“World Gold Price” Hits A New Record High

(July 16, 2020 - Deguss Market Report)

The “world gold price” – that is (in our definition) the price of gold in basically all currencies excluding the US dollar – has hit a new record high (see graph below). It has now well exceeded its last record level seen in September 2011.

As can be seen, the price of gold in US dollar has increased much less. The “gap” between the world gold price and the US dollar gold price suggests that the Greenback is still the most preferred unbacked paper money in the world.

Note in this context that a rising price of gold in terms of money units means that the official currencies are getting debased vis-à-vis gold – and the gold can be viewed as the world’s premier currency, its ‘ultimate means of payment’.

From our viewpoint three factors explain the latest surge in the gold price:

1. Central banks around the world have pushed market interest rates to ex-tremely low levels. This, in turn, has lowered the opportunity costs of holding gold, thereby increasing the demand for the yellow metal.
2. As a reaction to the crises caused by the politically dictated lockdown’, cen-tral banks strongly expand the quantity of money. As a result, investor have good reason to expect that the purchasing power of the unbacked paper mon-ies will decline.
3. The monetary policy of suppressing market interest rates and increasing the quantity of money causes malinvestment and price distortions (“speculative bubbles”) in financial markets. As a result, investor risks increase.

Under these conditions it is likely that investors will show an increasing interest in holding gold. For gold serves two purposes:

First, gold is an insurance against the loss of the purchasing power of money: The value of gold cannot be debased by central banks running the printing presses.

Second, gold does not carry a credit, or default, risk – as bank deposits and short-term debt instruments do; gold does not have a counterparty risk.

In view of the ongoing monetary expansion worldwide, we think that markets will most likely push further up the price of gold in the coming months. In fact, we wouldn’t be surprised if and when the market will fairly soon test the last record high of the US dollar gold price of 1.900.

Investors who expect the price of gold to go up further and do not mind high price volatility have reasons to also keep silver in their metal portfolio – as silver stands a fairly good chance to outperform vis-à-vis gold in the coming quarters.