Why Now Is the Perfect Time for Gold

Why Now Is the Perfect Time for Gold

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: The latest on interest rate cuts, gold’s gains or the dollar’s losses, and the European gold standard.

Gold’s headwinds are still bullish

What are gold’s headwinds anymore? Well, the latest pullback has been attributed to a strong U.S. jobs report. Of course, we have to question whether there is merit to this thesis. It’s all but expected for gold to ease off after hitting an ATH and gaining over 10% inside a week.

Still, unpacking the supposed driver behind these losses makes us realize that it’s yet another headwind that actually supports the price of gold. Analysts are engaged in debate: Is there any real economic strength driving economically-sensitive asset prices, or is it all a mirage? When are the rate cuts coming, how big, and how fast?

Generally, the thinking goes like this:

  • Higher interest rates increase dollar strength, pushing gold’s USD-price down, and encourage saving in cash, pushing gold demand down
  • Lower interest rates weaken the dollar, pushing gold’s price up, and increases inflationary pressures – which lowers the attractiveness of saving in cash, pushing gold demand up

The strong U.S. Employment Situation Report in November lowered hopes of interest rate cuts, which might seem negative for gold. But when we understand gold just hit an all-time high without regard to rate developments, we have to ask: Do gold buyers take the Fed seriously anymore?

When gold’s price rises while interest rates are still high, well, we have to credit gold’s fundamentals. The recent all-time high forces even a skeptic to concede that gold is in a very good spot right now. Its price is not dependent on any single factor.

One interesting point we’ve ran into is that some analysts believe hypothetical future interest rate cuts are already priced in. Obviously this is something that happens – investors consider both today’s price and expectations of future price changes before buying assets.

The problem with attempting to apply the same logic to rate cuts is that they have a very negative long-term effect on currency. Interest rate hikes have temporarily strengthened the U.S. dollar. But because the Federal Reserve’s mission is inflationary by its very nature, the U.S. dollar is on the same one-way street it has been on since the 1970s. Whether the dollar’s value is driven to zero at 2% or 4% per year, the destination is the same.

With this in mind, I doubt gold will suffer if the Fed’s inevitable rate cuts are delayed. Rather, gold stands to benefit from it. It’s difficult to find an opinion that doesn’t expect gains in gold immediately after rate cuts materialize.

If gold goes into the cutting cycle around $1,800, the near-term price targets would be $2,000, $2,100 and so on. But if gold is already $2,100 when the rate cuts begin? Well, in that case I’ll be absolutely glued to every post-FOMC press conference.

Gold’s gains vs. long-term losses in the U.S. dollar

Alasdair MacLeod’s familiarly in-depth analysis covers gold’s recent gains, but isn’t particularly exuberant. MacLeod reminds us that gold is money with a brief trip through history. So we could think of any gains in gold price as simply a slow return to its historical role.

MacLeod firmly believes the U.S. Treasury has attempted to actively destroy the gold-is-money connection – with an almost amusing lack of success. But more than that, MacLeod interprets gains such as these as merely a signal that the U.S. dollar is edging closer to a dramatic plunge in value.

That point is difficult to argue with!

I challenge you to think of a currency in which gold hasn’t posted an all-time high over the last 18 months. If MacLeod is correct, the U.S. dollar is undergoing a long-term decline that’s shifting global sentiment in favor of gold. (After all, isn’t that what the global dedollarization drive is all about?)

MacLeod’s warnings of a U.S. dollar collapse have many other interesting consequences that have mostly been ignored by other analysts An example is that he believes Russia wanted to introduce a gold-backed ruble during the much-anticipated BRICS summit in July, but was denied it because India and China were holding the reins, so to speak.

Why would Russia Times announce a gold-backed currency for BRICS only for there to be no mention of it during the actual summit? MacLeod notes that Russia will be formally taking control of BRICS in less than three weeks – so stay tuned for developments. This could make for the biggest gold news since the 1970s. And if Russia indeed plans to make such a move, now appears to be the perfect time, as inflation batters the ruble.

