As the northern hemisphere daylight hours shorten we’re approaching the season when gold-buying historically picks up, according to some academic research. Gold demand conventionally increases towards the end of the year, driven largely by purchases from Indians who give and exchange gold items around the festival of Diwali, which falls on 4th November this year.
This research holds that there is a recurring pattern of a seasonal rise in the gold price between May and the following January, with an increase observed “in 20 of 30 years, resulting in an average profit of +19.2%. But there were also 10 years, where the price of gold fell during this period of the year. The average loss then was -12.3%. The overall rise during all 30 years was +7.6% p.a.”
Fat years and lean years. So far 2021 seems to be shaping up to be a ‘lean’ year — the gold price has fallen by about 6.5% in the past 12 months.
Yet, last December it seemed to one source that gold “momentum and dollar weakness suggest that 2021 is going to be a very bullish year”. Since commodities are priced in US Dollars, weakness in the Dollar generally results in stronger commodity, including gold, prices. And if you pay attention to Goldman Sachs, the Dollar is due to decline, like some ancient warrior now past his peak: “We forecast broad Dollar depreciation over time on our expectation that the global economic recovery will continue and that slowing domestic growth and lower inflation will allow the Fed to remain on hold until Q3 2023”. But the decline, adds the bank, will be slow and bumpy.
Perhaps 2021 is even stranger than last year. 2020 started with a global panic over the coronavirus but ended with euphoria as vaccines were developed and started to be rolled out. 2021 was going to be the year when life returned to normal and economies began their recovery. But by September we have a white noise background — all audible frequencies are playing at once, making it impossible to pluck out any single dominant sound.
To continue the metaphor, let’s take just a few of the stronger ‘notes’. What’s happening to inflation? How fast might the central banks start to unwind their massive stimulus programmes? When will the US Federal Reserve start to raise interest rates — and how high? Will recurrences of coronavirus variants continue to impede economic growth? Could China succeed in toppling the Dollar as the international reserve currency? Is the massive global debt — nudging $300 trillion (more than £217 trillion) — sustainable? The US is planning a multi-trillion Dollar spend on infrastructure, which will push its fiscal deficit (so far this year more than $2.5 trillion, more than £1.8 trillion) even higher. This will simply add to the US federal debt, now almost $29 trillion (£21 trillion). In the US Social Security benefits are likely to run out earlier than expected; the annual Social Security trustees report now forecasts retirees and the disabled will only be able to receive full benefits on a timely basis until 2034. After that, the programme would have enough income to pay only about 78% of scheduled benefits unless Congress steps in to shore it up — by, presumably, sanctioning an increase in the money supply.
Who’d be a central banker?
As for inflation, that’s showing signs of far from being “transitory”, as central bankers persist in arguing. On the other hand countries are emerging from the global economic recession patchily. Central bankers are desperately trying to ascertain whether the world economy is properly on the road to recovery or if it’s stalling. It’s crystal ball time.
Jerome Powell, chairman of the US Federal Reserve, which sets America’s interest rates, seems more worried about deflation — when the general level of prices fall — than inflation. At last week’s Jackson Hole gathering of central bankers he said: “The pattern of low inflation likely reflects sustained disinflationary forces, including technology, globalization, and perhaps demographic factors, as well as a stronger and more successful commitment by central banks to maintain price stability. While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated. It seems more likely that they will continue to weigh on inflation as the pandemic passes into history”.
In the 19 countries of the Eurozone consumer prices in August rose by an annualised 3%, following 2.2% in July and well above the ECB’s 2% target, and the fastest surge in overall consumer price growth in a decade. In Germany — the Eurozone’s biggest economy — inflation is likely to approach 5% in the coming months. Thomas Nuernberger, managing director of EBM Papst, which makes industrial fans in Germany, told Bloomberg: “In my career we haven’t had a situation with so many commodities being scarce at the same time, and I’ve been dealing with the same materials since 1996”. House prices in the US are scorching — up by almost 20% in June compared to the same month in 2020. The US consumer price index (CPI), which rose by 5.4% during the last 12 months, conveniently does not include the cost of housing units. Other major economies are facing bursts of inflation — take Brazil for instance, where the annualised inflation rate in July was 8.99%.
The dilemma for central bankers is becoming daily clearer. Face up to growing inflation and start to end their quantitative easing programmes, and begin raising interest rates. But that will damage economies that are struggling to emerge from the coronavirus lockdowns.
Covid-19 variants keep popping up and forcing fresh lockdowns; in Vietnam’s Ho Chi Minh city, for example, residents have just been told not to leave their homes, which is causing delays to Vietnam’s exports and has already pushed up wholesale Robusta coffee prices. Even China, the workshop of the world, may be facing a slowing economy. The Caixin manufacturing purchasing managers’ index, an important independent survey of factory activity, was 49.2 in August, dropping below the 50-mark that separates monthly expansion from contraction, for the first time since April 2020.
No crystal ball necessary
We come full circle. Will 2021 see a seasonal uplift in the gold price towards the end of the year, on strong demand from India around Diwali? Or might this year be one of those outliers — a lean year, in which the gold price ends lower than where it started?
According to The Golden Constant, the seminal book by Roy Jastram published in 1977 , in Pound Sterling terms over the past four centuries gold lost purchasing power in every period of inflation; by anything from 21% (in both 1675–1695 and 1752–1776) to 67% (1897–1920). The story is similar for four periods out of five in the US, from 6% (1861–1864) to 70% (1897–1920). In each of the four deflationary periods since the 17th century gold has increased its purchasing power in Pounds Sterling, by between 42% (1658–1669) and 251% (1920–1933). In the US during the deflationary periods of 1814–1830 and 1929–1933 gold’s purchasing power rose by between 44% and 100%.
But that’s the past. And as every financial adviser will tell you, ‘the past is not a reliable guide to the future’. That’s as true of gold as any other financial asset, including stocks, cryptocurrencies, bonds, and even houses. But one has to ask oneself why one buys gold in the first place. Is it just a ‘safe haven’ when all else seems to be chaotic?
One thing is true: you will never find ‘the best’ time to buy gold. You will never find the ideal buying point. That shouldn’t bother you, because with Glint your allocated gold performs a dual function. It’s a means of saving when times are uncertain — and times have rarely been this uncertain — and hedging your bets against the erosion of the purchasing power of fiat currencies. And it can be used as money, at the grocery checkout, when booking a car rental, buying dinner at a restaurant — in fact, wherever the Mastercard®is accepted.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power. While we are convinced that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. Although we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
