QUESTION: Why are certain ASX critical metal stocks quietly rising in 2024? You’ll get a veteran exploration geologists’ answer in a new report called ‘The Next Potential Aussie Mining Disruptor’. Read it here now. |
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Why the Gold Price Isn’t Going up Now |
Friday, 26 April 2024 | By Nick Hubble | Editor, Strategic Intelligence Australia |
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[6 min read] In this Issue: Everyone’s favourite explanation for gold’s surge Why none of them have me convinced The US has just spent $95 billion it didn’t have for benefits it will never get. |
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Dear Reader, Everyone has noticed the gold boom by now. But nobody can agree on why the gold price is flying. It’s dangerously easy to read your favourite narrative into market action. Especially with gold. And especially when it’s going up, fast. The price is up almost 50% since October 2022, and 21% in the last six months alone. Over the last three months, gold outperformed all major Western stockmarket indices. And back in January, before the surge in gold even began in earnest, it was running ahead of the S&P500 since the turn of the 21st century! Lately, the gold price has even outperformed bitcoin. Put together, it’s enough to make gold bugs believe they were right all along. But why is the gold price going up? Everyone has their own theory. There are countless articles explaining it. And everyone is convinced they’ve got it right. But I’m not so sure any of the arguments are conclusive... The ‘real’ reason for gold’s surge The obvious explanation is inflation. It’s proving difficult to slay. In some countries, the rate of inflation is outright rising. Producer price indices and other measures like oil are suggesting there’s plenty more to come. Gold preserves purchasing power over long periods of time. And so investors worried about inflation can protect themselves by buying more of it. As they do, the gold price goes up. But gold is not the only inflation hedge out there. And it didn’t surge when inflation broke out in 2021. Nor when it surged out of control in 2022. Something else must have changed. A savvy version of this argument points to ‘real yields’. These are interest rates adjusted for inflation. If inflaiton is rising, then the true rate of return you’re getting from earning interest is falling. If inflation is higher than the interest rates you’re earning, then you’re actually losing money. Well, you’re losing purchasing power. This is not a great place to be. And so investors avoid interest bearing investments like bonds when real yields are negative. What might they buy instead? Gold! But real rates remain positive. And the gold price didn’t surge when real yields went negative in 2021 and 2022. Not like it is surging now. Inflation — was it murder or manslaughter? What if governments and central banks deliberately staged the inflationary outburst of 2021? And the negative real yields that followed as well? Such a policy is known as ‘financial repression’. The idea is to inflate away the government debt. By keeping inflation above government bond yields, the debt becomes worth less over time. If this was a deliberate policy, then we may face the same thing for a prolonged period. Inflation may spend a decade peeking above interest rates until debt to GDP ratios are brought back to more sustainable levels. In that environment, gold is a great asset to own and bonds are disastrous. So perhaps people are realising the inflaiton spikes of 2021 and 2022 were just the beginning. The prospects for gold are even better if the financial repression goes wrong. If inflation surges too high, people will lose faith in the currency. They’ll buy gold to protect themselves. That’s why unusual sources of gold sales like Costco are currently doing a roaring business in the yellow metal. But why didn’t gold go up in 2021 then? Blame the Russians and the Chinese Geopolitics is another popular explanation for gold’s surge. The world is growing ever riskier. Governments are fighting it out in the financial sphere as well as on the battlefield. Gold is one way to opt out of this risk. The US Congress recently voted to confiscate Russian assets to pay for the war in Ukraine. This has helped everyone realise that their property is only their own for as long as the Americans regard it as such. Gold is one of the very few assets which has no counterparty risk. If you hold it in your possession, that is. The theory is that governments which don’t want to be at the mercy of the West’s ability to confiscate their assets are shifting into gold to reduce the risk. The likes of Russia and China are buying to shift their wealth out of America’s reach. But the gold price didn’t surge at the outbreak of geopolitical tensions. It didn’t break out of its multi-year range when Russia invaded Ukraine. Nor when the conflict in Gaza began. It looks to me like the gold price took a break from its surge when Iran entered the conflict directly by launching an attack on Israel. Another angle is that Chinese investors seeking to escape their country’s property bust are piling into gold. Or that the Shanghai gold market is wrestling control of the gold price from New York and London. But none of this is new. Why is the gold price surging now. Conspiracy theories no longer Governments and central banks still hold a lot of gold. Not so long ago, they claimed this was merely as a remnant of the bygone gold standard era. But what if that’s no longer true? Over the last year, more and more mainstream institutions have come out in favour of gold’s role in the monetary system. And some have begun to speculate about a peculiar policy move that was dismissed as an absurd conspiracy theory not so long ago. The gold held by governments and central banks is not held at market value. A lot of it is valued at US$35 an ounce, for example. A revaluation to reflect the current price of gold would mean a vast capital gain for governments and central banks. Something that could make their precarious financial situation look a lot better. The argument of conspiracy theorists is that governments and central banks are preparing to do this. They will announce the revaluation of their reserves to market prices, or even higher ones. This would be an admission of gold’s role in the monetary system as the bedrock upon which money is based. The higher the gold price at revaluation, the better central banks and governments will look. The resulting attention this would draw is also likely to push the gold price up. But it would also be an