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Tuesday, November 21, 2017

Seeking Alpha Writer Sees 2 Drivers That Could Send Gold Prices Higher

Gold prices could steadily rise in the short term and long term.

Seeking Alpha's Clif Droke sees two solid drivers that could send gold prices higher, one in the shorter term and one over the long-term.

The short term driver is a potential reignition of safe-haven demand due to a build-up of weakness in stocks.

Some have expressed concerns that the stock market's run is built on overly-optimistic projections, and the recent surge in 52-week lows posted by NYSE-listed stocks corroborates this. In this article, Droke expresses that the broad market faces internal selling pressure, and a continuation of this weakness could lead to a familiar flight to the safety of gold as stock market indices slump.

As his long-term driver, Droke points to an unusual combination of fear and inflation expectations. While these might not seem to go hand-in-hand, Droke argues that they have been the yellow metal's biggest backers since last year.

After a jump in prices brought on by the merciless campaigns of both presidential candidates, gold assumed a downwards trajectory when Donald Trump was elected in November. The "Trump bump" saw investors abandon safe-haven assets in order to load up on equities, riding on the promises of a stronger and more stable economy.

However, the article points out that this faith has since largely evaporated amid political concerns, including uncertainty over Trump's tax plan and its ability to stimulate the markets. A strong booster for gold on its own, political uncertainty in the U.S. is aided by inflation expectations, which Droke feels are significant enough to facilitate a gradual increase in gold prices.

While the markets aren't expecting high inflation in the near future, Droke reminds us that present-day inflation is still markedly higher than it was two years ago when deflation was on the horizon. Furthermore, signs such as a lessened appetite for money point to an upcoming increase in U.S. inflation.

Droke notes that the demand for money was at its highest immediately after the credit crash as the world economy looked to rebuild itself. Since then, economies around the world have improved, led by developed Asian countries – in turn, demand for money has subsided as investors braced for higher inflation, improving the outlook for gold over the longer term.

Despite recent dips, Droke points out that the gold price is far above its December 2015 lows and is closer to its 4-year high than it is to the low. Cracks in the equity market, concerns over the U.S. political situation and a rise in inflation expectations should provide ample support for the yellow metal moving forward.

Wednesday, November 1, 2017

Why Iran Should Go For Gold

Forbes contributor Steve Hanke sees gold as an optimal solution for Iran's economic problems.

iran should go for gold

As Iran toys with the idea of a change in currency, Forbes contributor Steve Hanke refers to the slated reforms as nothing more than "a great illusion". According to the bill passed by Hassan Rouhani's government last December, Iran's national currency would be changed from the rial to the toman. This would also require a reduction of Iran's unit of account, since one toman equals ten rials.

Hanke states this is merely another cog in the engine of Iran's economic dysfunction, a problem that has persisted since the Islamic Revolution of 1979. Since then, the rial has officially lost 99.8% of its value as the country continues to struggle with high inflation. Although official figures place the annual inflation rate at 9.6%, Hanke estimates it closer to 20%.

The article clearly shows that something needs to change with Iran's economic system. Adopting a foreign currency such as the U.S. dollar or the euro would be one way to fix the currency issues, but Hanke points out the solution is politically unacceptable.

And while it might seem that there is no easy fix to Iran's economic problems, Hanke believes that the optimal solution is simple and unjustly overlooked: a return to the gold standard.

The article states that the reintroduction of gold as currency has been a talking point for some time now – going back as far as 1997, Nobelist Robert Mundell predicted that the yellow metal would return to its role in the international monetary system in the 21st century. Hanke notes that, since President Nixon abolished the gold standard in August of 1971, many have described the international monetary regime as a chaotic non-system.

Out of the various methods of implementation, Hanke sees gold-based currency boards as the most prudent choice – currency boards have been implemented by over 70 countries and have generally contributed to the fiscal discipline, price stability and growth rates in related countries.

The gold currency unit issued by this board would have to be fully backed by gold and fully convertible to gold at a fixed rate on demand, rendering it immune to manipulation. Hanke outlines a proposition that includes the creation of a Swiss-based Iranian board whose purpose is to issue coins and denominations while maintaining enough bullion to allow convertibility.

The proposed board would be unable to increase liabilities without appropriate backing by gold or foreign exchange notes the article, and it would also be independent from the financial obligations of Iran's government.

As Hanke explains, a gold-backed solution is elegant enough to be accepted by the Iranian government without appearing as a concession. Whether such a system is adopted remains to be seen, but there is little question that it would be more effective than the inconsequential reforms suggested by Hassan's government.