Friday, July 6, 2012

Gold And Central Bank Fiscal Stimulus

I don’t know about you, but I don’t think I’d want to be taking investment advice from someone who doesn’t appear to know what he’s talking about (excerpt; emphasis added):

Is it time to buy gold?

PETALING JAYA: Now is the time to invest in gold as its price is consolidating and likely to climb over the next few years, according to one expert of the commodity.

“Gold reached US$1,900 (RM6,042) last year but has fallen to US$1,600 now. This is a purely periodic correction,” said Dar Wong, a trader and veteran financial consultant who was the guest speaker at Tomei Consolidated Bhd's seminar…

…Gold, considered a safe haven in times of economic upheaval, has slipped some 15% since peaking at US$1,900.20 last September at the height of the eurozone crisis, but is up 2.7% for the year at yesterday's spot prices…

…He opined that this would come from two sources: inflation, which would force the hand of central banks to ease interest rates, and US monetary policy.

“Gold is traded in US dollars. Should the Federal Reserve decide on more fiscal stimulus, the weaker US dollar will push gold to new heights.

“From my studies, when the United States elects a new president after the third quarter, whoever gets the job will most likely put in a quantitative easing policy to consolidate his position. That will result in higher gold prices.”

Central banks, he added, had little choice in the current global scenario other than to loosen the reigns on fiscal policy.

Quite apart from the confusion over who is responsible for monetary and fiscal policy, I really don’t think he understands what the term quantitative easing means and who does it.

The Fed has done quantitative easing – but just twice in its history, and both occurred in the last 3 years. It’s not something that gets taken out of mothballs after every presidential election. And someone has to explain to me why when the Fed began both operations, the price of gold initially fell.

Moreover, I’m having trouble corroborating his “study” (never mind that US presidential elections occur in November i.e. the fourth quarter, not the third):

Year of election Average Gold price in 1st quarter of subsequent year compared to election year Average Gold price in the first year of presidency compared to election year
1972 - Higher
1976 - Higher
1980 Lower Lower
1984 Lower Lower
1988 Lower Lower
1992 Lower Higher
1996 Lower Lower
2000 Lower Lower
2004 Higher Higher
2008 Higher Higher

Hmm, does anybody see any correlation?

No matter what you feel about gold as an investment, there’s got to be better grounds for buying into it than this.


  1. Hishamh you have a good point. Generally gold bugs accumulate expecting the fiat currency system to be printed away into oblivion or anticipating a global financial reckoning. In 2008 gold initially fell during the panic and you could have bought for around US$750 an ounce before it started to rise again. If there is a major European breakdown this year, it will involve the writing off of sovereign debts which in itself is deflationary. It might be prudent to own gold in this case but I wouldn't bet the farm on it. :)

  2. The state of financial consultancy in Malaysia (and to be fair, so is most of the world) is a farce. Most of them are some sort of security sales person dishing out advise based on sales target rather than clients' financial well-being.