Why Gold’s Price Is Rising (and Not Slowing Down)

From Peter Reagan at Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Understanding why gold’s price rises despite higher interest rates, the trouble with “tokenized gold” and platinum might be the diversification asset you need.

Fed hikes, dollar falls, gold rises… strange?

The Federal Reserve’s 25-basis point rate hike placed the Effective Federal Funds Rate (EFFR) at its highest level in 22 years. By all accounts, gold should have plummeted. Doesn’t everyone know that rate hikes are bad for the price of gold?

Here’s the logic behind that assumption:

  • When interest rates are low, investors aren’t compensated very much for holding cash, or for loaning it out
  • When interest rates are high, holding cash or making loans is more profitable

Furthermore, high interest rates tend to strengthen the dollar against other currencies – which pushes gold’s price down.

Right now, understanding why gold rose and the U.S. dollar fell, the opposite of the expected response, is key to anticipating long-term price movements.

Even though a rate hiking cycle is generally viewed as the worst-case scenario for gold, this particular series of rate hikes caused gold to go up. Gold closed $1,970 on Friday’s trading session, with some lamenting how it was unable to go past $1,980. This gives us an idea of just how much the markets price rate hikes in advance, and how much speculation over gold’s price occurs generally.

Investors seem to expect this hike to be the last, mostly based on the absence of excessively-hawkish rhetoric by the Fed. It’s not exactly wild speculation: JPMorgan is similarly “pricing in” rate cuts by the second quarter of 2024, which should push gold to a stable $2,175.

If the hiking schedule truly stops now, what has been accomplished? Let’s refer to this quote:

Headline CPI peaked at 9% last summer, but now stands at 3.0% year-on-year. While the directional improvement is welcome, it should not be mistaken for mission accomplished, especially with the core indicator sitting near 5.0% and showing extreme stickiness.

If even the Fed’s core indicator places the inflation rate at a somewhat unmovable 5%, while John Williams’s ShadowStats has it at double or even triple that, what will happen when the cuts start?

It’s looking pretty clear that the U.S. dollar might not handle another round of monetary easing all that well, which is probably why de-dollarization is the trending word these days.

The markets have priced expected developments in already, but only to a point. It’s left to the imagination how far gold can go once this unsustainable hiking cycle ends and it’s back to business as usual.

Paxos wants “tokenized gold” as a settlement method

For as much as we like the idea from Paxos of tokenized gold for clearing and collateral, there are some obvious flaws in their presentation. The firm outlines how de-dollarization is giving way to almost a need to accept gold as collateral, which it already is.

It then goes on to explain how blockchain technology and the like could be used to settle using gold, but without all the hassle of transporting and securing the actual bullion.

Here’s the issue, though: it’s this “hassle” that makes gold appealing to begin with.

This feels like the hundredth such idea we’ve heard of in the span of a few months. From cryptocurrencies that promise gold backing, Zimbabwe and Texas, everyone seems eager to develop some new kind of “digital gold.” That’s not a new idea!

Simply saying, “Gold, but on the blockchain,” doesn’t make this a new idea. Simply an awkward portmanteau of the world’s oldest safe-haven asset and the latest buzzword (why not “Gold, but powered by artificial intelligence”? I’m confident that’s coming soon, too…)

The analysis invites the reader to speculate:

Yet, despite gold being the primary beneficiary of the rocky macroeconomic environment this year, the increased demand for the precious metal has raised more questions than answers. Most notably, why is gold still primarily traded in its physical form?

That’s an easy answer, at least for me: Gold is a tangible asset that should only be traded in physical form. Faith and promises to pay (in other words, counterparty risk) are reserved for fiat currencies and the like. The introduction of faith-based trading in the gold market has already paved the way for abuse on a stupendous scale. It’s well-known among gold investors that you don’t really own gold unless you can hold it.

From the Texas digital gold-backed currency to blockchain gold, all of this feels like yet another attempt to avoid physical delivery. That’s one step away from increasingly nefarious market manipulation.

Yes, transporting gold might be a hassle. And that complication contributes to gold’s value and reputation. If it’s so troublesome, maybe gold investing isn’t the right choice for you. Personally, I’m not interested in technological window-dressing. I like gold’s simplicity. Gold doesn’t suffer from lack of innovation! (The financial services industry, on the other hand, survives based on innovation – on endlessly repackaging the same assets over and over, with different names and updated marketing materials.

Investors don’t benefit when one of the few stable assets is complicated and possibly destabilized through so-called “innovation.” I’ll stand by my troublesome, cumbersome, stubbornly physical gold, thank you very much.

Platinum may be the new silver

As platinum retraces to $920 from $1,220, Forbes published an article titled Platinum Is The New Gold. Strange timing! Clem Chambers covers the basics about platinum: Much rarer than gold, used to be worth more per ounce and so on.

Why is platinum not the new gold? Well, for starters, it would take quite a bit more than tweaks in automobile regulations to slash the price of gold in half. Chambers gives us the expected “Gold is merely a historical relic” argument, along with this:

There is only one reason countries hoard gold and that is not because they really believe it is money, it is because like a tank, it is one of the few currencies in war. In short, gold is for war.

If that’s not an advertisement for gold…

However, while Chambers might have entirely missed the point of gold ownership in this analysis, his attitude towards platinum is warranted. Instead of comparing gold to platinum, let’s instead examine how silver and platinum relate to one other.

Silver, like gold, looms large among investors. But it’s often described as a speculative trade. Greater downside, and also far higher upside than gold. In recent times, silver has been remarkably stable, as if it’s assumed the role of gold. Silver’s price is practically immobile at $24. Platinum, on the other hand, has moved from $800 to $1200 and back over the last five years.

This is exactly the kind of speculative trade that some silver investors are hoping for. Platinum’s fundamentals are extremely strong according to Chambers, and he’s right to point out its $900 price doesn’t feel right. Especially during an inflationary period.

Platinum may well be worth a second look for diversifying your physical precious metals holdings. Because, remember, the only asset that diversifies better than precious metals is more than one precious metal

2023, Featured, gold as investment, gold price, platinum