admission that central banks need gold because they can’t manage the financial system properly. And I can’t see that coming. Who’s right about gold? I don’t know which argument for gold’s rise holds water. There are plenty I haven’t mentioned here. My own theory is that the 9 o’clock gold slam has stopped. Without this downward pressure, the gold price is finding it easier to break out. But even that explanation is not quite enough to explain the surge. Perhaps it’s a combination of all of the above. But here’s what we do know. When commodities break out of long-term trading ranges like gold has been in, they tend to spike dramatically higher over time. And when gold surges, gold stocks respond. Well, the right ones do. So, how do you find them? That part’s easy…well, my friend Brian has made it easy for you. Until next time, Nick Hubble, Editor, Strategic Intelligence Australia Nick Hubble found us at Fat Tail Investment Research in 2010 after a stint inside Wall Street’s most notorious bank, Goldman Sachs, during the 2008 GFC. That’s where he saw the true nature of the investment banking business. Since then, he’s been the editor of the Daily Reckoning Australia and the UK-based Fortune & Freedom and Gold Stock Fortunes. He’s delighted to work as Investment Director and Editor for Jim Rickards’ Strategic Intelligence Australia. Here he helps turn Jim’s big-picture views into specific actionable advice and ideas for Australian investors. Advertisement: The Road to $1 Million A theoretical timeline for bitcoin reaching millionaire status by 2030. And specific crypto moves to make NOW … Click here to watch |
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| By Bill Bonner | Editor, Fat Tail Daily |
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[3 min read] We all are human...all too human, as Nietzsche put it. Fear, greed, jealousy, hate, the lust for power, conniving, generosity, patriotism — the basic elements are always there. But power structures — such as the post-WWII world order — change. So, today... we put aside right or wrong, good or bad, axis, schmaxis...evil, schmevil... and look at what kind of change might be coming. In America’s latest ‘foreign aid’ bill, we find many of the ‘negative’ features of the human character. Larceny, Corruption, Delusion, Stupidity, Hubris — it’s all there. The nature of its dumbness is routine; the level of it is perhaps extraordinary. Russian Repo As for the larceny, the measure included a Repo section that allowed the feds to steal property that is owned by Russians. It is as if, in response to the US invasion of Iraq, France had seized Americans’ bank accounts in Paris. The Corruption follows soon enough. The effect of the measure is really to raise the bid for US-made weapons. The money goes from the US to the deciders in Israel, Taiwan, and the Ukraine. They skim off some for themselves. The Taiwanese take a little. The Ukrainians take a lot. The rest goes back to the US firepower industry, whence some of it makes its way to the ‘think tanks’ that lobby... and politicians who vote... surprise!... for more war. As for the canny Israelites... the US in WWII spent 43% of GDP on defence. Luxury consumer items almost disappeared from the shelves. Americans tightened up their belts to win the war. And now, ‘Israel’s very survival is at stake’, says Mike Johnson. But for all the talk of an ‘existential battle’, the Israelis don’t seem especially concerned. They spend only 5.3% of GDP on their military, relying on Trump, Biden, Johnson et al. to provide the money they need. What’s in it for the US taxpayer? We don’t know. But if the Palestinians had the kind of political power in the US that the Israelis have, we’d be sending artillery and planes to them, rather than to their enemies. The US government has been bought. Democracy Delusion Then, there is the Delusion... that the Ukraine is a model democracy and that by sending it more money the Ukraine will win the war and the world will be a better place. Even the Ukrainians don’t believe it. In WWII Americans lined up at recruiting offices, eager to ‘do their part’. Not so in the Ukraine. The New York Times: ‘In Ukraine’s West, Draft Dodgers Run, and Swim, to Avoid the War’ Stupidity. We don’t know the future any better than Johnson, Graham, Frum, Biden, Clinton, or Trump. But anyone with any historical, military, or cultural perspective knows that there’s always more to the story. Zelensky has banned eleven opposition parties, seized control of TV news coverage, cancelled elections, prohibited speaking Russian and persecuted Orthodox Christians. What kind of democracy is that? Is Putin really planning to ‘roll over Europe’? Where is the evidence? More to the point, is there any reason for Americans to give a damn or a dollar who wins the battle for the Russian speaking provinces of the Ukraine? The US has just spent $95 billion it didn’t have for benefits it will never get. A conventional cost-benefit analysis reveals huge, real costs and unlikely or imponderable benefits. So why do it? More security? Not likely. More peace? Not at all. More prosperity? Just the opposite. All it will get for sure is more debt — about $1,000 per household. Higher rates, lower stocks The extra borrowing will exert upward pressure on interest rates. Money will then leave the stock market to take advantage of the higher rates on bonds. Stocks will go down in value. Consumer prices will go up (pushed up by larger deficits)... Americans will be poorer…and the Primary Trend will run its course. But wait... there’s more. Hubris. Why beef up US military power so as to ‘counter’ Chinese influence? Why ban TikTok or subsidise the US chip industry? Why make China an enemy? Why seek ‘primacy in Asia’? Is it because working with China in a peaceful, mutually beneficial way would not benefit the corrupt political system...nor the firepower industry...nor its lobbyists and think tanks...nor the politicians who take its money and vote its way...nor would it support the Primary Trend? A win-win relationship with China would not increase consumer prices...nor would it boost US debt...nor would it contribute to higher interest rates and lower asset prices. Nor would it give jackass warmongers anything to go on TV and blab about. And next week we’ll take a peek at the ‘New World Order’. We’ll see that the Chinese, though human, may be a different kind of dumb…and America’s strange policies may actually help them achieve the glory they aim for. Regards, Bill Bonner, For Fat Tail Daily All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment. |
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