Last week, the London Bullion Market Association published a new edition of its quarterly journal called “Alchemist.” What can we learn from this publication? Most of the pieces focus on internal LBMA news or regulation updates, however, there is always one analytical text. In this edition, there is a transcript of an interesting speech entitled “Ultra Easy Money: Digging the Hole Deeper”, given by William White, Chairman of the OECD Economic and Development Review Committee, at the LBMA/LPPM Conference in Singapore, 16-18 October, 2016.

The main message is that the belief in the effectiveness of ultra easy monetary policy is false, since it is rooted in a model which treats the economy like a machine, although it is a complex adaptive system, which is path-dependent and not controllable by central bankers. Moreover, the ultra easy monetary policy entails significant unintended consequences, such as excessive risk taking, asset price bubbles, excessive indebtedness, moral hazard, low corporate investments, damaged process of price discovery, and some distributional consequences. This is why, according to White, there are more dangers now than there were in 2007. First of all, debt levels are now 20 percent higher relative to GDP than they were in 2007. Additionally, we have $10 trillion of bonds that are yielding negative rates. Indeed, everywhere you look, there are important challenges: Abenomics does not work, Europe has a lot of problems, China is in a transition, and the U.S. productivity rate is low, while investment is weak.

There are also other risks – for example, the rising interest rates might trigger disorderly effects or even a recession – but what do they mean for the gold market? Well, it may be the case that the current optimism about the accelerated growth and reflation is a bit exaggerated. In particular, the room for more fiscal stimulus is limited, given the current debt levels. Therefore, the current financial system remains fragile, so gold should not lose the investors’ interest. Gold remains an excellent portfolio diversifier, especially now, when the correlations between asset classes have gone up considerably. Having said this, investors should always remember that the fact that gold remains the ultimate safe-haven in our monetary system based on fiat money and fractional-reserve banking, does not mean that the price of gold is always likely to rise – it depends on whether (and when) all these risks materialize, which is, well, uncertain.