Paper Gold And Physical Gold Making Higher Highs And Higher Lows
Gold is trending toward $3k gold in 2024.
Shortly after Gold Fields made their offer for Osisko, I wrote two articles about gold and gold stocks being at an inflection point. What I saw immediately after the takeover offer was announced is that gold and the gold stocks reacted in bullish ways.
This is the result of it catching the attention of generalist investors. The timing was perfect as it happened shortly after several gold miners had remarkable quarterly reports because of gold having its best quarter ever, for the average price of gold during a quarter.
The beginning of the week announcement of the offer from Gold Fields for Osisko got the week off to a fantastic start. It continued throughout the week and ended the week on a great note. Gold in the futures market ended at its highest daily close and highest weekly close when it finished at $2546. Spot gold also had a remarkable close to the week by also closing at a new record high of just north of $2500.
Most of the time, there is a narrow difference between futures gold prices and spot price, but it is clear the futures traders are even more bullish than the physical gold buyers. Both have the most bullish technical indicator that I care about, they are making a series of higher highs and higher lows. Even more bullish is that each high is a new record and the pullbacks are very mild.
This brings up the question of which came first the golden chicken or the golden egg?
For a long time, the price action in the paper market set the tone for sentiment toward gold and gold stocks. During much of 2024, a battle has been raging between where the price discovery is set between the paper market and the physical market. They are both singing the same bullish golden song.
Ultimately, over the long-term, it is the supply and demand fundamentals that are the golden chicken that lays two eggs, those being the paper price of gold and the physical price of gold. The golden chicken and the golden eggs are definitely pointing toward much higher prices of gold.
Earlier this year, I wrote a report that I see gold reaching $20k within 10 years. The next key milestone I am watching for is that it surpasses $3k before the end of this year or at the latest by early 2025. The recent action, plus the reality that the Fed will go into a rate cutting cycle that will start in September is adding confidence for me that we see $3k this year.
When they start cutting, it will be a series that will make investors believe that they are heading back to the Free Money Era. Few are talking about the Fed balance sheet. When they started the rate hiking cycle, to fight the inflation they helped create, they also planned to “normalize” their balance sheet.
During the Free Money Era, they increased their balance sheet to just shy of $9 trillion. In their lame efforts to “normalize” it they failed to get it down to $7 trillion when they gave up. That sounds a lot more scary than it does normal.
With the jobs market in serious trouble shedding full-time jobs to create part-time jobs, it has been turned into the Gig Economy. The drums of a recession are getting louder. Some argue it will be a “soft landing” not a “hard landing” while the jobs market is certainly pointing toward a serious slowdown.
As always the Fed is behind the curve, they consistently react too late whether they are lowering or increasing. A prime example is the Free Money Era created the persistent inflation “not transitory” and the Death Spiral of Debt.
Their actions to jack up rates after the Free Money Era which they misdiagnosed as transitory when it was in fact persistent is what is causing the debt servicing to be north of $1 trillion and on its way to $2 trillion. And is putting plenty of pressure on the jobs market.
It is shocking that the Fed is not widely denigrated for their consistent ineptitude when it comes to assessing the economy and being remarkable at always being behind the curve. Instead the market parses their every word about their plotting of dots and then trades upon it.
Don’t be surprised that their latest ineptitude results in them pushing rates back toward the Free Money Era and that they start pumping up their balance sheet. If they cause a “soft landing” the balance sheet will double, if they cause a “hard landing” it could go well beyond $20 trillion.
As they move into a rate cutting cycle, it will put tremendous pressure on the US dollar (USD) which is already in a trend of lower highs and lower lows.
This will make buyers of the debt wonder what is my real return when getting paid yields in USD that is constantly having its purchasing power eroded. While asking those smart questions, the Fed will return to be the buyer of last resort that drives their balance sheet much higher.
Ultimately, the Death Spiral of Debt will continue to get worse due to the Fed’s failing because they wait for the dots to appear that makes them plot their tardy actions. Plus, the two candidates for president have zero interest in slowing down the insane spending by the past three presidents.
Vice President Harris is President Biden’s chief assistant in spending like a drunken sailor and will likely be even worse. While former President Trump has already earned his badge of being a drunken sailor spender.
Either one will work to beat the records set by the Trump and Biden one-term presidencies. Together they exceeded former President Obama’s spending, who made all previous presidents look like pikers.
The spending habits of the past three presidents have driven the national debt to $35 trillion that realistically could reach $50 trillion by the time the next president finishes their four year term. That sounds like a number that many haven’t talked about. But, there is a very good chance that President Biden will leave office with close to $37 trillion in debt. If the next president runs $3 trillion deficits, the national debt will get alarmingly close to $50 trillion during the upcoming term.
