This week, we ask: Who’s right about gold? While analysts shout gold is “overbought,” central banks are gearing up to buy millions more ounces (even near record high prices). Maybe there’s something we can learn from both perspectives?
By Peter Reagan
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- Analyst calls gold overbought…
- …while central banks prepare to buy millions more ounces – whose view do you believe?
- Silver zooms past $40 like it’s nothing (remind you of anything?)
- Sound Money League goes to war with Florida’s attempt to control gold
Central banks want millions more ounces of gold (even at $3,800 each)
This call for a $6,000 gold price, coming from Steve Hanke (Professor of Applied Economics at Johns Hopkins University) on a recent episode of The David Lin Report, isn’t the same as the $6,600 price prediction I quoted last week. It’s an interesting interview and well worth a watch!
So check it out, or scroll down for my interpretation.
Gold is an extremely polarizing asset. Let me briefly explain why.
First, the majority of financial assets are “procyclical” or “risk-on” assets. This means that they perform best when the economy is booming.
Secondly, only a handful of financial assets are “countercyclical” or “risk-off” assets that tend to outperform when the economy stagnates or declines.
Ideally, diversification involves owning a mix of assets from both classes. That’s best for you, the investor because it means your savings aren’t dependent on a single phase of the economic cycle. But you know who it’s not best for? The financial services industry. They favor higher risk, procyclical assets and “busy” strategies that are much more profitable (for them). Basic diversification is simple – but that doesn’t mean it’s easy. The financial services industry is huge, with massive advertising budgets and highly-motivated sales teams.
Once you understand this, you can also understand why the mainstream financial news channels (and websites and magazines) always say the economy is booming!
And why anyone who expresses pessimism gets shouted down.
That’s why, as a financial asset, gold is so polarizing.
Now this also means, you’ll always be able to find any number of bearish forecasts on gold’s price. (You can also find outrageous predictions, though, granted, you have to look a little harder.)
Key takeaways from the interview:
Gold’s secular bull market has more room: Hanke expects the current cycle to peak around $6,000/oz – not in 2025, probably by the end of 2026. Notably, his estimate isn’t based on crisis scenarios. It’s tied to historical relationships with growth of per-capita disposable income.
Money supply > rate tweaks: The Fed funds rate is a sideshow. Instead, money supply growth drives economic outcomes.
“The Fed not recognizing the money supply is like the Pope not recognizing Jesus Christ.”
Hanke thinks 6% annual money supply growth is the sweet spot for economic growth. Now, I think that’s an absurdly high rate! But I checked, and it turns out that the average M2 growth rate since 1984 is 6.12%. The Fed’s rate cuts alone don’t set mortgage or government borrowing rates. Why pretend otherwise?
The Fed’s personnel matters: Swap out the people on the Fed Open Markets Committee (FOMC) and you change policy. Furthermore, Hanke argues Fed “independence” has never been absolute. (I agree on that point!)
Macroeconomic backdrop: A slowdown is “baked in” after the post-2022 money supply contraction. We haven’t seen it yet, but it’s inevitable.
Finally, the real punchline of the entire interview:
“Stability might not be everything, but everything is nothing without stability.”
Keep that in mind while we consider the next part of the story…
Last week, seasoned financial reporter Wajeeh Khan said gold is in the most overbought territory since 1980. “Overbought,” in this context, means “trading above its fair value due to recent bullish trends.” Khanthinks gold is the most due for a correction it’s ever been since 1980!
That’s a bold claim. But, as I’ve said, we’ve seen thousands of forecasts for a correction in gold for the last two years. Ever since gold hit $2,000 for the first time, in fact.
To net it out, Khan argues that there should be, or will be a correction. (In finance terms, a “correction” means a drop in price of 10%-20%.)
Why? Well, because what goes up must come down. In other words, a correction for the sake of correction – not related to supply or demand or inflation etc. Based on the gold price chart.
Now, we’ve been over this many times. If gold’s price is rising to its real, fundamental value, then there’s no inevitable correction ahead. If like Hanke and many others argue, gold is actually still undervalued, then we’ll see still more price gains. Regardless of Khan’s observation.
Now, last week’s forecast claimed that $6,600 gold should already be here, based on inflation alone. So, from that perspective, gold is in a bear market and still due a big upward adjustment.
So the question really boils down to this: What’s driving gold’s price?
Remember, the U.S. dollar shamefully posted its worst H1 performance since 1973.
And don’t forget record-setting gold demand that, unsurprisingly, occurred during the same period.
So if gold price is responding to dollar weakness and increased demand, why does that mean it’s overbought? If currency devaluation is at least half the reason behind gold’s massive surge, how can gold’s price require a correction?
To be clear, gold price can fall at any time. The world of finance doesn’t always make sense. (Earlier this year, a cryptocurrency called “Fartcoin” briefly had a $1 billion market cap – that’s what I call an asset in need of correction…)
But if that correction happens, it will be exactly as we said: a correction for the sake of correction. Everyone’s long-term chart is pointing up.
And if Khan thinks gold is overbought now, what will he say when central banks purchase millions more ounces? Bart Melek, managing director and global head of commodity strategy at TD Securities, told BNN Bloomberg that China and other nations are steadily building up their gold reserves. Ask a central banker, odds are they’ll tell you they plan to buy more gold – at least 76% of them do, per the latest survey.
