It may very well be that 22nd January 2015 was the day that the Gold Bugs were waiting for, courtesy of ECB President Mario Draghi.
The “smart” money decided that in the wake of the financial crisis in 2008 that governments would require central banks to print money in order to avert a massive catastrophe depression. They would assume trillions in debt in order to erode the value of the cost of bailing out the casino banks and associated institutional clients of politicians.
The idea from 2009 onwards (amongst some) was that the value of gold would soar from around $900 to as much as $3,000 or even $5,000 an ounce as part of a parabolic ascent for the metal as investors sought out a safe store of value. That was not a bad idea. For instance, the metal peaked not far off $2,000 in 2011, and there was an okay run up for mining stocks for a couple of years, where they doubled if you were lucky enough to get in and out quickly.
Actually, the 2009 – 2011 experience would have been fine if the music hadn’t stopped.
But then the Eurozone started to fragment under the weight of the divergence between the winners, or rather the winner – Germany, and the PIIGS nations. Fears of a collapse of the Federal European dream and the drag of recession meant that we had the twin nightmares of high unemployment and recession. Even in the countries where the money printing / QE had been unleashed, such as the U.S. and UK, growth appeared to be anaemic at best.
On this basis alone it was perhaps not surprising that gold and especially mining stocks started to slide and just kept on sliding. Even Soros bailed out at $1,500, a long way off the top, and the man who had been one of the big winners in gaining from the fallout of 2007/8, managed to lose $300 million in a single day. There were even accusations that the yellow metal was being artificially depressed in order to prop up the relative value of the U.S. dollar.
But how things have flipped since last year.
Ever since Super Mario hinted that he would like to see the Euro weaker in May, and that there could finally be the QE in Europe that the Germans alone had resisted for so long, we have seen the single currency tank. Only gold itself seemed to be stubbornly diverging from this promise of inflation in the EU via a currency devaluation, or hopefully QE. The soaring U.S. dollar on the prospect of the Federal Reserve raising interest rates was an explanation, as was of course near zero inflation rates in most Western nations.
Of course, these two factors remain, but what also stands out is that the mystery as to why the supercycle in gold ended in the autumn of 2011 may have originated in Europe, as soon after the PIIGS bailouts began. Now that we have a decisive attempt at inflating the Continent it could very well be that the latest push for the metal above $1,300 is one which will have legs. The timing may be somewhat cynical / fortituous ahead of the Greek Election, and indeed, it may have been best just to write Greece a cheque for €1 trillion just to prevent a Grexit. But I suppose one has to think the Greeks know better than to trust ECB bankers bearing gifts…