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Gold Price Beats Expectations in the Best Way Possible

Over the last several months, we’ve seen signs that gold’s price is increasingly diverging from the performance of the U.S. dollar. What’s going on, and should we be concerned?

Gold Price Beats Expectations in the Best Way Possible

From Peter Reagan for Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: Has gold been performing due to high inflation?, Iran gold sellers go on strike over sales taxes and the list of countries bringing their gold home grows (again).

Gold’s price defies “hawkish” sentiment from the Fed

The last weeks and months have obviously had a guess-the-driver theme, with everyone wondering what exactly is pushing gold prices so high. In doing that, analysts have perhaps lost track of the main driver of gold price today, which is inflation.

Our nominal interest rate remains near historic highs, but inflation is still climbing. It has gained speed in recent months, hitting 3.5% as of latest counting. Some obvious questions arise. We all like to believe inflation fell from the 9.1% recorded in June 2022 due to raised interest rates, or rather a change in monetary policy.

If inflation dropped because a hiking schedule was enacted, it makes sense for it to continue rising once the nominal rate becomes static. No upwards momentum might be contributing to high inflation, while policymakers believe that a high nominal rate is enough to lower inflation on its own.

That is clearly not the case, as the drivers behind inflation are stronger than whatever downwards pressure a high benchmark rate is applying. Have we reached some kind of normalization of the inflation target around 4%, as opposed to the 2% that the Federal Reserve has been seeking so far?

We've heard of it, but would rather not entertain it, as a 2% inflation rate is damaging enough. But in times like these, we have to wonder. The Fed's options are, as usual, limited. It can hike from this point onwards, but that could spell economic calamity. Leaving the rate as-is introduces monetary harshness without yielding the desired result from the inflation rate. And cutting would just inflate the currency away.

The consensus is that the Fed might try to wait out the year and see if the 3.5% inflation goes down on its own. While they do that, we'll try to figure out if gold hasn't had a price readjustment based on inflation.

It could be responding to a "New Normal" of a 3.5% inflation rate, signaling that the CPI is much higher than reported by official gauges, or something else. Whatever it is, gold also doesn't seem to have a problem with waiting things out, trading sideways above $2,300 as gold bugs enjoy a couple of very good months. According to a large number of prominent forecasters, a couple of good years seem much more likely than not.

In a country ravaged by economic collapse, gold is getting harder and harder to get

Iran is quickly joining Venezuela in a category no country wants to be in. Just like in the case of Venezuela, economic sanctions have crippled its economy. It went from 12.5% growth in 2016 to shrinking by around 5% annually these days.

Any kind of economic collapse is usually accompanied by a hyperinflating currency, and Iran's is no different. And when the currency is eroding this quickly, the citizens want to ditch currency as quickly and as bigly as possible. And when they do, the make the same choice that’s been made countless times over the last 6,000 years.

They choose gold.

Iran is among the countries whose citizens buy gold jewelry as their preferred asset. Keeping this in mind, it's easy to see a tax on jewelers who have more than 150 grams (about 5 troy oz) of gold as a punishing citizens.

This obviously includes most gold sellers, who have responded in kind by going on strike.

In December, following a week-long strike, Ehsan Khandouzi, the Minister of Economy, acknowledged the industry's grievances and announced a step back from enforcing the registration of jewelers' information in the comprehensive trade system.

As the regime gears up to impose new tax schemes on various markets, including gold, currency, housing, and automobiles, tensions remain high, with significant impacts on the gold market already being felt.

It is the latest industry to go on strike amid Iran's collapsing economy and skyrocketing inflation as at least one third of the country is now living below the poverty line.

But it's not just these taxes that are making jewelers reluctant to sell their gold. The Iranian rial (42,000 rial to $1) is plummeting in value so quickly and unpredictably that gold sellers see more upside to hoarding their gold than in selling it.

This is a historical pattern we’ve seen countless times. Ever since currency issuers invented debasement, a way to rid their currency of value, they have strived to do nothing else. Eliminating gold and silver from circulation is the first step.

Removing all reference to precious metals as any form of money is the second.

But things can't quite be left there, as central bankers also (apparently) don't want people to be able to buy gold from the private market. So they outright prohibit or tax gold purchasing during a time of hyperinflation.

Citizens are left trying to contend with finding a gold dealer on top of everything else involved in buying gold in inflationary times. The best we can hope for is that some had the good sense to invest as much as possible while the country was still in reasonable economic health.

This is both a lesson and a warning – it may not be safe to assume that gold will be available when you decide you really need it. An ounce of prevention is worth a pound of cure.

An ounce of foresight is worth much, much more…

Ghana and Senegal become the latest nations to repatriate their gold from the U.S.

Gainesville Coins' Jan Nieuwenhuijs has given us some good analyses, but his view of official sector gold movement in Europe might be incomplete. In relating Hungary's and Poland's gold purchases to a possible euro-related draft involving central bank gold, he left out an important part out.

Germany repatriated 300 tons of its gold from the U.S. in what can easily be seen as one of the industry's biggest stories in 2017. And just as we begin to note that Germany also falls within the EU boundaries, we are hit with news that both Ghana and Senegal brought back their national gold from the U.S. this year.

Ghana's announcement gives us all sorts of things to consider:

Beyond the symbolic gesture of reclaiming control over its precious metal assets, Ghana’s move is underscored by a pragmatic desire to shield itself from the uncertainties of a destabilized U.S. economy.

According to economic experts, Ghana’s decision comes at a crucial juncture amidst escalating global economic uncertainties and mounting concerns about the stability of the U.S. financial system. Dr. Joseph Mensah, an economist specializing in international finance, asserts, “Ghana’s move to withdraw its gold reserves from American vaults is a prudent measure to mitigate risks and safeguard against potential economic volatility”…

Dr. Mensah concludes, “By reclaiming control over its gold reserves, Ghana not only bolsters its economic sovereignty but also strengthens its resilience against external economic shocks.”

I wonder if it was the bank failures that made them anxious? More likely, the REPO Act’s seizure of Russian assets forced global central bankers to realize their assets weren’t really their assets unless they could control them…

Senegal said it wants stability in an increasingly uncertain economic environment.

Last year, Reuters reported on the trend, citing a study which noted more and more countries are taking control of their gold reserves. Adding Ghana and Senegal dismissed Euro Zone anxieties as a reason. Generally, Reuters suggests countries took note of the sanctions on Russia (exactly as they should).

We have heard that explanation even from some prominent names in finance, but it again doesn't seem to capture the whole story. Neither Ghana nor Senegal are launching military offenses of the kind, to our knowledge. They, or Germany, don't seem particularly likely to be the target of sanctions.

These specific countries are African, and therefore tangential to the BRICS behemoth. BRICS has been gold-oriented from the start, and the last thing a BRICS member would want is gold bullion on account in a BRICS-rival nation.

That still leaves us with the example of Germany and plenty of others, so we'll have to conclude that there is simply a desire on behalf of the monetary authorities of many nations to know their bullion is secure. They've made little to no statement regarding gold's role or value in the monetary system, at least not so far.

It’s easy to see that, in the not-too-distant future, the creation of a new global financial system that will involve gold bullion at its foundation. We can only speculate on what scale that might be. Regardless of what may or may not happen in the future, decisions like these remind us that physical gold ownership trumps all other financial assets in terms of stability and security.

As we said above, don’t assume gold will be available when you need it. Add to that lesson, simply owning physical gold isn’t enough – it must be accessible.

That’s why we work with precious metals depositories whose only role is to keep your assets secure.

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