Gold rally in 2023? Why this time IS different!

Friday, 6 January 2023 — Albert Park

[12 min read]

Dear Reader,

It’s 2023 and I wish you all good health and spirits!

2022 was a forgettable year for those who speculated on gold.

Not the yellow metal itself — that was one of the most solid assets for the year. It ended down 1% in USD terms by the end of 2022, while up almost 8% in AUD.

I’m talking about the mining companies. After all, you don’t get rich buying gold. You do so by speculating on the fortunes of the mining companies that explore and produce it.

Things looked bright in late January as gold producers started to rally. The momentum picked up when conflict broke out between Russia and Ukraine the following month, sending gold soaring to levels near the 2020 highs.

Many, including myself, were of the view that gold would have a stellar year given that central banks finally admitted inflation was a lingering problem.

These were the same experts who refused to admit this in 2021, despite everyone on Main Street experiencing rising costs of living thanks to a strained global supply chain.

Rates started to rise in mid-March with the next occurring in May.

Markets laughed off the first as it was a feeble 0.25%. That gave gold another boost, and gold stocks were poised for a breakout by mid-April.

Let me show you what the ASX Gold Index [ASX:XGD] looked like at the time:

The 20-day moving average was above the 50- and 200-day moving average. The 200-day moving average started to turn positive.

At that time, my sights were set on what I believed would be a replay of 2019 or even 2020. In both years, gold stocks delivered rewarding gains.

Few saw a bear market coming for gold stocks!

I expected a bear market as the Federal Reserve decided to accelerate its pace in raising rates from May onwards, as I wrote in this piece. And I thought the bear market would cause people to seek refuge in gold, benefiting gold stocks at the same time.

I got the first part right, but terribly wrong on the other. Gold did pull back in US dollar terms amidst the rate rise, but stood firm in ours:

Gold stocks, well, they took a beating more severe than what we saw in 2020:

How did that come to be? Allow me to analyse with the benefit of hindsight.

Not quite a Volcker rate rise, but a hammer all the same

The Federal Reserve and other central banks around the world aggressively raised rates from May onwards. Rate rises of 0.5% or more reined in liquidity and dramatically cut spending across all sectors. While the Consumer Price Index climbed in many countries, it was doing so at a decreasing pace; signalling inflation was being brought under control.

So, in a way, the central banks were able to alleviate concerns of runaway inflation with monetary policy. That kept gold’s rally at bay. On top of that, a rising interest rate made fiat currency more attractive than gold as it pays a yield, while gold doesn’t.

The US dollar gained more than 15% from May 2021 to September 2022, as you can see in this figure depicting the US Dollar Index [DXY]. Even now, it’s trading at levels not seen since 2003:

Looking back, Federal Reserve Chair Jerome Powell did take a swing at inflation and appeared to have brought it under control to some extent. He didn’t do a Volcker and therefore the asset markets took a beating, but it hasn’t come crashing down in a screaming heap.

At least not in 2022.

But what I believe is coming next could be interesting.

Economy hanging by a thread, threatens to teeter in 2023

One of my favourite Peter Schiff sayings is about how the Federal Reserve tries to conduct a magic trick with monetary policy. You can hear it along with his other jokes in this stand-up comedy sketch (6:20–7:00). Note he was referring to the previous chair Janet Yellen on this, but it still applies today.

How’d you like that? Yes, economists can be funny, but they’re few and far between!

Anyway, Jerome Powell may have averted a market disaster raising interest rates as he did last year. The Federal Funds Rate ended the year sitting at 4.25–4.5%.

And apparently the Federal Reserve isn’t done with raising rates yet.

How high could it go?

5%? More?

This is where things will get very dangerous, if it wasn’t already.

You see, the US Government debt is well into the US$30 trillion mark, if you run by the numbers from the US Debt Clock. Total US debt is at US$93 trillion!

Taking the government debt alone, we are talking about each US citizen owing US$94,000! So their annual interest bill is around US$4,500 right now.

Throw on top of that their own personal debt — home, mortgage, credit card, etc. It’s a heavy burden and it’s about to get heavier.

I had a chat with a world-renowned gold stock investor, Don Durrett, almost two months ago about what to expect this year. He’s of the view that everything could come crashing down if the Federal Reserve raises rates to 5%.

