JP Morgan: “Debasement Trade” Increasing the Gold Price

Gold hits new all-time high on what JP Morgan calls the “debasement trade”

Bullion.Directory precious metals analysis 22 October, 2024
By Peter Reagan
Financial Market Strategist at Birch Gold Group

That’s right: gold has been gaining so quickly that headlines can’t keep up. (Even this column keeps being overtaken by events.) This has been happening all year long, extending the run to eleven straight months now.

Why yet another all-time high?

As we’ve seen before, we have an official story and an unofficial one. The mainstream media generally point to escalations in the war between Israel and Iran – and of course anxieties around the upcoming election here in the U.S.

Both are contributing to a global lack of certainty that typically drives investors to buy gold.

Behind the scenes, though, gold’s price seems to be driven mostly by fundamentals. This explains why mainstream media have so much trouble identifying a single newsworthy cause for each new all-time high. It’s quite easy to understand this massive run-up in gold’s price if we take the perspective that the world is finally realizing the consequences of the massive currency debasement we’ve seen, most acutely in the last four years.

Currency debasement is the focal point of JP Morgan’s analysis. They fully acknowledge that a loss of faith in currencies is (and has been) behind the rise of both gold and crypto. Though it’s worth mentioning that gold has actually outstripped crypto so far this year. And that’s not exactly a common sight when comparing these two asset classes!

JP Morgan, Morgan Stanley and Bank of America each have renewed their bullish takes on gold, with BoA reiterating that $3,000 is a target we’ll see sooner rather than later.

BoA says that nothing needs to change – gold will simply continue being carried along by the same forces that have driven its rise so far.

If we set aside the wars in Ukraine and the Middle East, the top factor driving gold becomes obvious. Globally, debt is booming to levels we’ve never seen before in human history.

Developed nations (and the U.S. is the poster child here) have engaged in unsustainable money-printing, driving down the purchasing power of currencies from the dollar to the yen. BoA notes the recent 50-basis point interest rate cut means that real yields (factoring in inflation) are 0% if not lower. Who wants to own currencies when they’re a certain loser? Gold the only safe haven left standing.

Where is silver in all this? According to most analysts, still waiting in the wings. I still believe that $40-$50 is a realistic range for silver, based on the gold/silver ratio and deficits in silver supplies.

Although silver price has risen, it remained below $34 early in the trading session, showing that the trigger has not arrived yet. With both gold and silver prices up about 38% year-to-date, we’re still waiting for the big boom – silver typically outperforms gold by 2x or 3x during a metals bull market.

When? Well, we can’t do much but speculate. Some pundits suggest that retail buying is yet to catch up, and that will be the engine to launch silver to new heights. When it arrives. Check it out:

Gold has already broken 33 price records this year. And we still have over two months to go! It’s an incredible statistic for an asset that is sometimes accused of being boring.

Personally, I’m confident we’ll see $2,850 gold before we unwrap our Christmas gifts this year.

Ronald Stoeferle’s 5 reasons gold will keep rising

Watching Ronald Stoeferle’s evolution of sentiment this year has been almost as intriguing as watching gold’s price itself.

Always a gold bull, Stoeferle was initially cautious with a forecast around the $2,100-$2,300 mark. He believed that gold has already done what it’s supposed to at $2,200.

But as the metal cleared one mark after another, Stoeferle couldn’t help but join the bandwagon of enthusiastic gold bulls. His latest update gives us a refreshed overview of the five reasons to watch gold right now, taking into account all that has happened in recent months. Here’s his list.

#1: Adjusted for inflation, gold is not yet at its all-time high

That’s quite the consideration in a year where gold has already broken 33 records. The previous record of $2,646 is well behind us since Stoeferle published his piece.

We’ve got a long way to go before we’re close to gold’s all-time, inflation-adjusted high price.

#2: Demand for gold remains high

Gold demand is extremely strong. The most obvious buyer is the official sector, in the form of central banks. Over-the-counter transactions increased eightfold in 2023 compared to a year prior.

Note: “Over-the-counter” or OTC sales are conducted directly between two parties, without going through an exchange. Such transactions are private, not publicly disclosed, which can be a significant advantage to parties who want to keep dealings confidential.

Stoeferle is open about the role of gold in a central bank portfolio:

“…a central bank’s gold reserves are also an expression of a country’s economic importance.”

#3: Interest rate cuts boost gold’s price

Stoeferle acknowledges that interest rate cuts have already been larger than anticipated – especially considering that inflation has yet to slow to pre-pandemic levels. He also takes us on a very relevant trip through history, pointing out that gold jumped from $270 to $420 in the early 2000s on the back of rate cuts.

The same thing happened in 2007 and 2008, except this time gold gained 140% during the cutting cycle as opposed to 60%. As we and many others have stated, the next cutting cycle has everything needed to leave us with a gold price not many can claim to have seen coming.

