In a week, gold gained 3% just short of matching its all-time high set in May. The official reason is the latest inflation reading, which showed the first signs of easing – but what’s really going on?
From Peter Reagan at Birch Gold Group | Reading time: 10 minutes
This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: Gold hits $2,424 on speculations of a rate cut, shifting our understanding of the gold market, and Africa’s turn to gold is sending us signals.
But first, I feel moved to say something about the assassination attempt on Donald Trump. This is part of a pattern – there have been 14 fatal politically-motivated attacks over the last three and a half years alone. This is a powder-keg situation.
I hope this is another “stress test” that will ultimately prove the resilience of our nation, our institutions and our laws. I fear it’s an indication of just how severe the polarization in American society has grown. I worry we’re on the brink of the “Great Conflict” Ray Dalio described. As always, let’s hope (and pray) for the best while preparing for the worst.
And with that off my chest, back to your regularly scheduled Your News to Know.
Gold returns to $2,424, despite Powell’s non-committal stance on rate cuts
In a week, gold gained more than $70 and came just short of reaching its all-time high of $2,450, set in May. The official reason is the latest inflation reading, which showed the first signs of easing since 2020.
You might expect some kind of big story propelling this kind of price action, but in reality, it’s the same inching upwards that we’ve seen for the last few years. Especially since the start of 2024.
In his latest speech, Federal Reserve Chair Jerome Powell again gave mixed signals that were interpreted as dovish, but can go either way. As we have pointed out over and over, gold appears exceptionally sensitive to the upside, with the smallest tailwind seemingly sending it towards a new ATH on any given week.
Robert Minter, abrdn’s Director of Strategy, told Kitco that inflation is only one half of this run, the other being deep-rooted economic weakness:
There is a strong case for a September rate cut. If you look at how high consumer debt is, it’s not going to take much labor market stress to cause real problems in the economy. I don’t think we are going to see a recession, but that all depends on the Fed. They are a little late, but not fatally late, to do something.
For all the supposedly positive bits of economic data we’ve seen, it does feel increasingly nuts to be an economic optimist. We have supposedly avoided a Volcker-era recession, but have we really? Or is the media downplaying how bad things are on the ground? And for that matter, are we living on borrowed time? Could the brutal recession begin after the Fed begins lowering interest rates?
That’s generally what happens, as Ryan McMaken warns us – the reason a “soft landing” is so elusive is because it’s impossible:
But there are two problems with this [soft landing] narrative: The first is that the Fed has never actually managed to pull this off—at least not at any time in the last 45 years. In actual experience, this is what happens: the Fed denies there is a recession approaching well until after the recession has begun. Then, the Fed cuts interest rates after unemployment has already begun to march upward.
The markets definitely believe that there is a strong case for a rate cut, with the CME FedWatch Tool reflecting a greater-than-90% probability. Carsten Fritsch, Commodity Analyst at Commerzbank, says that the markets have already priced a September rate cut and even one more before the end of the year.
Because of this, Fritsch says gold has all that’s needed to test, recapture, and possibly surpass its all-time high this week. And all of this is still in the near-term.
As we move towards the end of the year, gold will leave its weakest quarter and move into an election cycle that’s looking chaotic even by the standards of the last twenty years.
Gold’s driving forces are changing, and investors should stay ahead
In case you missed it, I just described how easing inflation gave gold a boost towards its all-time high. Doesn’t quite sound like the kind of thing we’re used to, does it?
In his latest report, Incrementum AG’s Ronald Stoeferle noted that gold investors should be mindful of the changing tides driving the gold market. (That’s not to say that the old ones are going away. Inflation and money debasement will still guarantee appeal, and any kind of safe-haven investment discussion simply has to include gold.)
Stoeferle lists the five trends that he now believes are key drivers of the price of gold in the years, and perhaps decades, ahead. Here’s a brief run-down of each:
#1: The decoupling of traditional correlations. This has basically been as in favor of gold as possible so far. If the U.S. dollar goes down, gold will go up, like always. But gold has shown that it can go up alongside the U.S. dollar, something we’d be hard-pressed to find previously.
The same goes for any kind of asset class that once had an inverse correlation with gold. We’re now clearly seeing that gold’s price can rise at the same time as many other asset classes.
Interestingly, Stoeferle seems most captivated by the abandoning of the correlation between strong gold prices and Western demand. This has allowed other forces to take control of the market, while leaving the West exceptionally exposed to counterparty risk.
#2: The East is taking over. In line with the above, we’re seeing the East take over the gold market, which is not something we’re used to when the price is set in London. In 2023, we saw 2,092 tons of gold jewelry demand, almost double the central bank demand we talked so much about. The majority of gold jewelry sold to Asia and the Middle East.
Indian consumers buying gold despite high premiums. The Chinese doing the same. The Indian government is sneakily increasing its reserves massively, not least through its sovereign gold bond scheme. We see the same in China, where citizens are now looking to gold to stabilize their finances now that the flimsy real estate market is in free-fall. (Then there’s that huge unofficial central bank gold reserve of theirs…)
The London price fix could be turning into a Shanghai price fix under our noses, especially given the comparative lack of demand in the West. We’re dozing while Asia scrounges up the world’s gold bullion – and that doesn’t seem like a sign of long-term economic wisdom, does it?