And should there be a crash this time round, central banks are out of the game. They’ll have to reverse their monetary policy, create currency like never before, and risk hyperinflation.

Perhaps this is part of the plan. Those who are aware would know of The World Economic Forum and their ‘Great Reset’ to usher in their Fourth Industrial Revolution. A central bank digital currency, decarbonisation, and an AI-driven world of surveillance.

Let’s hope for our sake that the central banks succeed in destroying their own petrodollar system but fail in rolling out ‘The Great Reset’!

But make no mistake, they’re preparing for a collapse and bought record amounts of gold last year.

A mighty gold rally for 2023? You can bet the central bank on that!

And based on that, I’m pretty confident about gold’s prospects this year.

Moreover, gold stocks are setting up for a rally once more. Check out how the ASX Gold Index is playing out now:

Notice that the 20-day moving average is leading the 50-day moving average? That’s a bullish short-term signal. What’s most encouraging is that the 20-day moving average has crossed the 200-day moving average from below, with the 50-day moving average soon to do the same. The picture is complete when the 200-day moving average turns upwards, and then we’re off to the races.

So why do I think it’s different this time?

Because the central banks are no longer standing in the way, they’ve moved in line with us gold enthusiasts.

So now it comes down to whether 2023 will be like 2019, when gold producers rallied hard as gold started breaking out.

Or could it be like 2020, when we had the manic buying phase with gold where explorers made monumental gains averaging 300% across the board in the space of six months?

Gold producers have jumped out of the gates since October and there’s still room to run.

If you don’t want to miss out, join me here.

But for the main event, and the potential to make life-changing gains if my outlook turns out right, you may want to get started buying up some good quality gold explorers and developers. Of course, this is for those with a much higher risk tolerance.

Head over here if this sort of high-risk, high-reward speculation is what you’re seeking.

Regards,

Brian Chu,
Editor, The Daily Reckoning Australia

Dear Reader,

‘On the rising of the sun
‘And the running of the deer
‘The playing of the merry organ
‘Sweet singing in the quire’

Traditional English folk carol

Passive solar heat seemed like a bad bet here in Ireland. In the winter, when you need it the most, the Sun is low…and furtive like a badger. You don’t see it very often or get much heat out of it when it appears.

The low-cost alternative is wood. We’ve spent years taking down ‘trash’ trees…what they call here ‘maple sycamores’…which are neither maple nor sycamore but seem to have characteristics of both. We’ve cleared much of the property, returning it to what it was before the last owner died. As a by-product, we have years’ worth of firewood ricked-up in the barn.

But let us return to the cottage itself. It was such a ruin when we arrived and so covered with vines we didn’t know there was anything there. It was only when winter came and the leaves fell, that we got a view of the old place.

The bare necessities

It is a typical Irish house from the 18th or 19th centuries. Stone walls. Thatched roof, later replaced with tin.

No conveniences. One bedroom. But in this sort of ‘cabin’ the Irish raised families of six, eight, or 10 children…with several of them eventually emigrating to England or the US if they didn’t starve to death first. Often, they set out for the US by way of England and ended up in factories in Manchester or Glasgow.

In England, they were never made to feel welcome. Typically, they lost the O’s or the Mc’s and gradually diffused into British mainstream life. When James Callaghan was named prime minister, in 1976, hardly any mention was made of his Irish roots.

In the US, the story was different. At first, the Irish were regarded with open contempt. They were rowdy and poor…cheaper than slave labour for many jobs…and more dispensable.

But they kept coming. At one time, one out of every four residents of New York had been born overseas, with most of them from Ireland. And soon, almost all the police were Irish…and then, the mayor and city councilmen too.

Finally, when John F Kennedy was elected president, the Irish were triumphant. His grandfather had come from New Ross, County Wexford…as poor as a church mouse. But by the 1950s, the Kennedy/Fitzgerald clan was as rich and as powerful as any in the US. Kennedy went back to New Ross in 1963 and was warmly greeted by relatives. But all of Ireland celebrated; one of its own had made good.

Kennedy, and practically the whole Irish American race, came from cottages like this one. We aimed to save it…‘in its juice’…which is to say, without much upgrading.

We tore away the underbrush, removed the collapsed roof, re-laid the stones around the tops of the walls and framed up a simple roof, following the pattern of the gable ends…one of which was formed by the wall running alongside the road.

