Thursday, December 18, 2014

Gold: What to Watch for in 2015?

The topic of monetary system change covers a lot of sub topics that all can impact the timing and degree of change. What Central Banks do matters. What the IMF does matters. What governments do with fiscal policies matters. What happens in the private economy and markets matters. Geo-political events matter. One key market we have to watch is the gold market. It's a controversial topic with strong opinions abounding everywhere. But our focus here is to watch the gold price and attempt to interpret what it may be telling us. That will continue to be a key factor to watch in 2015.

First, let's take some time to acknowledge that the gold market has been controversial for a long time. There are strong opinions about how freely this market trades. Many pro gold advocates are convinced that the price of gold is manipulated by Central Banks and large investment banks. They believe that the price is held down by using leverage in the futures markets (paper futures contracts, options contracts, etc) to excessively short gold from time to time. It is thought that the reason for holding the price down is because Central Banks view gold as a potential threat to their fiat currencies. 

Gold (and silver) have been used as circulating money for centuries so people are used to doing that. Central Banks could be concerned that the public might turn back to gold and silver as money if they lost confidence in their fiat currencies. Jim Rickards is among those who concede that Central Banks do intervene to manipulate gold prices (as well as many other markets) from time to time. That debate will surely continue into 2015.

Today, more people in the Eastern part of the world (India, China, Middle East, etc) still think of gold and silver like actual money than people in the Western world. In the West, gold and silver are viewed more like investment assets (like art, collectibles, etc) than as money. It has been a full generation now in the Western world since gold or silver circulated as actual money. In the US, only people over 50 can recall a time when they might have a real silver quarter in their pocket. In the West, most younger people think of money as a debit card, credit card, Paypal or in some other digital form (now including apple pay). 

Our purpose here is not to delve into controversy over manipulation of the gold market or whether the world should return to a gold standard. Those are important issues and would certainly impact the monetary system. However, they are issues the average person has no control over. Our focus here is on the average person who needs to try and understand what is happening with the monetary system and figure out how to make future plans no matter what actually does happen in the future. 

With that in mind, the price of gold is a key we need to watch. Anyone who thinks gold does not matter to Central Banks (or that they think gold is really useless) is simply wrong. 

Central Banks hold enormous amounts of gold in their reserves. The IMF holds enormous amounts of gold. Recent news articles have clearly established that large amounts of gold are moving into Eastern block Central Banks (Russia and China lead the way, but there are many other buyers). Western Central Banks already hold large amounts as does the IMF. It should be noted here that many pro gold advocates believe that the Western Central Banks have sold or leased out much of their gold to supply the move of gold to the East. This could be true, but there is no way to prove it since Central Banks will not disclose information like that. The published data that is available says Western nations own lots of gold and Eastern nations are buying lots of gold. That is the data we have available to the public (whether it is right or wrong). The point is, gold matters to all of them.

Lately, news articles have popped up indicating that many nations are trying to repatriate the gold they own back onto their own soil (Germany, Belguim, Austria, the Netherlands, France, etc). This also clearly shows that gold matters to Central Banks and countries no matter what you may read in the financial media about gold being "useless". When push comes to shove, it is still a core reserve asset recognized around the world, period.

OK, so Gold Matters, What should we watch for in 2015 related to Gold?

The price of gold is a key signal. (whether it is manipulated or not). Let's review the possible scenarios and try to assess what they might mean in 2015.

1) The price of gold stays in a narrow trading range (up or down $200 at most) all year. If this happens, it is an indicator of continued stability. It means nothing is happening that is likely to lead to major systemic change quickly. It really does not matter if the price is stable due to price manipulation or not. If it is manipulated, it simply means the Central Banks are being successful in their efforts to maintain enough stability so that the public will not be alarmed. If it is trading freely, it still means that nothing earth shaking is happening that would lead us to expect sudden change. This is because everyone still views the price of gold kind of like an alarm. If it is moving way of out price range (up or down) it indicates some kind of instability or the anticipation of instability.

2) The price of gold shoots up above its all time high and over $2000 in 2015 like Bo Polny is predicting. If this happens it is an important signal that some major events impacting the monetary system are in play. More than likely it indicates very high inflation is coming or that there is a major loss of confidence in the existing monetary system for some reason. If the gold price is manipulated, it means the Central Banks want gold higher or have lost the ability to hold the price down. This is why we are following Mr. Polny's predictions (gold over $2000 and a stock market crash in 2015). If this happens in 2015, we can expect the existing monetary system is under stress and change is coming sooner.

3) The price of gold falls (perhaps as low as $600-$800 for example). If this happens, it is a strong signal that deflation has overwhelmed the system. Low oil prices are another indicator. In this scenario the price of everything will be falling as will wages and government tax revenues. Unemployment will be headed higher. In the worst case, a deep depression could unfold with defaults on both sovereign and private debt unfolding everywhere. With China and Russia aggressively buying gold right now at any price just under $1200, a drop this far would suggest a global depression. Certainly it would indicate that deflation was in control (the fear of all Central Banks around the world right now). This would be viewed as a genuine crisis that could also lead to rapid monetary system change. Watch to see if the IMF steps more into the spotlight as global lender of last resort in any crisis situation.

This is what we will watch for in the gold market in 2015 along with the other key subtopics that can impact major changes in the monetary system (which in turn can impact all of us).

Late addition: Here is a Bloomberg article suggesting Russia might sell some gold that popped up after this article was first written. Gold advocates suggest this will not happen.

added note: 

A question I get here is how can the average person prepare for change given that so many different future scenarios are possible? On January 1st 2015 I will have an in depth article that talks about this. It will give the history for why this blog was started, what it hopes to do, and offer some common sense ideas that anyone should be able to use to prepare for whatever happens. This article will also be provided as a Google document in Word format so that it can be easily printed and given to anyone interested. Of course it will be free to anyone who can use it. Please do hand it out to anyone you think can use it.

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