The Incoming Gold Shortage Nobody Is Talking About
Peter Reagan

This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: How a slight rebalancing to savings could shake the gold market, more bullish forecasts for gold and gold’s movement other currencies hints at its future trajectory.

When private money follows central banks, will there be enough gold to go around?

Having been a bank director, Alasdair MacLeod knows a thing or two about the health of the banking system, and how to spot one that’s contracted something. Talking to Liberty and Finance, MacLeod explained that the banking crisis we’ve been seeing is very much a top-down issue starting from central banks.

Watch here, or read on for my summary and analysis:

It’s a tale as old as bailouts: if the average person managed their money as badly as big banks, they wouldn’t have a penny to their name. But then the same applies to an even greater extent in comparison between central and private banks, says MacLeod, with the former having basically zero accountability.

Liquidity is another thing they’re lacking, to summarize MacLeod’s lengthy and well-presented overview of the banking sector. Most interestingly, perhaps, MacLeod says that central banks aren’t so much buying gold as they are getting rid of paper currency. We’ve all heard of this interpreted as diversification or de-dollarization. Maybe that’s just a polite way of talking around the issue. In reality, central banks are using paper money to buy gold – and not just foreign currencies, but their own as well.

Why would they do that? MacLeod says we only need to look to gold’s fundamentals for an answer. By 2025, the U.S. federal government will owe some $40 trillion in debt, which (if you’ll forgive the pun) there’s absolutely zero interest in ever paying off. Politicians might talk about balancing the budget, they might hand-wave about paying down the debt. Instead of listening to what they say, watch what they do. Find any elected government official willing to spend less on his own constituents – I challenge you.

I just don’t think the federal government is able to pay down its debt. Not without truly massive changes to “business as usual.” Interest payments already set us back over $1 trillion in the fourth quarter of 2023! As we’ve noted many times, inflation is the preferred method of “paying off” debt a government owes in its own currency.

To this end, MacLeod notes that governments are printing trillions in currency annually to prop up their economies with limited results – other than the certainty of inflation and higher interest rates down the line. As interest rates rise, money-printing will accelerate to match, resulting in even higher inflation to offset the debt and relieve pressure. (And to think, we’re yet to experience the effects of a single rate cut despite the current high rates!)

Despite gold’s price rising over the last three years, MacLeod believes we aren’t really seeing a bull market yet. He says that interest in gold is disappointing, with nearly every investor, public and private, severely underweight in gold. MacLeod estimates that, of the $150 trillion in global savings, less than 1% is currently in gold.

Nevermind prices: when these portfolios adjust to 5%, 10% or even what MacLeod finds a more reasonable 15%, where is the gold going to come from? Merely adjusting to 2% would require 23,000 tons of physical gold! That’s 10% of all the gold mined in human history…

We already know what a 1,000 ton annual purchase for two consecutive years does for gold. We’ve seen it over the past two years with the official sector. Since central banks aren’t likely to stop these purchases, MacLeod leaves us wondering just how soon the rest of the world will catch on.

When $150 trillion in global savings begins to diversify with gold, just how fast and how far will gold’s price rise?

Goldman targets $2,175 gold price; TDS predicts gold at $2,200 this summer

Will gold ever drop below $2,000/oz again? We’ve taken care to note how bearish outlooks have been coming in with increasingly lofty figures. Here is a quote from the research report:

The metal has been trading between $2,000 and $2,050, with the market adjusting to the Federal Reserve’s hawkish stance and delaying rate cuts until June 2024.

In other words, $2,000 to $2,050 are now “business as usual” targets. We find this to be a triumph of its own for gold prices, but of course, there is a whole lot more growth on the horizon. Goldman Sachs’ analysts are maintaining their $2,175 12-month target, citing both economic and geopolitical reasons for the forecast.

Though not mentioning gold specifically in his analysis, Goldman Sachs’ global head of equity strategy research Peter Oppenheimer went into detail on what these “economic” and “geopolitical” factors include. Namely, he notes that one of the reasons high interest rates are no longer gold’s main enemy is that their economic impact in the form of high borrowing costs tends to deflate debt-linked assets’ prices. Rising government deficits, he says, will also become the norm in the coming decade until the value of sovereign debt itself becomes questionable. And with it, the value of assets and currencies issued by corresponding nations.

TD Securities is even more bullish, calling for an average of $2,200 in the next quarter and an annual average of $2,081. The latter part of the forecast is especially interesting, as it hints at expectations of persistently elevated gold prices even above current levels.

The price that was so exciting not that long ago, $2,000, now looks like a historic milestone gold is ready to leave in the dust as it moves ever higher.

Gold’s price in other currencies predicts rising dollar-price, too

Is China going to stop announcing gold purchases anytime soon? Maybe, maybe not. Some view the 10-ton purchase announced in January as conservative, compared to the previous 14 months. In reality, though, the view that China is under-reporting its reserves is becoming increasingly mainstream.

While most analysts are sure that China’s central bank is indeed buying gold every month, not many believe either the 10-20 ton monthly purchases or the 2,245 ton official gold reserve. It’s a matter of historic record that China’s reported economic numbers are more fiction than fact. How much gold China truly has, and how much it’s buying month after month, is a matter of fierce debate.

China’s official sector has been capturing headlines, but we find the everyday Chinese citizen’s actions to be far more interesting. In a commentary, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that Chinese citizens are following their central bank’s lead. We’d say that the issue is more interesting than that.

China just posted one of its worst economic performances to start a year ever. GSC Commodity Intelligence’s analysts called this a new era for gold, one that is marked by Chinese investment not out of desire for nice jewelry, but rather capital flight. GSC noted that it’s becoming more and more difficult to move one’s money out of China, and it was hardly a walk in the park before. So gold is, as has been the case throughout history, turning into a very steady option in an unsteady environment.

The capital is flying because of inflation, in the simplest of terms. It’s not just in the yen or the yuan, those free-falling currencies, that gold price posted new all-time highs in ahead of its year-end outperformance in dollar terms. Even currencies that have held up than the U.S. dollar over the last three years (such as the euro and the pound sterling) have also seen all-time high gold prices.

GSC says that performance in foreign currencies has been a key gauge of where gold is going to go in U.S. dollar terms in the past year. And true enough, the head-turning performance moving from December to January was preceded by similar action in most top currencies.

Gold has, if anything, gained even more rapidly in these currencies since. Because of this, GSC are certain we’re in for another repeat of gold playing surprise catch-up in U.S. dollar terms and hitting more highs down the line.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

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