These banks aren’t speculators pushing gold’s price higher by chasing a trend. They know exactly what they’re doing. Unlike most CEOs and investors, central bankers plan for decades (not days) in the future. And I can guarantee you they aren’t buying gold because they expect its price to significantly decline.
Silver price finally lives up to expectations – $50 next?
One of the main takeaways from gold’s run has been how quickly it left $2,000 behind.
Going back all the way to 2011, many analysts and investors felt $2,000 was an unbreachable price – that even approaching that level was unsustainable. Investors just couldn’t go there psychologically. This was seemingly affirmed both during the lockdowns and as Russia invaded Ukraine, when $2,000 again proved to be psychologically important. People just love round numbers.
In 2023, when gold started climbing from $1,650, everyone wondered whether it could break that all-important $2,000 level.
Today, most people have forgotten that. What’s a new, worst-case, bottom for the price of gold? $3,300? Maybe $3,000 after a brutal decades-long bear market – one that also magically saw the U.S. dollar’s purchasing power restored?
This brings us back to silver. Let’s repeat what we have been saying for most of two years: $40 and then $50 are the real targets for silver, and everything below is non-news. Even $40 is a stepping stone.
Well, as it happens, many traders have noticed that silver made extremely quick work of $40 targets compared to the absurd struggling with $30 ones, and is now eyeing $50.
Having hit $46.05 last week, the above source is saying $49.81 is the next technical target before we see what’s what.
Here, a few obvious things have to be pointed out. First, the silver market is much more manipulated than the gold market. It doesn’t really benefit from the recent Basel III squeeze on physical precious metals.
Its price, whether $30 or $50, is preposterously low and not in line with its price relative to gold, the U.S. dollar, other commodities or anything else.
So in a strange sense, it doesn’t even matter if silver will hit $50. The question now is: will the hidden authorities allow it to run to where it should, which is $100 and onwards?
That is the real question, because a $100 silver price is the minimum of what we should be seeing with gold this high. We shouldn’t be wondering whether it can pass $50.
So, the learned silver investor will continue to cautiously watch what’s happening instead of overly celebrating even if $50 is passed.
Because of the aforementioned manipulation, there is a far greater likelihood that silver will be pushed back down than there was in gold’s case with $2,000.
The plus side? All that we’ve seen in gold in regards to $2,000 applies several times that to silver with $50.
Silver’s performance is meant to be more explosive in either side. So $100, $130 or $150 silver, if it’s allowed to run, will not be surprising to anyone.
We were about to make a point to the tune of “unlike gold’s run to $3,800”, but come to think of it, nobody has really seemed that surprised by gold more than doubling in price on no news in two years.
It’s as if everyone knows the currencies are that beaten up and merely see it as formality.
Here, the plus side of silver continues to extend. All of the same applies again, except the $25-$35 levels have stood out as artificially low to basically everyone for decades, leaving room for gains depending on how far your imagination can go.
Florida tried reinstating sound money legislation – here’s why it backfired
Everything was dandy with reinstituting sound money, and then Florida came along, or something.
We were among the many to report Florida’s recognition of gold and silver as legal tender as a good thing. It seemed to not only be in line with states slowly falling into place regarding sound money, but even go above and beyond in giving the metals their due.
Apparently, I overlooked the fine print…
The Sound Money Defense League, which has mostly spearheaded this reinstitution of legal tender, is now calling to repeal Florida’s legislature and make way for a better one. Why?
As we said, the print is quite small. The goal as proposed by the SMDL is to have every state remove sales taxes on precious metals, and then more slowly reinstitute them as money ie Texas’ bullion depository.
Instead, what Florida did in a sneaky bit of legislature was make accepting gold and silver as payment voluntary, which is essentially in direct opposition to the Constitution.
But the real issue is one we mentioned as we wondered how these payments will be accepted. Digital, surprise, surprise.
So, state agencies can now accept gold and silver as payment, but only in digital form! The Founding Fathers would cry.
This issue is apparently spreading to other states, and is also hampering businesses dealing with gold and silver, as well as individual owners themselves, as they are now subject to new regulations and increased surveillance on their supposed legal tender.
Arkansas claims to want to do it to make things easier, while the aforementioned Texas Bullion Depository is doing this:
“In the Lone Star State, Gov. Greg Abbott signed a law in June that will allow Texans to spend precious metals stored in the state-run Texas Bullion Depository on routine purchases using debit cards and mobile apps.”
SMDL representatives haven’t been happy:
“This bill that passed in Florida is a disaster,” said SMDL Executive Director Jp Cortez during a July podcast interview with VRIC Media. “This is the most catastrophic thing I’ve ever seen enacted by a state.”
“This creates an entirely new regulatory structure that brings everyone in the gold and silver business, the storage business or any related industry under the money services transmitters laws that creates whole new regulation and reporting requirements.”
“This is a net negative for sound money.”
That it is. It’s sad to see that right amid a historic run in gold, investors have to worry about it being clamped down as some sort of CBDC.
We’ve just barely forgotten about the CBDC nightmare to only now see it brought back in a worse way, applying to real money in the form of gold and silver?
The government hasn’t been happy about you owning gold and silver since Roosevelt, if not longer.
Physical gold and silver are too valuable, free, anti-fiat and every other form of civil liberty that governors can rarely stand.
It seems that the modern gold and silver investor will continue to have to carefully navigate any good news about gold and silver getting nods from the government so as to essentially not get swindled. The good side is, the law of right remains the same: physical gold and silver are money, and nothing else.
