These topics are becoming more mainstream. When I talk to the most sophisticated macro hedge funds and investors, the common refrain that comes back is they’ve never seen an environment as complicated as this. There is consensus around gold; it’s a safe bet, and everything else is very uncertain. This is a very unique environment. I think we need to take a very, very broad perspective to actively reimagine and rethink our understanding of the world, because things are changing fast. The dollar and the renminbi and gold and money and commodities. I think they are all going to get caught up.
Here is a link to the full interview.
There are a lot of moving parts in the global macro environment. The introduction of AI and the race for dominance is a wholly new development for example. The challenge with making big long-term predictions is that other events can happen before the prediction comes to fruition.
The demand prediction for battery metals is a perfect example. For more than two years mining executives have been very vocal in stating that the supply of metal is inadequate compared to the expansion plans of the battery and renewable energy sector. The predictions of multiplication factors in the price of copper, nickel, zinc, etc. have not come to pass.
Meanwhile China’s administration appears to be serious about their reluctance to reflate the housing bubble. That is a major challenge for the demand component of the entire commodity complex. China was building the equivalent of a Manhattan every year. Now that it has stopped, there is a lot of excess capacity in steel, cement, glass, plastics etc that is looking for a home. That suggests there is a greater risk of prices going down. In fact, that would be a gift for the renewable energy sector because it would reduce costs.
China is setting up bilateral swap lines with its trading partners and at the same time allowing the renminbi to fall. That suggests they are putting favourable financial infrastructure in place now before demand for everything the rest of the world sells them declines.
Against this background, gold is the easy answer. The EU was buying natural gas in 2022 with no regard for the price. That caused a price surge which was fuelled by a geopolitical event. That’s a clear example of how geopolitical events result in price insensitive buying decisions.
If China is in a position where trading partners are demanding gold in payment for exports, how long before China closes the gold window? The USA is in the throes of passing a debt ceiling bill which is more about saving political face than solving fiscal problems. We are still in an environment where the answer to problems is printing more money. That’s a benign environment for gold.
The price has posted a mild consolidation in the region of the psychological $2000 which is the upper side of a three-year range. In most other currencies that consolidation is above the previous highs.