Dennis Gartman, a well-known commodities trader who publishes The Gartman Letter, considers gold to be a compelling investment, but using the U.S. dollar to buy the precious metal is a rather different matter than purchasing it with the yen or euro. Gartman emphasizes the varying amount of monetary stimulus used by central banks and the consequent impact on currency values.
Central Bank Policy
In the years following the financial crisis, central banks across the world used very liberal monetary policy in an effort to create jobs, keep inflation at a desirable level and improve business conditions overall.
At first, these policies included slashing benchmark interest rates close to zero and embarking on bond-buying programs. With these measures, central banks hoped to place downward pressure on interest rates and expand the money supply through asset purchases. By putting more money in people’s hands, policymakers hoped to spur more robust consumption and investment.
The U.S. economy has recovered more quickly than many others, and the Fed announced in October 2014 that it would no longer purchase fixed-income assets. In December 2015, the central bank announced that it planned to hike benchmark interest rates for the first time since 2006.
The European Central Bank (ECB) and Bank of Japan (BOJ) took a different approach, deciding to harness more stimulus in an effort to shore up economic conditions. The two financial institutions continued to leverage asset purchase programs after the United States stopped, and they have also dabbled in negative interest rate programs, which were experimental at the time.
Because the ECB and BOJ took this liberal approach toward monetary policies, their currencies depreciated. As a result of these foreign exchange fluctuations, gold has experienced sharply different returns, depending on whether those gains are measured in U.S. dollars, euros or the yen. Gold is a currency itself, one that man has loved for some time, Gartman argues.
The Importance of Currencies
Between early 2014 and July 2016, gold has enjoyed far better performance when measured in the euro than it has in terms of the yen and U.S. dollar. During this time, gold measured in the euro surged 40%, while gold in terms of yen and the U.S. dollar rose 8.4% and 14%, respectively.
Because of this, gold, as measured by the euro, enjoyed a bull market for two and a half years, while the precious metal had been rising for six months in terms of the U.S. dollar. Against this backdrop, Gartman suggests that investors purchase gold denominated in fiat currencies with the greatest chances of depreciating.
There may be many to choose from; Gartman lists a wide range of central banks – including the Reserve Bank of Russia, the People's Bank of China and the Central Bank of Brazil – that were all taking action to increase their money supply. Gartman predicts that these financial institutions will use this approach for some time because inflation remains stubbornly low.
Summary
Many have touted gold’s appeal as an investment, and the precious metal has delivered compelling returns at many points. Investors might want to hold gold denominated in numerous currencies if they expect central banks around the world to keep injecting liquidity into the money supply, Gartman asserts.
However, if these investors expect the Fed to use more conservative monetary policy than the ECB and BOJ, they may have far greater reason to own gold denominated in the euro and yen than in the U.S. dollar. In addition, they might take the lesson learned here and apply it to other currencies potentially impacted by an easy money policy, such as the Russian ruble or the Brazilian real.
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