The Next Gold Bull Market Could Be Around the Corner
Gold nears $2,000 for the third time in three years
It’s not the most accurate thing to say, perhaps, from a technical standpoint, as gold has seesawed across that level quite a bit over the last three years. But in that time, there were three spectacles that brought gold to $2,000 from various sideways trades. Those were the lockdowns, the Russia-Ukraine war and now the conflict between Israel and Hamas.
The strength of gold’s performance continues to affirm that investors are concerned. There has already been an oil price spike related to Saudi Arabian cuts after Russia invaded Ukraine. To the Saudis, that conflict was a lot more proxy than the latest one. Now closer to home, whether this and many other Middle Eastern nations get involved is on everyone’s radar.
It is a little strange to see gold hit the same high over and over. On one hand, it’s affirmative for prices. On the other, we can’t help but draw comparisons to the 2008-2011 period, as gold went up, down, then to a new all-time high. Is it doing something similar, but more protracted due to greater overall craziness of world affairs?
Many seem to think so, as Frank Holmes recently wondered if this was the start of a bull market in gold. A start around the $2,000 level? It’s a notion many gold investors will want to entertain. This video deep-dive from Incrementum says a “new golden era” might be upon us. And Saxo took note that there are many layers to the story of gold’s rise (beyond armed conflict).
Whichever of these debates we subscribe to, it’s clear that analysts see a lot of upside. Market participants aren’t exactly reluctant to ominously forecast “correction” any time an asset climbs, but this time, these voices appear lost in the noise.
Anyone with a close eye on the gold market over the last year knows it’s been doing very well. Seeing seasoned analysts suggest that some kind of bullish action might just be starting after all the outperformance we’ve seen is bullish in itself.
Egypt gold premiums skyrocket; Iranians stockpiling gold
Egypt has come up in the news this year as another country hoarding gold on the consumer level. It was not dissimilar to Turkey, though comparisons could also have been made to a few other nations. While not on the scale of Turkey, the tale of Egypt’s gold consumption is similar: a “who knows” sovereign currency and difficult access to foreign markets with comparative stability.
The war in Gaza pushed Egypt’s local gold price up 12% in two weeks. While Turkey poured its gold into the economy, Egypt went for a different approach by exempting gold-carrying travelers from various fees and hassles. This brought 1.5 tons of gold into the country within six months period, though premiums have soared even amid such a massive import boost.
Egypt will now likely join the likes of China among nations whose premiums considerably exceed that of LBMA spot. One could argue that this is merely proof that emerging-market currencies are flimsy, but did you know that gold recently hit an all-time high of $3,159 Australian per oz? You probably didn’t miss that gold has also posted highs in the Canadian dollar, as well as the British pound while Western markets wondered if $2,000 is coming again.
Clearly, the destruction of currencies is more complicated than we can cover here. The primary takeaway is, we should consider more data than simply gold’s spot price in U.S. dollars to determine its relative global performance…
Not waiting for any particular conflict to start, Iran has imported 7.45 tons of gold ingots on the consumer level in the six months between March and September. It’s now the 8th most popular import in the country. The reasons are likewise tied to a struggling economy with a weak currency, even as we are told marvelous trade partnerships with China and Russia are forming and strengthening.
To us, gold looks like the only safe haven in all of that.
Gold vs. the Federal Reserve
The Federal Reserve hasn’t yet conquered inflation, nor have they given up the fight. Pushing interest rates up to 5%, which is supposed to lure consumer dollars out of investments and into savings accounts, doesn’t seem to be working as planned. Even as banks beg for your deposits and advertise APYs as high as 5.4%, gold steadily rose over the last few weeks to just shy of $2,000.
Onlookers might find this strange, conflict or not, given the perception that high gold prices and high yields are supposed to be natural enemies. Like cats and dogs (or Alabama fans and Auburn enthusiasts), they simply cannot coexist. The economist’s explanation for this “common knowledge” is about opportunity cost. If you consider physical gold and a savings account as equivalents, gold doesn’t pay a yield. Thus higher interest rates are supposed to lure safe-haven investors out of precious metals, into the open arms of philanthropic megabanks who are delighted to pay you a nickel for every dollar you loan them.
This is obviously nonsense for a number of reasons.
First, history. As we have pointed out many times, gold has risen significantly in nearly every interest rate hiking cycle. It has now posted numbers we’ll be discussing in the decades to come – during the fastest (and arguably harshest) crackdown on debtors in the last 50 years.
Second, gold and a bank account aren’t the same thing. Owning physical precious metals doesn’t involve counterparty risk (which has always been true). They’re as different as chalk and cheese. Think for a moment – do you know anyone who’s sold off their gold and silver so they could put money in a bank instead? I’m willing to bet the answer is no. If I asked you how many people you know who did the opposite, liquidated savings accounts to buy gold and silver, I’m confident you know a handful of people, at least, who’ve done this over the last year or two.
Okay, back to the Federal Reserve…
How one chooses to interpret Jerome Powell’s words these days is a matter of personal preference. He continuously alluded to the 2% inflation target, only to say how they’ll need quite a bit more than a few good months of data to start reining things in. Then there is this bit:
“Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
And he added that economic growth, but also the labor market need to slow down for a return to 2% to be realistic. Earlier, we said that this is coming to feel like a longer, more stressful 2008-2011 stretch. Well, the last time yields were this high was 2007.
When he says that market conditions aren’t too tight and that more hikes are a possibility, that tells us the cuts and their effect will be monumental. The greater the tightening, the greater the loosening. And remember where rate cuts brought the Bank of Japan? If we are in some kind of bull run for the ages, a main talking point in it will likely become a massive round of monetary easing. And if you thought gold is performing well in tight monetary conditions like today, hang onto your seat. When the bailouts are signed and the printers start running, that’s when gold really shines brighter than ever.
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