Monthly Archives: January 2023
“Russia and China could choose to declare financial war on the major Western powers in Bloc 1 by selling US dollar assets and investing the proceeds not only in gold but in other precious metals and industrial commodities, forcing the dollar and other key currencies down further.”
USAGOLD note: Rowley considers a new alignment of nations as the world splits into two camps – one led by the United States, the other by China. “Beijing is in a relatively strong position to consolidate and strengthen its position while the US and its allies struggle with long-standing economic problems,” he says. We are not sure how much of that assessment is grounded in reality. The economic problems on both sides are profound.
“Treasury Secretary Janet Yellen said the Federal Reserve likely wouldn’t accept a $1 trillion platinum coin if the Biden administration tried to mint one to avoid breaching the debt limit, dismissing an idea that has been floated to circumvent Congress on the issue.”
USAGOLD note: Why do some choose to believe that outrageous solutions do not come with equally outrageous consequences? The best solution is to abolish the debt ceiling. It serves no practical purpose.
“The collapse of Sam Bankman-Fried’s FTX platform, along with his arrest, offered a tragicomic rebuke to those touting the blockchain as a serious challenger to gold (and the dollar and just about everything else). In contrast to crypto’s digital vapor, gold will inarguably hurt you if dropped on your foot.”
USAGOLD note: Bloomberg commodity columnist Liam Denning weighs in on what’s going on in the gold market…… Central bank buying is certainly a factor, but what are the reasons for that buying?
Gold trades to the downside ahead of tomorrow’s rate decision
WGC reports strongest gold demand in over a decade led by central banks
(USAGOLD – 1/31/2023) – Gold is trading to the downside this morning ahead of tomorrow’s Fed decision and press conference. It is down $9 at $1917. Silver is down 27¢ at $23.42. Wall Street expects the Fed to strike a more dovish tone, but there is a minority worried about a hawkish surprise. The World Gold Council reports the strongest demand for gold in over a decade. “Colossal central bank purchases,” it says in its full-year demand trends report for 2022, “aided by vigorous retail investor buying and slower ETF outflows, lifted annual demand to an 11-year high.” Investment demand for gold coins and bars grew by 10% to 1,107 tonnes. Central bank buying was at a 55-year high of 1,136 tonnes.
Chart courtesy of the World Gold Council • • • Click to enlarge
“Investors spend an inordinate amount of time trying to figure out something that is beyond figuring. Their views of the economy and markets are shaped by current economic data and expectations regarding the future actions of a small group of economists who have no better chance of predicting the future than a coin flip. And their collective track record at such tea leaf reading hints that the coin might be the better choice.”
USAGOLD note: What you just read, if you accept it as accurate and we do, is the best argument for diversification – and that diversification, if history is a teacher, should include gold and silver…… Some practical advice at the link.
“Despite all the talk, previous and ongoing, this Federal Reserve is soft on inflation. Not as eager as Wall Street to declare mission accomplished, Fed officials are nonetheless signaling that their work is near completion”…It was important that central bankers pushed back against the view that QE liquidity backstops would be restarted as necessary to quash incipient market instability. Powell was hawkish during his November 1st post-meeting press conference. But Fed hawkish resolve soon dissipated. Now, messaging has become so frayed that markets don’t take hawkish resolve seriously. The paramount message that the Fed would push back against looser market conditions is MIA.”
USAGOLD note: We agree with Noland’s assessment. After all is said and done, the Fed at its core is dovish.
“For the US central bank, the burden of controlling elevated inflation falls increasingly on hopes for favorable supply shocks.”
USAGOLD note: And that could go either way. A one-paragraph, no-nonsense summary of the Fed’s latest policy conundrum……
Chart courtesy of TradingEconomics.com
“As of now, the structure in gold seems to be quite bullish. And, while I would still like to see another pullback before we continue to trek much higher in 2023, I wanted to take a moment to outline my longer-term expectations for this impending rally that I expect. Back in 2011, I utilized a 100+ year structure in gold to identify the topping target for gold. And, I used the same structure to identify a bottoming target for the correction I expected, even before that correction began. So, now I am going to provide you my next target on the upside – and that is $2,428.”
