Why Goldman Sachs LOVES Gold Right Now
Peter Reagan

Analysts from leading banks predict gold price surges. Amid inflation, a global economy teetering on the brink recession and multiple wars, just about everyone from Goldman Sachs to Bank of America see gold setting new records…

This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: Saxo Bank says gold is facing biggest tailwind since the lockdowns, the normalization of the gold/silver ratio and Chinese citizens might finally get easy access to genuine gold.

Goldman Sachs, Saxo Bank and others are very bullish on gold

Ole Hansen, Saxo Bank’s Head of Commodity Strategy, said in a recent update that the global markets are facing turmoil similar to the 2020 crisis. That is quite a claim, since we know that gold essentially went on a four-year bull run that is still only heating up. The brief presentation is well worth watching, check it out here.

Hansen’s reasoning rests primarily on Japan, which has seen the first interest rate hike in decades. This hasn’t impacted gold in the slightest, as the metal has had some of its best performance out of any developed-nation currency in the yen.

The Bank of Japan’s July 31 hike has done a lot rattle investors! (For background, see Phillip Patrick’s recent description of the yen carry trade.) 

The BoJ turning hawkish? That’s inconceivable, to quote The Princess Bride’s Vizzini. Japan had negative interest rates for over eight years! The July 31 rate hike was only the second in 17 years! Granted, Japan boasts the world’s 4th largest economy (behind the U.S., China and Germany).

Any discussion of the global importance of the yen seems to perfectly fit the analogy of a tempest in a teapot. Granted, Hansen mentions the yen’s role as a funding source in global finance. And yes, financial contagion is a legitimate concern…

So what can Japan’s rate hikes accomplish, really? The U.S. has endured a far less severe round of dollar devaluation by comparison. Yet the Fed’s rate hiking cycle has sent every economist and analyst worth their salt on recession watch.

However aggressively the Bank of Japan hikes interest rates, the yen will remain almost worthless globally. And then there is the whole threat to the Japanese economy itself, which, depending on your source of news, either entered or narrowly avoided recession back in March. The BoJ is flogging a dead horse.

MKS PAMP’s Nicky Shiels provided a somewhat broader overview of factors supporting the price of gold. She calls her new investing concept the “Gold n Guns trade.” She thinks gold’s price is correlated to increasing sales of guns for several reasons that have nothing to do with home defense.

In most of the West, military expenditure is reaching records. That money is coming out of the federal or state budget, and as we know, all nations involved are operating with a deficit.

The U.S., which is the biggest spender in this equation, has a federal deficit of $1.6 trillion this year alone. Our government generally responds to a need for more money by printing it, which is why Shiels has set a rather aggressive year-end price target.

Talks of money printing have been heating up, which is not a good thing if you’re a currency owner but a great thing if you’re a gold holder. Either a rate cutting cycle or a bout of quantitative easing have enough in them to bring forth a gold bull run. But together, and especially since the figures get loftier with each cycle, they have all that’s necessary to indeed continue pushing gold up for years to come.

A week ago, Goldman Sachs analysts bluntly claimed:

Long-gold positions now offer portfolios the greatest hedging value…

Can we expect four more years of gains in gold, then?

Frankly, opinions are divided. But the consensus says this will be a good year for gold. It already has been! Gold's price is up 20% so far this year. Even so, the consensus of the pros is that next year will be even better.

Gold/silver ratio to normalize; JP Morgan forecasts $36 silver

Silver may be one of the most attractive investment opportunities right now. Depending on where you look, the news might have you believe that silver is on the ropes, dropping 5% in a single day last week.

Here’s the thing: Silver demand didn’t fall. The sell-off came on the heels of disappointing economic data that implied a global economic slowdown – which was a major booster for gold’s prices last week. Remember, silver demand is generally more economically sensitive than gold demand. Furthermore, silver’s price about twice as volatile as gold’s over the last three years.

All this means that, last week, the gold/silver ratio became more skewed. We should note this very same ratio has historically corrected (sometimes surprisingly quickly) without exception.

