Why Gold and Silver Just Surged

Reflecting on recent gold price changes…

Bullion.Directory precious metals analysis 18 December, 2023
By Peter Reagan
Financial Market Strategist at Birch Gold Group

This is the level we have been hearing about all year. Dozens, if not hundreds of pundits have named $2,000 as the level that gold needs to capture for the next leg of its bull run, be it from a technical or psychological perspective.

Given the immense gain, one might have indeed expected gold to dip briefly below that level as it paused around $2,143. But in yet another exciting turn of events for gold investors, that hasn’t happened. For that matter, any time gold dips below $2,000, it seems all too eager to retrace.

Such was the case last week, when gold mostly traded around the $2,020 level, but touching $2,040 on data from the Federal Reserve minutes. As previously mentioned, the Fed story and how it ties into gold is becoming an interesting subject in its own right.

We’re once again told that the Fed’s announcement regarding its policy rocketed gold while plummeting the U.S. dollar and real yields. But here’s the thing: Fed Chair Jerome Powell was actually hawkish, even though the announcement is being called dovish everywhere. In his own words:

“[Higher economic growth] could mean we need to keep rates higher for longer,” he said on Wednesday. “It could even mean ultimately that we would need to hike again.”

Hardly dovish stuff. He did do a bit of double speak, saying interest rate hikes aren’t the base case anymore and that the Fed might need to consider cutting down the line. But everyone already expected rate cuts. We recently covered some analysts view’ that they have even been priced in by the markets. So how can this explain gold’s strength?

Or can we simply quote chief director of the Japan Bullion Market Association, Bruce Ikemizu, from his investor note: “What a day, what a day!”

What this tells us is that investors are very eager to turn bearish on the U.S. dollar and its issuers. So much so that they’ll outright ignore what’s being said by the Fed. What this in turn tells us is that gold is in a position where any real positive headlines could send it flying to new ATHs.

After all, we struggle to recall an instance of gold posting a new ATH without a clear and immediate driver, which was very much the case as it climbed to $2,143.

In related news, we’re finally seeing according action in the silver market, which has gained around 5% last week.

Silver is trading above $24, but the moves are still tepid compared to how the metal has historically followed and outperformed gold. So there are a lot of expectations on that front as well, given gold’s performance over the past weeks.

Here’s why Chinese gold investors are happy paying steep premiums

We’ll sometimes remark how gold’s supposed competitors – tangible long-term assets like collectibles or real estate – are difficult to value, illiquid and not exactly a medium of exchange. But they’re assets, and they do hold their value. Usually.

That hasn’t been the case in China as of late, which is experiencing a collapse across asset classes. Yes, asset prices fluctuate, that’s what they do – but what about real estate? Doesn’t that always preserve its value? “Safe as houses,” as they say over the pond in the UK?

Apparently not, as China is dealing with a government-driven decision to let the air out of the nation’s real estate market. Like the Japanese asset bubble of 1986-1991, China’s visible economy is just the tip of a truly massive iceberg of debt hidden just under the surface. Most of the debt is deliberately held “off the books” by local government financial vehicles. Out of sight, but not out of existence.

Subsequently, we’ve seen the lowest home sales and housing starts in a decade. Mind you, this is still somewhat irrespective of the whole Evergrande debacle, which has the makings to collapse a good part of the nation’s economy on its own.

We have wondered if high Chinese gold premiums might simply be a result of them having the more correct price, and we stipulated that just ahead of gold’s jump to $2,143. But another argument could be that gold is simply that high in demand. The premium that hovered around $10 an ounce for most of the decade seems to have standardized around $50, and it has went as high as $100 recently.

Some go as far as to suggest gold’s gains have come as a result of the spike in Chinese consumer demand. It’s a nice thought, but given just how disconnected the physical market is from spot and how much the latter is driven by manipulated derivatives, we aren’t sure.

What we have no trouble agreeing with is that the willingness of Chinese investors to pay high premiums represents a form of capital flight and a distrust in the second-largest economy in the world. That’s what people do! When the economy is in a tough spot, and the government doesn’t have a handle on the situation, money floods into safe-have gold. They’re willing to pay such high prices over spot because that’s how badly they want it.

On a more positive note, it means that Western investors are now buying “discount” gold compared to Chinese citizens. At least for now.

Central banks are telling us something: will we listen?

If there was ever a buy signal in the physical gold market, two consecutive years of record gold buying from central banks has to be it. But can central banks possibly exceed last year’s figure of 1,136 tons?

We were on the fence initially, but the closer we get to the end of December, the more we are convinced it’s a possibility.

One major issue with this idea was that Turkey, one of the top gold buyers, poured its gold reserves into the domestic market to prop up the lira earlier this year. The tonnage was massive, with as many as 160 tons of gold being liquidated from March to June.

But data shows that this was only temporary, and that Turkey resumed gold purchases in Q3, bringing their hoard from 439.75 tons in Q2 to 478.97 tons in Q3. That means Turkey, whose net selling was one of the bigger gold stories this year, bought 40 tons of gold in the three-month period.

General data so far supports what seemed unbelievable when the record figure was posted. In Q3, central banks bought a total of 337 tons of gold, seemingly setting them on track to beat that eye-catching figure. But they don’t need to.

What might be overlooked by some is that central banks have raised their quarterly average by an immense margin, which now stands at 328 tons. This has happened during a time when two top buyers in the form of Turkey and Russia have had to halt sales and dispense with a considerable part of their hoard due to economic crises.

Until very recently, the quarterly average of purchases was 127 tons, less than half the current average. We had stories like Hungary and Poland’s big buys, along with Russia basically buying more gold than everyone else together. But now, despite Russia’s absence, official-sector gold purchases have tripled.

Going back to 2017, 2018 or 2019, the idea of some kind of gold standard was viewed as fringe by nearly everyone. These days, it’s viewed as fringe not to expect something along these lines. Between BRICS and the European gold standard we covered last week, something seems to be brewing past just asset allocation.

Whatever the case, more weight is being added by the day to Doug Casey’s quote in his forecast heading into this year:

Anyone who doesn’t have a significant part of his assets in gold coins will be an unhappy camper.

This article was originally published here

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