USAGOLD note: Elliot Wave analyst Gilbert reprises a long history of successful gold calls to give extra credibility to his bullish $2428 target ……
Gold trades sideways ahead of this week’s Fed decision and press conference
Schroders says gold does well during recessions returning 28% on average
(USAGOLD – 1/30/2023) – Gold is trading sideways this morning as the markets remain cautious ahead of Wednesday’s Fed rate decision and press conference. It is down $2.50 at $1928. Silver is up 9¢ at $23.76. If a recession is in the cards, then what might we expect from gold? Schroders, the London-based investment firm, has some answers. Gold, it says in a report released last week, “tends to do well in absolute and relative terms during US recessions.” It has returned 28% on average and outperformed stocks by 37%.
“One observation we would make is that when the policy responses to US have been particularly loose/accommodative, the gold price performance has been most explosive,” says the firm. “This was the case in 1973 (when Arthur Burns was Federal Reserve governor) and was also the case in 2008 and 2020. We think policy responses to future US recessions will also be highly accommodative and involve a return to combined fiscal/monetary support.”
Gold and recessions
(Shaded bars = recessions)
Chart courtesy of TradingView.com • • • Click to enlarge
“The initial focus will be on how a new currency, which Brazil suggests calling the ‘sur’ (south), could boost regional trade and reduce reliance on the US dollar, officials told the Financial Times. It would at first run in parallel with the Brazilian real and Argentine peso.”
USAGOLD note: The dollar rebellion gains new adherents – the two largest economies in South America, and that makes for an interesting headline. That said, Argentina might find it difficult to give up its money printing ways – something that will no doubt be required in a monetary union along the lines of the European Union. In short, discussions about a currency union at some point will necessarily get down to the nitty-gritty of government spending, deficits, money printing – and most importantly, monetary sovereignty. Austerity has never been one of Argentina’s strong suits, and that fact of life, in our view, is likely to keep this new currency union in the discussion stage for a long time to come.
“BofA said another factor that will push up inflation is a renewed spike in commodity prices as the reopening of China’s economy will spark a wave of demand for oil. That, combined with supply issues stemming from the ongoing conflict between Russia and Ukraine, will put renewed pressure on oil prices, which dropped nearly 40% from their 2022 peak.”
USAGOLD note: This is not the kind of future the Fed has in mind……Of all the big banks, Bank of America is the most bearish by far. The bank is bullish on gold.
“The divergence reflects beliefs about future inflation, which has cooled in recent months but remains high by historical standards. ‘There is a very clear disconnect and it is a disconnect about inflation, said Priya Misra, head of rates strategy at TD Securities.
USAGOLD note: The tug of war between Wall Street and the Fed proceeds…… The “disconnect” described could be in force for some time to come.
“Going soft on inflation will plunge economies back into the recessionary depths of the 1970s and have “adverse effect on working people everywhere,” former US Treasury Secretary Larry Summers warned.”
USAGOLD note: We have made consistent reference to the 1970s Fed strategy that kept interest rates below the inflation rate – a policy that fostered stagflation and a strong gold market. The Fed, in our view, is not going soft, it is already soft on inflation and has been since it first surfaced as a problem several months ago.
Gold trades sideways ahead of next week’s Fed decision
Bill Blain: Buy gold now to finance future bottom-fishing in other markets
(USAGOLD – 1/27/2023) –Gold is trading sideways as we go into the weekend and next week’s Fed decision. It is up $2 at $1933.50. Silver is down 19¢ at $23.79. Morning Porridge’s Bill Blain believes having some gold stuck away to finance future bottom fishing in other markets is a good thing. “That’s when the liquidity of gold is a marvelous thing,” he says. “In times of market uncertainty it’s a beneficial asset to hold.” (In the chart below, please note the price levels during times of economic uncertainty.)
“My colleague Ashley Boolell, Shard’s head of commodities, reckons gold is going to a new record level this year,” he says in a lengthy analysis on gold posted at Zero Hedge yesterday, “fuelled by a number of factors – not least being the ongoing market uncertainty. Each time we get another unexpected market number, or a corporate shock, it chips way confidence. In uncertain markets gold is seen as the safe-haven investment – especially when there is the threat of the technical US default on the back of the debt-ceiling being blocked by the Alt-Right of the Republican Party.”
Gold annual average prices
(1971 – 2022)Chart by USAGOLD [All rights reserved] • • • Data source: Macrotrends.net
“In finance, everything is about marginal flows. These matter the most for the largest marginal borrower — the US Treasury. If less trade is invoiced in US dollars and there is a dwindling recycling of dollar surpluses into traditional reserve assets such as Treasuries, the “exorbitant privilege” that the dollar holds as the international reserve currency could be under assault.”
