MMT could spark a new bull cycle in gold - Morphic Asset Management


“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

John Maynard Keynes


The year is 2003 and a long argument has ensued over gold and inflation. Gold is trading at $US370 an ounce, having recently traded at lows of $US250. I am locked in a debate with an analyst colleague who is adamant that gold is going to soar on the back of the coming inflation from interest rates at near zero percent.

I have been lucky enough to work with a diverse range of personalities. Without naming names, one ex-sell side analyst taught me how to model stocks in such a lucid and coherent way that my analysts now dare not stray from the colour coding I was taught.

At the other end of the spectrum, I learnt just as much from the aforementioned analyst who retrained from being an engineer after reading The Australian Financial Review and deciding “I could do this”. As you do. He is an out-of-the-box thinker and a natural contrarian, someone who thinks of things well ahead of others, sometimes to his own financial detriment. I argued that there can be no inflation without deflation. What I meant was that with independent central banks having stable inflation mandates, they would halt any rise in inflation. Only if they either removed or were forced to remove this (by virtue of losing independence) could we have inflation.

He, of course, had the last laugh, as gold has quadrupled since. But on the inflation point, there’s early and then there’s early. He was at least 16 years early on the inflation argument, but we may be getting to that point soon.

This year has seen global bond yields move negative in many countries and there is a growing acceptance that independent monetary policy – instituted after the inflationary crisis of the 1970s – has reached the end of its useful life. All sides of politics are talking about a pivot to fiscal policy. Enter stage left, MMT or modern monetary theory. This is a phrase you will be hearing a lot more about in coming years. Many parts of the theory are somewhat uncontroversial. It is the idea that governments can issue debt in their own currencies to fund government policies to hit full employment and therefore can’t default on that as they also control the money supply. Taxation does not determine the level of allowed expenditure.

In some respects, the world is almost there already. Under quantitative easing (QE), the Bank of Japan buys the debt issued by Japan, which then spends the money. The BoJ also buys shares on the stock market. MMT can be thought of as “people’s QE” rather than “plutocrats’ QE”.

The controversy around MMT comes from the panoply of policy proposals that flow from green-lighting potentially unlimited government expenditure. For the left, this could mean guaranteed jobs or trillions in climate change infrastructure spending. MMT has been dismissed as ridiculous by many economists, but the political sciences angle ignored by many is that the dominant theories in economics have always aligned with the political mood of the populace at those times, as per the Keynes quote above. If there is one dominant mood globally, it is a backlash against neoliberal economics. Two-thirds of Millennials agreed with the statement “capitalism has failed and governments should exercise more control over the economy”. Independent central bankers gave them increasing wealth inequality, low wage growth and unaffordable house prices.

MMT doesn’t have to be inflationary but used in the wrong way, it almost certainly will be. And even if we don’t go “full MMT”, the mood of the populace is moving away from accepting a Japanese slow deflation style outcome.

Yet the world of investing is positioned for ‘‘Japanisation”.

Rising inflation with little productivity growth (aka stagflation) is most definitely bad for bonds, it is very bad for long duration assets, it is somewhat bad for equities, and it is very bad for cash. I’ve never been a “gold bug” per se –which Keynes called a “barbarous relic” – but the reality is gold is one of the few asset classes that do well in this scenario. The gold price in the last year is certainly trading like it’s anticipating something in the air as interest rates head below zero. Ray Dalio, the godfather of macro hedge funds, certainly thinks so.

Now as an environmental, social and governance-focused firm, translating this view into investments for us is particularly challenging. Mining gold is a dirty business, often using a cyanide leaching process and tailings dams. We are engaging with our investors on their thoughts on how best to approach these challenges.

Where can the gold price go if MMT gets out of control? Hard to say, but drawing on my ex-colleague’s views, he suggested 16 years ago a $US5000 an ounce target, which would replicate the 1970s bull market cycle.


This article was written by Morphic’s joint-CIO Chad Slater in a column for the AFR and you can find a pdf version here.

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