Gold is on an unprecedented march to new heights while garnering the unlikely attention of the mainstream media and the legions of Americans who have never invested in the safety and shelter of the yellow metal. Of all the benefits that Gold has to offer, the most overlooked is its ability to forecast.
Those who have their finger on the pulse of the economy are the first to adjust their assets when the climate of economies shift. While Gold is a necessary component of every portfolio, it is the “storm shelter” of choice when clouds gather on the horizon. Gold historically “zigs” when traditional assets “zag”. There are sometimes interesting moves in the spot price of Gold that break from the norm and make one ask, “What is Gold Trying To Tell Us?”
Gold is up 18% in the last 60 days, and 30% since October. This historical run has taken out several resistance levels without pausing. Gold Historical drivers include Geopolitical Uncertainty, Inflation, Stock Market Corrections/Crashes, Recessions, Banking Sector Instability and Fear. The Stock Market is doing just fine currently. So “What is Gold Trying To Tell Us.”
Central Bank Purchasing - One of the most active drivers of Gold today is Global Central Bank purchases. Central Banks made a net purchase of 1037 Metric Tons of Gold in 2023. The second year in a row that these institutions have added over 1000 Tons to their foreign reserves. Central Banks were net sellers of Gold throughout the 1990’s through 2008. The trend turned to becoming net buyers of Gold in 2009 and that practice dramatically accelerated beginning in 2020. Central Banks use Gold in their foreign reserves to strengthen their local currencies. The U.S. Dollar has been the Reserve Currency of the World since the Second World War. With the current de-dollarization occurring around the world due to Sovereign Nations bypassing the U.S. Dollar for international trade, Sovereign Nations no longer need to keep the same number of Greenbacks in their reserves. Since Gold is priced in Dollars globally, it is an easy transaction to change Dollars for Gold.
The United States Federal Reserve, our Central Bank, is 108 years old. 2023 marked the first year in its history that showed a loss. In the charter of the Fed, it prescribed that the profits each year be given to the United States Department of Treasury. In the unlikely event that the Federal Reserve does not make a profit, the loss would be recovered from future annual payments. The future annual payments from the Fed to the Treasury will have to be more than $114 Billion before the government gets another penny.
Inflation and Gold have a parallel relationship. One of Gold’s jobs is to keep up with inflation. Consumers can purchase the same goods and services today for one ounce of Gold, as they could 100 years ago with one ounce of Gold. The difference is, that ounce was $20.00US 100 years ago, today it is nearly $2,400.00US. The skyrocketing and stuborn inflation that is stifling the economy today, is neither transitory nor under control. In fact, de-dollarization will find more U.S. Dollars repatriate back to U. S. shores. There are $12 Trillion in foreign reserve funds around the world. Inflation is an increase in the money supply. This inflation is a result of the $2.2 Trillion Stimulus Package that Congress appropriated to blunt the effects of the Covid-19 Pandemic. The National Debt is increasing by $1 Trillion every 100 days under this Congress and President. Gold certainly has a lot of fuel to support its future climb.
The U.S. Equities Markets are doing quite well currently. They are so resilient that they trade on headlines not fundamentals and ignore bad news. There has not been a stock market consolidation or correction in 16 years. Of course, there is a lot of money in circulation and considering the average age of the “new” generation investor, none were around in 2001 and 2008. They will certainly follow the herd over the cliff the next time.
Recessions are a necessary correction in an otherwise healthy economy. While two years of predictions of an imminent recession have been incorrect, history tells us that it should be on the horizon. We are long overdue, and incumbents can only kick the can down the road so far.
Geopolitical Uncertainty and Gold prices have a direct correlation throughout history. There are three hot spots around the world and two at home. The Russian invasion of Ukraine is now two years old. The perpetual conflict in the Middle East was escalated in October by Iranian proxies and has reached dangerous levels in the last two weeks. China is signaling that Taiwan will be absorbed soon. North Korea is not getting enough attention so they keep playing with dangerous toys that eventually will put someone’s eye out. And $7.2 Million undocumented, unvetted, and illegal foreign persons have entered our country in the last three years. Secondly, the United States has never been more divided, angry, and unproductive since the Civil War.
Banking Sector Stability is a touchy subject. Everyone keeps their money in banks. There were three bank failures in 2023 that sent shock waves through the Country. The Secretary of Treasury, former Federal Reserve Chairman Janet Yellin advised that there would be more “consolidations.” Apparently, “Bank Failure” is not politically correct anymore. One of the primary assets held by banks is Treasury Bonds. When interest rates go up, the value of Treasury Bonds go down. This is not good for balance sheets. It is good for the mega banks, however. The three banks that failed in 2023, were “consolidated” with mega banks footing the bill to bail them out.
This handful of examples of “What Gold Might Be Trying To Tell Us” are only highlights. Americans are locked up and scared. All of the drivers for Gold prices are not only in place, they are flashing warning signals. Gold is telling us something, that is a certainty. For most, the awareness of impending danger will arrive too late. In the last two market crashes, those that rode out the carnage lost 65% and 50% respectively. It took seven years for those individuals to just to get back to even. In the first case, seven years took them right up to the second crash. Those that diversified with the safety and inverse properties of Gold, fared dramatically better. There is never a bad time to buy Gold. But some times are better than others.
Doug Pullen
President – GMR Gold