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Gold Appeal Rising as Fear of Risk and Failed Monetary Policy Grow

Gold Appeal Rising as Fear of Risk and Failed Monetary Policy Grow

John Kicklighter, Chief Strategist

Talking Points:

  • Gold has advanced as much as 30 percent this year amid the depreciation of key currencies and financial assets
  • Full scale risk aversion is a capable catalyst but we have only experienced a jolt in the system so far
  • To truly see the metal climb with absolute conviction, we need a broad FX devaluation - including the Dollar

See how retail traders are positioning in Gold and the FX majors using the SSI readings on DailyFX's sentiment page.

Gold is not just an asset for those that constantly forecast financial market catastrophe - though it may seem that way given their persistence. In reality, the precious metal plays an important role in the broader financial system - both as barometer and investor outlet in particular conditions. And, given the decline of the fundamental backdrop, the rise of speculative exposure and the crumbling confidence in expansive monetary policy; conditions are ripe for gold to gain a more significant foothold. How far and how fast the metal may rise depends on what elements are at play, but we have already seen traction on the fundamental front with the market climbing as much as 30 percent this year (spot gold closed up 24 percent from the 2016's open as of Friday).

While bulls believe there are many reasons to buy into gold, there are two themes in particularly that are crucial for supplying the level of appetite to produce trends of the duration and reach comparable to the 2008-2011 run: full risk aversion and universal devaluation of fiat-assets. The metal's appeal as a safe haven is well known and is in large part a result of its ubiquity through the centuries of evolution of economic systems. However, in modern finance where access and options leverage the importance of yield; the level of fear necessary to build appetite for the commodity is the same degree that completely curbs the consideration of income-like returns (dividends, carry, coupons, etc). We have seen a shudder in the global markets so far, but we are far from that systemic burn.

The most capable lever for gold to make another concerted bid for $2,000 per ounce is the universal depreciation of fiat currency - and the assets that derive their value from them. We are already far along this road with monetary policy. Major central banks including the European Central Bank, Bank of Japan and Bank of England have pushed expansive stimulus programs and cut rates to near zero, zero or negative. Amid this concerted devaluation, we have the added threat of diminished credibility for policy authorities and confidence in their control over the financial system. This is where much of gold's current buoyancy is founded. Yet to truly escape the pull of financial gravity, the Dollar needs to fall under the same scrutiny and cut off a critical outlet for capital. We discuss one of the best positioned havens for the unique conditions facing the global financial system in this weekend Strategy Video.

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