Rates

There's one certain winner of next week's presidential election, according to HSBC Holdings Plc: investors in gold.

Shanghai Gold Exchange and Dubai Gold and Commodities Exchange signed an agreement on Friday in Shanghai which makes the DGCX the first foreign exchange to use the SGE's renminbi-denominated gold benchmark.

As the gold market takes a break in its journey to much higher levels, it is good to step back a bit and understand why gold has appreciated so dramatically in the last 100 years and why this will continue for many years to come.

We can’t help but see also the beginning of a flight away from the currencies. And, besides, those countries (China, Middle-East countries) are indeed big buyers of gold, whether through their people or their central banks.

In a hyperinflationary period gold will reflect the devaluation of paper/electronic money while in a deflationary period it will reflect the collapse of the banking system and people will resort to gold as in extremis money again.

The mistake that most people make is to measure gold in US dollars. Gold in pounds for example is only 8% from the September 2011 peak.

Odds of the rate going up in December are said to be about 65 percent on the futures market, but only 8 percent when the Fed meets in November, just before the US election.

Today, we might be standing at another historical peak in the global economy. There are certainly many similarities like deficits, debts and decadence. Just like the Roman Emperors, current leaders have illusions of grandeur of a magnitude that the world has never seen before.

The possibility of a hike in long-term rates is becoming a recurrent issue of concern in the markets. Will the Fed raise its rates? Are investors anticipating a normalisation in the yield curve? More important is the question of all the liquidity created by the central banks since 2008.

The SDR is just a step in the long strategy of China to eliminate the dollar’s “exorbitant privilege” and that gold will play a major role at the negotiating table