When Investors Sour on Risk, They Buy This

When Investors Sour on Risk, They Buy This
Photo by Daniel

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: Gold doesn’t want to leave $2,000, how the U.S. government has indebted you by around $100,000, and Canada releases 2023 coin from single-source mine.

Forecasters predict $2,050-$2,075 as the next key targets for gold price

The last week has shown us two things, if everything else remains a little muddy: gold’s price was driven in some degree by the Israel-Hamas conflict. While having its ups and downs over the past week, gold sat above $2,000 since Friday.

Traders are saying it’s an “anyone’s guess” environment, with one listing $2,050 and $2,075 as the next key resistance levels to breach. Sunil Kumar Dixit, chief technical strategist at SKCharting.com, offers this specific forecast:

With spot gold having successfully cleared the $1,998 horizontal resistance and reaching $2,009, the next major push would be towards $2,050 and $2,075.

They are lofty targets that, when captured, will probably mark another stage of gold’s bull run.

A lot of gold’s performance can be attributed to conflict unfolds. But Alasdair MacLeod has some nuances to add. He explains how the chart of open interest in gold near all-time lows is gold’s most bullish chart right now. Why? Here’s his explanation:

It illustrates the very low level of speculative and hedging interest in gold, both of which can be expected to increase materially as the conflict in Israel evolves. Central to the problem, of course, is oil. Any attempt by the US and her NATO allies to intervene increases the likelihood of Iran closing off Hormuz at a time when western oil reserves are depleted… oil demand now exceeds pre-covid pandemic levels.

He also notes that fund managers are now agreeing that high interest rates are constraining gold price.

If this is the case, does gold have any real headwinds?

MacLeod says that an inflow of institutional money is expected to add yet another bullish argument for gold’s case.

The Israel-Gaza conflict is still a wild card. We know from history that open fighting in the Middle East has an alarming tendency to spread. MacLeod points out that any agitation of Iran, such as what we’ve already seen, increases the likelihood of Iran closing off Hormuz and cutting the West off from yet another oil source. This is happening during a time when oil demand has reached pre-pandemic levels, according to Standard Chartered.

Today, gold is serving its historic safe haven role as it always has. As uncertainties increase, it’s reasonable to expect that gold will as well.

How U.S. federal government debt drives gold’s price

One big economic story that isn’t getting as much attention as it should: The shrinking global appetite for underwriting the U.S. government’s addiction to deficit spending. (Or diversifying away from the U.S. dollar altogether.)

This is a problem for several reasons.

First, deficit spending means borrowing money. As with any loan, this only works if there are creditors willing to exchange cash for an IOU of dubious value.

Second, defict spending expands the money supply. When a currency has no intrinsic value, its market price is based on supply and demand. Thus, increasing supply at the same time demand is waning is a recipe for disaster.

These days, D.C. is reminding those waiting for a bus that the U.S. national debt recently passed $33 trillion through the use of large electronic billboards. But what can these witnesseses do about it? Precisely nothing. The U.S. government has, in effect, given every citizen a debt of approcimately $100,000 regardless of what their their personal finances look like.

Month after month, the citizen’s money is taken to service the debt and allow for government spending, yet this method has been inefficient even with higher taxes. As of September, the U.S. national deficit (or one-year addition to the debt) was $1.7 trillion, $320 billion higher than last year’s figure while still being some ways off from the end of the year. Perhaps not coincidentally, Daniel Lacalle notes that the U.S. debt is on track to post the weakest GDP growth since 1929, the decade of Weimar’s economic implosion.

The classic example of a hyperinflationary crisis was that of the Weimar Republic during the early 20th century. After losing World War I, Germany was forced to pay reparations to the nations it had invaded – and those reparations were paid in gold (or real money). Money-printing for domestic programs led to inflation, then hyperinflation…

In addition to the largest government debt in history, the U.S. enjoys the world’s largest sovereign gold reserve. But it doesn’t seem particularly eager to introduce a gold tether even though it’s supposedly the best-positioned nation for it, and even though the next global bid for power seems set to revolve around re-creating sound money. Is it any wonder that speculations are rife that Fort Knox is all but empty?

The greater the U.S. debt is, the more reluctant anyone will be to hold its liabilities, leaving us very much open for a Weimar scenario. Of course, it has to be worse. After all, Germany was never the global superpower nor had its currency pegged as the global reserve.

With nothing in the way of solutions regarding U.S. debt as it, along with interest payments, continues to balloon, implosion seems like a safe bet. The only upside is that this time, there is no real threat of capital flight to foreign markets to worry about. Whatever capital leaves the U.S. dollar these days is almost guaranteed to find an immediate home in gold, which will in some ways force the global economy back to sound money.

Royal Canadian Mint’s new 0.9999 pure gold coin follows the responsible-sourcing trend

Known for its dedication towards coin purity compared to competing sovereign issues, the Royal Canadian Mint (RCM) seems to have its sights set elsewhere these days. Its latest mintage is the the $50 1-ounce 99.99% Pure Gold Maple Leaf Single-Source Mine coin, a piece that might best be described with the word “trendy.”

2023 Royal Canadian Mint special edition gold maple leaf sourced from a single mine

Image courtesy of the Royal Canadian Mint

The RCM seems to have taken its obsessiveness over coin purity a step further by focusing on source purity as well. In their announcement, the mint said that all of the ore in the coin comes from Newmont’s Eleonore mine in Northern Quebec.

It didn’t hesitate to comment on what it calls a demand for greater transparency over ore sourcing. The latter is an interesting story on its own, particularly in light of recent developments in Switzerland. Valcambi left the Swiss Association of Precious Metal Manufacturers and Traders on Friday due to disagreements over its metals sourcing.

The top refiner has been criticized over sourcing gold from the United Arab Erimates, which essentially serves as a hub for what some deem “underground” gold. On the other hand, Valcambi says its ongoing LBMA accreditation, among other things, is a testament to its good policies and responsible day-to-day operations.

Is the Canadian coin going to end up a commemorative style if the ESG trend in the gold market fades? It’s difficult to say. We’re already hearing that top Western banks are willing to resume their trading in Russian aluminum and make a nice bit of profit along the way while the rest focus on green metals.

While we like the RCM coin, both Valcambi’s actions and firms like Citi resuming the purchase of Russian metals tell us that gold is a difficult asset to try and demonize. And isn’t that how we like it?

2023, Featured, gold as investment, gold price, safe haven