Preface

Mario and Gold Coin

In the 1970s and 1980s, during the late recession to recession of the last Cobo cycle, gold had the upper hand against the dollar, and the gold market ushered in a 10-year super bull market, during which the nominal price of gold increased 20-fold. On January 21, 1980, the price of gold soared to a high of $850 an ounce.

Perhaps inspired by the red-hot gold market, in the same year, Nintendo launched Mario Bros., an arcade game designed by Shigeru Miyamoto. Mario's craze quickly swept across East Asia, and then sequels on red and white machines quickly captured the TV screens of families. In the age of black-and-white picture tubes, Mario jumped crazily on TV and harvested one glowing gold coin after another, which became the childhood memories of generations. By 2020, Mario had sold more than 560000000 copies of all its series, topping the highest-selling video game series in history, and the leaping Mario brought real gold coins to Nintendo.

First, the knot that cannot be untied-- "Triffin problem"

Why is the price of gold so strong? Before answering the question of gold price fluctuation, we must first understand the two basic attributes of gold: commodity attribute and credit attribute.

In the special topic of analyzing the influencing factors of international oil prices, the author has discussed the fluctuation factors of the influence of US dollar exchange rate on the price of commodities (international crude oil). After combing, it is found that commodities show two different attributes at different stages: commodity attributes and financial attributes. In the period of rapid economic and demand growth in emerging industrial countries, the pattern that supply falls short of demand makes commodity attributes push up commodity prices, and financial attributes are determined by future fundamentals and alternative returns, which is different from the trigger mechanism of commodity attributes. If we can understand the above two points, it is not difficult to understand that gold will show two kinds of attributes at different stages of the cycle, and credit hedging attribute is the fundamental attribute of gold in the long-wave cycle.The last round of gold bull market began with the fundamental attribute of gold-credit hedging.

After the first World War, international trade suffered a great impact, which led to the collapse of the gold standard. With the depression of the world economy in 1929 and the outbreak of the second World War in 1937, the global currency exchange and credit system remained in ruins. In order to rebuild the international monetary order and speed up the resumption of international trade, representatives of 44 countries met in Bretton Woods, New Hampshire, USA, to discuss the establishment of standards for international monetary and financial transactions. The meeting decided that the Roosevelt administration would lead the allies to set up two major institutions, the International Monetary Fund and the World Bank, to implement the postwar reconstruction and development plan. These two major international financial organizations also provided a fixed exchange rate between gold and the dollar. In response to the problem that world gold production is insufficient to support the growing currency flows in the international financial system, at a time when the United States accounted for 75% of the world's gold reserves.

The Bretton Woods system established the dollar as the reserve currency of various countries and the settlement currency of international trade, then the dollar must continue to flow out of the United States and continue to precipitate overseas, which will form a long-term trade deficit for the United States. In the book Gold and Dollar crisis-the Future of Free convertibility, the author believes that the stability and strength of the dollar is the core prerequisite for it to become an international currency, that is to say, the United States must be a trade surplus country.The strong exchange rate stability and the long-term trade deficit of the United States are a paradox, which is the "Triffin problem" that deeply troubles the Fed.

Countries outside the United States hold more and more dollars, and the United States can only alleviate the money supply and trade deficit by constantly issuing more money and peddling treasury bonds. but other countries have also come to realize that the Triffin problem is an inextricable knot. As confidence in the dollar waned outside the United States, they were reluctant to hold too many dollars and began to sell dollars and buy gold.

II. Currency devaluation and credit overdraft

While the excessive issuance of money in the United States has led to domestic inflation, it has also led to a sharp depreciation of the US dollar. In the 1960s and 1970s, many dollar crises broke out. In August 1971, the Nixon administration closed the gold exchange window, and the Smithsonian Agreement in December of the same year marked the depreciation of the dollar against gold. at the same time, the US Federal Reserve system refused to sell gold to the central banks of other countries, and the system of pegging the dollar to gold existed in name only. As the anchor of physical currency and later currency, the true value of gold is more recognized by the international community than the US dollar.

You think it's over?Too young...

On February 2, 1973, the US government announced that the US dollar had depreciated by 10% against gold, and the US dollar had further depreciated. European countries were the first to announce the abolition of the joint floating against the US dollar, and then the world's major currencies were forced to implement a floating exchange rate system due to the impact of speculators, and the Bretton Woods system completely collapsed. In the context of the depreciation of the US dollar, other countries can only passively reduce their dollar reserves and increase their holdings of gold. The turmoil in the credit system has led to a rise in risk aversion, which further drives up the price of gold and separates the price of gold from the price of other commodities.

Out of the forest, the torrent of long-wave cycle decline has become unstoppable.

Judging from the operation of the whole long-wave cycle, the disintegration of the Bretton Woods system is not accidental, but a necessity. The last long-wave cycle in 1966 was the turning point from boom to recession, which was actually the turning point in the reverse movement between growth and inflation.

From 1948 to 1966, during the last round of prosperity of Combo, the intuitive gap between American economic growth and core CPI expanded continuously due to the improvement of labor productivity driven by technological innovation and the balance between supply and demand of resource goods. During the recession period of 1966-1973, the rising demand for resources and the limited supply stage made the core CPI gradually exceed economic growth. From 1973 to 1982, during the depression, the oil crisis pushed up production costs in western industrial countries, which led to inflation. Cost-driven inflation has become the leading factor restricting economic growth.

At this time, only to slow down the improvement of labor production efficiency is the solution to reduce costs, then economic growth is bound to decelerate significantly.

This is why after entering the long-wave recession, we can see that the strong growth rate of the economy turns weak and the momentum of the real economy dries up.

