The bad economic news is piling up, and Federal Reserve is poised to lower interest rates – even though the inflation fight hasn’t ended. Among the dozens of reports, briefings and updates you’ll find just one number will tell you everything you need to know about the economy…
From Peter Reagan for Birch Gold Group
This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: Federal Reserve finally signals rate cuts, Russia is buying gold like it’s 2015 and silver price’s growing disconnect from reality.
Here’s why gold’s upside is far greater than most analysts think
We now have the first official confirmation of sorts that the Federal Reserve is ready to soon cut interest rates by a quarter or half percent at the upcoming Federal Open Market Committee (FOMC) meeting. The President of the Federal Reserve Bank of New York John Williams, was characteristically ambiguous in his announcement on Friday:
“The current restrictive stance of monetary policy has been effective in restoring balance to the economy and in bringing inflation down. With the economy now in equipoise and inflation on a path to 2%, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the Federal funds rate.”
The announcement came after another disappointing unemployment report, which sent the price of gold up, but then Williams’ speech sent gold price back down. That is, if we consider $2,500 “down” in the first place.
Why? Well, speculations that the Fed’s pivot from fighting inflation to fighting unemployment might be slow (or something to that tune).
In reality, any analyst worth their salt can tell you that gold is preparing for something big again, which is what the big banks have been screaming in unison. CME Group recently wondered why falling inflation is boosting gold. I mean, everybody knows that gold prices go up when inflation is high.
Right?
Well, inflation isn’t falling anywhere close to the degree we’re being told. The Consumer Price Index (CPI) is grossly inaccurate and reports rising prices in a way that most benefits the bureaucracy – NOT the American public. Remember, the Fed has to at least pretend it’s fighting inflation to satisfy the public, but it’s really a dream scenario for the government. In an inflationary environment, the U.S. Treasury gets to pay off old debts with new dollars, worth far less than the initial loan.
Stop a random person on the street and ask them if they believe that we have the same inflation rate from a decade ago. They’ll react about the same as if you asked, “Isn’t…?” They’ll outline how everything is clearly exploding in price to the point where their own lives are unaffordable. (They might ask you how
The politically-correct term for this is “the increased cost of living.”
The economically accurate term is “currency devaluation.”
In 2014 or 2015, people weren’t habitually walking into stores as if bracing for impact before checking prices. And if the Fed’s inflation gauge was honest, we wouldn’t need John Williams’ ShadowStats, which consistently places inflation to more than double or even triple the official figure.
So this is a long-winded way of saying that high inflation is still a thing, and the Fed hasn’t done much to combat it. It takes a naive inclination to believe they want to in the first place. Now, they will cut, and it will be called easing. We wouldn’t want a recession from such a high nominal interest rate, after all.
But like we have been saying all along, rate cuts are inflationary by nature. Just like rate hikes strengthen the U.S. dollar, rate cuts weaken it. A large part of this is due to rate cuts often being accompanied by other so-called monetary easing, often in the form of stimulus. Needless to say, this has already been discussed in abundance this time around. After such a big hike that rang recessionary bells, we need the Fed to come in and rescue us by printing money, right?
This is why the very same “cautious” forecast on gold by TD Securities that we covered last week remains hot in the headlines a week later. There are basically no others. Goldman Sachs expects gold to hit $2,700 early on in 2025, while advising people to enter now if they feel like it.
Here’s the problem with entertaining the idea of gold falling right now. Where is it going to fall to? $2,300? That’s still a very high level. The media is going to act like it’s a bankruptcy-level event, even though the metal remains historically stable and at the very high end of its price range. And then if it does fall there, the Chinese buyers are going to come right in and make good use of the price. Goldman Sachs’ team said exactly that, saying that such a level would immediately trigger support from Chinese consumers that have been buying even amid high premiums. India is just one of the countries for which the same can be said. So the bearish case for gold is starting to sound increasingly fictional as we move from one leg to another of this historic run.
Why is Russia ramping up gold purchases by 700%?
Russia, which is running the BRICS countries these days, upped its official gold purchases by 700%. This kind of news would have been head-spinning in 2015, when Russia was just another U.S.-sanctioned country trying to prove the U.S. dollar isn’t all that. But we are so far removed from that environment, it might as well have happened centuries ago.
Today, there are talks of a gold-backed ruble.
There are talks of a gold-backed BRICS currency.
Everyone seems to understand that BRICS nations want to end U.S. hegemony, dollar and elsewhere, and position themselves as a kind of European Union. But backed by commodities and not nearly as friendly to the U.S. We’re often told that this is because the U.S. went too far with weaponizing the dollar with its sanctions, and there is plenty of truth to that.
