This week we explore the reasons behind gold’s latest all-time high – and evaluate whether we’re likely to see gold at $3,000 by Christmas. We also review Zimbabwe’s latest, desperate attempt to prop its economy using the power of gold…
From Peter Reagan for Birch Gold Group
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- Why gold is nearing $2,700 so soon after breaking $2,600
- You heard it right: Even the skeptics are projecting $3,000 gold by year’s end
- Why Zimbabwe’s gold-backed currency is failing (and what it teaches us about economic independence)
Gold jumps 2.3% in a week – $2,700 is the next objective
This year, the gold price has outperformed bitcoin – at least in terms of all-time highs. To be fair, bitcoin has outperformed gold in percentage terms but crypto prices are retracing old ground. We’ll defer to this bitcoin analysis to understand why.
Matt Mena, Crypto Research Strategist at 21Shares, explains it this way:
“Today’s lower-than-expected [personal consumption expenditures inflation] numbers have strengthened the dovish sentiment sparked by last week’s rate cut, fueling optimism that inflation pressures are cooling faster than anticipated. This encouraging backdrop has bolstered [bitcoin], as investors gravitate toward risk assets, anticipating a more accommodative Fed stance going forward.”
Now, let me explain what this means (skip ahead if the quote makes perfect sense to you):
- The Federal Reserve lowered interest rates by half a percent (50 basis points) earlier this month
- One narrow measure of inflation from the Bureau of Economic Analysis claims prices went up a mere 2.2% over the last 12 months
- These two datapoints lead investors to expect further interest rate cuts from the Fed
- Lower interest rates encourage inflation
- And lower interest rates mean lower yields on cash, savings accounts, CDs, debt etc.
- Anticipating that cash will rapidly become trash, investors are pouring money into bitcoin
The Federal Reserve may lower interest rates by 100 basis points or one full percent in just three months. To put this in context, it would be more than twice as fast as the Fed’s grudging interest rate hikes of 2022-2023.
Obviously, this is highly inflationary – assuming the economy is “growing at a solid clip” and has created “more jobs in two years than any President has created in a single four-year term,” as we’ve been told for the last three-and-a-half years.
If the economy’s so great, why is it suddenly urgent to stimulate the economy?
Regardless, the Fed’s pivot has driven a lot of capital into inflation-resistant investments. Both gold and bitcoin have benefited from this – more than anything else. In fact, gold and bitcoin are two best-performing assets so far this year. That’s strange, isn’t it?
Personally, I can’t think of two assets more different than gold and bitcoin. Tangible vs. intangible. Thousands of years of history vs. two decades. Low volatility vs. tremendous volatility… They couldn’t be more different.
Except for one thing: BOTH are forms of money no government controls.
That’s got to mean something.
This year, gold has set and then broken its all-time high price at least a dozen times. There’s simply no precedent of this kind in recent history. When gold hit $2,620 last week, it seemed excessive to contemplate $2,700 so soon after…
But the past week, gold stopped just short of it above $2,671.
Even though we’ve seen weekly pullbacks, nothing seems to be making a dent in gold demand. We’ll discuss predictions of $3,000 before the end of the year next (keep reading). Looking back on forecasts like this one from UBS, that gold will hit $2,750 by the middle of next year, seem awfully conservative.
Gold could easily clear $2,750 before Halloween. We’ve seen prices rise $80+ in two weeks repeatedly this year.
Even pessimists, when they assemble all their ammunition, craft and hone their most disparaging arguments? They still end up with a $3,000 gold forecast.
This skeptical analysis is wrong on everything – except gold rising to $3,000 by Christmas
Forbes columnist Ross Norman makes one of the strangest anti-gold cases I’ve read in quite a while.
His premise: Gold is derivatives-driven and fundamentally weak. But we’ve clearly seen over the last nine months the opposite is clearly true. It’s as if Norman said gas prices went up “because commodity traders” rather than considering supply factors – OPEC production cuts, Houthis hijacking tanker ships in the Gulf of Aden, hurricanes shutting down oil rigs and refineries – OR increases in demand.
The argument is so backward it’s almost a parody.
Ross tells a story where gold’s run began with the rush of Chinese investors demanding physical gold, (maybe jewelry?), but couldn’t sate their demand with tangible assets for some mysterious reason. So they started playing in the commodities market, using margin loans and futures trades to – well, to something. derivatives. He seems to think China is the only place on earth people have any interest in gold as an investment.
Nonsense!
