The spreading Middle East conflict is now one of the dominant forces driving gold and silver higher – alongside thriving central bank demand and the growing deficit of silver production. The path to $50 silver seems clear – here’s what’s next…
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 geopolitics will drive the next lap gold and silver’s run
- The Reserve Bank of India seems worried about gold loan, but is it really?
- Central banks are making the biggest gold bid in modern history – are we watching closely enough?
Geopolitics will boost gold ( and silver even more) in the near-term
While we were always considerate of the Gaza conflict’s impact on the global economy, I’ve been skeptical regarding its impact on gold’s price. The Hamas surprise attack and Israel’s response didn’t start gold’s current run, despite some analysts’ insistence.
However, in recent weeks, the tables seem to have turned – at least shifted. The conflict has spread significantly and indeed turned into a full-fledged tailwind for gold. The war might have played a considerable role in one of gold’s recent all-time highs.
Alasdair Macleod has called it a developing conflict, which is not the term you want for a war that has been active for one full year. Somehow, things are still escalating, and Macleod correctly notes that America is increasingly being pulled into the affair:
This week has seen attacks and a ground invasion by Israel into Lebanon attacking Hezbollah, and a missile attack by Iran against Israel. At the time of writing, we await the Israeli’s response, thought by many likely to be an attack on Iran’s oil refinery at Abadan on the Shatt al-Arab. An escalation of this sort would certainly drive oil prices sharply higher, because the Hormuz Strait would be effectively closed because cargos would be uninsurable…
America supplied the two-tonne bombs dropped on Beirut on locations guided by U.S. intelligence and by U.S. AWACS early warning systems. The U.S. appears to be very much involved, albeit covertly, and the situation is likely to deteriorate rapidly.
Macleod highlights several ways the conflict is boosting gold, starting with the increase in Middle Eastern demand. (Although, this demand can equally be attributed to the destruction of local currencies and the BRICS saga as well.)
He notes that gold and silver and oil are responding to the Iranian/Israeli escalation. The whole situation is starting to look like the commodities market from some 40-50 years back.
Besides tight physical supply facing intense gold demand from the Middle East, Macleod is most interested in how silver will play into all this. He reminds us that monetary silver was still in circulation during our lifetimes in the Middle East and some parts of Asia.
We need reminders like this during a time when gold as legal tender is getting the whole spotlight. While silver is shoved aside in terms of both price action and investment status. That’s a mistake. Even during the days of the gold standard, silver was far more common than gold. More useful for everyday transactions, too.
No doubt due to silver’s strong industrial demand, these days, all we seem to hear discussed are things like photovoltaics and electric vehicles when silver’s price rises. Though, credit where due, we did cover analysts suggesting that manufacturers might soon find themselves competing with investors to buy silver. Since manufacturers are price insensitive – there’s no substitute for industrial silver! – that would be a recipe for a true surge in price.
There doesn’t seem to be enough silver to go around, but silver’s price doesn’t currently reflect that reality. It’s strange to consider that silver dipped below $20 several times these last few years – when today it’s so strongly positioned above $30.
Shawn Khunkhun, president and CEO of Dolly Varden Silver, noted in a recent interview:
I would be shocked if we didn’t get a new all-time high in silver. Every other time we’ve been into precious bull market, silver has lagged and then outperformed. It looks like that setup is occurring right now.
Since silver is already performing well, this obviously translates to a rapid move above $50. Looking ahead, we have to wonder what’s in store after that.
Is $100 silver realistic during this run that the metals are posting? Plenty of pundits believe so.
Maybe that’s asking too much. Even $50 silver would leave a lot of Birch Gold customers content, and a lot of miners delighted. Like every big move upward, though, it will be accompanied by the anguished groaning of the fence-sitters who thought $30 silver was “too high.”
Funny how you can’t spot a bargain price for the ages except in the rearview mirror…
India’s gold loans are blowing up (not to the borrower’s benefit)
India’s gold loan scheme is slowly but surely turning into one of those under-the-radar stories that could ultimately have a massive impact on gold ownership in India, and also worldwide.
I’ve been telling you something is suspicious about the Reserve Bank of India (RBI)’s reported gold purchases. Their reserves blew up 80+ tons in an unclear fashion… Where did that gold come from?
You have to understand how the line between private and central banks blurs in emerging markets. Then we have a clearer picture of where those 80 tons of gold came from – and how the gold loans are invovled.
In a recent announcement, the RBI cautioned banks issuing gold loans about “getting over-extended.” That’s how central banker press releases put it when they mean something like, “Kids, don’t make me come in there…” It’s quite possible that India’s gold loans have been too successful.
