Gold Skeptics Are Always Wrong About This

Are we preparing for a gold price correction that will never come?

Bullion.Directory precious metals analysis 25 June, 2024
By Peter Reagan
Financial Market Strategist at Birch Gold Group

That level has mostly been forgotten now, and we could say that $2,300 is the new $2,000. (There’s just something about round numbers like this – they appeal to the tidy mind.) This is the level we’ve been seeing for months, one that no U.S. jobs data reports, alleged “disinflation,“ or even whispers of hints of rate hikes have knocked gold’s price down.

Ever since gold broke out last summer, we have been seeing calls for a correction. Of course, there are always two camps, one cheering and rooting for higher prices, the other scoffing and shouting “Bubble!“

The anti-gold camp have at least been consistent. No matter how high gold’s price goes, from $1,900, $2,000, $2,100 and now $2,300 they declare these are “elevated“ prices. Gold jumped “too fast and too high,“ they say, and a correction is coming. A single day ending with a drop in spot price results in a new wave of warnings from this crowd.

This causes no small amount of anxiety!

We addressed this recently in my columns on alleged gold market manipulation and “shaking out the weak hands.“

But six months later, it’s time to reassess these claims. The trouble is that we don’t really have anything to compare to gold’s current run. We could take a look at historical episodes of key gold price movements, of course. Those aren’t predictive. Speculation based on history is better than blue-sky speculation, of course – but that isn’t terribly useful.

We can’t really begin to examine a full cycle until it’s over. The problem with history, by definition, is that by the time you know about it it’s too late to do anything about it.

Both the pro- and the anti-gold invokes two comparisons. The first is of course the 2008-2011 run. We know that gold corrected from $1,910 after 2011 in pretty steep fashion within two years.

Gold price, 2008-2011. During this cycle, gold’s price more than doubled to peak over $1,900

Here’s the problem with that, though. Gold started the run the year before, below $700. The absolute bottom of the price cycle arrived in late 2015, when gold fell a bit below $1,100, but quickly reversed and began marching upwards.

But do you see the issue? Gold’s absolute bottom of the cycle was still more than 50% higher than its previous low. The headlines of the time told us gold owners were facing a “lost decade“ when gold’s price was in the green the entire time. Unfortunate investors who bought in at the 2011 high, and then liquidated in fear – well, that’s why we always recommend a long-term perspective on your physical precious metals investment. Seeing the subsequent gains in gold’s price undoubtedly compounded their regret.

The second comparison are the lockdowns.

Right up until the pandemic became official, gold was inching up slowly towards $1,600 on strong fundamentals. When the lockdowns hit, gold jumped to $2,000. It was a classic fear trade, and we saw a correction to $1,700 in mid-2021, then Russian invasion of Ukraine brought gold to another all-time high, and another correction came mid-to-late 2022, when gold dropped to the $1,600 level.

We again have the differences. The ”massive correction” ended with gold above its 2019 price, which this time was three years before, not seven.

So let’s ask the big question: Has gold already seen its correction? Is $2,300 the new floor on gold’s price?

The more we look to gold’s movements week in and out, the more it feels like this might be the case. Those analysts that are waiting for a correction might be looking the wrong way. Perhaps the only correction ahead is to the upside?

Views to corroborate this are abundant. We have covered a number of insiders who believe that we are in a bull run that has to last until 2028. By that point, it’s a safe bet that nobody who bought now is going to find any correction level disappointing.

But we like NASDAQ contributor Martin Tillier’s reluctant concession that gold’s long-term strength seems set in place. Tillier apparently isn’t a fan of gold, but finds it an asset that is basically a must-have these days. And curiously, the one driver of gold he mentions is supply. Simply put, mine and recycling supply isn’t there to keep up with increased demand.

Tillier says that this will exacerbate the perceived scarcity of gold and push it even higher. Yet this is a factor nobody talks about, somewhat with good reason as there are so many other bullish things to mention. It’s mostly silver’s supply that we get red flag reminders of, but rarely so in the case of gold, which is why we chose to highlight this particular view.

These days, even the correction calls come with a note. RBC Capital Markets believe gold is overvalued, but not really:

While we are cautious, it’s more because we do not think gold should be at such high levels just yet.

In other words, they are acknowledging $2,300 gold is accurate, but perhaps a little early.

That’s what passes for a negative outlook on gold these days!

Listen: Here’s the best advice I can give you, based on my decades in the industry:

1. Don’t get too caught up on today’s gold price. The price of gold only matters on the day you buy and the day you sell – in between, it’s just noise.
2. Don’t check prices at all. Dozens of behavioral finance specialists have taught us that, the more closely you follow the prices of your assets, the more you worry. The more you worry, the more bad decisions you make. Unless you’re buying or selling today, price is just noise.
3. Do not panic sell. History tells us one thing quite clearly: Gold is not a speculative asset likely to either soar 3,000% or fall to zero in the next couple years. As one of my colleagues frequently says, “When in doubt, do nothing.”

Apparently, first-world nations are buying even more bullion than third-world nations

Czech central bank governor Ales Michl said he wants to more than double the nation’s gold reserves from 40 to 100 tons in the next five years.