Here in reality, we know the massive, record-shattering demand from central banks (for whom the only acceptable form of gold is physical gold bullion) has been a major factor influencing gold’s price. For two consecutive years, 2022 and 2023, central banks bought more than 1,000 metric tons. Numbers for the first half of 2024 show the buying hasn’t slowed.
Since we’re Americans here, let me translate that into meaningful units: 1,000 metric tons is 32,150,000 troy oz of gold.
In 2022, the world’s central banks bought the equivalent of ALL American gold eagles in existence. Imagine every single gold eagle from 1986 to last week – from the hefty 1 oz bullion gold eagles to the dime-sized 1/10th oz baby eagles – all disappearing into central bank vaults.
Then, in 2023, they did it again!
So far, this year, central banks have “only”taken another 12,329,811 troy oz of gold off the market. (But the year’s only half over…)
That’s all physical gold bullion, by the way. Just like Birch Gold Group customers, the world’s central banks understand the difference between a gold bar and a piece of paper that says “IOU 1 gold bar.” (Hint: One of these is worth a LOT more than the other.)
Now that you understand the scope of central bank demand, isn’t it silly to pretend that this level of demand isn’t reflected in gold’s price?
Only then can we consider demand for gold jewelry – which is about twice as much as central banks are buying. (See recent gold demand trends here.)
Norman is right on a few points:
- Demand from Western investors has been lagging (potentially another tailwind in the making)
- Commodities traders have recently gotten more involved in the gold market
Despite all this pessimism, Norman admits a $3,000/oz gold price by Christmas wouldn’t surprise him. A recent analysis from Sprott highlighted the importance of debt and its role in driving gold towards $3,000. Debt, especially sovereign debt (that’s where cash comes from) is a primary factor in gold’s price.
Gold investors should simply focus on $3,000 as the next target without too much worry, while keeping a few important points in mind. When it comes to gold, only physical metal is a real asset.
As the Chinese and now Zimbabweans have found, IOUs surrounding gold often come without much metal attached to them.
Zimbabwe’s gold-backed currency fails – bad for Zimbabwe, but good for gold?
We’ve said multiple times when Zimbabwe launched its ZIG that it was being primed for failure. Gold “backing” simply isn’t the same thing as physical gold! It doesn’t mean anything without faith and trust in the government’s ability to deliver physical gold on demand.
We also wondered if gold will end up being blamed for Zimbabwe’s mess. But gold may yet end up the only good thing about this particular monetary experiment…
The ZIG blew up even quicker than expected, lasting only a few weeks before officials announced a 44% devaluation. Hilariously, the official explanation for this devaluation was that the ZIG was too successful… (We’re not even going to try to figure out what this means for those wanting to redeem the ZIG for gold.)
Every other currency Zimbabwe had has failed, and it’s clear that the “gold-backed” ZIG wasn’t much more than a marketing scheme. As Bloomberg observed:
“The sixth attempt to stand up a local currency since 2009 was immediately met with doubt from Zimbabweans, who have bitter memories of how previous local currencies had failed.”
Any currency that isn’t made of gold or silver is nothing but an IOU. There is no going around that. The legal tender movement we have been seeing is only the starting point of returning gold into circulation as money so individuals can choose to opt out of government’s meddling with their money.
One small problem: No nation would ever give up its sovereign currency. Even in Zimbabwe, where we’ve seen many (a dozen?) forms of government money fail, one after another. We see central banks happy to destroy their nation’s currency in collusion with governments happy to spend those freshly-printed banknotes.
A country like Russia has done nothing but give nods to gold’s value, yet it continues to keep the ruble untethered and inflated. This is a carefully crafted scheme we outlined, where Russia uses the ruble to sell oil and buy gold. Oil and gold go up, currency goes down and everybody’s happy (except the citizens of Russia, and who cares about them? Certainly not their government!)
India has its own version of the cash-for-gold scheme, like the world’s biggest pawn shop. “Swap your treasured heirlooms for worthless paper!” isn’t much of a pitch, but it seems to be working. Struggling citizens are steadily impoverished while India’s central bank adds more and more gold to its vaults.
Regardless of the country of the currency, it should be clear what’s going on. Printing currency is a whole lot easier than building a sustainable economy – and it costs almost nothing for the government. All costs are born by its inflation-crushed citizens.
The situation in the U.S. is a little bit different. We’re supposed to have the world’s biggest gold stockpile, but nobody dares look in the vault to see if it’s really in there. The dollar is being ruined, but not quite as quickly as most other currencies.
If you’re still wondering why analysts are taking $3,000/oz gold seriously, look no further than the destruction of the dollar. The more our purchasing power shrinks, the more dollars we need to buy the same amount of gold.