Above is a 13 year chart of the price of gold in GBP(£), each bar on the chart represents 1 month of price action for gold.
The first part of this post talks about the price action of gold vs GBP over the 13 years, the second half states the bull/bear cases for gold going forward, it would be great if you add your own bull/bear cases so we can get a discussion going.
Gold from 2007-2020
Gold’s last bull market started to pick up speed at the start of the 2008 Global Financial Crisis.
The Bank of England started QE1 and cut rates down to 1% all the way from as high as 7.5% in 1998 - many of us are too young to remember rates that high, me included :).
QE (inflating money supply) and cutting rates debases the GBP because there’s more in supply, and we receive less interest reducing the desirability to hold it.
These two factors combined with uncertainty and fear during the Global Financial Crisis (GFC) of 2008 drove gold to a record high of £1,112 per ounce.
In September 2011 gold made an ATH.
After the GFC many banks were restructured (bailed out), we were told that QE would come to an end and that QT (quantitive tightening) would start, along with an increase in interest rates once the economy got back on its feet.
A reduce in money supply (QT) and an increase in interest rates is bearish for gold, because why hold a shiny rock when you can hold GBP that pays interest?
This put gold into a bear market from September 2011 – January 2016.
After the GFC interest rates still 0.25% and not near the 5% levels before GFC of 2008, but we all believed it would happen in due course and jumped on the next bull market (2011-2020).
Nothing really happened until February 2016 - Brexit.
This vote debased the GBP and started the new bull market in gold vs GBP.
In June 2016 gold received another leg up as BoE started to talk about re-starting QE (QE2), which it did so in August 2016.
The BOE managed to raise interest rate from 0.25% to 0.75% by August 2018 which kept gold in line, investors expected more rate hikes in the coming years and kept hold of their GB.
The UK could not sort out a deal for Brexit and the GBP was debased again compared to the price of gold in June 2019.
Fast-forward to March 2020 and the lockdown happened, BOE then cut interest rates back to 0.25% and starts QE infinity – then gold took off.
This where we are now, gold at an ATH around £1,5000 and what looks like QE to never stop with interest rates staying low for longer is the central bank mantra at the FED/ECB/BOE.
What is going to happen next? Here are my bull and bear cases for gold vs GBP, again feel free to share your own below.
Bull cases for gold?
* If interest rates keep moving lower to negative, investors are going to move out of GBP and into gold. UK government bonds for the 2 year and 5 year gilts are currently negative, this is an indicator that negative interest rates are around the corner. If you’re going to be charged -0.05% for bank deposits, there’s less reason to hold GBP.
* If the UK cannot get a good deal with the EU/USA, fewer countries are going to want to hold or trade in GBP, creating less supply for the GBP causing it to weaken further.
* More QE and government programs means more GBP needs to be put into circulation. This will further devalue the GBP. The current bailouts for companies, furlough scheme, bounce back loans etc increase government debt, which needs to be paid by taxation or inflation (money printing).
If you think universal basic income is coming, or governments will need to support businesses and people for an ongoing amount of time, this is bearish for GBP and bullish for gold.
Bear cases for gold?
The bear cases are the opposite of bull cases.
* If we get a great trade with the EU/USA and other nations, they will want to trade in GBP, increasing the demand and purchasing power.
* If we don’t need more QE and can quickly raise interest rates to pre 2008 levels (5%~), people are going to get out of gold and back into GBP as it pays great interest.
* If the UK can reduce its debt and not grow it to the point of no return
* A v-shape recovery.
For me, gold is the goalkeeper in my portfolio and stocks are the strikers.
Stocks pay dividends and give me a stake in a profitable business, if I can pick the right one that has growth potential I can make an income via dividends and growth through price.
Gold does not return that, but it does provide safety against the debasement of the GBP, and currently plays a better role in protection than bonds.
I also like the fact that gold is outside of the monetary system which I think is broken, I like that safety over bonds (buying debt) and that gold has a 7,000+ year history of being used as money.
The current price of gold looks way over-extended right now, but the entire chart looks bullish, I will be looking to add on a meaningful 10-30% pullback in the coming months, but not at this price.
