Gold is drifting lower of late, but money debasement continues and gold will rise again.

Here are a few medium to long term thoughts on the subject after watching the U.S. central bank balance sheet overtake the Bank of Japan (BoJ), again.

On the subject of Japan.

For me, Japan represents one of the most beautiful countries and cultures that I have had the privilege to visit. I came to know it over a couple of months in the late 1980s, when travelling the islands with one of my besties.

It was a veritable powerhouse of business, electronics and people. Yep, millions all living and working together in a giant Meccano set, timed down to the last second.

Best description - the Matrix.

Best memory - hurtling past Mount Fuji in the Shinkansen and having to look above the cloud line to see it.

But of course, all good things come to an end and for a great many years now, Japan has lost its position as the world’s largest economy, and disinflation and deflation are now the norm.

The U.S has turned Japanese.

If you scan the chart below, you will see that since the GFC, the U.S Federal Reserve outstripped the BoJ’s purchases, for about 8 years.

Then in 2016, Shinzo Abe decided to pour on more Shōchū in an attempt to startle the Japanese economy out of deflation.

But in March this year, the Fed shot its $3 trillion death ray at COVID-19 and once again took the lead in central balance sheet creation. You can see it represented by the asymptotic blue line in the yellow shaded area of the chart below. Think of a blast from the death star.

Today, it sits at $7.2 trillion, while the BoJ sits in the high $6 trillions.

Money debasement through monetary pump priming.

As an aside, and as of now (November), total assets of the world’s four largest central banks stand at around $27.2 trillion, or around 35% of global GDP depending on when/how you measure it.

That’s a lot of pump priming for not much of a return in growth and inflation terms.

But the point is that Japan reached zero interest rates a number of years ago due to continual money printing and over-priming, without any growth to show for it. Sure, some of it was a result of cheaper jurisdictions becoming global leaders in electronics. A loss of comparative advantage. But, isolationism and nationalism also played a part. Sound familiar?

And, given central bank balance sheet expansion and disinflation have become ingrained in Japanese expectations, and given debts have risen and when they can’t be repaid they are refinanced, the country has not been able to stop the money printing infinity train.

Interest rates seem to be suspended at, and below the zero bound, with Japanese 2 and 5 year bonds yielding -0.15% and -0.12% and with the 10 year paper mildly positive at 0.01%.

Inflation (a proxy for growth) in Japan has only reached 2% twice since 1991, and for almost all of that 29 year period, the real economy has dis-inflated or deflated. The secondary markets (for investment assets) have done well, and are not blipping on the radar of many investors. Sound familiar?

Many other countries also have negative interest rates, with central banks carefully managing rates down, under the auspices of emergency legislation/agreements which allow the central banks to do what would otherwise be illegal.

To avoid a debt spiral, and in an attempt to stimulate growth and inflation, Japan has not been able to take its foot off the infinity train accelerator, and that is a close proxy for a U.S., under Trump.

Whether this changes under Biden depends on:

• whether Biden’s Democrats control the senate;

• the extent to which Fed Chair Jerome Powell (if he remains) and mooted Treasury Chief, Janet Yellen (if that happens) will see dove to dove (which many are predicting) or dove to hawk (not sure how to assess that probability just yet), on what seems to be the diminishing real economy returns of QE Infinity; and

• whether debt can simply be extinguished by some bizarre act of Congress (again goes back to who controls the Senate) or refinanced with new debt, and so the money printing spray gun party continues.

Gold.

So far, this all bodes well for gold. And that’s great for Western Australian gold miners, explorers, equipment suppliers, service providers, investors, and for the state in general.

Although Gold is pulling back of late due to perceptions of several efficacious vaccines nearing completion, with plans in some cases to have immunisations before the end of the year, that won’t reverse the debasement of the dollar and fiat currency.

Long term, it’s a very relevant metal, and locally, it’s a source of growth for Western Australia.

And that’s a great thing!

Mike.

Next Level Corporate Advisory is an independent financial advisory firm with a multi-decade track record of successfully delivering strategic M&A, IPO, private equity and other bespoke transactions. Based in Perth and globally connected, our sole focus is on helping our clients to transform and take their business to the next level, in and out of Australia.

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