Then, we dug up the floor, insulated with three inches of Styrofoam, poured a light concrete over it…and put down large stones we had saved from another renovation project. The walls were cleaned; loose plaster removed. But they were left more or less as we found them. And then, everything was covered with a limewash that picked up the colours beneath it.

The bedroom, however, still felt cold and damp. So we covered the walls with one inch of foam insulation and then a wood beadboard panelling. And on the ceiling, too, we put three inches of Styrofoam between the rafters…and covered the whole thing with the tongue-in-groove pine panelling.

The house was still dark. So we added a very unauthentic conservatory onto the south side. This ran into some serious money, though we don’t remember how much. We had to buy the double-pane glass panels…and the treated-wood framing. And the door, we made using a sliding door rail…cutting out each side so that, when the two halves are pushed together, it resembles a tree.

The other things that might have involved considerable expense were the water and electricity. For the latter, a friend was able to get a temporary meter from the power company and install all the outlets and lights we wanted, at low cost.

And for the water — what luck! — nearby was a cattle trough. We simply connected our water system to the cattle line. Then, with flexible tubing — the kind used by the farmers — the water comes to the house…and then moves from a very simple kitchen sink to a small bathroom, built in the form of a large armoire, with only a toilet and a shower:

The cost

We didn’t want the expense of a regular hot water heater, so we put in an ‘on-demand’ heater in the shower itself. It only heats water when you actually use it. Very economical.

A similar heater, under the kitchen counter, will do the same thing for the kitchen — though we haven’t put it in yet.

And so, after cleaning and painting…the place was almost ready. We didn’t keep track of our investment, but it was probably only US$5,000–10,000. We had done almost all the work ourselves, which showed. Some things looked OK. Others were amateurish.

And would anyone want to stay in it? That was the question we posed before the Christmas holidays. We have a small house. And a big family. Where would they all stay? Could we get one of them to stay in the ‘guest’ cottage without feeling ‘dissed’ or humiliated?

Fortunately, one of our sons was delighted with it.

‘This is great. Very cozy. I love the fires.’

Whew. That was a relief.

Midnight mass

On Christmas Eve, finally, we took down the poor pheasants. They had ‘hung’ long enough.

They were placed on a makeshift table outside. Elizabeth and one of the boys went to work on them, following directions from a YouTuber. By 6:00pm, they were ready for the oven, looking like small chickens or large pigeons.

‘They don’t smell right’, said one of the boys.

‘That’s just the gamey smell of pheasants’, Elizabeth reassured him.

At 11:00pm on Christmas Eve, the bells of St Mary’s, the huge Anglican cathedral in Youghal, sounded. It was time for the faithful to gather for carols.

Alas, over the years, the faithful have dwindled to two dozen at most. So small was the congregation, gathered for midnight mass, that we all sat in the nave…with a heavy velvet curtain separating us from the rest of the church…and holding in a little heat.

We have been members of the Anglican Church (known as ‘Episcopalian’ in the US) all our lives. We have watched it decline, like our own contemporaries, from robust and confident, to doubtful and even cynical, to weak and doddery in old age.

Most of the people at midnight mass were as old as we are. Almost any of them would have been at home in our stodgy Episcopal church in Maryland. The men in their sweaters...the women in the plaid wool skirts — there is a kind of Anglican style that must be trans-Atlantic.

In our youth, we carried the cross…now, we guffaw and grumble under our breath. Is it us, we ask? Or is it the church? One of us has lost its way.

The message of Jesus is fairly clear: it is up to each of us to find his way into the kingdom of Heaven. ‘You got to go there by yourself’ is how the old African American hymn puts it. His challenge to us was to change ourselves, not to change the world. The message of the modern church, however, is that we can vote for Democrats, force others to change, and somehow create Heaven on Earth…or at least, the version of it currently in vogue among the elite.

After so many decades as a churchgoer, we now find ourselves out-of-place…but still going.

The carol service over, after midnight, we wished each other a Merry Christmas and headed home.

Brady and Tommy

Brady is a lean handyman. His white hair is thick and cropped close. But we rarely see it since his hat is a near-permanent part of his attire. Brady’s sidekick is Tommy, who comes occasionally to trim trees.

