UBS Forecast Has Bad News on Inflation, Good News for Gold

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Recent forecasts predict a resurgence in inflation – and many believe the Fed is considering a higher-for-longer rate of inflation as the “new normal.” That’s just one reason analysts are anticipating gold will hit $3,000 in the months ahead…

By Peter Reagan

UBS Forecast Has Bad News on Inflation, Good News for Gold

This week, Your News to Know covers:

  • UBS gold will hit $3,000 next year on 3% inflation
  • Gold investment in South Korea: Military paranoia or good sense?
  • Gold’s price in euro is a wakeup call…
  • …and global reserves of gold surpassing euro was inevitable

UBS forecasts 3% inflation and $3,000 gold (and a crowd of analysts agree)

Recently and in the not too distant past, I’ve stressed two facts that I thought were important not to overlook.

First was that Bitcoin’s rise to $100,000 was driven primarily by inflation, both official CPI reports and real-world cost-of-living increases.

Second was that we should brace ourselves for a normalization of a higher inflation rate (as if 2% was normal to begin with!) An official “new normal” from the Federal Reserve. Acceptance that mere 2% inflation was nothing but a fond memory.

We’re noticing increasing support for the Bitcoin argument, and, like last week, we hardly need to tell you that inflation-driven ATHs in crypto are good for the price of gold.

Week after week, headlines keep mentioning a “strong U.S. dollar“, when it is becoming increasingly apparent that there is no such thing.

Something seems to be looming, as it has for the past two years, and gold could be signaling warnings. A debt crisis is the obvious answer, but we suspect many more intricate economic horrors could unravel over the next few years.

In the closer and more specific term, it was interesting to see UBS provide a little background on their bullish gold forecast. They were among the early voices predicting $3,000 gold among big banks, and have now offered a detailed explanation as to why.

Having fine-tuned their forecast to $2,950 next year, what immediately stands out is that UBS expects this year’s inflation to reach 3%.

This is both a strange notion and a not-so-strange one. In regards to the former, inflation is supposed to take off during rate cutting cycles.

But this is no ordinary cycle. It was the worst inflation in 50 years, along with the tightest interest rate hiking cycle.

The Federal Reserve has failed to meet their inflation criteria of 2%, having sliced rates several times already this year.(Update: Again just this WednesdayDespite clear evidence that inflation isn’t going away!)

We are even hearing of the Fed maybe changing course, possibly hiking rates again in the near future. So are we in an interest rate cutting cycle to begin with?

UBS forecasts 2.6% inflation for 2025 and 2.5% for the duration of 2027. But what is supposed to lower the inflation rate, even relatively so compared to 3%?

If the Fed cuts, inflation has to go up, just based on what we’ve seen so far this year. High interest rates are what’s keeping inflation down or subduing it. If they go down, inflation goes up.

All the more curious, however, is that we seem to be in for several years of normalization of an inflation rate higher than 2%.

The more one researches money, poverty and everything in-between, the more one understands it’s only a matter of getting the populace to accept whatever downtrodden conditions are presented.

If the Fed sees it can get away with 2.5% or even 3% inflation for years, there isn’t much to suggest they’ll feel compelled to bring it back down, especially as they lack the means to do so.

Well, the means are there, and they’re called the gold standard, but not many in the official sector like to talk about that.

Another obvious problem is that a 2% rate isn’t acceptable to many, if not most, but it’s being imposed on us anyways. So why not 2.5% or 3%?

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The forecasters we have covered believe we are in for a 4% inflation rate standard by 2030, so these are still optimistic numbers.

This, dear gold investors, is how the U.S. dollar is likely to go. Not with some bombastic usurping by a menacing, gold-backed BRICS currency.

Instead, just as it took a long time to build it up, so it will be a long and painful journey down. One that will require no formal transfer of power before U.S. dollar holders notice their savings are gone.

Regarding other gold drivers, UBS is practically letting you pick your favorites.

They’ve listed soaring deficits, deglobalization and protectionism, and a forceful push towards green energy as things that could be just as meaningful in terms of pushing gold up.

They recommend gold to investors, listing the array of fundamental factors that have brought it above $2,800 as another pick ’em of reasons.

Even with all that said, we urge our readers to pay attention to this cutting cycle closely, and perhaps consider alternate inflation gauges as the U.S. dollar’s structural weakness gets pushed to the forefront.

Young South Koreans are rushing to gold – but why?

One big story in the news this week came out of South Korea, with a psych-you-out declaration of martial law that was quickly rescinded.

Separately, a Korea Economic Daily study showed a considerable surge in South Korean individual gold investing, beginning back in April.

The source links it to the conflict in the Middle East, which seems a stretch given the 5,000-mile distance between South Korea and Israel. Though initially it sounds plausible due to the general national mood.

