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November
22
2023

As Debt Skyrockets, So Does This
Peter Reagan

Physical gold: The opposite of debt

There are a few things that are now admitted even in the somewhat-mainstream. The U.S. federal government is indebted by over $33 trillion, and it matters. It not only matters, but gold stands to benefit from it. It must, or we wouldn’t be seeing these two mentioned together so often.

The metal has had a good week on what some attribute to fears of loose monetary policy. We know how the boom and bust goes. The moment the Federal Reserve shows any kinds of easing, we expect an avalanche of selling to crush the U.S. dollar’s purchasing power.

Michele Schneider, director of trading education and research at MarketGauge, compares today’s economic situation to the 1970s and 1980s:

Inflation in the mid-1970s rose to 12% and then dropped sharply to around 5% by 1977. However, after that trough, inflation spiked to 14.5% in mid-1980. The Federal Reserve has said this is the scenario it is trying to avoid, but Schneider said that this is unlikely.

She explained that the biggest difference between now and the 1970s is the size of the U.S. debt. She said the Federal Reserve can’t afford to push interest rates high enough to tamp down long-term inflation pressures.

The sheer quantity of federal government debt matters, Schneider points out, because it means the government can’t afford to provide any fiscal relief when the recession inevitably hits.

So strong is the concern over government debt that another Federal Reserve “wait-and-see” decision in December will be enough to boost gold. A pause in rate hikes generally signals rate cuts ahead. Analysts are more concerned about future interest rate cuts, quantitative easing and bailouts than ever before in the Fed’s history.

That means every time the Fed fails to take action against inflation, every meeting that passes without the necessary interest rate hikes to tackle inflation, serves as a positive force for gold’s price. Obviously, interest rate cuts would send gold’s price surging.

It should go without saying that interest rate cuts will weaken the U.S. dollar’s purchasing power. When the next recession comes, Schneider predicts:

There is nobody who wants to buy U.S. debt and the Federal Reserve is going to be forced to buy the debt. This new [quantitative easing] is what pushes gold to all-time highs. The gold market is just waiting for the Federal Reserve to make a misstep in monetary policy.

It seems like the world is beginning to re-learn the lesson that currencies bear the burden of their issuing nation. Remember how, for decades, the yen was considered a safe-haven currency? After all, it’s still the world’s #3 foreign exchange reserve currency (after dollars and euro). Japan’s policy of constantly devaluing the yen is proof that, outside of physical gold, the label “safe haven” can expire faster than fresh produce. Is it any wonder that gold’s price in yen is up some 50% since the beginning of the pandemic panic?

Forecasters predict $34/oz silver in 2024 (and the data backs them up)

Silver has easily been the most neglected of the four precious metals, with each of the other three enjoying at least a moment in the spotlight this year.

We believe it’s a mistake to overlook silver. Too many investors let its relatively low price-per-ounce lead them to the conclusion that silver is a second-rate precious metal. Consider these factors:

Industrial Demand: Silver has a wide range of industrial applications, from electronics to solar panels, which means its price is supported by strong and growing demand in various sectors of the economy.

Affordability and Accumulation: The lower price point allows for greater accumulation of physical silver for the same amount of capital compared to other precious metals, giving investors more flexibility and potential for leverage.

Potential for Growth: Historically, the gold-to-silver ratio has been much lower than it is today, suggesting that silver may be undervalued and has significant potential for appreciation as conditions normalize.

This recent analysis details out how $34.70/oz silver price is a realistic forecast for 2024. And that’s not all – silver’s price could rise to $48/oz. toward the end of the year, or possibly by early 2025.

Investing Haven notes that their forecast for silver hasn’t really changed from a year ago. All indicators remaining bullish. The analysis stipulates that silver would already be above $34 if not for the Fed’s interest rate hikes.

Elsewhere, the Silver Institute says that silver demand is rising in important areas while certain sectors are dragging the overall figure behind. Industrial demand is notching another annual high, offset by weaker jewelry sales and a slowdown in bullion demand. (These seem localized to India, where both jewelry and investment demand have declined, and Germany due it a VAT increase.)

For those who aren’t familiar, Europe applies a “value-added tax” or VAT, basically a sales tax on everything. This makes silver investments considerably more expensive. While the European Union specifically exempts gold bullion from these taxes, it has no such exception for silver. With a spot price of $24, even the most up-front silver dealer in Europe sells silver for over $30 an ounce. You can see why our friends over the Atlantic are more likely to be goldbugs than silver stackers…

It makes for a curious situation where relatively wealthy individuals are given access to an investment they enjoy, like silver, but at a steep premium. Those who do invest despite it are likely long-term buyers willing to pay for the initial investment plus taxes, and hold their silver long enough that its price rises well beyond their cost.

Other notable statistics include that silver demand may shrink by 10%, but only compared to last year’s highest-ever record silver demand. Even after shrinking 10%, this is the second-highest silver demand year on record.

With an expected 2% fall in overall mine supply, silver’s fundamentals are indeed as strong as one could hope for. A forecast of $34 silver doesn’t seem at all unreasonable. Rather, it’s more like one many have been waiting for and wondering why it hasn’t materialized yet.

Another year of record sales by the U.S. Mint

The story of silver we discussed above can be viewed from several different angles. Sales data from the U.S. Mint, however, isn’t what I’d call open to interpretation.

Everyone is kind of waiting with bated breath to see if somehow central bank gold demand figures for this year will surpass that of the previous. But in the meantime, the U.S. Mint has already beaten last year’s sales, as of October. Now, that’s what I call an unambiguous result!

Virtually every category of gold bullion expanded in sales volume, with the American Gold Eagle sales seeing triple-digit percentage gains. What makes this all the more remarkable, of course, is that the last few years have all set records. We’re getting accustomed to new records only lasting a year…

U.S. Mint’s sales figures are nothing short of staggering. A 3.5x increase in American Gold Eagle ½ oz compared to last October. An astonishing 9x increase in the more affordable ¼ oz gold eagle. Only the American Gold Buffalo’s sales have failed to shatter last year’s figures.

The American Gold Eagle’s triple-digit percentage increase actually wasn’t the most impressive of its kind. Consider silver bullion coins: Just under 4 million ounces were sold in October, a 213% increase year-on-year. Well, if this doesn’t look like everyday Americans loading up on cheap silver, I don’t know what does.

The U.S. Mint has now beaten its own records in both gold and silver sales. Strange that we haven’t heard any stories about demand intensifying, isn’t it?

When I see numbers like this, I get excited. I interpret them to mean the American people aren’t sitting back and passively letting deficit spending destroy the value of their dollars – rather, they’re standing up and taking action! I strongly suggest you join them, if you haven’t already…

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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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