Gold Shatters Yet Another Record – Is There More To Come?

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: What’s next after yet another all-time-high gold price?; lessons from Turkey’s financial crisis, and China’s dramatic influence on the gold market.

Gold price shatters $2,200 to set new record (and bullish forecasts still abound)

Another week, another record gold price. No, I don’t get tired of reporting gold records! I’ll keep writing about it every time we see a new one.

What’s driving price action this time? For once, we do have something to talk about, but it still feels a little flimsy:

Gold rose to a fresh all-time high following a slightly less hawkish-than-expected Federal Reserve meeting. The central bank maintained its guidance for three rate cuts this year, defying expectations of a downward revision to two rate cuts. Following the meeting, the U.S. dollar fell and helped gold rise to $2,222 per oz.

When the dollar falls, all commodity prices tend to rise proportionally. We know this.

But is that really enough to cause gold to hit yet another all-time high price with such force? Probably not, but it’s the start of an explanation. The general view is also that gold’s immediate pullback had to do with the Swiss National Bank cutting rates, weakening the franc and sending some international investors into the U.S. dollar as an alternative.

Just as adherence to Fed policy normally isn’t enough to propel gold’s price so emphatically, so too must we attribute the pullback to a standard correction. Indeed, what appears to be going on is a fundamentals-driven move up, along with near-term corrections when the price gets too hot.

Once again, the most interesting part of the story is what isn’t happening. Gold isn’t being boosted by a black swan. There’s no shocking geopolitical turmoil to point to. It seems that the consensus view is ready to accept any explanation for gold price movements.

Though there were plenty of calls for a correction over the past few weeks, warnings that gold’s price had risen “too high,” we’re still waiting: $2,080 gold became $2,180 gold, and the $2,300-$2,500 camp of forecasters gained more credibility.

BofA said in a recent analysis that sentiment around the metal remains very bullish, highlighting its hedging properties and near-total lack of correlation with other assets.

BofA is the latest institution to come out with a forecast so pro-gold you might’ve thought I wrote it myself, pointing to $2,500-$2,600 gold in the short term. This level is attainable, says the bank, if investors truly catch up to sentiment and enter the market. In other words, when individual investors catch on to what the world’s central banks already know – and act accordingly.

As has been pointed out by both Alasdair MacLeod and Ronald Stoeferle, gold’s current record price lacks one notable marker: private investor interest. Neither believe that the average saver, especially here in the U.S. has really woken up to the reality of how high gold’s price is and what it means.

The moment this changes, we’ll see the kind of prices these institutions have been predicting.

Another point of interest in BofA’s analysis is that they say this is the first big move in gold in two decades that is based on demand for physical gold only.

However, the story of physical gold taking back its spot in the financial system and shoving aside alternatives is just as big as that of any price move. From the Basel agreement to talks of COMEX squeezes and rumors of an empty Fort Knox, gold has slowly recovered its role as a tangible, physical asset.

Gold buyers are increasingly bullion-oriented. Or, as the World Gold Council put it:

…total gold demand in 2023 was the highest on record at 4,899 tons.

Remember, physical precious metals are just about the only financial assets that can’t be conjured out of thin air by an accounting trick or a central banker’s sleight-of-hand. When demand rises, price must respond.

That’s another way of saying I don’t believe we’ve seen our last all-time-high gold price for the year. Not by a long shot.

Turkey’s desperate citizens turn to black market as physical gold becomes scarce

It’s tragic to watch how different countries have destroyed their currencies. The hyperinflated Venezuela has seen considerable social decline made worse by foreign sanctions, while the similarly-positioned Turkey is trying to keep up appearances.

The same article that assures us Turkey is doing just fine economically and will certainly rebound also notes that the official annual inflation rate is 67% (but over 100% in reality). This is somehow happening while the central bank’s interest rates just hit 50%.

Earlier, we outlined how Turkey’s developments regarding gold will be one to watch. The country sold its national gold reserves to its own citizens, at the same time ending its central bank gold buying (and preventing 2023 from beating the 2022 central bank gold buying record).

The goal was to meet rapidly-growing demand from Turkish citizens attempting to escape the lira – but there was only ever going to be so much gold to go around. (We’re now hearing that gold smuggling is becoming popular to meet insatiable consumer demand.) This has partly to do with the hefty premium over international prices, but also President Recep Erdogan’s efforts to limit gold imports and therefore minimize the flight of capital from the country (which would push the lira’s value down further).