For those that think $3 trillion annual deficits is unrealistic, don’t forget the next president is probably going to say hold my beer when he or she gets into office when it comes to spending.
This is all going to bring into question the asinine statements by past Fed chairmans that said with their outside voices that the US could never default on the debt because they had the printing press for the world reserve currency.
Hubris often gets tested, and that is hubris of the highest order. I don’t think the US will default on the debt, but they are certainly heading in that direction. It would be much better to back the debt up in a significant way with gold. Will they? I’m not sure as they won’t like the forced restraint on spending that will come with a return to the Gold Standard.
There really is only one question, do they want a default or a return to the Gold Standard? Either answer leads to explosive moves in the price of gold. They can do it the easy way, by returning to the Gold Standard, or do it the hard way, by defaulting on the debt.
The only other solution is for the Fed to allow the economy to run hotter than they would like with near zero interest rates and dramatically increase their balance sheet. While at the same time the politicians slash spending and increase taxes. The chances of politicians cutting spending and increasing taxes are zero.
While the Fed will have to keep kicking the (debt) can down the road to try their best to avoid debt default. They are painted into a corner that is made worse by unfunded liabilities. This is all certainly not a pretty picture, folks can thank the Fed’s inept rate policies and insane spending by politicians on the left and right.
We are truly at a head gold wins, tails gold wins, time in economic history.
The central bankers of the BRICS nations are putting themselves on the Gold Standard. Chinese and Indian folks are doing the same. Investors in the West are joining the gold party by buying physical gold and sending funds back into the gold ETFs.
The next golden shoe to drop is the gold miners themselves to start hoarding gold. I was talking to someone about my thinking that more gold miners should sit on gold instead of cash.
My point was that one of the key reasons investors own gold is because it is the soundest form of money and a wonderful way for investors to protect their purchasing power against the ravages of inflation.
Bearing this in mind it begs the question, why aren't gold miners sitting on gold instead of fiat currencies? I get that they need cash to run their businesses, but with gold doing so well, they have much more cash than they need to run their businesses.
They also need cash for dividends and stock buybacks. I argue that based on the last few years of action in their stock prices, dividends and stock buybacks have done very little to help their stock prices. While gold has been in a powerful trend since the lows of the third quarter of 2022, until February of this year, the gold miners paying dividends and buying back stock were in a bear market.
They talk about the benefits of storing wealth and fighting inflation with gold. Yet, they don’t put any of their excess cash that is beyond what they need for operating their businesses in gold. Hoarding on for dear life would send the message they like eating their own cooking.
Instead they sell all their gold as quickly as they can for fiat currencies. Whether they like it or not, it sends the message that they don’t like eating their own golden cooking.
They certainly could hold gold beyond their cash needs for operations and growth. As a group they haven’t been very good at increasing their production and bringing down costs. Gold production has peaked and is about to go into many years of decline.
Except when it comes to Agnico Eagle and Alamos Gold. Both of them can argue that they are allocating their cash exceptionally well, both produce gold for well under the average cost of production for gold miners. While also investing remarkably well in increasing production and reducing their costs.
The rest of the big gold miners can't say the same. So they really have no excuses for not hoarding some of their gold production. The benefit is that a hoard of gold in a powerful bull market is much more rewarding than their allocation of capital to dividends and stock buybacks and failing at efforts to increase their production and bring down costs.
Another added benefit is that it would take a lot of physical gold off the market and due to tight supply in gold, it would further tighten supply. This would be extremely bullish for gold which would juice up their free cash flow. Winner winner chicken dinner.
When I recently made these points on an online forum, someone flabbergasted me by making the point that it is like a baker buying bread. Well, if the baker wasn’t making enough bread to meet demand and bread wasn’t perishable and was going up because supply is tight and demand was growing rapidly, it would be very smart for the baker to in fact buy bread if they could get it at a good price.
Especially if the baker was making so much money that the baker was sitting on a big stock pile of cash and needed a place to park wealth and fight against inflation. I didn’t bother pointing this out because it was obvious the commenter wouldn’t get it.
The arguments for gold miners to hoard gold far outweighs any arguments they could make against it. Plus, it would send the message that gold miners believe in the concept that gold is the soundest money, and the best currency to store their wealth and protect them against inflation.
Sadly, I think the idea of gold miners hoarding gold instead of inferior fiat currencies will fall on deaf ears. But, a gold bull can hope.
Fortunately, whether or not the gold miners see the golden light to hoard gold, demand is very strong and supply is weak. Which will continue to drive gold much higher.
Both the paper market and physical market for gold are seeing the guiding golden light to prosperity. Are you?
All the best,
Allan Barry Laboucan
Disclosure
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