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Hidden In the Inflation Numbers: The Next Gold Price

Recently, persistently stubborn inflation has raised expectations the Fed will have to raise rates higher and keep them high longer than expected. Here’s why gold dropped in response, and what happened last time we faced this economic situation…

Hidden In the Inflation Numbers: The Next Gold Price
Public domain photo by David Falconer, courtesy of The National Archives and Records Administration

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: Fed's hiking plans are causing a kerfuffle (once again), gold could soon take on an even more important role, and on-the-ground reports of gold demand trends in China and India.

Gold trends lower over hike expectations, yet history offers some good news

The recent surge in the price of gold has taken a breather. After breaching $1,920 in a run from $1,650 that some called a bit excessive, gold has now retraced back to $1,840. The general latest consensus is that a $1,775/oz price serves as a floor for the next move up.

By this point, we have to wonder: are gold investors the group to be worried here? If the above analysis is true, a $1,775 floor is still a respectable 7% above the $1,650 “floor” forecast just weeks ago.

Higher highs, higher lows and all that. Price fluctuations are nothing new. It’s times like these when it pays to remember one of the most important pieces of wisdom Benjamin Graham shared with generations of investors:

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

Too often, I see individuals who diversify their savings with gold because they want to stop obsessing over economic fluctuations instead turn their attention elsewhere. While it’s true that nature abhors a vacuum, there’s a lot of other things we could spend our time doing… Reading a book. Taking a walk. Planning a summer getaway.

Somehow, that shift in attention is challenging for a lot of people. At least at first. Those who’ve been diversified with physical precious metals over years or decades tend to have fewer worries. It’s strange, but true: the longer you’ve owned gold, the less you care about today’s gold price.

Having said all that, let’s look at trends driving gold right now…

Kitco’s Gary Wagner blames hawkish statements from Federal Reserve officials for the recent drop. Gold tends to rise in price when the dollar wanes – and higher interest rates imply a stronger dollar – so traders who obsess over FOMC speech transcripts try to outsmart the market by selling or even shorting gold before those hypothetical interest rate hikes occur.

That explains the short-term trend. So what about the long term? Why would the Fed already be rethinking their most recent plans? Here’s why:

Advocates of a more hawkish monetary policy in the Federal Reserve are citing recent inflation reports that indicate that inflation is much more persistent than they had believed and not declining as quickly as their projections.

That’s right – the same people who told us inflation was “transitory” two years ago are still capable of being surprised when reality fails to meet their expectations.

They've also doubled down on their commitment to bringing (some form of) inflation back to 2%.

Well, returning inflation to 2% won't make absurd prices any lower – rather, prices will still rise, but at a slower pace. I know it’s pretentious to quote myself, but still:

Inflation might be transitory, but its damage is permanent

That's why gold will keep rising over the long-term. That’s why any substantial drop in gold’s price simply isn't plausible until central banks stop deliberately destroying the purchasing power of their currencies.

What happens in the meantime? The Fed appears determined to try the Volcker solution – simply raising interest rates until inflation goes away. In the 1970s it took a double digit increase in rates, all the way to 19%, to end the only comparable inflationary episode in U.S. history. (Though if we're being honest, this one is significantly worse because of the amount of money printed.)

5% is little more than a third of "what worked last time." To use the same formula, the Fed would have to hike the benchmark rate at least 15%-20% above current levels.

Today’s traders see higher interest rates as poison for gold’s price. Yet, while Volcker was cranking interest rates into the double digits 50 years ago, gold’s price increased from about $125 (1973 average price) to $900/oz at its peak in 1980.

Should we expect another massive superbull market for gold? Well, it’s certainly possible… In the meantime, focus on what you can control.

Make a plan. Diversify your savings. Control your expenses. Then turn off the finance news.

Do your “voting” now and let the “weighing” happen over the years and decades ahead.

Gold, globalism and the Great Reset

Kitco spoke separately to both Frank Giustra, CEO of the Fiore Group and founder of Lionsgate Entertainment, and Andy Schectman, an expert on economic and monetary history. The themes of the interviews are globalism, control, CBDCs and everything in-between that spells "the end of freedom." And, of course, gold.

Here’s the interview with Schectman:

Schectman, who has decades of experience in precious metals markets, describes a tsunami of events, some of which have already unfolded and some of which seem to be around the corner. Currently:

The BRICS are, I think, coalescing against the dollar, the perceived hypocrisy and hegemony of the dollar. We’ve already been told that the BRICS currency would be pegged to gold or to commodities, the assumption being that gold is one of the commodities.

Note: “BRICS” is an acronym referring to the five biggest “emerging markets,” namely Brazil, Russia, India, China and South Africa.

Schectman fears that a massive de-dollarization wave in the near future will create a flood of greenbacks returning to the U.S. This would trigger higher inflation, then higher interest rates, and finally asset price collapses.

Schectman ties CBDCs into this, predicting the Federal Reserve will use them as an alternative form of dollar. And a new false promise of real, stable value. He points to Lael Brainard, Vice Chair of the Federal Reserve and soon-to-be Director of the National Economic Council, who’s a modern monetary theory (MMT) evangelist:

She [Brainard] wants to do modern monetary policy directly to your iPhone. It would fit perfectly that this could happen sometime in the next few years, where she could come in and administer a Central Bank Digital Currency from the ashes of what would be new system.

Giustra is even gloomier about the state of affairs, foreseeing a totalitarian world government where control is enforced digitally, one way or the other. CBDCs, which Giustra doesn't think will take longer than a decade to implement, will perhaps be the primary method of this control.

While Schectman mostly discussed gold as a peg for a BRICS common currency, Giustra views it as the last refuge from this new system. And his money is, in fact, where his mouth is:

I gave my kids gold coins recently, and gave them a long lecture as to why they need to own gold. I hope that one coin resonates with them, that it's important to have gold in your portfolio.

What gold demand really looks like in China and India

It seems that lately, any time we hear about Chinese gold, it's the government buying it up by the ton. Yet the consumer side of things is just as interesting. For example, the Shanghai Gold Exchange (SGE)'s premium on gold has risen to $35 an ounce. That's more than $19 the premium set by London's benchmark, and nearly four times last year's average.

The World Gold Council says that the SGE's premiums are now the highest they have been in over a decade. (Remember what gold was doing back then?)

And while Chinese buyers wrestle with historically high premiums, India’s import taxes are driving gold onto the black market.

Indian jewelers estimate that of the 720 tons of gold arriving in India annually, 340 tons are smuggled from neighboring Asian nations. That’s right – almost half.

The latest seizure of gold bullion from a local jewelry shop has affirmed that Indian importers aren't always keen on paying an 18% duty on the gold they bring into the country. Anand Sekri, president of India's Jewelry Association, called upon the government to lower import taxes on gold. That’s the only feasible method of dissuading gold smuggling.

These two stories about gold demand have one thing in common: when people want gold, they’re willing to pay just about any price to get it.

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