Here’s how these gold loans work:
- Deposit gold: These are loans taken by pledging gold items (like jewelry) as collateral
- Loan repayment: When an individual takes a gold loan, they receive money based on the value of the pledged gold
- Payoff: If the borrower repays the loan along with any applicable interest within the agreed-upon period, they get their pledged gold back
- Default: If the borrower fails to repay the loan, the lender keeps the gold
So where does it go? To the bank issuing the loan – at least at first. The final destination might be a bit more centralized.
Despite sanctions on the sectors growing by 26% year-on-year in Q1, it’s a booming business! In July, the World Gold Council reported some 3,000 tons of gold pledged as collateral. As of August, the gold loan sector grew by 41% year-on-year despite a steep rise in wrist-slaps from regulators.
It’s hard to believe that the RBI is seriously concerned about aggressive gold loans… If gold from defaulted loans is making its way to RBI vaults, they’re probably happy. Considering that India is the “I” in BRICS, and the massive growth of gold reserves in Russia and China (the “R” and “C”), the RBI is bulking up the nation’s gold reserve without affecting the nation’s balance of trade.
Indian households hold some 11% of the world’s total gold supply – an absolutely massive figure. More than the combined total of the top 10 largest central bank gold reserves. Why so much? Well, Indian gold ownership has always been cited as a rare example of financial prudence. Indians are a people who haven’t forgotten what a safe haven gold offers during economic or political crises.
Enter gold loans…
For the Indian government, it’s a win/win! They get lots of gold from the nation’s estimated 25,000 tons owned by private citizens. The RBI gets this gold in exchange for rupees, which they can print. The banks who sell the gold are happy with cash, the RBI and by extension the national government is happy to increase their gold reserves.
The only loser here is the Indian citizen.
Despite the RBI’s official warnings and wrist-slapping, gold loans are growing rapidly. Indians can now apply for gold loans through Google Pay. There is clearly a vested interest in “monetizing” that gold – in other words, making increasingly-attractive terms to lure even more privately-owned gold into the banking system, where it becomes vulnerable to predatory bankers.
If I haven’t made it clear enough, let me spell it out: I believe there is a focused effort to reduce India’s private gold ownership and boost its central bank’s reserves at the same time.
If a government wants its citizens’ gold, there are far more refined methods to employ than Roosevelt’s infamous Executive Order 6102.
Poland, Hungary and Argentina’s central banks are shaking the gold market
Three central banks have dominated the gold headlines over the past week, each for their own reasons. Where do we start? We’ll go with Poland.
In yet another conspicuously large purchase given the country’s size and geopolitical affiliation, Poland increased its gold reserves to 420 tons, making it one of the largest sovereign gold holders in the world. And they aren’t done yet – central bank governor Adam Glapiński announced, “We are aiming for 20 percent of our currency reserves to be in gold.”
Poland’s case stands out for several reasons. European nations don’t buy gold as much as their emerging market counterparts. When they do, it’s rare to see them aim for a 20% share of total reserves. Equally as rare is to see central bank heads heap praise on gold, considering it’s essentially an argument against their own currency.
Glapiński noted that Poland’s gold reserve is now larger than England’s, despite London’s central role in the global bullion market.
Hungary’s case is not to be overlooked, either, as its recent purchase of 15.5 tons gave it the highest per capita gold reserves of any country in central and eastern Europe. We’ve previously discussed why there is a lot more to European gold purchases than meets the eye, and this remains a story to watch closely.
But the case of Argentina is, without a doubt, the most interesting. Some of our more seasoned readers might remember that Venezuela’s gold reserve was in the middle of a tug-of-war between two presidential regimes. (In other words, he who has the gold makes the rules.)
Argentina’s economy, while nowhere as bad as Venezuela’s, has been rickety for quite some time. Besides the collapse of its peso, there is now a lawsuit filed by two hedge funds to seize the nation’s gold reserves held abroad.
Every pundit and economist I know of agrees that U.S. and NATO sanctions on Russia made the whole world wary of relying on the U.S. dollar. This was a major factor in two consecutive years of record central bank gold demand.
Stories like Argentina’s matter, too. Who wants to keep its gold abroad if it can be frozen by a hedge fund’s lawsuit? And while two funds are trying to claim Argentina’s gold as compensation for some $20.5 billion in defaulted debt, Argentina announced that it’s close to closing a $5 billion loan from the Bank of Basel to support the peso and its own economy.
Do we really believe this loan will be held in the depreciating currency it was issued in? Not likely. Those familiar with our monetary history know that France quickly and secretly repatriated 3,313 tons of its gold in the mid-60s. They knew where the U.S. dollar was headed.
It is very likely that all the recent gold repatriations were motivated by similar concerns – but on a much wider scale. Not only do countries no longer feel too enthusiastic about holding U.S. dollars, they aren’t satisfied with having their gold bullion held overseas. Even by “friendly” nations.