Bombs fall. Markets panic. Gold’s price doesn’t react. That’s not a glitch – it’s a warning. Headlines aren’t driving gold anymore. Not war. Not inflation reports. Just the slow, undeniable collapse of faith in business as usual…
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:
- U.S. strike Iran doesn’t move gold’s price…
- …proving our theory that we’re in a fundamentals-driven rally
- Basel III Endgame update: A view of gold as HQLA from a Swiss expert
- Lessonls learned: Why a generation of investors are making a huge mistake
U.S. bombed Iran, but gold didn’t react – what’s going on?
In a surprising weekend development, the U.S. bombed Iran’s nuclear sites.
“The strikes were a spectacular military success,” Trump said in a televised address. “Iran’s key nuclear enrichment facilities have been completely and totally obliterated.”
In response to escalation of geopolitical conflicts, we might reasonably expect to see a response in the price of gold. I watched and watched, but gold didn’t react (so far, at any rate).
I’ve have continuously reminded readers that the Gaza conflict doesn’t have much to do with gold’s price movement over the past two years. I have, again and again, pointed out that this is a fundamentals-driven rally. As if to make my point for me, headlines told us gold slumped when President Trump set a two-week deadline to decide on military action.
Why? We were told that this is cause for optimism, that a peaceful resolution might be possible instead, so safe-haven demand for gold declined. Not long after, B-2 bombers began their 18-hour flights and submarines began launching Tomahawk missiles. To me this looks like the biggest escalation of this conflict so far! Once again, you’d expect to see a response in gold’s price. Yet, so far, we haven’t.
Here’s a marked-up chart of gold’s price over the last month with key events indicated. You’ll note just how muted the price response has been:
Some analysts have taken note of this disconnect, highlighting similar points on how a global war is failing to move gold. (I really think they’re missing the mark with all the talk of “traders” and “algorithms,” though.)
Iran has committed to retaliation (and today attacked a U.S. airbase in Qatar). If gold’s run had anything to do with this conflict, you’d expect a surge to $3,500. Some are still holding out on that, saying that gold should hit $3,450 today and $3,500 this week. But why the delay? The strikes were announced on Saturday, and the market is open on Sunday. There is no reason why the price of gold shouldn’t have reacted, if it was going to.
All this is mostly yet another reminder that gold’s price has ignored this conflict (again, so far). If there is an even bigger escalation, it could feasibly benefit from it. We’re not about to discount that possibility. Gold is, after all, the safe-haven asset.
But by this point, it looks like nothing short of a true global war would move gold significantly higher. And there’s a good reason for that! Safe haven demand for gold, at this time, is much more of a steady trend than a knee-jerk reaction to a headline.
The famed Black Swan author, analyst and trader Nassim Taleb highlights exactly this in an interview with Bloomberg last week – this video starts at the relevant segment:
On a somewhat related note, some analysts have blamed the relative lack of gold price movement over the past week on what they’re calling a “delay” in Federal Reserve interest rate cuts. It’s more relevant than a “Gold is going up because of Gaza” narrative, but again missing the mark!
Gold started taking off in the summer of 2023, when rates were peaking and only the easiest of the easy-money types were calling for lower interest rates. Yes, Trump wants lower interest rates, and yes, they will likely be beneficial for gold’s price. But that’s not really the major takeaway here.
BofA hits the nail on the head in this $4,000 gold forecast. Here’s what they get right:
- Gold is moving because of the unsustainable, unsolvable debt mountain crippling the U.S. federal government
- This will inevitably cause an unsustainable, unsolvable erosion of the dollar’s purchasing power
- The growing trend of global central banks shifting reserves away from U.S. dollars and debt in favor of gold (central bank gold holdings have risen 18% in the last decade)
There are also many other factors (supply constraints, the effects of Basel III Endgame implementation and so on). However, those are the major forces at work today.
These are the fundamentals that gold is resting on as it makes one historic move after another, and they aren’t going anywhere. Whether gold goes to $3,000, $4,000 or $5,000 is less important than whether these fundamentals stay in place. Unless the U.S. national debt stabilizes, unless current and future presidential administrations can heal the damage done to trust in the dollar by Biden’s nuclear weaponization of sanctions and reverse the global dedollarization trend, gold’s price will keep going up over the long term.
I expect another historic run, and another, and another. Because these fundamentals aren’t going away. I just don’t see how they can.
The 55-year global experiment with Modern Monetary Theory has failed. Well, it’s failed the 99%, at least – not the elites, they’re doing just fine. The success of gold is merely a reflection of that failure.
One expert says a slight change to the Basel III agreement could spike gold price
Over the past few weeks, we’ve covered recent murmurs about the Basel III agreement.
We reminded investors that it was drafted to lessen leveraging and restore the importance of having gold bullion backing.
We entertained the idea that this run might be significantly powered by a delayed reaction to the agreement, which went into action three years ago.
And we’ve also touched upon notable analysts like Frank Holmes, who seemingly erroneously believed that gold is about to be reclassified as a High Quality Liquid Asset (HQLA) in a few days, as of July 1. The consensus was that Holmes may have misinterpreted something, but we were nonetheless curious if he really did, or if there’s more to the story.
The reason is that officially making gold a HQLA would harm the debt-based global banking system. And if the 2007-08 Great Financial Crisis taught us anything, it’s that banks always come first. (Trust me – there’s no single citizen of any nation who’s “too big to fail.”)