The relatively serious inflation from 1972 to the end of 1974 and from 1978 to the beginning of 1980, and these two rounds of inflation coincided with the two surges of gold prices in the same period, and the US economy was changing from boom to stagflation.

At the same time of inflation in the United States, countries around the world are also suffering from inflation, and gold, as the best investment product to combat inflation, has become the object of competition.

Therefore, during the long-wave recession of the 1970s, the collapse of the Bretton Woods system was actually a reflection of the decline of the economic strength of the dominant country after economic growth reached the stage of recession.

IV. Hiding gold in troubled times

From March 16, 2016 to August 3, 2020, London Gold (XAUCNY) rose by 175.5 RMB / g, or 66.35%.

On August 3, 2020, London Gold (SPTAUUSDOZ) hit $1987.95, closing at $1976.6, an all-time high.

GCmain Gold main Line also replicated the trend of London Gold (XAUCNY), up 51.23% over the same period.

The performance of A-share gold-related stocks is strong, not only continuing the upward trend of four years, but also rising rapidly this month.

Chifeng gold rose 43.53% in July, compared with 112.60% in the same period; Zijin Mining Group rose 33.36% in July, although it has experienced many shocks, its long-term rising logic remains unchanged; Shandong Gold Mining rose 15.78% in July.

The gold market is so hot, how to accurately seize the rising opportunity? This article will answer these questions from a long-term perspective, and will also use Kangbo's point of view to judge the future trend.

5. Jinshan stacked by long waves

There were great bull markets in commodities in the 1920s and 1970s, and long-cycle recessions or depressions in the world economy in the 1920s and 1970s. According to the law of long-period fluctuations, 2004-2019 should belong to the fifth long-cycle recession of the world economy, which cross-confirms the great bull market of this commodity. History also shows that when long-cycle and medium-cycle recessions occur together, it is also a time for the collapse of commodity prices.

In 2020, the US stock market breaker, unlimited QE, oil futures fell to a negative number, the world economy and geopolitics into a deep crisis. In economic indicators, stagflation turned to deflation-the leading indicator of recession to depression appeared, and in this chaotic year, gold's gains refreshed again.

According to the US Treasury Department, the total amount of US national debt has increased by nearly $3,000bn since the beginning of 2020, exceeding $26 trillion for the first time in history. The Fed's policy of issuing money and buying treasury bonds will increase the money supply in the economy and boost GDP growth. But it could also lead to a sharp rise in inflation and weaken the long-term position of the dollar.

At present, the currencies issued by various economies are hardly the credit sovereign notes that anchor any precious metals, and the currencies of many countries are issued by anchoring their own US dollar asset reserve rates. it is through US debt that the United States has become the core reserve asset of monetary authorities in the form of investment goods. At the same time, the US economy has passed on nearly $1 trillion in annual deficit and inflation risks by exporting dollar liquidity.

While continuously exporting debt, the US dollar is also repeatedly spending its own credit, which will be ignored in the recovery and prosperity phase of the long-wave cycle in the United States, but after entering the long-wave recession, as the strong economic growth turns weak and the real economic momentum dries up, the dollar's inflation and credit crisis will greatly deepen.

This round of long-wave recession turns to depression, in the same cyclical dimension as the 10-gold bull market that began in 1970; during the recession, the return on assets fell and the tide receded, followed by the deterioration of global physical and monetary credit. under the superimposed epidemic, the unlimited quantitative easing policy in the United States and the spread of negative global interest rates seem to be repeated in a deja vu scenario. The relative yield advantage of gold assets is reflected, and gold is likely to replicate the super bull market of the 1970s.

The flying red flag guides you

Central bank data show that since 2000, the central bank has increased its gold holdings five times. From 2000 to 2010, China's economy developed rapidly and the central bank's assets expanded rapidly. during this period, the central bank increased its gold holdings three times, which took place in December 2001, December 2002 and April 2009, of which gold reserves rose 75.69% in 2009. it was the biggest increase in nearly 20 years.

From 2015 to 2019, US bond yields fluctuated greatly. The central bank increased its gold holdings twice during the downward phase of US bond yields in June 2015 and December 2018, of which gold reserves rose 74.80% in 2015, a large increase, and gold reserves in this stage showed reverse changes with foreign exchange reserves.

From the several operations of increasing holdings since 2000, we can see that gold is not only a reserve asset of the central bank, but also a structured investment of China. At this stage, with the uncertainty of the US dollar becoming more and more prominent, gold is also a tool for the central bank to manage risks effectively.

Compared with the proportion of gold reserves of other countries, the people's Bank of China's gold reserves still have a lot of room to improve. Under the policy background of "Belt and Road Initiative" and the steady progress of RMB internationalization, the gold reserve is the bottom of RMB, and the central bank's demand for gold will rise.

Conclusion

The operation of the Combo cycle determines the fundamental trend of the gold price, and the gold price largely follows the pace of the commodity cycle. In this process, the supply and demand of gold market, inflation level, currency exchange rate, economic expectation and financial stability and other factors directly or indirectly affect the trend of gold price. When the economic system runs to a specific stage, when the market credit and monetary system are greatly volatile, the pricing mechanism of gold will change fundamentally. At this time, the gold price will usher in a super market under the release of credit hedging attributes.

Postscript

In 2017, Nintendo launched a new video game console, Switch, and the platform's exclusive "Mario go-kart 8 Deluxe Edition" sold more than 24.77 million copies. Mario remains the top-grossing game on Nintendo Switch. And Mario this time driving a brand-new go-kart, once again gallop in the gold rising track, harvesting real gold coins.

Forty years are fleeting, cycle and Mario have never been absent.