Slowing global economic growth along with competitive currency devaluations is showing up in gold prices denominated in various currencies.  The gold price is experiencing significant technical break-outs to the upside in terms of yen, euro, AUD, CAD and emerging market currencies. The Russian ruble chart is the most dramatic. Importantly, over the past six weeks gold is also advancing in terms of US dollars, breaking above its 200 day moving average and countering pundits’ calls for gold to succumb to a stronger US dollar. Gold’s price action, in our opinion, is reflecting growing concern regarding central banks’ mandate to stimulate economic growth through printing press monetary policy rather than policy makers willing to make politically difficult structural reforms.


The Swiss National Bank (SNB) rocked the markets this past Thursday with the announcement that it was discontinuing support of the euro / Swiss franc exchange rate. Switzerland failed to pass a referendum on November 30th requiring the SNB to hold 20% of its assets in gold.  At the time, the SNB stated it would handcuff monetary policy, specifically maintaining the 1.20 peg to the euro.  The thought at the time is that safe haven buying of the Swiss franc would explode the Swiss balance sheet further after having grown from 100b francs to 525b francs since 2008.  Six weeks later the SNB announced it was abandoning the peg as the prospect of defending the CHF/EUR exchange rate would overwhelm the SNB as the European Central Bank prepares to take the central bank quantitative easing (QE) baton from Japan.  Despite the outcry from Swiss exporters and from those on the wrong side of the trade who believe the SNB immune from market forces, the SNB had little choice as Switzerland is not big enough to stand on the bid and be the buyer of last resort without completely destroying its currency.  In some ways it harkens back to President Nixon’s decision to close the gold window in 1971 or lose all the US gold to foreign redemption. There was a time when the Swiss believed its currency was better than gold.  Those days are long gone but holding onto the notion that the franc is better than the euro is worthwhile.


Collapsing oil, iron ore and now copper prices have brought out deflationary fears as slow to zero growth in Europe coupled with slower growth in BRIC countries counter US economic growth.  Cheap money has expanded global supply of everything and a period of market adjustment is at hand.  The problem is capacity has been financed with an explosion of debt as evidenced by total global debt exploding from $70 trillion to over $100 trillion since 2008.  Servicing debt with harder to earn dollars in a deflationary environment increases credit and default risk. Consequently, we have the mantra by global central banks to create 2 percent inflation at whatever measures and cost.  Central bankers in a time gone by are surely looking down in amazement.


After two years of cost cutting campaigns, the gold mining industry is receiving further relief on two fronts, currencies and lower oil prices.   Gold mining companies with large open pit operations and/or operate in remote locations utilizing diesel generators are seeing the biggest benefit from lower fuel prices.  Additionally, the strength in the US dollar means decreased local operating costs denominated in US dollars in countries, such as Australia, Canada and South Africa.  Gold mining equity valuations from 2008 and 2012 were hampered by rising costs leading investors to become disillusioned with the lack of earnings leverage to rising gold prices.  With the tailwind of lower operating costs and higher gold prices, it appears to us gold mining shares are set to regain some lost ground.


Our main thesis for owning and maintaining exposure to gold assets in the face of the strong performance of US equity and bond markets over the past three years is a simple one – the risk that the extreme monetary policies pursued by global central bankers since 2008 to manage the global economy will end poorly is exceptionally high. In turn, we believe there will be greater appreciation of gold’s monetary attributes, most notably gold is not someone else’s liability and that it is not easily reproduced like paper currencies.

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