Claudio Grass: Interview with Alasdair Macleod (Part I)
“The Eurozone faces the worst combination of economic and systemic risk”
The past few months have been an exciting time for gold investors, as the precious metal has seen a spike in demand after serious economic concerns and geopolitical tensions unsettled the markets. Many mainstream analysts have pointed to a number of recent events, from the US-China trade war escalations to the inverted yield curve, to explain the recent gold rally. Although these developments certainly play a part in short-term price moves and are of great interest to speculators, for the long-term investor, who understands the true function of gold and the purpose of their physical precious metals holdings, the bigger picture is much more relevant.
To further examine the implications of this perspective, I turned to Alasdair Macleod, whose insights have long helped sound investors gain clarity and better understand important macro-economic events, the real impact of monetary interventions and the role of precious metals as real money and as a hedge against the inherent risks of fiat currencies.
Alasdair Macleod started his career as a stockbroker in 1970 and became a Member of the London Stock Exchange in 1974. He has accumulated a decades-long and hands-on experience in investment management, fund management, corporate finance and banking in director-level positions and today he serves as Head of Research for GoldMoney. Having worked for forty years in the finance sector, he has developed a very deep and clear understanding of the monetary system, of equity and bond markets and of precious metals, which makes his analyses uniquely insightful and of real value to investors.
“It is not a question of gold rising, but of state-issued currencies losing purchasing power. It will be clear from my earlier answers I do not see a positive future for state money.”
Alasdair Macleod
Claudio Grass (CG): The last couple of months have been very interesting for gold. The recent price uptick has largely been attributed to stock market volatility and geopolitical developments, like the US-Iran tensions. Do you agree with this assessment or do you see other factors that played a role too?
Alasdair Macleod (AM): Undoubtedly factors such as stock market volatility and geopolitical tensions do have an effect, but for it to be long-lasting it must be deemed to increase the likelihood that the purchasing power of currencies, in this case the US dollar, will be undermined by these events. To me, the real reason for gold’s strength is clear: we face a recession which is likely to be deeper than anything we have seen in recent years.
If I am right in this assumption, then central banks will try to support financial asset prices by reducing interest rates, deeper into negative territory if necessary. We can also expect more quantitative easing, likely to be on a greater scale than seen to date, in an attempt to bolster banks’ balance sheets and encourage them to lend to the private sector. In short, the monetary inflation to deal with an upcoming recession is what both bonds and gold are trying to discount.
CG: What do you make of the significant increase in central bank gold purchases over the last years? What do you think are the motivations and the strategic considerations behind the gold stockpiling activity, especially in Russia and China?
AM: In Russia’s case, it is simple. She wants to eliminate as far as possible American power over her economy through dollar hegemony. Don’t forget that Russia is also the largest energy exporter in the world, so she continually has dollars to sell. Also, from what I have observed, Elvira Nabiullina who heads the Central Bank of Russia is quite “Austrian” in her approach to money, so she values gold as the natural hedge against being dependant on foreign fiat currencies.
In China’s case, I believe she started accumulating gold as a state from 1983 onwards, as a simple hedge against growing dollar inflows. Bear in mind that only a small portion of this gold is declared as national reserves, with unknown quantities stored “off balance sheet”. Obviously, the Communist Party felt it had enough gold by 2001/02 to then permit her people to buy gold, so the Peoples Bank set up the Shanghai Gold Exchange. At some stage, government strategists must have understood the value of gold as a strategic asset, and we have seen China come to dominate the market for physical gold.
Other central banks, particularly in Asia, Eastern and Central Europe, cognizant of the shift of geopolitical and economic power to the Russian-Chinese partnership, know they must also accumulate gold in order to align their reserve asset policies with this developing power base. I would expect to see this trend continue with more central bank purchases.
CG: We have seen an important shift away from the US dollar. China is trying to internationalize the yuan, Russia adopted a “dedollarization” plan in response to US sanctions, while European leaders signed an agreement to develop an alternative to SWIFT. Do you believe such moves have an impact on the future of the USD as the world’s reserve currency?
AM: In the longer term, these moves will obviously impact on the dollar’s future as the dominant reserve currency. Even though America continues to abuse its monetary power, it will take something else to undermine it. It will still be used at least for pricing references in all international commodity markets. Given the likely long timescale for the dollar’s demise, I think other factors are more important, particularly the fall in its purchasing power as the Fed battles to protect the US Government, the banks and the US economy in the developing recession.
CG: Staying on the topic of the future of currencies, what is your take on the Libra project that Facebook recently announced? Do you think it has the potential for mass-adoption and if so, what would the wider implications be in your view?
AM: I think Libra is ill-conceived and potentially inflationary. It is a crypto version of a collection of fiat currencies and unnamed assets, but unlike bitcoin, does not have a widely decentralised base beyond the reach of governments and the establishment. It is intended to become a global currency for the world’s unbanked. The assumption is with even nomadic herdsmen using mobile phones, they will use Libra for transactions. If Libra is superior to the weak local currency, Gresham’s law tells us they will use the local currency and save Libra if they can get it. If the local currency has a similar strength to the major currencies, why use it?
Libra is said to be backed by a pool of currencies and assets stored around the world. Putting the assets to one side (are they government bonds? Equities? ETFs?) you have to ask about the origin of the currencies. And here we will almost certainly find it is the expansion of bank credit, unless central banks come on board which is unlikely in my view. I think the concept is ill-conceived by people who do not understand money.
In the upcoming second part of this interview, Alasdair Macleod shares with us his views on the “Bitcoin vs. Gold” debate, his expectations regarding Brexit and his outlook for gold and silver going forward.
Claudio Grass, Hünenberg See, Switzerland
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