So hopefully it is fairly obvious that we are in deflation or at least disinflation. If that isn’t obvious enough then read our previous posts. If nothing else you will see that it has been our view since at least June of 2009 is that we are in deflation. That being said we are currently long gold. Some of you might be thinking that we must be smoking crack, after all how can we be long gold if we dont see inflation anytime soon. Because of the general perception that gold is an inflation trade we thought it would be useful to look at the current situation.
Currently the situation in Europe is pretty bad. The EU is essentially in complete disarray as new problems seem to surface every couple of weeks. Everyone but the EU knew that the PIIGS had problems but now Hungary, Belgium, and even France are coming up in the news as problem areas. We are seeing currency issues, debt issues, liquidity issues, structural issues, etc. The EU right now is like the Lindsay Lohan of regimes with all of its issues. All of this adds up to what is the largest fear, a sovereign default. If this were to happen, or when it happens we will see some major turmoil across all markets.
So what are investors doing right now? The have been fleeing the Euro and Euro denominated assets. No one wants EU based stocks, bonds, or the Euro. As they leave the Euro they have been going into the US Dollar, US Treasuries, and into gold. Yes, they are leaving the Euro to buy gold. While investors across the world have been buying gold the trend has been especially obvious in the EU and its neighbors. We can see this in the following charts.
Here is GLD the gold ETF. As you can see it has been steadily moving higher but only recently started hitting new highs as it sold off back in December and took a long time to consolidate.
For real evidence that gold is going up on worries of a sovereign default we need to look at gold priced in Euros. As you can see in the chart below gold in Euros consolidated but has barely even pulled back during the past year and has really accelerated to the upside over the last few months.
Gold in Euros
Being very tied to the mainland Europe, and having a weak economy as well many UK investors have also been buying gold to get out of Pounds. While not quite the move of the Gold/EUR this has been a strong and steady move.
Gold in Pounds
Finally lets look at gold in Swiss Francs. As you an see the trend has been pretty much the same with a steady move higher and very tight consolidation. One thing worth noting with the Swiss Franc is that in a normal crisis investors would be taking their money out of their regular bank and putting it in Swiss banks. This time around Switzerland gave up their role as the ultimate bank by giving away their client list to the I.R.S. We think that Swiss Banks will be looking back and shaking their heads at that move. This is not the only reason (the Swiss want a weak currency for example) for the relatively poor performance of the Swissy but it does not help, especially in the long term.
Gold in Swiss Francs
Comparing gold in US Dollars to gold in European currencies it is obvious that people want out of the Euro and see gold as a reasonable substitute. Hopefully this helps answer why gold can be a good investment even if we are in a deflationary environment.
Disclaimer-We are long GLD