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Gold breaks $2,000, but is anyone surprised?

Bullion.Directory precious metals analysis 20 March, 2023
By Peter Reagan
Financial Market Strategist at Birch Gold Group

The Fed’s going to raise interest rates this week? Well, a stronger dollar pushes gold’s price down. Institutional investors shun “yield-free” gold in favor of paper Treasury bonds, whose yield is measured in stacks of paper (and let’s not forget, there are no constraints on those paper yields, so long as you’re willing to accept paper as payment).

Two of the three biggest bank runs in U.S. history unfold in 72 hours? The entire U.S. banking system’s credit score is downgraded, and Credit Suisse gets a $54 billion bailout (and hours later is sold off for a paltry $3.3 billion)? Central bankers scream themselves awake at 2 a.m. from nightmares of the 2008 banking crash?

It’s no surprise gold’s price surged above $2,000 this weekend. Marcus Garvey, head of metals strategy at Macquarie Group, observed:

The longer uncertainty rolls on, with neither market fears being wholly calmed nor a full-blown systematic crisis unfolding, the higher gold prices should be able to trade.

Last week’s 6.5% rise was the highest weekly gain in three years. And it’s happening right as the Federal Reserve is expected to announce another interest rates hike, which is supposed to push gold prices down.

Of course, careful observers will know that the markets price these hikes far in advance, so it shouldn’t be surprising that gold’s current price already has these higher rate expectations factored in.

Analysts are decidedly bullish on gold’s prospects right now, and they don’t really have a reason not to be.

StoneX analyst Rhona O’Connell explained the surge in gold price as investors seeking a safe haven against loss:

It’s all about risk hedging. A Swiss bank is supposed to be the be all and end all of safe havens. If something else happens in the banking sector, you can expect gold to go higher.

It’s not just safe-haven demand driving gold’s price, though. TD Securities’s global head of commodity strategy Bart Melek explained that the decision to guarantee uninsured depositors’ funds is already countering the anti-inflationary effects of interest rate hikes. Banks borrowed a record $164.8 billion from the Fed in just one week — where’s the money coming from?

(That’s really a trick question – at the Federal Reserve, they make money by fiddling with numbers on a spreadsheet, and hey presto! There’s another few hundred billion dollars in the world.)

In the event last week’s $165 billion handout wasn’t enough, the Fed unveiled a brand new bank welfare program last week, the Bank Term Funding Program. JPMorgan Chase & Co estimate this new facility could provide up to $2 trillion in new dollars to keep banks in business.

Do you see the problem here?

The Fed is at war with itself – tightening the money supply while expanding the money supply at the same time.

The result? During a time when the Fed has declared war on inflation, and is using higher interest rates and quantitative tightening to reduce the money supply, we would up with another $297 billion dollars in circulation in just one week.

Actions speak louder than words, don’t you think?

If inflation is such a problem, why keep expanding the money supply?

If propping up banks is really the Fed’s mission, at the very least be up-front about it. But no, the Federal Reserve is above the law, above every sort of legislative and executive oversight. We’re expected to simply adapt every time they change the rules of the game. Maybe the next press release will somehow break the back of inflation?

In times like these, I ask you, is it any wonder people are realizing what an absurd “store of value” the U.S. dollar has become? Is it surprising to see a surge of interest in the timeless and universal safe haven of gold?

“Gold can’t go bankrupt, unlike a bank”

We’ve said time and again how the Treasury yields’ gains are being overplayed in the media. We’ve reminded readers that Treasuries are not only historically underperforming, but that they are the only sovereign bond yet to “come around” in what is a bond market crisis some years underway.

Now, the 2-year U.S. Treasury has notched its biggest decline since 1987, the year of the infamous stock market crash. Do you still believe that the Treasury offers safety with current market conditions, especially when gold is available as an alternative?

The banking crisis is one of liquidity, yet on the other end, we’ve had the biggest liquidity pump in history added to the markets in the form of a multi-trillion dollar stimulus. Bailouts have to happen because “too big to fail” is a thing, and any form of bailout has to involve money printing. Quantitative easing to clean up the damage of the quantitative easing from a few years ago? Again, pretty clear what this spells for the dollar and gold, because we’ve seen a lot of it in the 2008-2011 run. However, and importantly, gold wasn’t nearly as well-positioned back then.

This situation is being called a crisis of confidence. That’s Wall Street talk for “Everything’s fine but people are panicking anyway.”

This doesn’t make sense, at least it doesn’t to me. A “crisis of confidence” is when you get to the office, worry you might’ve left the oven on and drive back home, burst through the door and discover – that you turned the oven off. Everything’s fine.

What’s happening with banks? To expand my analogy, you get to the office, remember the oven, jump back in your car and race home toward a pillar of jet-black smoke to find your building surrounded by fire engines. This is not a crisis of confidence! It’s just a crisis.

So even though I think he mischaracterizes the problem, at the very least GraniteShares CEO Will Rhind understands the solution:

And when you see a crisis of confidence, but particularly in our financial system and our banking sector, people rush for safe havens. And arguably, there’s no more famous safe haven in the world than gold. It’s one of the highest quality assets out there with no counterparty or credit risk. So in other words, gold can’t go bankrupt, unlike a bank, and that’s very appealing at this particular point in time.

Is there a development here that preserves the U.S. dollar’s value and its sovereign credibility while restoring the faith and credibility in banks? We’ve yet to see an analytical take presenting this scenario.

Gold over $2,000/oz is the new normal

Alastair Still, CEO of GoldMining, advised us to get used to seeing gold above $2,000. This point alone is worth consideration.

A stable gold price over $2,000/oz  means that something has gone wrong. Either the greenback crumbled further, or there is some kind of issue that isn’t going away and that is driving haven demand. So often investors see asset prices rising and, fearful of missing out on a new bull market, buy in and drive prices even higher.

Higher gold prices, therefore, could become self-supporting – and, depending on how vast the next flood of money-printing becomes, may be sustainable indefinitely.

To be clear, this is not good news for anyone except gold mining companies and those few whose wealth is primarily invested in gold. In financial terms, gold is the equivalent of a storm shelter or a safe room. You don’t want to live in your safe room, do you? Of course not – that’s not what it’s for. You have it because you need it sometimes. It’s a form of insurance. More than that, just knowing you have it when you don’t need it gives you a great deal of peace-of-mind. That’s my personal metaphor for gold ownership (and why I don’t live in a safe room).

Strangely, though, higher gold prices aren’t as wonderful for gold mining companies as you might think. Still explains:

The industry as a whole has been really quite poor in being stewards of their future, such that in the rougher times the major operating and producing companies tend to pass on the long-term future of their companies for the benefit of the short-term returns for investors.

Most of the major companies have been reducing exploration expenditures and reducing money spent to advance new projects, such that the major companies simply have not been replacing what they’ve been mining.

So, would a permanently higher gold price help encourage exploration and future planning for gold miners?

Maybe. Here’s the thing: getting a new gold mine off the ground can take as long as a decade. Starting a mine from scratch is incredibly capital-intensive. To complicate matters, most of the readily available, easier-to-reach gold has already been mined. New mines are generally going for deeper gold, or lower-quality ore – and either prospect is expensive.

Gold demand, while it’s been strong for years now, is much more elastic than supply. Considering that all-in sustaining costs (AISC) have quadrupled in the last 20 years, you can understand why gold production hasn’t risen in lockstep with demand.

In summary, I think gold’s price can go very high and stay there for a very long time before we see much of an increase on the supply side.

This article was originally published here

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