Central banks

After months of debate about various currency and commodity baskets, a Russia- and China-led consortium has apparently settled on using gold as the basis of a planned new international currency system separate from the US dollar and euro.

In addition to discussing the Fed’s total failure in controlling inflation, in this article I will also stick my neck out in the climate debate before I go on to the likely disastrous effects of debts, deficits and inflation will have on investment markets.

US fiscal policy is incompatible with current monetary policy, whose primary objective is to bring down inflation. This incompatibility between fiscal and monetary policy is also the reason for gold's resilience, despite the recent explosion in interest rates and the dollar's rise against the yen.

From being a purely economic variable, inflation will also become a geopolitical issue through the Russia/NATO war, de-dollarization and an increasingly multipolar world. It's vital to be aware of this and to act globally, otherwise things are going to end very badly, especially for Europeans.

The close link between gold and the dollar is well known: when the greenback rises, the yellow metal falls. For several years now, however, the international context has been shaking things up.

Against an already tense liquidity backdrop, a new banking stress story emerged this week. The threat of a credit event is likely to support the gold physical demand in the short term.

China raised its gold reserves for a ninth straight month in July. Bullion held by the People’s Bank of China rose by 740,000 troy ounces, the central bank said on Monday.

The financial system should have been allowed to collapse 15 years ago when the problem was 1/3 of today. But governments and central bankers prefer to postpone the inevitable and thus passing the batten to their successors thereby exacerbating the problem.

The global economy is currently going through a long period of transition. This situation could prove favourable for gold, but unfavourable for equities, which are also suffering from high valuations and have never been so unattractive compared to US government bonds.

Bitcoin is often presented as "digital gold", but the question immediately arises: competition or complementarity? Gold benefits from a centuries-old history and unrivalled trust, while crypto-currencies bring the innovation of blockchain, and it is here that synergies can occur.