The first part of this post talks about the price action of gold vs GBP over the 13 years, the second half states the bull/bear cases for gold going forward, it would be great if you add your own bull/bear cases so we can get a discussion going.
Gold from 2007-2020
Gold’s last bull market started to pick up speed at the start of the 2008 Global Financial Crisis.
The Bank of England started QE1 and cut rates down to 1% all the way from as high as 7.5% in 1998 - many of us are too young to remember rates that high, me included :).
QE (inflating money supply) and cutting rates debases the GBP because there’s more in supply, and we receive less interest reducing the desirability to hold it.
These two factors combined with uncertainty and fear during the Global Financial Crisis (GFC) of 2008 drove gold to a record high of £1,112 per ounce.
In September 2011 gold made an ATH.
After the GFC many banks were restructured (bailed out), we were told that QE would come to an end and that QT (quantitive tightening) would start, along with an increase in interest rates once the economy got back on its feet.
A reduce in money supply (QT) and an increase in interest rates is bearish for gold, because why hold a shiny rock when you can hold GBP that pays interest?
This put gold into a bear market from September 2011 – January 2016.
After the GFC interest rates still 0.25% and not near the 5% levels before GFC of 2008, but we all believed it would happen in due course and jumped on the next bull market (2011-2020).
Nothing really happened until February 2016 - Brexit.
This vote debased the GBP and started the new bull market in gold vs GBP.
In June 2016 gold received another leg up as BoE started to talk about re-starting QE (QE2), which it did so in August 2016.
The BOE managed to raise interest rate from 0.25% to 0.75% by August 2018 which kept gold in line, investors expected more rate hikes in the coming years and kept hold of their GB.
The UK could not sort out a deal for Brexit and the GBP was debased again compared to the price of gold in June 2019.
Fast-forward to March 2020 and the lockdown happened, BOE then cut interest rates back to 0.25% and starts QE infinity – then gold took off.
This where we are now, gold at an ATH around £1,5000 and what looks like QE to never stop with interest rates staying low for longer is the central bank mantra at the FED/ECB/BOE.
What is going to happen next? Here are my bull and bear cases for gold vs GBP, again feel free to share your own below.
Bull cases for gold?
* If interest rates keep moving lower to negative, investors are going to move out of GBP and into gold. UK government bonds for the 2 year and 5 year gilts are currently negative, this is an indicator that negative interest rates are around the corner. If you’re going to be charged -0.05% for bank deposits, there’s less reason to hold GBP.
* If the UK cannot get a good deal with the EU/USA, fewer countries are going to want to hold or trade in GBP, creating less supply for the GBP causing it to weaken further.
* More QE and government programs means more GBP needs to be put into circulation. This will further devalue the GBP. The current bailouts for companies, furlough scheme, bounce back loans etc increase government debt, which needs to be paid by taxation or inflation (money printing).
If you think universal basic income is coming, or governments will need to support businesses and people for an ongoing amount of time, this is bearish for GBP and bullish for gold.
Bear cases for gold?
The bear cases are the opposite of bull cases.
* If we get a great trade with the EU/USA and other nations, they will want to trade in GBP, increasing the demand and purchasing power.
* If we don’t need more QE and can quickly raise interest rates to pre 2008 levels (5%~), people are going to get out of gold and back into GBP as it pays great interest.
* If the UK can reduce its debt and not grow it to the point of no return
* A v-shape recovery.
For me, gold is the goalkeeper in my portfolio and stocks are the strikers.
Stocks pay dividends and give me a stake in a profitable business, if I can pick the right one that has growth potential I can make an income via dividends and growth through price.
Gold does not return that, but it does provide safety against the debasement of the GBP, and currently plays a better role in protection than bonds.
I also like the fact that gold is outside of the monetary system which I think is broken, I like that safety over bonds (buying debt) and that gold has a 7,000+ year history of being used as money.
The current price of gold looks way over-extended right now, but the entire chart looks bullish, I will be looking to add on a meaningful 10-30% pullback in the coming months, but not at this price.
Comment:
I have now published a new chart on where you find the best buying areas during this gold dip.