What’s Gold Doing? Exactly What It’s Supposed to…

Ronald Stoeferle: Gold has done exactly what it was supposed to

Bullion.Directory precious metals analysis 26 February, 2024
By Peter Reagan
Financial Market Strategist at Birch Gold Group

We’ve always leaned towards the former simply because of how the financial system operates. You buy assets and hope their prices go up. But Stoeferle adheres to the latter view. Today, in a world where many are unfamiliar with gold investment (and not too long ago unfamiliar with inflation as well), currencies are the go-to asset for saving.

Well, as Stoeferle notes, saving in currency has been disappointing. All across the world, those who lack allocation to gold (or simply prefers instead to park their money in currency) has endured a brutal haircut on their purchasing power. Besides “weaker” currencies like the Argentinian peso and the Turkish lira, Stoeferle reminds us that gold posted all-time highs in the euro, the yen and even the traditionally stolid Swiss franc recently.

Stoeferle brings up some very interesting points surrounding last year’s statistics. We ran multiple stories highlighting the incredible surge in gold price measured in Japanese yen. Gold’s 2023 annual gain in yen? 20%.

That’s not too far off from its 13% annual gain in dollars. Does that mean the dollar is “strong”?

How can that be true, if gold tracks the purchasing power of currencies? These two numbers alone seem to suggest the U.S. dollar is on a slump nearly as bad as that of the yen or yuan, but is being given some kind of preferential treatment by the mainstream.

Stoeferle addressed the erosion of trust in institutions, establishments and perhaps the current hegemony. Regarding his visit to Dubai for a presentation, he noted of the BRICS-related countries:

People don’t care about daily price fluctuations. They’re more interested in the long-term picture. They’re very self-confident regarding their region, be it Arabic countries, but also obviously China, India, Vietnam, Turkey, and so on. All those players are like the small brother who is quickly growing up and becoming very strong, but the big brother doesn’t recognize it yet and doesn’t trust this development.

Returning us to the West, Stoeferle divided people into three categories based on their belief in the monetary system and the establishment behind it: the believers, the skeptics and the critics. He noted that, just like the flow of gold from West to East, this is a one-way street. A believer can turn into a critic, but once a critic can never go back to believing in the mystical powers of the Federal Reserve – or taking the dollar seriously as a store of value.

Here’s Stoeferle describing the skeptic:

This is a fairly large camp, and those people in the financial industry, banking, and asset management quite often privately buy huge amounts of gold. But in their official role, they’re hesitant because recommending gold doesn’t make any money. Then also, it is something that, in big institutions, people don’t like, but privately, they get it. [emphasis added]

Stoeferle calls them skeptics, but it sounds to me like cynic would be a better description… (For more on this issue, see Why your financial advisor won’t recommend physical precious metals.)

Stoeferle harkens back to Alasdair MacLeod’s idea that, despite what we’ve seen over the last few years, gold has yet to see any true investment frenzy.

“We are far away from a mania. We are far away from this irrational exuberance, and that’s a pretty good sign from my point of view,” he explained. (This is an important point in my perspective! “Mania” and “irrational exuberance” are ways of saying “price has become detached from reality.”)

Stoeferle and I agree on that point – gold’s price is indicative of its fundamental value. Not hope, not fear – just simply what it’s worth.

While he urges investors to be satisfied with gold’s current price and recognize the metal has delivered on its purchasing-preservation promise, Stoeferle still seems to expect $2,300 gold not too far in the future. That is when silver can expect to post the kind of gains we’ve been waiting for, $28, $30 or more, as the fund manager notes that the gold-silver correlation remains exceedingly strong – even if it’s not as prompt as we might like.

Why budget deficits and rising government debt drive gold higher

If there’s one thing to like about U.S. debt, it’s that it isn’t ours individually. It’s “ours” in the American sense, in the same sense Grand Canyon National Park is “ours,” but we don’t really own it.

We managed our finances well, paid our bills on time and lived within our means. We haven’t run up $34 trillion in IOUs. We didn’t spend the money, so it doesn’t really affect us that much…

Right?

Economist Jane Johnson outlined why this belief, one that even the economically-savvy can fall into, is completely and utterly wrong.

Unfortunately, with each dollar of deficit spending and every IOU the Treasury Department writes, we American citizens might as well have applied for a loan ourselves. In more accurate terms, our political leaders took out a loan in our names.

It’s not a small one, either: $102,149 is the debt per capita (today). That’s how much every American, from toddler to retiree, owes on behalf of our government. It’s not fair, but it’s reality, and it’s getting worse.

How much worse? Well, it’s worth pointing out that total federal debt was $5.67 trillion in 2000. That’s the accumulated debt starting with George Washington’s presidency 224 years before, across the nation’s entire history. (Fun fact: That’s almost exactly how much federal debt has increased under President Joe Biden in just three years!)

