Consumer ‘Penny’ Drops - Gold Pops

A week ago we wrote an article on the world’s negative yielding sovereign bonds breaking a record of $12 trillion.  Now, just a week later, we are looking at $13 trillion.  ‘Sophisticated’ investors have piled an extra $1 trillion in 7 days into debt instruments they have to keep paying for the privilege of owning.  Is it any wonder gold is on a tear?  Indeed the chart below shows the correlation between the gold price and negative yielding bonds:

Gold sentiment

When ordinary, everyday people start to see this sort of madness combined with their central bank (wherever they are) openly now either implementing or talking about lowering rates as the economy deteriorates, the penny drops and consumer confidence along with it.  Yes, nearly every asset class is currently reaching new highs, but this is off easy money policy not fundamentals (except gold).  It all feels very much like that last terminal spike before the blow off.  

Infamous manager of DoubleLine hedge fund, Jeff Gundlach has a favourite predictor of the onset of a recession.  He looks at the difference between current and future consumer confidence.  Over the last 50 years, each and every time it peaked and rolled over, a recession ensued.  That just happened.

Consumer confidence

Of course when one is supremely confident in everything being awesome, one doesn’t need to save.  Look what happened in 2000 and 2007 just before each recession (vertical blue lines).

Consumer versus saving

When every asset class is pumping new highs off the promise of cheap money, who needs savings!?  That same cheap money policy even means the bank is not giving you any interest on your savings anyway!

Why is this?  All this asset inflation can be thought of as Fiat currency deflation, particularly given it is off weak fundamentals.  An historic natural consequence of printing more money and increasing fractional reserve banking debt is inflation.  Inflation is not really the price of goods going up, it is the value of the dollar buying them going down due to expansion of those dollars.  Never before in history have we seen the level of money printing (via QE) and low rate stimulated debt in the developed world as we have since the GFC (and let’s not get started on Venezuela, Zimbabwe, Argentina, etc…).  And yet “inflation” has remained stubbornly low.  But maybe ‘they’ are just looking in the wrong place with measures like CPI etc.  All that inflation has gone into financial assets, enriching the 1% and leaving the rest behind.  QE and zero (and negative) rates has fundamentally fixed nothing.

Throughout history gold has protected people from inflation as it is real money that can’t simply be ‘printed’ at will and hence isn’t deflated like Fiat currencies have time and time again over the millennia.

What we are potentially seeing now, in its most fundamental form, is the early onset of the value of that financial asset bubble being transferred to gold.  The problem is there are around $300 trillion in financial assets and only around $1.5 trillion of tradeable gold.

Well, it’s a problem if you don’t own gold beforehand….