Rising Gold Prices Attract Global & Local Attention

Recently, Zing News, one of Vietnam’s leading news and media portals, asked me to contribute to a feature article it was writing about the recent strength in the gold price.

Given that Vietnam is known for its strong tradition and culture in holding gold and even using gold in property transactions, I knew that it would be an article that would get a lot of attention from Hanoi to Saigon (Ho Chi Minh City), as well as from Vietnamese expats around the world. The Zing News website gets about 35 million visitors per month.

Besides, Vietnam is a close neighbor of Singapore across the South China Sea, and I  had studied and written about the Vietnamese gold market before for BullionStar’s Gold University and for ‘Gold in times of Crisis’, and found Vietnam to be one of the most interesting gold markets of them all.

So with Zing News reporter, Phuong Thao, posing some questions, my answers formed the basis of the Zing article which was published (in Vietnamese) on 13 July. While the Zing article contains a lot of my input and is an extensive piece, some of it does not translate so well into English using online translators, so I decided to publish my contribution to the Zing News article in full below.

Feedback from Zing News says that the interview article received a large number of positive feedbacks from Vietnamese readers and that were very interested in the information provided.

In your opinion, what are the main causes of the increase in gold prices?

Gold prices are currently rising for a number of reasons, many of them interconnected. Chief among these are the ongoing financial crisis, the major central banks’ responses to this crisis in the form of aggressive money printing and quantitative, the resultant debasement in the value of paper currencies, and a global environment of zero and negative interest rates.

Triggered by the COVID-19 crisis and its effect on financial markets beginning in March, central banks (the US Fed, ECB, Bank of England, Bank of Japan) are now engaging in explosive and unlimited quantitative easing (creating money out of thin air to purchase financial assets). This in turn is leading to the destruction of fiat (paper) currency values and setting the scene for the real possibility of hyperinflation.

Gold holds its value when the purchasing power of paper currencies erodes, which is another way of saying that the price of gold rises as the value of paper currency erodes, i.e. gold is a store of value. Furthermore, the gold price is a barometer of future inflation expectations, and so a rising gold price is signaling expectations of higher future inflation.

Given the financial and economic crises, central banks have also aggressively lowered interest rates, which has led to falling real yields, and since the gold price is inversely correlated to real interest rates, this has also triggered the gold price to rise.

Finally, gold is and always has been a safe haven asset, and investors flock to gold in time of financial crisis, such as now, since gold is a form of financial insurance which does not have any counterparty risk.

How long can the rise in gold prices last?

The factors which are driving a rising gold price are still with us, i.e. central bank interventions into financial markets with quantitative easing, negative interest rate cuts, and market interventions. There is also no end in sight for when these central bank actions will stop.

From an investor perspective, investors are driving demand for gold as the opportunity of holding gold is lower in zero and negative interest rate environments. Investors are also moving to real assets including commodities and gold because of the fear of much higher inflation ahead which destroys the value of cash and fixed income investments.

Even though financial markets have been rescued and propped up by central banks and their governments, markets are still broken and nothing has been fixed. The pain has just been prolonged. Thus, savers and investors in gold are also buying as a form of wealth preservation and insurance against the collapse of the current monetary system.

Based on all of the above, gold prices should continue to rise for some time. Rising prices will also create more price momentum, thus pulling in more attention and investor interest into the precious metals sector.

To what levels can gold prices reach in the near future?

Note, on international gold markets, gold is traded and quoted in US dollars, and gold price discovery takes place in US dollars and so the US dollar gold price is the de facto gold price we are talking about here, but this US dollar gold price drives all other local currency gold prices around the world.

At this juncture, the US dollar gold price is in a strong uptrend and is up 19% year-to-date and 27% over 1-year. Having breached the $1800 mark, the price is now at a 9-year high, the next important level is the $1900 level and then the nominal all time-high of about $1920, which was set in September 2011. After this, the price could shoot up quickly, having taken out the old all-time high, and psychologically, $2000 is an important mark. The gold price could of course pull back before it gets to the $1920 and $2000 levels as no move is ever in one direction.

For example, in August 2011, the US dollar gold price moved up from $1650 to $1900 in less than three weeks (2 August – 22 August 2011). It then fell by nearly 200 dollars in a matter of days (by 25 August 2011), only to rebound again by over 200 dollars (by 5 September 2011).

Finally, looking at the bigger picture, with their quantitative easing and money supply expansions, the major central banks (who are the biggest holders of gold in the world) have expanded their balance sheets massively. But in the future there is no other way for these central banks to balance their balance sheets except a significant revaluation of their central bank gold reserves at far higher prices than the current market price. This is called a monetary system reset and could happen sooner than the general market thinks.

How will a rising gold price affect the world economy, especially countries like Vietnam and other Southeast Asian countries? Should investors buy gold now?

Rising gold prices on international markets (such as the London gold market and the COMEX gold futures market) feed directly into all local gold markets around the world. Trading of the London and COMEX gold markets establishes the gold prices, and the local markets take in these internationally established prices, i.e. London and COMEX are the price makers and local markets are the price takers. This includes South East Asia and Vietnam.

So higher gold prices internationally also mean higher gold prices locally, when converted at local exchange rates. Right now gold is in a bull market in every fiat currency around the world. Which also means that fiat currencies around the world, including in SE Asia and Vietnam, are eroding in value versus gold. Which means that if you buy physical tangible gold, your savings or investments are being protected from the eroding value of paper currencies.

So in an environment where the price of gold is in an uptrend and rising in all currencies and where there may be much higher inflation on the horizon, it certainly makes sense to buy physical gold since gold is a store of value, a safe haven and an inflation hedge.