oh, how that has changed when those in a position to manipulate the economy to retain their control over it realized there was nothing left to do but to punish those who aren’t fully buying into expensive equities with ever-weakening currencies.
However, there isn’t much they can do about gold. After all, it just sits there and does nothing.
In a world where everything else is being manipulated and inverted to effectively siphon money from investors, it has become the perfect tool to make sure some of our savings remain untouched.
So ignore the naysayers, detractors, and the imbeciles who say that gold is a useless relic of the past.
In the 21st century economy, gold has a newfound importance because holding gold was never about what gold is or could do.
It has always been about people. Namely, how to protect ourselves and our savings from those in positions of power who use us for their own ends.