Another Eastern European nation following in the footsteps of Poland and Hungary, or something more?

I wonder if Jan Nieuwenhuijs follows my columns due to my sporadic references to his very noteworthy reports?

Just as we labeled Thailand the next big gold nation, Jan takes that idea and runs with it, explaining how Thailand is now driving the gold market like China was before. (Lengthy and well-worth the read!)

But the reason we mention Jan is an earlier analysis of his that we covered, where he suggested that all these European Union nations buying and repatriating gold is part of a plan. Some kind of unofficial gold standard for the euro? Jan has often described how and why European central banks might be preparing for a return to gold-backed money somehow. It’s a complex move, and if it happens, it’ll be equal parts unofficial and reluctant.

That’s to say the European Central Bank’s head isn’t likely to announce at a press conference that gold is a symbol of a nation’s economic power and financial independence. (Besides, this statement is unnecessary – we already know that it’s true!)

But if even a part of what Jan has suggested over the past few quarters materializes, no European nation is going to want to mess around when it comes to the size and location of their bullion stockpile.

This was reinforced by a recent survey by the World Gold Council, showing 57% advanced-economy central banks see gold’s share in global reserves increasing (up from 38% last year). That’s huge.

The same survey tells us that, among emerging-market central banks, a minority of 23% expect the U.S. dollar to lose market share to any competitor, even gold.

Which is very strange! Emerging market central banks were the major buyers of gold during the last two record-setting years, adding over 2,000 tons of gold bullion to their vaults. So why would they talk down gold, while talking up the dollar?

This would be a mere oddity, if not for ongoing reports of European gold purchases and repatriations. After all, we just recently reported that gold overtook the euro in terms of share of global reserves. As we speculate on what BRICS nations are up to, our neighbors on the Western market could be preparing something that few see coming.

What Tether’s gold-backed crypto stablecoin tells us about gold demand

Tether, the issuer of the world’s largest U.S. dollar stablecoin, is launching a new platform to allow for the purchase of digital gold.

The name of the platform is Alloy. (No, really.)

Though we’re being told that it’s an innovative solution, there is nothing new about digital gold, backed or not, supposedly, by real gold in Swiss vaults. The only remarkable thing about Tether Gold is its big-name backing.

Well, there’s a bit more:

Unlike traditional stablecoins like Tether’s USDT, which are pegged to fiat currencies, Alloy is backed by Tether Gold (XAUt). This stablecoin is designed to offer users the stability of gold while being pegged to the U.S. dollar, effectively creating a synthetic dollar that is overcollateralized by gold.

“Overcollateralized“ in this case means “more than $1 in gold per $1 in crypto.“ That’s a refreshingly sane approach compared to, oh, say the U.S. banking system’s “required 4.5% minimum capital ratio.”

We’ve discussed Zimbabwe’s hopes that gold will bail out their economy (somehow).

We’ve discussed the campaign for a “digital gold standard“ from Texas.

Generally speaking, in finance, new products aren’t rolled out in rapid succession like this unless there’s massive demand for them. We wouldn’t be seeing so many new digital gold products if there wasn’t interest. But just as we were highly skeptical of the Texas approach, Tether Gold is unlikely to change the world.

Here’s the thing: Gold has been so divorced from the financial system that most people don’t know how to buy gold. They don’t know what separates good bullion from bad, what karats are or how to safely buy and store gold.

We will say that Tether has positively surprised us. It has been under heavy scrutiny and seems to be constantly battling the SEC, but maintains a 1:1 ratio to the U.S. dollar, unlike quite a few of the algorithmic “stablecoins“ that went the Weimar route, hyperinflated into oblivion. But even still, it adds a whole new layer of systemic risk compared compared to holding physical cash. And that’s saying something, since the greenback offers as much systemic risk as any currency in history ever has.

Would you rather have cash or Tether in your digital wallet? These days, it’s kind of similar. Depending on your circumstances, holding Tether now might actually be safer. You’re a lot less likely to get mugged for the contents of your crypto wallet, for example.

But five or ten years down the line?

Frankly, Tether is more likely to collapse than the U.S. dollar (based on what we’ve seen in the crypto market). If for no other reason, because of bailouts.

A private project like Tether can’t expect the same level of government intervention that the U.S. dollar will enjoy. In the worst-case scenario, the Federal Reserve can simply print more money, forever. There can’t really be a default on dollars because there’s nothing to default on! There’s no there there.

This is neither a critique of Tether nor digital assets. But it is a reminder that attempting to replace tangible assets with debt, IOUs and promises to pay is how we got into this mess in the first place.

Whatever effort is required for you to familiarize yourself with physical gold, it’s worth it. It’s easy to imagine a world without the U.S. dollar. But it’s impossible to imagine a world that doesn’t value gold. When you opt for physical gold, that’s what you’re buying: Real long-term protection. Future-proofing your savings.

And you don’t need fancy technology to do it. No matter how many times finance companies reinvent the wheel, they can’t improve on physical ownership of precious metals.

This article was originally published here

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