Recently, investors have realized that bad economic news is in fact bad news, and the global financial system is reeling. Here’s what happens next…
From Peter Reagan at Birch Gold Group | Reading time: 8 minutes
Key Takeaways
- Gold prices remain at near-record levels, trading at $2,450, despite some skepticism earlier in the year
- Recently, disappointing economic reports have strengthened gold’s position as a safe-haven asset
- Ongoing geopolitical tensions in the Middle East and Asia continue to bolster gold’s appeal
- Recession signals have heightened expectations of near-term interest rate cuts, supporting gold prices further
- China’s previously unreported gold purchases highlight the growing demand for the precious metal worldwide
This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: Recessionary fears renew as sentiment shifts in favor of gold, is the world ill-prepared for a consumer-driven supply glut, and guess who’s been fudging the news about their gold purchases?
Dovish Fed, recession signals and a uniformly gold-bullish sentiment
Weird as it might be to say that gold hasn’t enjoyed universally favorable sentiment, we have actually seen plenty of bearish headlines so far this year despite the historic price action. Survey data shows that investors, both professional and private, couldn’t seem to agree on gold’s direction.
But several things that happened in the past week look to be changing that. For starters, we didn’t see much of a drop from what is for all intents and purposes an all-time high gold price. As of this morning, gold traded at $2,450.
What’s keeping gold elevated besides fundamentals?
A big point has been a string of disappointing reports, including U.S. jobs, non-farm payrolls and wage inflation. You could say there hasn’t been any good economic news (unless you’re a gold investor).
Risk-on assets took a beating in the wake of all this while the U.S. dollar fell to a 4.5 month low in what has been a sell-off and a flight to safe haven assets, which are few and far between these days.
Not that it was ever irrelevant, but the conflict in the Middle East is actually becoming more supportive of gold as time passes by. The Russian invasion of Ukraine had its biggest impact in the first week or two, as seen in gold’s price action. It slowly withdrew from the public eye, so to speak, as the months went by. Part of this had to do with a re-establishing of supply lines. But the BRICS alliance, in a strange sense, supported Russia. They have to keep up some appearances for the BRICS thing to work, right?
Nearly a year into the Gaza conflict, things only seem to be getting worse. Discussion of imminent U.S. troop involvement is happening at the highest levels, the arms sales have topped records – and that’s just the start. People don’t know what to expect, and the more this goes on and especially if it worsens, the more gold will rise.
The biggest story in the U.S. is now unquestionably the recessionary signals we’re seeing – higher unemployment, fewer job openings and less consumer spending. And when we talk recession, we must talk about the Fed and the rate cuts we’ve been trained to expect during economic slowdowns.
For the last three or four years, investors have treated bad economic news as good news! Bad economic news means the Fed will be forced to slash interest rates, boosting speculative asset prices. Suddenly, almost overnight, investors and analysts realized that bad economic news is bad news. And they’ve acted accordingly.
Not only is inflation nowhere near 2%, but as we’ve just mentioned, wage growth simply isn’t keeping up. That means an effective pay cut for American families as grocery, fuel and housing prices rise faster than their income. Month after month, year after year… Understandably, nobody who’s watched their paychecks buy less and less wants this wealth destruction to accelerate.
When the economy weakens, though, the Fed cuts interest rates. Dollar strength declines, credit gets cheaper, and speculative investments find support.
“Policy mistakes are very clear now as the data has confirmed that a trend is in place and the Fed is late,” said Naeem Aslam, Chief Investment Officer at Zaye Capital Markets. “I think that the path of the least resistance is to the upside, and we are going to see gold prices moving sharply higher due to concerns about a recession taking place.”
What this means for price specifically remains to be seen. Michele Schneider, Chief Strategist of MarketGauge, said gold will rise to $2,650-$2,700 by the end of the year This means that we’re talking about a gain of 50% within a year for gold.
It’s just like Warren Buffett said:
Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time.
The more fearful investors are, the more uncertainty there is, the higher the stakes, the more gold will soar.
Gold demand is flaring up around the world: Are mints and refiners ready?
Just after we covered the U.K.’s Royal Mint downsizing due to lack of profits, we’re hit with a slew of headlines pointing to extremely strong investor demand for precious metals. The first and most curious one is that of Costco is now selling $200 million of gold bars and coins to American families every month.
Costco got in the gold business fairly recently and seems to have persevered mostly due to high demand. Most of their sales are likely to first-time gold buyers. Existing investors are likely to have one or more bullion dealers that they prefer doing business with rather than going to a big-box retailer for their monthly groceries and a gold bar or two.