Nonetheless, it was interesting to see the perspective of Swiss analyst Arthur Jurus, Head of Investment Office at ODDO BHF, who wondered how official HQLA status might affect gold.
Like in our own analysis, Jurus said that gold already meets all the criteria for a HQLA. The official absence of HQLA status is meant to protect banks and the whole house of cards built on debt and counterparty-guaranteed paper assets.
Jurus argues that officially classifying gold an HQLA would benefit banks. Especially those in Switzerland. He says it would give them better options when it comes to managing liquidity, especially in times of crisis.
I hope regular readers remember that there were warnings of a liquidity-based banking crisis not too long ago.
Jurus accurately points out that there is a broad structural change in the gold market (the positive kind). Institutional investors are not only starting to move into gold as necessity, but are demanding physical gold bullion rather than gold contracts or leases.
Readers might remember that we also suggested a possible tie between the recent supply gluts involving COMEX and the Bank of England, which supports Jurus’s theory.
Jurus goes on to predict that an official recognition of gold as HQLA and a subsequent allocation of just 5%-10% in bank reserves would increase the price of gold by $200-$300. Furthermore, this increase would be independent of all the other drivers that have been supporting gold over the past several years – and would add another, exceedingly powerful, force. (I think his estimate is rather on the low end, personally.)
Is something going to happen in July involving Basel III, despite the LBMA’s claims to the contrary? Given what the metal has done over the past two years, gold owners are well within reason to make optimistic predictions.
“Digital gold” and 14-karat jewelry: Have Indians forgotten what gold is about?
Last week was absolutely littered with headlines of Indian families playing their cards wrong when it comes to gold investment. Despite the sizeable amount of coverage we’ve given these subjects, more is warranted. In other words, the situation is worsening – and what works over there won’t stay over there.
We can begin with this story, which tells us physical gold, with its premiums over spot price, today’s high price-per-ounce and the inconvenience of physical possession are just too much hassle for some savers. Thus, Indians are turning to digital gold more and more often.
Folks, I’ve said it before and I’ll say it again: “Digital gold” isn’t gold. What they’re actually being sold is an IOU, a promise to pay (in currency) based on the alleged existence of some physical gold in a vault that they can’t see or hold in their hands.
Remember, physical gold is the only financial asset that isn’t someone else’s liability. This “digital gold” is, quite clearly, someone else’s liability – for that reason alone, it fails the sniff test.
Somehow, previous generations of savers and investors managed to buy gold despite premiums over spot price, high-and-rising prices per ounce and the “inconvenience” of securing, storing and owning physical gold. (And their heirs sure are glad they did!) But of course, the financial services industry is happy to explain to you, our benighted ancestors were forced to make that choice because they didn’t have high-speed WiFi and smartphones running polished apps offering immaterial, intangible gold as an alternative to the real thing.
Let me give you my two hard-won cardinal rules when it comes to managing my own savings:
- “Like a thing that already works, but better!” Why not just buy the original thing instead?
- “Cloud…blockchain…digital…stablecoin…” Nope.
You might think, just by reading those two statements of personal preference, I’m a grumpy old guy who hates novelty. Not at all! I’m intolerant of complexity for its own sake. I think financial engineering is capitalism’s worst enemy. When it comes to “financial innovations,” I’m very much in the Paul Volcker camp:
“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth – one shred of evidence.”
Well, despite my personal misgivings, the digital gold industry in India is booming.
I’ve come across quite a few comparisons between India and China lately. They frequently note that, out of the two biggest gold-owning nations in the world, Chinese citizens are far more focused on buying physical gold (regardless of premiums) than Indian citizens. Mostly, in India, it’s the younger generation at fault here, turning their backs on centuries of prudent savings. Those who insist on physical gold are settling for 14-karat gold jewelry. Significantly lower weight of precious metal compared to the 22k bangles and bracelets, rings and necklaces and chains their grandparents bought as hedges against financial catastrophes.
Indian citizens, today, own the most gold in the world (roughly 24,000 metric tons, or three times the official U.S. gold reserve). Regardless of their income bracket, Indians have always diversified their savings with physical gold – often jewelry. They wouldn’t compromise on karats or opt for smaller bracelets, and certainly wouldn’t buy “digital gold” because it’s easier.
So let’s ask a question that is very much relevant to the American investor… For example, this article complains that gold shouldn’t be considered as a component of inflation gauges because it skews the rate!
Despite the rupee being an absolutely destroyed currency, India’s central bank claims that annual core inflation is merely 4.2%, and furthermore that consumer prices are falling.
Believable? Not particularly, based on math alone – mere 4.2% inflation means prices (overall) are 4.2% higher than a year before. Any inflation rate above 0% means higher prices.
Gold is throwing a wrench into India’s numbers, though, with its 24.7% year-to-date price increase. In other words, gold is getting more expensive everywhere because currencies are falling. What we can see here is that, unlike official reports on price indices, gold prices aren’t as easily fudged. The central bank has to admit the price of gold rose by however much it did. This is why central bankers never talk about gold, and want it kicked out of any official inflation measures.
The bottom line is that this is a very bad time to hold currencies. And it’s also a terrible time to forgo physical gold ownership for other, more “convenient” options. That’s just as true here in the U.S. as it is in India.