Some time ago, the newest edition of famous In Gold We Trust report was released. So, why should we trust in gold in 2018?

The main theme of the latest report is the unfolding sea change in the global monetary order. The authors focus on the turning of the tide in terms of monetary policy, i.e. the fact that the Fed switches from monetary easing to monetary tightening. They point out that in addition to hiking interest rates, the U.S. central bank also started quantitative tightening, i.e. reducing the size of its massive balance sheets. Ronald-Peter Stoeferle and Mark J. Valek believe that its importance is underestimated by the investors. When liquidity is withdrawn from the markets, the “everything bubble” may burst.

We don’t agree. The Fed believes that all the problems are liquidity problems. If there is something wrong happening, all we need to do is pump some liquidity. If liquidity is so great, withdrawing it must necessarily cause some problems. However, it is a very simplistic, hydraulic view of the economy. Many problems are structural. Liquidity will not solve them. It doesn’t help insolvent companies, as solvency is something different than liquidity. We are really surprised that such great analysts as Stoeferle and Valek adopted that Keynesian/central banking perspective. What we mean is that there might be bumps on the way, but so far they seem to be manageable. Quantitative tightening could be lethal for the financial markets if it had been unexpected (remember the taper tantrum?). But it was smoothly telegraphed and the investors managed to adjust.

Anyway, the authors correctly note gold’sfascinating strength. It’s true that it remains in a sideways trend, but it does so amid the Fed’s tightening cycle, a rising greenback and accelerating economy:

Despite rising interest rates, monetary policy normalization, and a still solidly performing stock market, gold held its ground last year. Admittedly, the gold price isn’t really going anywhere at the moment. It is still dancing the cha-cha-cha – “one step forward, one step back, one step sideways”. Naturally everybody wonders how much longer this will continue.