MacLeod notes that various economic factors, such as strong exports, place Russia in a good position to transition to a gold-backed currency. The only thing that could hold Russia back, he says, is China. It’s possible this move could harm trade with China, or more specifically put Russia in the BRICS driver’s seat.

But is this a sacrifice China is willing to make? As another step toward undermining the U.S. dollar, a scenario that China has endorsed for decades? Well, yes. Maybe not today, and maybe not in the next twelve months – but inevitably, yes.

MacLeod often says that a re-introduction of any feasible gold-backed currency to the global economy will, by definition, doom all unbacked currencies. Since China’s actual gold reserves these days are estimated to range from 10,000-20,000 tons… And since China’s external debt is 1/14th the size of the U.S. government’s… And China is the world’s #1 gold-producing nation, as well as the world’s leading exporter… China is currently the nation best equipped to back its own currency to gold.

Thus ending the 50-year global experiment with unbacked money.

It’s a subject ripe for speculation, to be sure. I happen to believe this move is inevitable. Remember – the last 50 years have been unprecedented in human history! Every global reserve currency, including the U.S. dollar, has been made of or freely exchangeable for physical precious metals. China will deploy its gold reserve at a time and place of its choosing, when forcing the world back onto the gold standard will be most beneficial for their plans and most detrimental to our own.

Is a not-so-secret gold standard brewing in Europe?

Gainesville Coins’ Jan Nieuwenhuijs ties together all the conspicuous central bank gold purchases in the Eurozone in a unified theory of sorts with a simple summary: Europe is, in some way, gearing up to return to a gold standard.

We would call it a bold claim, but there is already too much corroborating data to label it as such. Some of it is Nieuwenhuijs’ own research, which outlines how the Eurozone has been preparing for a gold standard since the 1970s. Others come from underhanded admissions, such as the Dutch central bank’s statements.

A tell-tale sign that central banks might be preparing for a gold standard is aligning their gold to GDP ratio to neighboring countries and towards an “acceptable” figure. Nieuwenhuijs believes that every nation, from European ones to Singapore and China, might be going for a ratio of 4% precisely for this reason.

Have onlookers been naive to believe the official version, that the likes of Poland and Hungary are merely buying gold to strengthen their nation? Perhaps. Nieuwenhuijs expects Poland to eventually come public with an announcement of 130 tons more bought to meet this target.

Nieuwenhuijs’ analysis indeed ties many things together, including the somewhat strange experiment of the euro currency. As he notes, of the 27 countries currently making up the European Union, 20 have adopted the euro. In the remaining seven, the official currency exists alongside the euro, not unlike what one might see in Latin American countries with the U.S. dollar.

Why has the European Union gone to such extreme lengths, causing massive upheaval in every nation, to introduce yet another free-floating currency? It seems illogical, but we were willing to believe it because central banks’ actions tend to be such.

Many other things corroborate Nieuwenhuijs’ idea, such as that EU member nations are required to transfer some of their gold to the European Central Bank as soon as they start using the euro. Would hoarding gold therefore really make sense for Poland unless its officials know something we don’t?

None of this, unfortunately, makes good news for the world economy in the short-term. The aforementioned comments by the DNB reference a crisis event where a gold standard would be a second choice after the first response has failed. Other countries have made similar comments.

It seems, then, that the Eurozone might be waiting for some kind of crisis to introduce a gold standard as a response. Given everything we’ve seen, we can safely assume it will fall somewhere between planned and manufactured. It’s hard to imagine going to these extreme lengths and setting the stage for decades “just in case”.

So if it does materialize, a European gold standard will come on the back of a lot of suffering on behalf of those in the region. As tends to be the case, those who hold gold will end up cushioned before, during and after it.

And by the looks of it, U.S. dollar holders and by proxy American citizens will be hard hit. We were once seen as the gold standard nation. Now, it seems that everyone from Europe to Russia to China has a laid-out plan for a gold standard while we wonder if there’s any bullion in Fort Knox to begin with.

2023, Featured, gold as investment, gold price