But the BRICS thing has, from the start, been a tale of hard resources. These are all nations that are major producers and exporters of basically everything the world needs: precious metals, industrial metals, minerals, oil, gas and so on. They’re doing a power play during the worst time for the West, when everyone is starting to wonder how much faith they should place in free-floating currencies and claims of 2% inflation.
So Russia increasing gold purchases by 700% warrants an in-depth look. For starters, we know that Russia produces a lot of gold, and buys up all of it. We also know it has been exporting heavily since the sanctions, to places like the UAE and many others that aren’t too concerned about scary, dark Russian gold and enjoy the premium.
Russia has pretty much openly said that the oil and gas business has been good, which is why it’s buying this much gold. Of course, we can’t exactly stop there. Analyst Jon Forrest Little calls it what it is, which is a workaround around Western currencies, which gives us a starting point as to what’s really going on.
These mineral and commodity exporters want to trade in hard assets that aren’t anyone’s liability, and most certainly that can’t be sanctioned or cut off. But there is so much more to it. The ruble is still free-floating, and certainly worse off than the U.S. dollar.
Suppose Russia sells oil for rubles, which is what it’s doing anyways. It looks like it wants to prop up the ruble. But what does it do then? It uses the rubles to buy gold. So it’s almost like a money laundering of sorts, or should we call it, value laundering. One side ends up with oil, the other with gold, and the rest have to contend with increasingly worthless currencies. As Little puts it:
“Fiat Currency Is the TRUE Shady Workaround”
So now, we slowly get an idea of why none of the BRICS countries seem too eager to roll out a gold-backed currency. To them, gold is already the only currency that matters. The rest are actually convenient. They leave the citizens with as little value as possible while the central banks themselves hoard it. There doesn’t need to be some great war when there is already a massive one being waged on individual wealth. The Chinese citizens know it. The Russian citizens know it. But do those in the West do, or are they content with stashing dollars in the mattress until the big stash is worth less than the mattress itself?
How long can silver’s valuations stay disconnected from reality?
Out of all the weird valuations we’re seeing in assets now, silver’s is among the more nonsensical. It doesn’t make sense from an investment standpoint. An industrial one. A supply-and-demand one. A gold/silver ratio one. A historic pricing one. And on it goes.
The good thing in all of this is that now is probably a very good time to either be a silver buyer or a silver holder, and not a very good time to be a silver seller. Another good thing that anyone with the prudence to invest in silver right now can enjoy is that, unlike what we had last summer with gold, there aren’t really conflicting opinions. There aren’t people saying silver could or should fall more from $28, how it’s overvalued, moved too fast and so on. Instead, everyone is kind of wondering what’s going on.
We can start with the graphic here that calls silver “The unsung hero of the new economy”. We don’t mind the title, but we’d just add a reminder that silver was the sung hero of any economy for most of history. Either way, the thing that stands out most is that 70% of silver comes as a byproduct of mining other metals. It’s used in over 10,000 applications, not counting investment, which many will argue is the primary application of silver. For all the shoving aside, the number of people insisting that silver is money is growing, not diminishing. So that it barely has any mines of its own considering all this is strange in and of itself, and ties right into the price weirdness.
Then we get to the supply side. As Sprott recently pointed out, silver ore is seeing a decline in grades and mines are being depleted. But, remember, there aren’t that many mines to begin with. Their number has actually decreased over the last decade, and the cost of starting a new one has gone up in the meantime.
There is definitely a reckoning already materializing, as we are in the fifth year of demand outstripping supply. The shortage is no small thing, either, projected to around 7,500 tons a year.
And, in one of our favorite gauges that is too frequently undersold, the gold/silver ratio remains historically high. It has always corrected to the upside when it reached these levels, so much so now that even if gold was to fall to $2,300 or below, silver would still have to gain plenty to normalize this ratio to any degree. But gold is expected to continue posting gains for a minimum of 18 more months, to how high is anyone’s guess.
Reminding investors just how discount silver is is turning into a public service announcement. Analysts these days aren’t talking about $32 or $34 silver. Everyone knows that $50 is the target to clear, which should be alarming to anyone who doesn’t own silver because it represents a near-doubling of price. When’s the last time you heard someone say that double the price is the main resistance to clear for an asset?
But it gets even better, as seasoned analysts believe that $50 and its clearing could be the starting point for something much bigger. It’s far from a novelty idea, but it’s one that bears repeating as the metal continues to give off conspicuously suppressed vibes.
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