We said several times that despite the price action, open interest is yet to come to the gold market. Mints’ sales data corroborates this: Western investors, according to these reports, seem to have all but forgotten about gold bullion. So who’s buying $200 million of it just in the U.S. from Costco? Something seems amiss here…
Vietnam has hit the highest gold bar and coin demand in a decade in the first half of the year, a 30% year-on-year increase. India recently cut its import duty from 15% to 6%, with estimates that this will increase Indian gold demand by up to 40%. Then there’s this bit from the India story:
“‘India has become a hub for Sudanese syndicates running a booming trans-Saharan gold racket,’ says The Week magazine, reporting how flows from war-torn Sudan – estimated as Africa’s 3rd largest gold mining nation and the 10th largest worldwide – have been smuggled by female kuruvis (meaning ‘sparrows’, a slang term for human mules) flying into India from the United Arab Emirates or walking across the border from Nepal wearing gold dust or paste on their skin and swallowing or hiding gold capsules in body cavities.”
Many takeaways from this story, but the one we’ll focus on is the same thing we’ve been repeating a fair bit recently: Gold isn’t easy to get in many parts of the world. In China, it’s almost a roll of the dice on whether you’ll get real gold or not. In other countries, although this applies to China as well, exorbitant premiums are punishing buyers. (The UK’s Royal Mint, for example, consistently charges some 50% over spot for silver bullion! At France’s sovereign mint, Monnai de Paris, prices are even worse.)
It could be that Americans are beginning to realize the privilege of having easily accessible, low-premium gold bullion for purchase during times of global fiat destruction. Regardless of what Mint data says, U.S. citizens seem to be making the most of that privilege, no doubt spurred in part by the eye-catching price action.
But all of this leaves us with an important question. Central banks are buying over a thousand tons of gold a year. Costco is selling $200 million of investment-grade gold a month. Vietnam, like many other countries, is nearly doubling gold imports. The gold demand in India, already the top gold consumer, is projected to increase by up to 40%.
While this is happening, miners are struggling, and mints are downsizing. We’re not going to ask where the gold is coming from just yet. But we might soon need to.
Surprise! China has been buying gold this entire time
It’s a month ago, and gold has fallen to $2,295. Analysts call this to be the beginning of the end. They’re wondering: $2,100 next? $2,000? Furthermore, we’re being told that this drop was caused by China’s end to its official gold reserve purchases after over a year of steady monthly inflows.
Not many were brave enough to say this story was irrelevant to the gold market. (I was among them.) My logic: Since China is known to purchase gold off the record and rumored to have a gold hoard more than ten times the official figure, why should we even look at the People’s Bank of China (PBoC)’s press releases?
I should also mention that the PBoC’s stated reason for the gold-buying pause was a desire for lower prices so that they could get more bang for their buck when they resumed purchasing.
Not only does this sound like market manipulation, but it again begs the question. Why this was framed as bad news for gold? The PBoC never lost interest. The flipside, of course, is gold’s fundamentals – more than strong enough to completely stifle China’s attempted market manipulation.
Enough backstory. Let’s focus on the latest analysis from Jan Nieuwenhuijs. To make a long (and well-worth the read) story short: China is buying 400-ounce gold bars from the West under the pretense that they’re for the domestic market – thus, not “official” central bank gold reserve purchases – and then adding them to an already-massive gold hoard. (Meanwhile, Chinese consumers are desperately buying fake gold.)
Obviously, China’s pausing of official gold purchases was fake news. In fact the opposite is true. The false story caused some anxiety, which may or may not have contributed to lower prices. How much of that happened isn’t clear, but it should tell everyone to take bearish gold stories with a grain of salt when they’re being released during a historic bull run projected to last through 2025.
This might also be a good time to give a brief mention of the Unit, a creepy-sounding currency with an equally creepy backing. It’s to be the BRICS currency everyone has been talking about, apparently. The problem is that it will only be 40% backed by gold and 60% by BRICS currencies. (Interestingly, the 1913 Federal Reserve Act legislated only a 40% gold ratio for the gold standard dollar. I’m sure it’s just a coincidence.)
Here’s the thing: Saying a currency, any currency, is “backed by gold” is not the same thing as making a currency convertible to gold at a fixed rate. That’s the secret of the gold standard. Anything less is another attempt to delay the inevitable collapse of government debt with smoke and mirrors.