Global Currency Shift as the Dollar Cannibalizes Itself
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: Global de-dollarization as a major driver of gold prices, gold demand statistics for 2023, and how silver is becoming more industrial by the day.
A safer safe haven: The U.S. dollar is losing ground to gold
Last week, we took note of an expert opinion that sort of went against the mainstream, and that’s the U.S. dollar being last to collapse. There are others with a similar view. Fund manager Jim Rogers had this to say on the matter:
The U.S. dollar is not a sound currency anymore. We’re the largest debtor nation in the history of the world. But everybody thinks it’s a sound currency, and they think it’s a safe haven. So when problems come, people race to a safe haven.
But while the U.S. dollar continues to enjoy both reserve currency status and safe-haven reputation to which it’s accustomed (despite increasingly shaky fundamentals), not everyone is signing up. Frank Holmes delved into the seemingly mysterious driver of gold prices in the form of emerging markets that are choosing gold instead of the U.S. dollar as their safe haven investment.
Holmes prominently quotes a report from BMO commodities analyst Colin Hamilton titled New Drivers for a New Gold Era. Hamilton points out that the correlation between real (inflation-adjusted) interest rates and gold, previously a reasonably sturdy one, has broken down in recent years. That much is clear since gold’s price rose abundantly despite relatively high interest rates.
We should probably put “relatively high interest rates” in quotes, as today’s effective Federal funds rate of 5.25-5.5% only looks high after two decades of almost uninterrupted interest rate repression. It’s only a little over the long-term average of 4.6%.
Now, the widely-accepted story about interest rates and gold is simple and straightforward: Higher interest rates push gold prices down. Gold doesn’t produce a stream of revenue – so, the logic goes, why would anyone buy gold when they can loan out money instead, and collect higher interest rate payments as income?
Well, there are some very compelling reasons (see counterparty risk or dedollarization for a more complete discussion). Suffice to say that, if you aren’t a political ally of the U.S. there’s simply no sound economic case for buying U.S. government IOUs (aka “dollars”) when there’s an alternative investment.
Out of the various national investments in gold, both Holmes and Hamilton find China’s case to be the most interesting one. China’s population might be one of the few developing markets preferring to flee into the dollar instead of gold, and that is only in recent times and only because of sky-high yuan premiums. But we’ve mentioned that even in this environment, China is buying gold hand over fist on both the consumer and individual level. The central bank reported a 225 ton increase in gold reserves last year, clearly undeterred by high prices or high premiums.
As tends to be the case, China’s economic situation is turning into a headline affair. The government is preparing a $278 bailout. That’s two trillion yuan, which will obviously be massively inflationary in nature. And, as Holmes notes, similar interventions in 2015 had no immediate effect on asset valuations. Hong Kong has now ordered the liquidation of China’s largest and most indebted real estate firm. So it’s easy to see why the Chinese are fleeing the yuan. But will they really want to hold U.S. dollars instead?
Firms like XIB Asset Management are betting on more outperformance from gold as the dollar declines on upcoming interest rate cuts. UBS has a $2,250 year-end forecast and recommends buying any dip below $2,000. Gold has stayed comfortably above this level since the start of the year, so those dips may be few and far between. (We have noted how the psychological impact of this can’t be overstated.)
The demand for gold below $2,000 will push gold back across this threshold rapidly. So long as it stays above, analysts are mostly unanimous that great things are in store.
In short, it’s a great time to already own gold. And we’re unlikely to see a better time to make a move into gold in the near future.
2023 central bank gold demand almost broke last year’s record
It’s no secret that we were eagerly waiting for the World Gold Council statistics pertaining to gold demand in 2023. Namely, central bank gold demand, but there are some other things to mention as well.
If we include 398 tons of gold derivatives, the annual gold demand for 2023 was the highest figure on record, 4,899 tons. Without them, the total gold demand of 4,448 tons was 5% lesser than 2022’s figure.
While it’s tempting to include the derivatives number so that we can blow the trumpets, we find it all the more interesting what happened on the bullion front. There seems to be some discrepancy in figures, as the WGC now lists 2022’s central bank gold demand as 1,082 tons, not 1,136 as previously reported. It’s not a wide margin, although more than enough to cause trouble if you’re the unfortunate vault attendant who signed for those 54 tons of gold…
In 2023, central banks bought 1,037 tons of gold, down 4% from 2022’s record. While some pundits believed it won’t be the case, we said we expect it will because of Turkey’s currency crisis. A major gold buyer pouring its reserves into the national market and nearly halting purchases makes a big impact on the local market, if not the global gold market. But based on the figure, we estimate that were it not for this single instance, we would indeed have another record year behind us.
That’s not exactly a hard argument to make, or corroborate. Total demand would only need to be 44.5 tons higher, and Turkey bought 18 tons of gold just in December, as it recovers from the aforementioned liquidation.
2023 also saw gold’s price at year-end close at a record high of $2,078. The annual average of $1,940 per ounce was also a record high.
Peter Krauth: Silver demand frenzy from solar sector
Peter Krauth, editor of Silver Stock Investor, recently spoke to Kitco about some bullish and perhaps overlooked factors in play for silver. Krauth’s opinion is in line with the mainstream view of silver taking time to match gold’s gains before eventually beating them.
“It usually does with a lag… but it will catch up to gold and then it will absolutely outpace gold. It has done that multiple times historically. I expect that will happen again this time around,” he said regarding whether we can expect major gains after rate cuts.
Although both metals tend to be in focus as investment vehicles, Krauth notes that the industrial and especially production aspects are something we should pay special attention to.
These days, industry accounts for 60% of silver demand compared to 50% just a few years ago, highlighting the move towards green energy through the use of solar panels. And while the Silver Institute makes bullish fundamental forecasts seemingly in line with its name, they were actually moderate compared to reality last year.
Industrial demand grew by 8% compared to the expected 4%, and 190 million ounces were used in solar panels compared to the expected 160 million. On the flip side, Mexico, the top producer of silver, posted a 12% decline while Peru’s production neared 20-year lows.
In the past, we have spoken about how “thrifting” is a temporary solution, and how solar panel manufacturers won’t be able to rely on it to “spread out” silver and minimize the need for it for long. The reckoning appears to have come sooner than expected, as Krauth said technologies these days are using up to 50% more silver than before.
“Solar is really the 800-pound gorilla, we can’t ignore it,” he said of the overwhelmingly positive supply picture. “Even if the overall production of panels were flat, we’re going to need a whole lot more silver, just for solar. It’s going to have to come from somewhere. We’ve had three years of deficits, there’s going to be a reckoning and the silver price will absolutely react.”
As always, when demand increases while supplies contract, price must respond. We can’t know for sure how much silver’s price will rise, but when it does, expect an explosion…2024, central banks, Featured, gold demand, gold price, silver price