USAGOLD note: Zoltan Pozsar, the head of short-term rate strategy at Credit Suisse, believes that China’s deepening ties with OPEC+ and BRICs+ will alter the “existing world order” and “eventually lead to ‘one world, two [monetary] systems.’” Investors, he says, will have to discount new risks. If he is correct that the dollar’s exorbitant privilege could be undermined, it will carry important implications for gold.
“Prices of silver could hit a nine-year high of $30 per ounce this year — possibly outpacing gold prices. Insufficient supplies of silver as well as its tendency to be a better performer than gold in periods of high inflation are key drivers supporting the outlook, analysts told CNBC.”
USAGOLD note: Big rallies in the silver price often come out of the blue without warning, rhyme or reason. The best approach to owning silver is to accumulate it in physical form sans leverage and wait for the potential price spike. At $30, silver would provide a hefty return for most USAGOLD clientele who own the metal. Even as it is, silver is up 34.5% from September 2022’s bottom at $17.75 per ounce – a more than respectable gain that has not gotten a lot of play in the financial press.
“Investor cash holdings are near record highs, and that could be good news for stocks since there is a wall of money ready to come right back into the market. But the question is this: Will those investors return any time soon, especially with sentiment still so sour and stocks at risk of a major selloff?”
USAGOLD note: For the first time in years, investors are able to garner a decent return on money markets. That’s no small matter. Wall Street, no doubt, is chomping at the bit for that cash to wash like a great wave into the stock market, but that money could also sit where it is for a long time to come. Merryn Somerset Webb, a senior columnist at Bloomberg Opinion, thinks cash holdings might be another dead end for investors. “If you are holding cash,” she says, “it is only a temporary king.” She says that inflation, which erodes the value of cash, will be with us for the long haul and that investors should look to gold, as an alternative.
“Global oil demand is set to rise to an all-time high in 2023 as China relaxes its Covid-19 restrictions in a move that may push crude prices higher in the second half of the year, according to the International Energy Agency.”
USAGOLD note: Should oil prices start higher, as some predict, it could bode well for the rest of the commodity complex, including precious metals, but undermine hoped-for restraint on monetary policy.
Gold retreats after bumping against $1950 level in overnight trading
Dalio says dollar-dominated world order and globalized economy are ‘fading away’
(USAGOLD – 1/26/2023) – Gold retreated after bumping against the $1950 level in overnight trading. It is down $11 this morning at $1938. Silver is down 21¢ at $23.80. A key factor in gold’s pricing of late has been the return of hedge fund interest. “Hedge funds meanwhile have been near constant buyers since early November,” writes Saxo Bank’s Ole Hansen in a report issued earlier this week, “and during this time the net long has jumped from a 3.9 million ounce net short to a 9.3 million ounce net long, a nine-month high.” With greater hedge fund involvement in play, we should not be surprised at increased volatility and technical trading at key chart numbers.
Ray Dalio, who founded the world’s largest hedge fund, says the world order is shaping up in ways similar to the pre-World War II era, with “each country’s populism and nationalism growing in preparation for greater conflicts.” In the process, he says in an article on the Modern Diplomacy website, “the era of a ‘dollar-dominated world order and a globalized economy was ‘fading away.’ We are now going to have the major powers and their allies form economic, currency, and military blocs.” Mature economies, he says, “have run up very large debts and have developed a dependence on their central banks to print money to buy the government debts,” he said. The increase in debt monetization “will mean that holders of debt assets will get bad inflation-adjusted returns.” Dalio is a long-time advocate of gold ownership.
Gold and silver prices
(October 2022 to present)
Chart courtesy of TradingView.com
“Inflation in such a system resembles one of these inextinguishable long-burning underground coal mine fires. I’m not sure if you have them in Switzerland, but in Pennsylvania for example there has been such a fire that’s been going on for around fifty years. You don’t always see it, but it flares to the surface from time to time. It’s always there, it’s always latent, leaking smoke, warming the soles of your shoes. To me, that is a good analogy for inflation in a free spending and paper currency issuing social democracy.”
USAGOLD note: If you’ve never exposed yourself to James Grant’s unique brand of deep thinking on the economy and financial markets, you might find opportunity in this interview with Christopher Gisiger. Grant has always been an advocate of gold ownership, and nothing has changed on that score. “Allow me to suggest that I’m somewhat of a broken record on gold,” he confesses. “I’m going to continue with this broken record and observe that people have not yet come to terms with the essential inherent weaknesses of the monetary system that has been in place since 1971.” A point well taken as illustrated by the chart below.
Gold and the purchasing power of the US dollar
(USD as measured by the consumer price index)
Chart courtesy of TradingView.com