Tommy was asked to take down some giant limbs overhanging the cottage. He is bald, and thin, like Brady and your editor, but slighter. Somehow, he finds ways to do what appears impossible to us. He throws a rope far into a tree and pulls himself up…swinging between branches and trunk.

He does this with a rolled cigarette in his mouth and a chainsaw in his hands.

‘Tommy, be careful up there’, we yell up the tree.

‘Now, don’t ye be worried. I’ve been doing this all me life.’

‘Yes, but I want you to keep doing it.’

Brady is more cautious. He worked for years at a fuel company. He doesn’t smoke.

At precisely 10:00am both men stop ‘for tea’. Brady brings a thermos and sandwiches. Tommy has his own stash. They sit on tree stumps or stones and carry on a conversation that has been going on for approximately half a century.

‘I don’t know how those bloody fools can make such a mess of things’, says Brady.

‘It’s all they do’, replied Tommy.

‘How do they expect us to get along, with everything getting so expensive?’

‘Prices going up all the time.’

Brady complains. Tommy, like a chain-smoking Greek chorus, merely echoes.

But in the matter of tree trimming, Tommy says nothing. He sets to work. Chips fly. And limbs fall.

He had artfully rigged-up a rope to the limb hanging over the cottage so that once cut, it did not fall on the roof, but swung back towards the tree, where it could be lowered to the ground without damage.

That’s the charm of the working classes. They work. They get things done.

Their talk is sometimes as silly as a US senator. But their work is valuable. They know how to do things. And get things done.

‘Brady…Tommy…would either of you like to take home a pheasant? It’s all prepared.’

‘Nooo…tank you’, says Brady. ‘I saw them hanging in the garage. I felt sorry from them.’

‘I’ve never had pheasant’, Tommy replied. ‘They’re not native to Ireland.’

Christmas morning

At 8:00am it was still dark outside. But our 18-month-old grandson was fully awake. He wandered unsteadily from the kitchen to the library…caught between the sublime and the delicious, he alternately admired the lit-up Christmas tree…and came back for pieces of pancake with maple syrup.

We finished breakfast and then assembled in the library. A fire made it cheery. Presents piled up underneath the tree.

Outside, the wind was blowing a gale. Coming in from the Atlantic was a storm. It was not especially cold, but the wind, with a light rain, made it uncomfortable and difficult to work outside.

‘I won’t come over today’, Brady had telephoned. We could hear the disappointment in his voice. He would normally spend a few hours here…interrupted by the deep tranquillity of his ‘tea’…doing what he likes to do best — cutting firewood…cleaning the ivy off stone walls…visiting with neighbours and passers-by. Our guess was that he just wanted an excuse to get away from the house and to busy himself outside.

His main project now is clearing up a ‘secret garden’ hidden in the woods. It’s the site of ancient ruins…walls, doorways, even a ‘killing slot’ where a man with a bow might shoot an enemy with little risk to himself. He is cutting down the trees that don’t belong there…and removing the brambles that cover the area. In their place, he plants rhododendron, azaleas, and fuchsia — all of which grow well in the damp Irish climate.

Brady disappears into the woods in the morning. He comes out in the afternoon.

‘What are we going to do about the deer and the rabbits’, he asked.

‘They’ll kill everything unless we find a way to stop them. Once the plants are mature, we won’t have to worry. But when they are young, the animals love them.

‘I’ll talk to McIlveny [the gamekeeper at the pheasant farm].

‘I’ll ask him to come over and do some shooting. But we also need to put up wire mesh around all the plants.’

The Sun set at 4:30pm…by then, we were all prepared for our Christmas dinner. Normally, the occasion calls for a goose. But this year, pheasant was on the menu.

The table was set in the dining room. A fire was set in the fireplace. The candles were lit. The best china was on the table. The silverware and the wine goblets sparkled in the firelight. Champagne toasts to Christmas and the coming new year were offered. It was a scene from a Thackeray novel…all cheery…warm…and jolly.

We enjoyed our foie gras…on little pieces of toast. We gave thanks to all present for making the journey (one of the boys came from California).

And then, it was time for the main course. The piece de la resistance appeared — two pheasants on a big platter. Elizabeth brought it in and placed it at the head of the table. We sharpened the carving knife, while all admired it. And then…

‘They don’t smell right’, said one of the boys.

‘I think they’ve gone bad.’

Regards,

Bill Bonner,
For The Daily Reckoning Australia