On Friday, gold in Aussie dollars surged to another all-time high. It reached an intra-day high of $1,981 per ounce, and finished the session around $1,950.
However, you wouldn’t really know about it if you only read the mainstream business pages. The Weekend Australian didn’t have a peep on it, nor did The Financial Review, The Age, or the Sydney Morning Herald (SMH).
The Age /SMH did run an article on gold, lazily borrowed from London’s The Telegraph, on Friday. But it was more of a hit piece than anything else. The headline sort of gives the article away…‘Preparing for Armageddon: Why gold is such a delusional investment’.
The rant begins thus:
‘Gold has just had its longest winning streak in 18 months, as investors get nervous about the impact of the Trump trade wars on economic growth, and the US Federal Reserve looks likely to cut rates. Once again, excitement surrounding the “quasi-currency” metal is building – and the gold bugs are out in force talking the price higher. But is this excitement really justified?
‘Gold is one of the strangest “investments” there is. There’s a fevered devotion to the precious metal in some quarters, particularly in the US, that borders on delusional. Devotees claim the end of fiat currency is nigh and the global currency system will collapse – with holders of gold emerging from the ruins as the victors of this financial Armageddon. For some, buying gold is a way of prepping for the end of the world as we know it. It’s the investment equivalent of buying guns and heading for the hills with a bug-out bag.’
The author is talking about the US dollar gold price, of course. The geniuses at The Age and Sydney Morning Herald don’t think their readers deserve to know (or they don’t know themselves) the difference between the US dollar gold price and the Aussie dollar gold price.
To them, gold is just gold. And people are dumb and delusional for buying it. In order to taint it as a respectable investment, the author highlights the 1% of gold buyers who own it for ‘end of the world’ insurance. Not that there’s anything wrong with that. But in this bloke’s eyes, such people are uneducated and stupid.
It’s just more elitist gibberish from the Fairfax stable. No wonder their once great papers are dying a slow death.
Anyway, if you’re genuinely interested in why gold priced in Aussie dollars is currently trading at all-time highs, and haven’t been brainwashed with a university degree in economics, listen up…
The gold price, like everything else in financial markets, is an information provider. If you’re willing to listen, a price is rich with information.
Free Report: ‘The Top Three Gold Stocks on the ASX’ – Click Here for Report
The Hidden Message Behind The Gold Price in AUD
What is the gold price telling you now?
It’s saying that Australia’s economic wealth, measured in constant dollars, is not as flash as the government bureaucrats would have you believe.
For example, all assets are denominated in Australian dollars. This is a fiat currency, managed by the Reserve Bank and subject to fluctuations.
Having a floating currency is a good thing. It bears the brunt of any economic adjustments in a way that does minimal damage to an economy. If our currency was fixed, for example, and foreigners grew wary of investing in Australia, asset prices would fall to reflect this increased risk.
But under a floating rate regime, the value of the currency falls instead. This boosts the purchasing power of a foreign currency and keeps our assets attractively priced in the eyes of foreign investors.
As local owners of these assets (shares, property etc), we don’t notice the decline in asset values, because it’s ‘only’ the dollar that has declined in value, not the dollar denominated asset price itself.
Let’s use the property market as an example. Since peaking in September 2017, average prices in the major capital cities are down around 20%. Since that time, the dollar is down around 15% versus the US dollar.
In US dollar terms then, Aussie property values have fallen around 35%. That’s quite a correction in the eyes of foreign capital.
A falling dollar is a stealth wealth tax on the country. It reduces the purchasing power of your labour.
To give you a stock market example, have a look at the recent performance of the ASX 200 priced in gold, not Aussie dollars…
Priced in gold, or in ‘real terms’, the Aussie stock market peaked in 2018. The recovery in 2019 has been much more tepid than you’ve been led to believe.
This is the ‘magic’ of a floating currency. Its weakness masks the real picture.
As I said, a floating rate currency system is much more flexible than a fixed rate system. I am not advocating for a return to the gold standard.
I’m simply pointing out why it makes sense to own gold in a floating rate environment. An ounce of gold is simply a metal that never changes in weight or consistency. Measured against fiat currency, it is a great barometer of how that currency is being managed.
In Australia’s case, the gold price is telling you the RBA doesn’t see a falling dollar as a problem. In fact, it could help bring about inflation (a weak dollar increases the prices of imports), so the RBA probably prefers a weaker dollar right now.
That’s certainly what they’ve got. The chart below shows the Aussie dollar gold price inverted. That is, it shows the destruction of the value of the dollar since 2013. It’s not a pretty picture…
Those who have bought gold in recent years (including subscribers to my investment advisory, Crisis & Opportunity), have protected themselves against this destruction of value. They haven’t done so because of some ‘financial Armageddon’, as the condescending article from The Telegraph tries to portray.
They are just trying to preserve the purchasing power of their labour and their wealth. It’s as simple as that.
That an elitist media outlet wants to tell you that such an investment is ‘delusional’ borders on state sponsored propaganda.
Ignore these fools. Protect your wealth. Own gold.
Editor, The Rum Rebellion
PS: In an exclusive new video interview, Greg Canavan talks all things gold with Richard Hayes, CEO of The Perth Mint. Click here to watch.