A $3,500 gold forecast isn’t just about price – it’s a warning. Central banks are ditching dollars for bullion (while the gold/silver ratio just broke 100:1!) Amid back-ups at Swiss refiners and compliance with the Basel III accord, are even U.S. banks ditching the dollar?
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:
- $3,500 gold in sight – unless we get certainty and safety…
- …but does anyone really see that happening anytime soon?
- More are saying that bets on gold are bets against the U.S. dollar
- Gold/silver ratio passes 100:1 while analysts shout (but nobody seems to care)
StoneX: $3,500 gold looks plausible, and refiners aren’t ready
Some of our mid-term readers might recall a kind of adage of ours over the past two years.
As gold kept barreling above $2,000, on and on, we said that we can only be a little bit pleased, because gold doing well means the economy and the dollar are doing badly.
Now, a similar argument has been made with perhaps an even more interesting turn on a podcast hosted by StoneX’s Senior Market Analyst Fiona Cincotta, and featuring Rhona O’Connell, their Head of Market Analysis for Asia/Emerging Markets.
Asked what could possibly be a headwind for gold, O’Connell said:
“I said to someone recently, on humanitarian grounds, I would like to see gold price peak this year because that implies that geopolitical risk is subsiding, and hopefully armed tension might start to dissipate.”
It’s an interesting idea, and shows just how strong gold’s position is now (regardless of fluctuations a hundred dollars up or down).
Geopolitical risk and armed tension aren’t likely to dissipate in the near term. Russia isn’t likely to lose its appetite for reconquering its former territories. China’s still eyeing Taiwan and smacking its chops.
Actually, put that way, one could argue there is less of both now than, say, a decade ago. The Gaza conflict is protracted, but Iran, to our knowledge, isn’t yet testing nuclear weapons and making hysterical demands in the North Korean fashion.
That leaves us with what the pair called the $3,500 gold price question, jokingly calling it $4,500 according to JPMorgan.
And JPMorgan is far from the only blue-chip firm making those kinds of forecasts, by the way.
Stagflation was already a considerable threat, so it’s unsurprising to see it re-appear as a concern. Because it never went away. The risks have been there all along.
Still, in listening to the podcast, we get the sense that its twin is also here, in the sense that investors are worried about a dollar weakened by the administration’s fiscal and trade policies – adding up to a slower economic growth in the years ahead.
However, the highlight of the podcast was perhaps O’Connell’s dive into the COMEX-London-Switzerland situation. As she explained, it’s extremely rare for even 5% of short positions on COMEX to be settled physically, with a 40% normal cover to be on the safe side.
That cover has now gone up to 83%, resulting in some 650 tons of gold shipped to New York in short order. That is a lot of gold bullion during a time when central banks are buying over 1,000 tons a year, which O’Connell predicts will continue for the foreseeable future.
Interestingly, O’Connell blames the lack of fungibility between New York and London. I agree, it’s absolutely absurd that London’s 400 oz gold bars can’t go to New York without a side trip to Switzerland to be recast as 100 oz COMEX gold bars. That adds so much additional complexity and cost! And it’s mostly a convenience anyway – COMEX contracts allow for other weights of gold, but the 100 oz gold future is the most popular. So commodities speculators and their preferences really do have an impact on the real world – not just prices, but logistics.
It’s so frustrating to see the tail wagging the dog.
Especially in light of the Basel III agreement, which names only physical gold bullion as a Tier 1 reserve asset. Not futures, not leases, not promises – just physical gold. Maybe Basel III is in fact involved in this current supply situation?
There would, in fact, be extremely interesting – if American megabanks started following the example of global central banks, and diversifying their reserves with gold bullion in record amounts?
Because if it is, then the surges in gold price are directly correlated to that new source of demand.
If Goldman Sachs, JPMorgan and the rest are deciding that “cash is trash” on the sly and dumping dollar reserves in favor of gold, how much higher could the price go?
Use your dollars to buy gold (it’s what the central banks are doing)
Alasdair Macleod has really been diving deep into the idea that what we’re seeing happen with the U.S. dollar has less to do with devaluation and more to do with loss of faith.
He has almost entirely dismissed the money supply side when it comes to recent inflation (remember, inflation is what we call it when our purchasing power goes down, but for the rest of the world, it’s dollar devaluation).
But while this is an unusual perspective, he’s not the only notable analyst concerned with it.
John Rapley, an economist and author of curiously named books such as Why Empires Fall: Rome, America and the Future of the West and Twilight of the Money Gods: Economics as a Religion, says:
“All told, we may be in the very early stages of the search for alternative reserve currencies, as it appears that central banks are selling some of their dollar assets and parking the receipts in gold.”
It’s a bold proposition, to be sure, because an obvious question arises. Why not just use gold?
To be clear, I don’t disagree! One answer to that question is rather of obvious. In this era of modern globally-integrated economies, there isn’t enough gold to go around. We are using unbacked paper promises and must continue doing so, lest the financial system grind to a halt!
