Jim Grant on Gold's Central Bank Buying and Possible Revaluation

Jim Grant is writing about Gold again in his erudite historian way. In a brief but tightly-worded comment in this week’s Interest Rates Observer he touches on: The press infatuation with pronouncing Gold dead, Central Bank purchases and history, Gold’s performance in 2022 as inflation hedge (not so good), the potential for European Central Bank revaluations and more. Here is an attempt to summarize and decode some of it.

HATE THE GOLD

The writer starts off noting the absolute pessimism by the press. He takes a jab at the one-upsmanship by publications to see who can deride Gold the most. He quotes both Bloomberg and Business Insider one day apart

“Gold set for its longest monthly losing streak since the late 1960s,” was the headline over a Halloween Bloomberg bulletin. “Gold prices are down for seven consecutive months, the longest decline since 1869,” Business Insider reported the next day..

Business Insider, he observes in the game of Gold-bashing media poker was, “seeing” Bloomberg and raising the date by 100 years. After which he admits he has been a friend to Gold for quite some time.

INFLATION HEDGE

On Gold as an inflation hedge he self-effacingly notes: Everyone knows that inflation isn’t just bad for the bond market. What not everyone had realized is that inflation is also bad for the gold market, yet so it’s proven in 2022.

One cannot argue against that based on the numbers so far. But, at some point those money market rates, if they keep climbing will begin to tear at the structure of credit itself, which he believes will happen.

In other words, at a point, there will be no interest high enough to make someone hold dollars as compensation for accelerating debasement. To our ears, he is describing what happens when a CB chooses to chase inflation (Burns) rather than over come it like Volcker did. Money markets giving over 4% now makes them fetching by comparison to the pet rock yielding nothing

When that happens he says:

[G]old’s very sterility—no coupon, no counterparty [risk], no embedded options—may seem plenty fetching in its own right.

Next up is his summary of the WGC report on CB buying in 2022.

CENTRAL BANK BUYING

The World Gold Council reported that, central banks, led by Turkey’s, have purchased 673 metric tons of gold, “higher than any full year since 1967.”

This, he notes is the same year in which Chairman William McChesney Martin admitted to his the rest of the FOMC that: “the horse of inflation not only was out of the barn but was already well down the road.”

Given his inflationary timeline starting at 1967, it might be worth while how that compares to the more popular timeline analogs.

THREE ANALOGS

When you think of past parallels consider these three scenarios making the rounds.

Volcker Light

In the first one the Fed and financial media would like you to believe the ghost of Volcker has been summoned and the recent hawkish vibe is 1982 all over again. This Volcker-signalling implies the end of inflationary pressures are near of course !