Bank of America has taken note, recently saying the ratio will fall to 75 by the end of the year. They expect a sharp spike in silver price to $34/oz. next year, which implies an end-of-year gold price of $2,550/oz. (That’s a bit conservative in my opinion.)

JPMorgan agrees with me as much, calling for $36 silver by the end of 2025. If JPM analysts are correct, that gives us a gold price of $2,700/oz.if the gold/silver ratio falls to 75. Over the last 12 months, the ratio has remained closer to 83 ounces of silver per ounce of gold – at THAT ratio, a $36/oz silver price implies a gold price of $2,988/oz!

BoA said that any industrial slowdown in silver demand is temporary, and that tailwinds remain strong on all other fronts. Which makes sense, considering industrial demand is predicted to deplete inventories by 2025.

JPMorgan paid more attention to investment demand, saying that loose monetary policy and subsequent inflation support silver as a financial asset. (Especially when gold hits $3,000/oz.)

Both reports agreed that supply-and-demand dynamics are worth watch. Silver's supply has slowed while demand has risen. With annual deficits exceeding a million ounces, the market can only ignore reality temporarily before something gives way.

Maybe that’s why the LBMA is having so much trouble refilling its silver vault?

London silver vault stock levels, via LBMA

While supply constraints are a classic fundamental, investors should remember that the gold/silver ratio being out of balance is a fundamental of its own. Silver has never not corrected to the upside every time in history the ratio climbed this high.

Silver is known to outperform gold when the latter breaks out, yet has conspicuously not done so thus far. And with gold expected to rise for another year and half at least, silver bullion seems very unlikely to disappoint.

Chinese gold ATMs are coming

From fake senzu beans to built-in-a-day bullion storefronts, Chinese gold buyers haven't had an easy time. The demand for physical gold is as high as ever, but it isn't being met (likely because the PBoC wants to control all domestic gold bullion).

Enter Kinghood Group's gold ATMs. Before we go any further, you'll probably wonder: "What gives these any legitimacy compared to other Chinese consumer gold ventures as of late?"

Actually, things are looking good on that front. The Kinghood Group gold ATM is essentially LBMA-approved, as the organization's chief technical officer Neil Harby praised its speed during a recent display of the global version at the China Gold Congress and Expo in Shanghai. The event is a top industry gathering, and countries like Russia and Singapore have already expressed interest in perhaps housing the ATMs themselves. So this isn't yet another Chinese gold scam that will scare consumers away.

The ATMs, which are already active in Shenzhen, are perhaps the most advanced of their kind. We've seen a few pop up around the world in different countries (Dubai, the United Arab Emirates, Malaysia and India for example), but this seems like the best effort so far. They dispense a variety of gold bullion items, as opposed to just gold bars, and these can weigh between 3 grams to 1 kilogram (32 troy oz). 

Now, I don't know about you, but the very idea of leaving over 30 oz. of gold bullion in a vending machine makes my palms sweat. Presumably, every installation will also come with a team of armed guards? 

Xiao Yingjie, brand general manager of Kinghood, had a lot to say about the device's technology:

It will integrate with local physical gold trading markets, gold prices and third-party payment platforms to facilitate settlements in all major global currencies. Additionally, tailored development tools will be provided to customers based on different country-specific languages, common measurement units and legal regulations.

This is good news for several reasons, with the obvious being that they should significantly reduce damage gold bullion scams are doing to the desperate Chinese citizenry. 

But more than that, gold ATMs are signaling something to us. Not unlike bitcoin ATMs, we're clearly reaching a point where people are no longer content owning or transacting increasingly-worthless paper money.

We’re seeing a greater need and demand to have quick and easy access to a safe haven, long-term store of value asset. Basically, the opposite of paper money. Is this going to be the start of a slow but steady process of finally returning to sound money? I'm all for it.

It's a development to watch, but for the time being, I'm just glad everyday Chinese families are getting easy access to real gold bullion.

 

 

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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