Ten years later, the debt approximately doubled to $13.56 trillion in 2010.

Ten years, it doubled again to $26.95 trillion in 2020.

So it’s a quickly accelerating one… Current projections point to a minimum of $50 trillion by 2030, approximately doubling again in a decade. In 2030, newborns will get a slap on the bottom, a Social Security number and a total debt of some $200,000.

And, of course, we can’t ignore that as a share of GDP, U.S. federal debt now matches what we had near the end of World War II. After four years of fighting history’s biggest war on three continents.

Essentially, the federal government has engaged in crisis-level wartime spending for the last two decades… We’ll leave the why aside for now. Johnson doesn’t seem interested in tackling that particular question.

What she does point out is that there are only four methods that the government can deal with the debt. She summarizes them:

1. Outright confiscation of property for public use, which is prevented by the U.S. Constitution’s “taking clause” without just compensation of the property owner.
2. Taxation.
3. More debt, borrowing from Peter to pay Paul.
4. Inflation that erodes the nominal (non-inflation adjusted) value of the debt over time, harming lenders.

Could the first thing really happen? Even Roosevelt’s infamous swapping of gold for U.S. dollars didn’t really take property so much as exchange it.

Arguably, American gold coins were sort of the property of the Federal government, and Roosevelt did offer cash for the coins. Regardless, that wouldn’t work again… the total private quantity of gold owned in the U.S. (one estimate puts it at 26,000 tons) would just about cover one year of President Biden’s federal budget deficits.

And that’s assuming everyone just handed over their gold!

Taxation we already have, in abundance. Higher taxes are met with roars of outrage and lost elections. Funny, but when you ask taxpayers for more money, they start asking awkward questions about where the money they already gave you went. Politicians do not have good answers to this question! So they try to avoid it.

More debt? Well, the problem with that is credibility. How much more can a nation borrow without at least some vaguely plausible plan to eventually start to pay some of it off?

That leaves us with the fourth option, one that we tend to point out is by far the most preferred of the four. The reasons for that are obvious. Inflation is the silent thief of wealth. It’s the monetary mosquito, filching just a drop of our purchasing power daily. It’s sneaky and almost unnoticeable, which is why inflation has become a fact of life.

The last few years have shown a few things to both the Federal Reserve and the U.S. Treasury. If the 2% wealth-destruction goal (aka inflation rate) is increased to 10%, the populace will only complain to an extent. In many developed nations, a 10% inflation rate has all but normalized. And if in the U.S. we hear that the “standard” rate might go from 2% to 4%, it will mostly be overlooked.

Gold is what gives us the option to fight back against these highly damaging policies. It is the easiest and safest way to do so. In the interview above, Ronald Stoeferle dismissed ideas of gold as a hedge with a 2% allocation, saying that 10%-15% is necessary to call it such.

Based on the analysis above, even 15% seems very low to those holding a lot of cash relative to assets, as they are the primary target of the inflation-driven fixing of the debt issue.

European investors pay a 40% premium on silver bullion (but that could change)

One thing we’ve mentioned in the past but can’t get enough of reiterating is how fortunate the U.S. silver investor is compared to those abroad, specifically Europe.

We’re used to tax-free purchases of gold and silver, enjoying them due to the U.S. dollar’s once-firm relationship with both.

Europe has no such luxury.

Those looking to buy silver bullion in Europe generally contend with a minimum 30% premium over spot, which can go higher. It might be more accurate to call it a 30% spot over U.S. silver bullion.

Europe recognizes that gold is money and should not be taxed on sales, but seems to ignore silver in the same role.

Resource Capital is watching these developments carefully, noting that differential taxation has been proposed and seems to have good chances of returning this year.

It’s still not ideal, but would allow for much cheaper silver investment through the purchase of imported coins. Specifically, the example of Poland’s 8% against Germany’s 19% tax on silver bullion is used.

Should this indeed come to fruition, it would almost certainly make room for greatly elevated consumer interest in silver. The metal has the same popularity worldwide, but not everyone can go out and buy it just over spot like U.S. investors.

This brings us back to Alasdair MacLeod’s and Ronald Stoeferle’s comments on how the mania in the gold market still hasn’t arrived.

Might we see the aforementioned tax easing coincide with general interest in gold returning and boosting silver to heights many have been calling for?

UBS precious metals strategist Joni Teves has this to say:

“In a scenario where the Fed is easing, we think silver can do really well. It tends to outperform a move in gold,” Teves said. “Silver has been underperforming gold quite a lot. So there is a lot of catching up to do and I think the move could be quite dramatic,” she added.

Silver’s performance is tied closely to the health of the overall economy due to its wide industrial applications. The precious metal is commonly incorporated in the manufacturing of automobiles, solar panels, jewelry and electronics.

For as much as gold is turning into the asset to watch in 2024 and 2025, silver might end up being the precious metal to watch.

This article was originally published here

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