Mehmet Hekim, the Deputy General Director of the Turkish State Mint, said that the mint has almost doubled production to meet demand but that hasn’t proven sufficient. Others have noted that sellers of physical gold in Turkey are becoming difficult to find, worsening the issue of premiums and availability. When everyone wants to buy and no one wants to sell, price responds… to the benefit of the sellers and the regret of buyers.

A gold dealer in Turkey explained that real estate or land were popular investments until recently, with either gold or bank savings now becoming preferred options. There’s a mathematical issue with Turkish savings accounts: Even unsustainable interest rate of 50% is less than half the inflation rate. Cash in a Turkish savings account is losing more slowly than cash stuffed under a mattress, but it’s still losing. (I told you savings accounts were a con.)

Turkey’s situation with gold demand is very reminiscent to what has been going on in China. Both countries are experiencing currency depreciation, and the citizens of both are attempting to escape it through massive investment in physical gold.

The CNN article above says that Turkey’s high inflation took hold in 2021, and makes it sound like it’s a matter of making the right moves to restore the confidence in the lira. In reality, this hyperinflation has been going on for the better part of a decade, just under-reported.

In a December 2017 article, which we covered in a timely manner, Steve Hanke had already noted back then that the lira is a worthless junk currency to Turkish citizens themselves. And while they were using the U.S. dollar as a more liquid alternative to gold for the purposes of wealth storage, it’s hard to not notice how Turkey is merely serving as a more extreme example of a global trend.

As we wondered recently, how many American citizens know that there have been talks about shifting the Fed’s inflation goalpost from 2% to 4%? That’s just for “calm” periods, where no inflationary crisis is taking place, and just the official gauge, which many (including myself) criticize for under-reporting actual cost of living increases.

The lessons to glean from Turkey’s situation are straightforward, and they have mostly been in place when that analysis by Hanke was published in 2017.

  1. Currencies are for expenditures only – not a savings vehicle.
  2. Ideally, don’t wait for a gold market frenzy to diversify your savings with physical precious metals. You’ll regret it.

How much does China really move gold’s price?

The idea of a Shanghai Gold Price Fix has been around for a while. We’d say not many believe China is happy with the West determining the price of gold, and that it would like nothing more than to have its own price fix.

Jan Nieuwenhuijs suggests that China might already be influencing gold prices more than we realize and presents us with a fairly laid-out mechanism on how this is happening.

Nieuwenhuijs believes the PBoC and China’s private sector have been the main gold price drivers since the second quarter of 2022. Nieuwenhuijs explains his method of arriving to real central bank holdings:

“The difference between WGC’s estimated buying and reported buying, arising from the fact that the WGC’s numbers are based on field research, is ‘largely’ created by the PBoC, two industry insiders shared with me,” he said.

“To compute what the PBoC secretly acquires every quarter I take eighty percent of total unreported purchases. Then, I add what the Chinese central bank reports to have bought. In total, over 2023, the PBoC bought a record 735 tonnes, up 23% from the previous record in 2022 at 597 tonnes.”

“My estimate is that the PBoC now holds 5,358 tonnes, which is 3,108 tonnes north of what’s officially disclosed at 2,250 tonnes).”

The private sector in China imported 1,411 tons of gold in 2023, almost equaling global central bank purchases for the year, and 228 tons in January this year alone.

Interestingly enough, what Nieuwenhuijs calls a “worry” on behalf of China is actually a preferred policy by the Federal Reserve. That is of course referring to the use of inflation to reduce sovereign debt.

Instead of some menacing agenda, Nieuwenhuijs suggests instead that China’s gold purchases might be driven by a desire to escape the planned destruction of the U.S. dollar, but possibly other currencies as well, entirely brought on by the issuers of said fiat.

The idea of China as the gold price driver is an interesting one, and certainly a possibility during a time when everyone’s guessing as to why gold is so high. But perhaps even more interesting is Nieuwenhuijs’ reminder that the consumer frenzy such as the kind we’re seeing in Asia is yet to hit the West. When it does, Nieuwenhuijs expects the gold price to dazzle in perhaps yet-unseen ways.

2024, Featured, gold demand, gold price