#4: Demand from private and professional investors in the West remains quite low

Although demand has been a major driving force behind the price gains, it has actually been lagging on the private side, especially in North America and Europe:

“A Bank of America survey of investment advisors in 2023 found that 71% had invested no more than 1% of their portfolio in gold. A further 27% held between 1% and 5%.”

Stoeferle says this as another source from which gold could suddenly and unexpectedly draw strength. Let’s spare a moment for those investors who haven’t yet diversified with gold – the longer they wait, the more they’ll pay for the privilege.

#5: Geopolitical tensions remain high

Rare is the analyst who won’t notice an uptrend in gold purchases ever since the Western sanctions on Russia. Whether they want to admit it or not, Stoeferle is certain that central banks no longer view assets with counterparty risk as safe, and are turning to gold as the world grows more uncertain.

Stoeferle reminds us that gold gained 28% in U.S. dollars, 27.2% in euros and 28.3% in Swiss francs since the start of the year. Year-on-year, the corresponding percentages are even loftier, amounting to 42.3%, 35% and 31.1%.

It’s the kind of return that a hasty seller of bullion could only hope for, and Stoeferle expects much more. As he notes, basic economic models point to a gold price of $4,800 by 2030, a projection that’s still on the conservative side.

Two good reasons not to sell your gold

The gold bullion affair in Greece is slowly turning into a cautionary tale of how to not strip yourself of your gold holdings if the numbers are any indicator.

Forget about Roosevelt or central bank cash-for-gold schemes – once again, we’re reminded the biggest threat to personal wealth is still, as it’s always been, hasty decisions made by individuals.

For a little background, the Bank of Greece stands out among central banks with a somewhat unusual service. Greek citizens can not only buy but also sell their gold coins to the central bank. The Bank of Greece acts as the nation’s primary dealer of gold coins.

They don’t actually mint gold coins, though – the most popular gold coin in Greece is the British sovereign, a Royal Mint staple for over 200 years.

Here’s the problem: Greeks who bought their gold sovereigns towards the end of 2023 and sold it now expected a 34% profit, based on the rise in gold’s price. They didn’t get it.

As of Friday, the Bank of Greece was selling gold sovereigns for $735 while, at a different window, buying them for $615.

Yikes. The buy-and-sell statistics look even worse. While the bank sold 4,662 gold coins between January and September, they bought 36,000 coins from citizens during that period.

It’s clear that Greeks are selling their gold, despite the haircut. But why? I can’t imagine that all of these sellers understand they might only make an 11% profit…

This is one of the many problems that come with buying and selling gold in the short-term. First off, there’s always a premium over spot price paid up front. Second, those premiums are higher (sometimes much higher) during times of intense demand. During the pandemic panic, for example, premiums on gold coins doubled – and premiums on silver coins rose fivefold! (And that’s IF we had stock.) When everyone wants something, the price goes up.

And it works the other way, too.

Say, when gold hits an all-time high and a lot of people decide to cash out all at once, a single buyer like the Bank of Greece can get overwhelmed with supply – and start offering a lower price.

When there are eight sellers for every buyer, that tells us there’s a massive mismatch between supply and demand. Side note: This is a huge reason to consider the liquidity of your gold and silver coins.

The most-minted, most popular coins (American eagles, Canadian maple leaves and British Britannias for example) simply enjoy a more active market, which narrows buy/sell spreads.

Ultimately, though, gold is a long-term asset. Ideally you want to hold onto your gold long enough that premiums shrink to a rounding error in the overall equation. (Think early 2000s compared to now, for example.)

Usually, we see central banks robbing their citizens in a more subtle manner. As a member of the Euro Zone, the Bank of Greece doesn’t get to affect the money supply. They gave that privilege up when they abandoned the drachma back in 2002! Even so, here we have yet another example of how a central bank can impoverish its citizen-victims by simple price gouging.

As we’ve seen again and again, central banks are delighted to buy gold. They get a safe haven, store of value asset for their vaults – and all they have to give up is some currency, which is losing purchasing power daily.

Listen: I think central bank gold reserves are a good idea.

I think everyone, every nation and every citizen, should diversify their savings with physical precious metal. I also think central banks should buy their gold on the market, just like everybody else! Globally, central banks already own 17% of all gold ever mined!

One out of every 6 ounces of gold refined in human history are already locked up in central banks’ vaults.

When it comes to gold, I believe buy and hold is the name of the game. Pretty much the only reason to sell gold is an urgent and immediate financial crisis – and even then, getting it back should be a priority!

I have very strong feelings about this. I’ve seen too many financial emergencies (global as well as personal) and they’ve changed the way I think about stability and security.

Think long term. Remember your priorities, and fight the urge to try to make a quick buck. It’s easier to do if you remember those “quick bucks” have a tendency to quickly lose their purchasing power…

This article was originally published here

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