Ron Paul dismisses this idea – he says the “not enough gold” argument is completely irrelevant. He says it’s like an architect saying he can’t build a skyscraper because he doesn’t have enough yardsticks to measure it… And he’s right – the “not enough gold” argument is really just another way of saying gold’s price is too low. Prices are set by supply and demand – “not enough gold” means the price keeps going up until there is enough gold at the new, higher price.
Regardless – I’ve said this before and I’ll say it again. The first plausible gold-backed, gold-convertible currency will destroy all other currencies. More specifically, will render all unbacked currencies obsolete.
I’ve also come to realize that BRICS nations, despite their dedollarization enthusiasm, are in no hurry to roll out a new gold standard. For now, they’re content with simply hoarding gold while letting their citizens play with paper money. (Side note: I think I’ve started to understand what BRICS are really after now – I’m calling it the Rio Reset.)
We will have to quote and correct as much as agree with Rapley here:
“Its 20% increase since the start of the year would, if annualised, amount to a near-doubling, but the precious metal has been more restrained against other world currencies such as the euro and the yen.”
(But that is only since the start of the year. Before 2025, gold was exploding in every other top currency, including both the euro and yen but also those like the pound sterling as well as both the Aussie and Canadian dollars.) Everyone was tapping their foot and waiting for it to catch up in U.S. dollar terms, which appears to have now happened, as Rapley notes that the greenback has fallen 6% this year against other currencies globally.
It wasn’t due to the sudden strength of these other currencies, either…
The idea that central banks are parking their money is something we both agree and disagree with.
The basis of Rapley’s argument seems to suggest that a better alternative to the U.S. dollar can materialize or will be picked, and that gold will then be sold off for it.
That sounds as unlikely as anything ever.
We would instead propose that central banks are hoarding gold for the purpose of having money, while understanding full well that theirs and others’ currencies aren’t money.
As we said previously in the case of BRICS, the view that there might need to be a new, international gold-backed currency is looking a little naive.
It suits central banks in the world just fine to buy gold in record quantities, year after year, while keeping their money-printers running. Yes, it’s cynical! It’s the modern version of Marie Antoinette’s infamous economic policy of, “Let them eat cake.”
There is no reason why this wouldn’t go on for many more decades. Just as $1 became $10, so can the $10 become $100, and on and on – with each new zero arriving twice as fast as the previous one.
This is what has been happening for the last 50 years! When someone asks me why central banks buy gold? Why central bank gold reserves exist? I tell them, “Central banks print money – so they know better than anyone else what it’s worth.”
That’s not to say there’s no place for dollars in the modern world. We still transact in dollars daily, for better or for worse.
My urgent suggestion to you is simply to reconsider whether you want to save in dollars – or to do what central banks do, and convert your savings into physical gold bullion.
Gold-to-silver ratio continues to astonish – let’s take a closer look
The gold-to-silver ratio was about 89:1 when we last described it as “unacceptably high.” It absolutely was. And every time it has climbed anything close to that, there has been a massive correction to the upside for silver’s price.
But here we are again, with headlines of the gold-to-silver silver ratio passing 100:1 being met with mostly silence.
Gold has pulled back slightly over the past week, though still remaining comfortably above $3,000.
But it was the same week that the gold/silver ratio reached a 5-year high, which even then was far and above the average level over the last 50 years – in fact, nearly double. (The average since the end of the gold standard is about 55:1).
So, when gold is going up, silver is failing to make any significant breakout, as in to the $40 or $50 level.
But when gold falls, silver falls also for whatever reason and somehow blows up the gold/silver ratio even further.
This situation is unsustainable, despite how long it has went on. Something has got to give, and many, like Blue Line Futures Phil Streible, are wondering how far is too far.
We’re not about to get into an argument with Chris Vecchio, Head of Futures Strategies and Forex at Tastylive.com. But one of his recent quotes really stands out:
“Silver is not recession-proof. It is, at its core, an industrial metal. If you are looking for a recession-proof metal, gold is your only option.”
We understand what Vecchio is trying to say, but silver isn’t only an industrial metal. Silver is, and always was, money. It was the cheaper cousin of gold, and was used for day-to-day things while gold would be used for more expensive purchases. This is evidenced by all American states explicitly including silver as legal tender, besides gold, as part of the Constitution.
As Norm Franz famously put it:
Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.
Quotes like these show how far we are removed from sound money, and that perhaps all there is to do is to make an informed investment and watch while things collapse.
As far as informed investments go, there’s no shortage of analysts ringing the silver bells.
Peter Krauth, author of The Great Silver Bull, says silver could be the main actor in the biggest technical breakout in modern history. Granted, Krauth has an agenda here – but that doesn’t mean he’s wrong. Besides, the data corroborate him:
“There’s about 223 million silver ounces that are net short right now. That’s about 25% of the annual mine supply.”
We encourage anyone not fully understanding how great the upside for silver is to watch Krauth’s full interview, where he quotes Eric Sprott who said silver could go anywhere from $250-$500.
When you’re talking about the only metal still trading below its 1980 levels, that is absolutely realistic. Silver’s current price doesn’t make sense! A reality check is clearly overdue.