While central banks worldwide race to slash interest rates, gold’s price is on the cusp of setting a new record. The old $3,000/oz price targets are now $3,300/oz – and demand from the central banks themselves have a lot to do with it…
By Peter Reagan
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- Gold inches towards the ATH of $2,800
- Global central bank decisions take center stage
- Hot take: National gold reserves support unbacked currencies
- And THIS is how seriously our depositories take their business
Gold is already eyeing a new all-time high (and it looks like the start of something big)
No sooner did we say that the “Trump is bad for gold” idea is completely false than it has manifested in the markets.
Up and down the $2,800 gold price has been where the action’s been over the past few days, and there are a few things to unpack here.
But before we get into why gold went up over the past week, let’s mention that it shouldn’t have gone down to begin with!
The gold market has always been one of strong fundamentals and strange sentiment, insofar as the last 50 years are concerned. (The same applies to silver, only more.)
If we want to argue that gold should have gone down, then it is to be attributed to all markets’ panicky need for a correction in all things elevated. Nonsensical, but understandable.
But that’s not what the headlines claimed. When Trump got re-elected, we were told it’s bad for gold. Why? Well, because.
We correctly pointed out that this was over fears that a Harris presidency would’ve been highly inflationary, and that nothing about Trump’s own tenure hints to a gold pullback. The opposite, really.
Now that a few weeks of somewhat manic sentiment have passed, the markets are coming to, and we are left with the reality.
That is one of massive sovereign debt, ongoing fiscal deficits and the resulting inflation. Any single one of those three would be a tough thing to contend with by itself.
Despite what our dear central bankers have conjured, they are not actually synonymous or mutually inclusive. Either can exist on its own without the other two and spell trouble. But all three? That’s likely to spell disaster.
Any analyst worth their salt these days is talking about debt, and rightly so! We’re reaching a point where we’re slowly realizing that this debt can’t be paid off. The figure increases yearly, both from new spending and the financing costs of rolling over old debt. The interest payments alone are difficult to deal with. As my colleague Phillip Patrick recently pointed out in a company meeting, the federal government’s debt service payments are about the same as the entire UK’s government spending.
That’s right – the U.S. spends as much on debt financing as the British, the world’s 5th wealthiest nation, spend altogether. Excessive debt is the greatest risk, indeed.
The only way for governments to reduce their debt burden is through inflation. That happens two ways:
- Refinancing old debt with new debt (which expands the money supply)
- Money-printing (which doesn’t just expand the money supply, but actively discourages investors from financing the debt)
Listen: The national debt can’t be paid off, not through legitimate means. For that reason alone, it’s becoming clear that a return to sound money is coming.
Soon?
Probably not.
Central banks have bluffed their way for this long, so they definitely have a motive to stay in the game for as long as they can…
Citizens, on the other hand? We have much much more to lose!
How long until everyone agrees the unbacked, free-floating currency experiment has failed?
Seems like $36 trillion of debt isn’t enough – how about $100 trillion? (That’s the approximate sum of the entire world’s GDP.)
$200 trillion? $300 trillion? (That’s the current global debt, by the way.)
Will this generation of children hear the word “quadrillion” for the first time in economics class?
Eventually, someone has to say, “Come on.”
Unless the global financial system collapses first.
This was what went through my mind when I heard that the Bank of Japan is raising rates to their highest in 17 years. That’s half a percent, by the way – 50 basis points. And I don’t mean they raised rates 50bps, I mean the BoJ’s target interest rate is 0.5%. Why?
Japan’s core consumer inflation hit 3.0% in December, marking the fastest annual pace in 16 months. It has exceeded the BOJ’s 2% target for nearly three years, heightening the case for the central bank to raise still-low borrowing costs.
Equally laugh-out-loud funny, to me at least, this analysis:
Gold’s rally against the yen has been somewhat surprising. Higher interest rates are traditionally considered negative for gold, as they increase the opportunity cost of holding the non-yielding asset. Despite this, gold also rallied as the yen strengthened following the anticipated rate hike.
