A Macroeconomic Case For Gold Is Still Strong – Seeking Alpha

Intro

In the past few months, I have written articles detailing the macroeconomic case for gold that revolves around low-yielding debt, and expensive equities market, and the Federal Reserve cutting rates. I believe that these will be the main fuel source for gold to surge, but there are underlying events that go relatively undiscussed when assessing the potential value of gold.

Countries such as China and Russia have made a concentrated effort to become less dependent on the U.S dollar and have instead rapidly increased their gold stockpiles. Not only is there less gold to be purchased, but these actions are also slowly decreasing the value of the dollar and increasing the relative value of gold.

In this article, I want to discuss global superpowers flocking to gold, the reasons behind it, and what this means moving forward. Beyond this, I will touch on the impact of October’s ISM Manufacturing report, and the potential for more rate cuts.

Disdain for the USD

For China, the on-going trade war has created an environment where the Chinese government does not want to have such a dependency on a currency where political tensions remain high. Due to this, China’s current stockpiles have grown to 62.64 million ounces, which is an increase of 99.8 tons of the precious metal in the past nine months. This represents a market value of $4.81 billion purchased since December of 2018.

Source: Bloomberg

In the grand scheme of things, this is a relatively small amount, but the idea that China is pursuing a safe commodity and shifting away from reliance on the USD serves as a catalyst for gold.

Howie Lee, an economist at Singapore-based Oversea-Chinese Banking Corp stresses this point by stating that “Given strained relations with the U.S., China needs a hedge against its large holdings of the dollar, and gold serves that function,”. “As China becomes a superpower in its own right, I expect more gold-buying.” This mentality is seen in Russia as well as they have been adding substantial amounts of gold to their reserves as well.

Source: Bloomberg

Although Russia has the same approach to lessen its dependence on the USD, around 75% of their exports are still denominated in dollars. Adrian Ash, head of research at a gold brokerage BullionVault Ltd. Stated that, “If it wasn’t for Russia’s central bank, last year would have been the worst year for gold buying in a decade, so it helped put a floor on the price.” He did qualify this statement by mentioning that this is well-known information and it would take a significant increase in their purchases to materially impact the price of gold.

In all, a higher stockpile of gold between both China and Russia should create a floor to gold with upside potential given an increase in macro-economic uncertainty.

ISM Manufacturing Report/ Rate Cuts

Announced at the beginning of October, the ISM Manufacturing report gave data about the purchasing manager’s index, which fell for the second consecutive month. The number came in at 47.8, which is the lowest level since 2009. Any number below 50 is seen as a contraction in manufacturing and investors were initially concerned shown in a 200-point drop in the DOW.

Source: CNBC

Now although the DOW has more than recovered since this incident, a decline in manufacturing evokes fear of an incoming recession. Peter Boockvar, chief investment officer at Bleakley Advisory Group stated that “We have now tariffed our way into a manufacturing recession in the U.S. and globally.” This does not bode well for the equities market and Chris Rupkey, chief financial economist at MUFG Union Bank has a very bleak outlook on the future of equities saying, “Purchasing managers are telling stock market investors to get out.” “Run. Run for your life. Get out while you can. The outlook is darkening and the thunder is growing louder by the day.”

Now it may be hard to find a take more pessimistic than this but holds some semblance of truth that the manufacturing data is providing investors with a clear and obvious warning sign.

This data can strengthen a case for another Fed rate cut and the market is stating there is a 90% chance of a rate cut on the October 30^th meeting and another 85% chance there will be a second rate cut by April. This would push rates down to a range of 1%-1.25% and strengthen a case for gold as bond yields would be pushed down considerably and equities would be facing a looming cloud of a possible recession.

Final Thoughts:

With countries like China and Russia purchasing ample amounts of gold in recent months, there is now a floor that should be hard to crack given the demand for this precious metal. Pair this with poor manufacturing data and the overwhelming potential for another rate cut, gold has a promising future.

I wrote an article detailing the proper entry point for gold in an article that was dedicated to technical analysis, but I believe pairing the long-term macro case for gold with technical analysis should give investors a savvy entrance point into a safe investment.

Disclosure: I am/we are long GOLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.