Gold Has Formed A Strong Base To Launch Higher
Houston, the golden rocket is ready for launch.
Gold made a powerful move after the end of February, 2024, that had it exceed $2400 twice, once in April and again in May. It also helped the gold miners stop a long term bearish market that caused many to trade at multiple year lows, then rally significantly off those lows.
Since April, a powerful base has developed between a bit better than $2400 on the top of the base to $2300 at the bottom of the base. I do like to point out that the second quarter of 2024 has the highest quarterly average price of gold ever.
While basing, the gold miners have given back some of their gains from the runup, but have not returned to the dismal sentiment prior to the run that started in gold in late February. They have basically gone from left for dead zombies to getting off the canvas.
Considering the horrible sentiment prior to the run up, they are showing relative strength by not returning to the historical low valuations prior to the run up.
The long term trend for gold is very bullish as the world is in a Death Spiral of Debt and countries in the BRICS nations are returning to the Gold Standard. It took many years to create the debt crisis and it will take many years to fix it.
So far, only the BRICS nations are recognizing the problem and making moves to back up their debt with more gold, for the most part, the West is burying their heads in the sand. While they also continue to spend in an insane fashion, even while the debt servicing costs are growing at an alarming rate.
It is business as usual in the West, spend like debt doesn’t matter, grow the deficits and debt in an unsustainable way, devalue the purchasing power of fiat currencies, do nothing to move toward sound money, and ignore the growth trajectory of the debt servicing costs.
The global economy is changing before our very eyes. For too many decades the global economy has been built on debt, and devaluing the purchasing power of fiat currencies. Which has been led by the US and their grip on the world economy due to their status of having the world’s reserve currency.
As is often the case in economics, the pendulum swings too far in either direction, it has swung much too far in the direction of politicians spending far beyond their means. While creating the Death Spiral of Debt and chronically devaluing the purchasing power of fiat currencies.
Especially in the USD which buys much less now than it did just a few years ago and around 10% of what it did when the country went off the Gold Standard.
Of course, those that have benefitted from the pendulum swinging too far like the status quo and want to keep it that way. But, that doesn’t change the reality that the debt pendulum has swung much too far.
All politicians throughout the world need to address the debt crisis, some will and some won’t. Those that do, will be prepared when the pendulum swings away from the Death Spiral of Debt, those that don’t will suffer as they fight to keep the status quo.
Central bankers in the East actually started preparing for the inevitable return to the Gold Standard, soon after the 2008 GFC, when they saw the US enter the Free Money Era.
Since then, they have been buying more gold to add to their reserves. They went into overdrive in 2022, when the Free Money Era caused inflation that was far from “transitory” and has remained persistent despite a remarkable increase in interest rates.
The aggressive gold buying by central bankers since 2022 continued throughout 2023 and 2024. At the same time, the Eastern central bankers, led by the largest members of the BRICS coalition have been divesting themselves of US debt and no longer want to see the US dollar as the world reserve currency, and are making moves to see more international trade outside of the US dollar.
The advantages of returning to the Gold Standard are clear to the BRICS nations. Such as, it demands discipline in politician’s spending and reliance on printing money like it is nothing more than Monopoly Money.
Returning to the Gold Standard, truly is the remedy to the Death Spiral of Debt, whether central bankers and politicians in the West recognize it or not.
The efforts to return to the Gold Standard are well underway. From the central bankers in the BRICS nation loading up on gold, to the consumers in China, and even consumers in the West buying whatever gold they can get their hands on from Costco and Walmart.
To me, it is inevitable that not only will a return to the Gold Standard happen as more countries back up their debt with gold, but another important trend is that as they do so, they will also want to get away from the US dollar dominating world trade.
Gold used to play a crucial role in international trade and will again. The biggest argument for that is the volatility and devaluing of the purchasing power of fiat currencies.
World trade done in highly diluted fiat currencies that can swing significantly in short order, isn’t exactly the most efficient way to conduct international trade. Especially when gold is at or near record highs in every fiat currency worldwide.
A return to the Gold Standard, forced by the Death Spiral of Debt and the return of gold as the soundest money for international trade are the key reasons that I recently made a prediction that gold would reach $20k within 10 years.
Another key reason that I have confidence in that prediction is the long term weakness in the supply of gold, and that the current and future demand will overwhelm the supply.
For much too long, not enough money has gone into exploration that leads to success of making discoveries to help replace the gold the miners mine each year.
The ramification of not enough exploration success, can be seen in the lack of enough discoveries that then advance to the development stages.
Beyond the developers, there aren’t nearly enough small miners that want to grow rapidly, or can for that matter. Nor are there enough mid-tiers in the gold mining space.
The lack of small gold miners and mid-tiers is important because they used to take over explorers and developers to help their own growth.
Then you have the majors that many years ago abandoned exploration and made the conclusion it was cheaper to buy smaller companies than to explore for new discoveries to replace what they mine. They have gotten so big that the smaller players need to be very big in order to move the needle for the majors in a takeover.
From the explorers to the majors, there are systemic issues that collectively contribute to the weakness in the physical gold supply chain.
Much like it took many years to create the Death Spiral of Debt, it has taken a long time to create the physical gold supply chain weakness. The need for central bankers to combat the Death Spiral of Debt, while the physical gold supply chain is very weak has put into place a perfect storm to drive gold much higher.
Friendly Trends
Prior to the big run in gold in late February, 2024, I wrote some articles about seeing that gold was primed to rally. My thesis was based on the fundamental bullish arguments I made earlier, plus that gold was basing and looking for an excuse for a breakout.
I’m seeing the same basing action now. Gold looks primed for another strong rally off its current base. This base is stronger than the one earlier in the year because it has happened after such a big move prior to the basing action.
Another bullish trend I’m seeing is that due to the rally in gold and then the basing, gold has maintained much of the gain and it will see the highest average price in a quarter ever.
The average cost of production of gold is around $1400 per ounce, while the gold miners will have sold their gold for somewhere north of $2300 during the second quarter of 2024.
This has several gold miners in a position to report windfall profits for the second quarter of 2024. Significantly higher than in the first quarter of 2024 which was a strong quarter for many gold miners.
The windfall profits in the second quarter for many gold miners will catch the attention of generalist investors. They won’t be able to ignore it and many gold miners will enjoy a strong move when they report their second quarters.
Which brings up the next trend that hasn’t happened yet, but is primed to happen. The windfall profits in the second quarter for several gold miners will be the driver of the gold miners to finally join the gold bull market.
I expect to see strong moves in the largest gold miners trickle down to the smaller players, even down to the gold explorers with impressive discoveries.
All the best,
Allan Barry Laboucan
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