That’s right – after three consecutive years of above-target inflation, when a Japanese savings account earns you a guaranteed 2.75% loss on your money – so-called analysts are mystified that the price of gold is rising.
That’s not to say we don’t have an exciting week of central banking ahead, with the Federal Reserve, the Bank of Canada and the European Central Bank all announcing their interest rate decisions.
In a recent poll, 80% of Wall Street and 70% of Main Street respondents were bullish on gold in the coming week.
Kitco does these polls weekly, and this is the most bullish response I’ve seen in a while. “Who cares?” is the theme of next week as far as central banks go.
We are also seeing forecasts far beyond the $3,000 level. Right now, $3,300 is the new $3,000…
Phil Streible: “Foreign currencies are being propped up by gold”
A little more than a single sentence from Phil Streible of Blue Line Futures was enough to warrant full coverage by us, and that line came from a recent CNBC interview.
Streible discussed commodities generally, from base metals to agriculture, as well as gold. And he had something especially interesting to say about gold.
As he pointed out, gold has allowed fiat currencies around the world to escape weakness relative to the U.S. dollar over the past few years.
It’s a wonderful piece of framing that gives gold its due. It’s worth the three-and-a-half minutes it’ll take you to watch it:
When we hear that central bank demand is supporting gold’s price, it’s true. But that statement makes it sound as if gold needs the central banks – when in fact the opposite is true.
Here, Streible reminds us that all the other currencies in the world are competing with the U.S. dollar. They are always measured against the dollar.
A strong U.S. dollar, by nature, weakens other currencies. (Although you may not realize it, because it’s not often mentioned – but believe me, central bankers know this.)
The “race to the bottom” is still a race! It’s still a competition! The winner takes the savings of its citizens (and its creditors!). Currency devaluation, default, consolidation with a new currency – and the cycle repeats.
Sound cynical? I challenge you to read a brief history of Argentina’s currency crises – they’ve had four different currencies in the last 40 years!
So what do you do if you have a currency that’s taken a beating? It’s getting worse because the U.S. dollar has rallied since the election (against all logic) and you desperately need to stabilize your currency?
You buy gold.
Gold, “the only financial asset that isn’t someone else’s liability.” The “currency of last resort,” as Goldman Sachs called it back in March 2020. Gold’s historical stability and reliability as a store of value during times of crisis mean that entire nations buy gold as a sort of emergency fund.
Instead of thinking of central bank demand as a pillar of the gold market, we should consider gold as the foundation of currencies – yes, even unbacked, “fiat currency” indirectly derives its value from gold.
Streible expanded on his points a little more, again, it’s worth a watch. It might get you thinking about the importance of diversifying with gold in a new way.
Air Canada’s most notorious cargo heist
What does it take for Brink’s legendary security to be compromised? Air Canada, apparently.
One of our preferred precious metals depositories has, for some months, been attempting to resolve a crime, equal parts scandal and heist. A $20 million gold shipment from Zurich to Brink’s vanished from an Air Canada cargo facility back in 2023.
Not a good look.
Now, there’s no cause for concern (unless you’re an insurance underwriter). Brink’s itself and all customer assets they store and our customers who store gold through them are fully insured. They call it “all-risk protection,” from Lloyd’s of London as I recall. This insurance essentially makes thefts like these completely irrelevant to gold IRA owners even if their own property was somehow involved.
As you might expect, Brink’s is suing Air Canada for mishandling their cargo. Brink’s alleges that Air Canada failed to meet their own security protocols after unloading the cargo – while Brink’s security guards were driving to the airport to pick it up! A criminal investigation led to 10 arrests (including an Air Canada employee) which, to me, does speak to the airline’s liability.
Air Canada disputed they’d mishandled anything. Even so, a judge instructed them to pay a fine to Brink’s. It’s not a very big fine, though – a $18,500 penalty over a $20 million shipment makes a slap on the wrist look like cruel and unusual punishment.
While it’s truly shocking that $20 million in gold bullion was stolen, I’m not at all surprised to see that Brink’s wasn’t at fault. I mean, that’s why they have insurance!