#3: Central bank gold demand. While this one doesn’t need too much expanding upon, it’s worth mentioning that we might be on track for a third consecutive year of record central bank gold demand exceeding 1,000 tons annually.
Central bankers went from “By the way, we’re net buyers now” to “The official sector is now driving gold prices.” This happened over the course of a decade, during which most officials couldn’t find a single nice thing to say about gold. (We certainly heard little about it from officials in the West.)
Now that they’re loaded up, are we going to hear more Poland-style remarks from central bankers or even hints to a gold standard? We’ll have to see, but Stoeferle fully expects the buying to continue and possibly increase from its already lofty figures.
#4: Debt. This could easily be the most important factor on the list because debt is directly correlated with both inflation and therefore the prominence of a sovereign currency. Stoeferle says we are entering a new era of debt which casts a large and looming shadow (though he focuses more on Europe and Asia than our own $34 trillion pile).
It’s almost nostalgic to see Stoeferle mention Italy, reminiscing of a time when it looked to be threatening the entire European Union due to its indebtedness. These days, Italy’s 250% debt-to-GDP ratio barely registers next to France’s 330% (the second-most bankrupt nation in the world).
Now, France’s debt situation seems to have come out of nowhere. Its election had a familiar tone of a candidate whom nobody can name being elected. Little is known of this “far-left” candidate, except that he aims to battle “inequality” through currency debasement. How’s that going to work in the context of the Euro Zone? How did France’s finances get so bad in the first place? These are mysteries I won’t attempt to solve.
Most importantly, though, Stoeferle demystifies the slump of the Japanese yen in a warning to the U.S. Being the world’s most indebted nation with a debt-to-GDP ratio of 400%, the yen had no choice but to fall, and fall hard. What it’s done for gold in yen terms is already a matter for the history books.
Remember, the yen was once considered a safe haven currency! Why, exactly, are we expecting better things for the U.S. dollar?
#5: The new portfolio. Stoeferle presents us with a dramatic, but highly reasonable reimagining of the new diversified investment portfolio, where gold occupies up to 25%. We could easily expand some of Stoeferle’s percentages, such as commodities and even cryptocurrencies, and plenty of money managers have done that. The appetite for government debt is hitting historic lows.
And if we had to add anything to Stoeferle’s detailed analysis, it’s the seeming resurgence of difficulties in the mining sector. We’re hearing that miners aren’t making profits. A major mine in Yukon just closed with no reassurances it will reopen.
Right now is a very bad time to be experiencing any kind of supply disruptions in the gold market, unless you’re a gold bullion investor. In that case, you can just sit back and watch the scarce become even scarcer, and for price to respond.
Zimbabwe, Uganda and Nigeria would like gold to solve their money problems
Anyone who thinks Africa has been a sleeper in the BRICS affair hasn’t been paying enough attention. Russia and China have stolen most of the show so far, but there is plenty to see on the sidelines. Let’s take a look.
Technically, BRICS members only include three African nations so far: South Africa (they’re the S in BRICS after all), then Ethiopia and Egypt joining this year. But it shouldn’t be a surprise that other African countries are already eyeing the alliance. Zimbabwe has formally applied for membership. Both Uganda and Nigeria are seen as likely candidates. This is important because all three countries have had interesting gold-related developments recently.
In the case of Zimbabwe, we discussed its gold-backed currency developed after its disastrous hyperinflationary episode.
Nigeria‘s Senate recently shot down a bill that would have the nation buy gold as a major part of its central bank reserves. Remember, central banks own gold for most of the same reasons we do – to diversify and guard against economic calamity. Now, I’m far from an expert in Nigerian politics, but it looks like the bill failed because it had too much extra stuff attached to it. We shouldn’t be surprised to see a cleaner version debated and passed in the near future.
Uganda announced that it will significantly increase its gold bullion stockpile. They’ll buy from local mines, too. This is important for several reasons. For starters, Uganda’s central bank currently owns no gold, which would make it a new customer in the very crowded official-sector gold marketplace.
Now, buying from domestic mines is a cue taken straight from both Russia and China. Both of these BRICS heavyweights are known for their aversion to selling domestically-produced gold. In Russia it’s prohibitively taxed; in China it’s essentially outlawed.
In other words, some of the world’s biggest gold producers are choosing to buy local instead of selling their gold to other nations, allied or not. So where’s the gold to come from for the Western investor?
It’s similar to what Ghana is doing, recently legislating that domestic miners must sell 20% of their gold to the Bank of Ghana. Quite the development! See, adding to a nation’s gold reserves from domestic mining operations essentially eliminates the paper trail we use to figure out how much gold a central bank has. Most of the time, nations do want the world to know how much gold they own. After all, central bank gold is just about the only asset that other nations would be interested in accepting as payment. It’s a sign of national wealth!
Central banks are already competing with gold buyers in the world gold market. It makes sense, after all – there’s only so much gold to go around.
But major gold producers selling to themselves exclusively? That’s something to watch closely. Central banks have dropped the pretense of disinterest in gold. As the global gold marketplace becomes more competitive, we might see an even larger share of the gold supply vanishing into central bank vaults before it enters the market.
That would drive the price of gold even higher.