To those unfamiliar, South Korea shares a border with North Korea. South Korea is famous for its vibrant tech industry and its chart-topping K-pop bands. North Korea is famous for its communism, famines and of course its current leader who executed his own uncle with anti-aircraft cannons. In other words, it’s not a nice place to live.

South Korean law features mandatory military conscription, mostly due to the constant threat of invasion from the north. Seoul, the capital of South Korea and home of 25 million citizens, is within actual firing range of nearly 5,000 North Korean artillery emplacements. Worse still, in 2006 the North’s Strategic Rocket Forces successfully detonated their first nuclear weapon. They now have between 30-50 nukes.

So between the specter of North Korean spies and the very real threats of its conventional artillery and nuclear missiles, it makes sense that South Koreans might buy gold the moment they hear of armed conflict.

But is that really what happened? The study, which analyzed trading accounts, noted an increase of 255% in gold accounts between January and November.

A surge in April seems to corroborate the narrative, but there was another one in October. More worries over the Middle East? Maybe, maybe not.

A far more plausible explanation is simply that South Koreans are tired of losing money, not due to bad investments, but bad policies by their central bank.

The South Korean inflation rate was officially 3.60% in 2023, down from 5.09% the previous year. High, but not exactly the reason one might flock to gold in such numbers.

For that, we simply need to look to the won, South Korea’s national currency. Right now, $1 will get you a staggering 1,434 won (minus transaction fees, of course).

With a national currency spiraling into worthlessness, South Korea joins the depressed ranks of many Asian neighbors – nearly worthless currencies make for perpetual tough economic times.

South Korea is often glamorized, but the living standard is not what you might expect from a country whose TV production rivals our own Hollywood’s. It is a developed nation, with a world-class tech sector and electronics manufacturing. On the other hand, as the won’s value can attest, the nation’s grasp of monetary policy clearly isn’t as well-developed as its entertainment sector.

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It’s sometimes likened to Japan culturally, economically, industrially and even socially. The comparison here is appropriate.

For the longest time, we were told that a Japanese yen priced at 100 per dollar was a “safe-haven currency.” Then we saw one of the biggest explosions in gold price among developed nations. Remember, in Japan they don’t care about the dollar price of gold, they care about how many yen it costs.

It was, and is, a sure sign that the currency is not safe and not doing well. What was true of the yen seems to equally apply to the won.

Fortunately, the younger generations of Koreans, 30s and under, aren’t swallowing their leaders’ tales of economic strength and currency stability. As you’d expect, these younger South Koreans form the biggest share of the nation’s gold investors. No doubt, they’re fed up with watching their purchasing power crumble over the last few years, realized that the official story is nothing but feel-good PR and found an alternative store of value. The same one seemingly rediscovered every generation for the last 5,000 years.

Now, let’s hope they also realize that physical gold alone is the real safe haven investment

How has the euro fared vs. gold? (Better than the won, but not much)

We’re sometimes told that gold is nothing more than a U.S. dollar strength gauge.

I’ve explained many times that this view is overly simplistic, especially since it doesn’t account for supply and demand, let alone other currencies. As we’ve just seen with the South Korean example, any currency’s performance in terms of gold tells us a lot.

Ray Dalio gave an interesting speech recently, saying that gold is still the third-largest global reserve currency after the U.S. dollar and the euro. He makes some good point! Check it out:

While his comments were mostly on point, there is just one little problem: we’re almost a year into the euro being surpassed by gold as a global reserve, with now only the U.S. dollar remaining.

Is Dalio working with secret information or overlooking some public one? That remains to be clarified. Either way, the euro’s performance against gold is nothing to brag about, and shows exactly why it was overtaken.

The gold-tracks-dollar notion, when adhered to too strictly, would have one believe that gold is there to measure inflation. In reality, gold mostly outperforms inflation, as has been the case for more than 50 years.

The oil crises in 1973 and 1979 drove inflation up to 14.5%, but gold appreciated by over 200% around this stretch.

In comparison, gold’s “worst year” in recent memory could be 2013, when the metal lost 31.16% with a eurozone inflation of 1.3%. Not exactly comparable to the 1970s figures, especially when considering that gold’s “losses” are always recovered. Those of currencies are never.

An especially damning figure is that gold rose by around 700% since the introduction of the euro in 2002. Skeptics of the euro only needed to buy up as much bullion as possible with it when it was introduced to the nations forcibly to experience this monumental gain.

Very much contrary to the aforementioned won, the euro has traditionally been and remains stronger than the U.S. dollar. It is the only currency to claim that alongside the Swiss franc and the pound sterling.

This is all a long-winded way of saying that there is no such thing as a strong free-floating currency. The euro might be exceptionally strong compared to the won, but it has depreciated all the same, losing 700% compared to gold in just two decades.

Gold must be viewed as money, and all forms of money judged against it. The very moment you do so, the claims of any central banker’s unbacked paper currency as a “safe haven” simply fall apart.