Posted on April 05, 2023
At the time of this writing on the early afternoon of Tuesday April 4th, 2023, gold and silver are having a little bit of a breakout party. The chart tells the story.
It is exciting to see the metals on a nice bull run and there are plenty of reasons for that, which we have been covering lately. The recent banking crisis has woken many up to the risk of bank failures, and those are one of the core causes we explored in the last few weeks.
There are other reasons for gold’s rise, namely persistently high inflation, the subsequent rising rates on bonds and other debt, weakness in housing and other asset prices, and now some new and emerging weakness in the job market.
Because the underlying fundamentals are so strongly aligned in favor of the precious metals moving higher, I thought we could take a moment to examine where gold and silver may go next.
You may have heard the saying that gold is only good when everything else is bad. That is somewhat true, as gold tends to trend inversely to the existing financial system that followed the classic gold standard era ending in 1971.
Stock and bond markets driven by excessive money printing have led to bubbles that are now bursting, as the economy turns down. And that is where gold and silver tend to shine – when everything else is having problems.
Now, we have a collection of worsening economic data points coming out since the start of the new year. The economy is deleveraging after an historic era of heavy debt and the contraction is causing alarms to pop up on financial dashboards in the financial sectors.
It is during a deleveraging process whereas other asset prices come down, money flows into safety. And there is no safer historic asset to own than the previous metals.
So why did the dollar rise so high in recent years? Everyone needs them to service existing debt that requires dollars (dollar denominated). Therefore, the dollar can appear strong when it really is not.
In fact, as the world moves out of the dollar, it is likely the dollar index rises strongly as more and more debt is paid off with existing dollars to the point at which the US dollar no longer exists.
How can this happen? Because we have more debt than dollars, and to extinguish the debt we eventually use up all the dollars until there aren’t anymore. This system kept going for 100 years because there were always more people wanting more debt created (denominated), which simply created more dollars in the process.
But now, there are not, and the world can see the end of the current system in sight. The dollar will live on in some form, but US lawmakers will have to wrestle with a much weaker version of it.
The chart above shows the last two financial crises caused by the pandemic shutdowns in 2020, and the banking crisis this year. In both cases, the precious metals rose substantially as the dollar fell. This chart shows clearly that the dollar is no longer considered a safe haven in times of financial calamity.
Looking at the gold chart it appears we are poised to test the previous all-time high of $2074. Factors motivating gold’s previous all-time high were economic deflation caused by the pandemic, tensions leading to the Russia-Ukraine war, and the after-effects of Brexit.
I believe the factors supporting higher gold prices are stronger now than 2 years ago, hence my belief gold breaks through and reaches new highs this year.
In the 1970s, gold was pegged at $35 per ounce as part of the gold standard negotiated during Bretton Woods. After Nixon was forced to remove the US off the gold standard and remove convertibility from the dollar, we moved into a pure fiat, paper money system. After that, gold surged to $200, withdrew, and then reached a peak of $850 in 1980 as the markets repriced the metals in the new economic reality of the time.
Gold proceeded to trade around $400 for a long while until the tech crash of 1999-2000 led investors back into precious metals. There, gold started its current 30+ year bull market. This market has been very robust for gold, and the largest one ever to occur in US history. Why?
Because Bretton Woods pegged gold to the dollar at a fixed exchange rate, the price never had a reason to move. And investors had no reason to pay attention to gold in the market because the price did not trade along with the other commodities on the open market.
Gold in a free market is a different beast. Prices now fluctuate based upon the general supply and demand of market participants. In the last chart above, we can see where the last two rounds of economic instability, the 70’s and again in the first decade of this century, saw gold rise along with economic uncertainty.
Except for 2011-2016, gold has been in a bull market without stopping since 2000. I see this period (2011-2016) as consolidation in gold as the central bank printed a lot of money and issued a lot of cheap debt. Markets ignored gold and the need for safe assets. After all, they had all the cheap credit they needed!
This caused companies and municipalities to focus on using debt (bonds) to expand operations. It also led financial analysts to claim debt is a high-quality asset instead of calling it like it is – money owed with interest.
Of course, without the natural barometer of gold, the government overextended itself and now here we are in this current mess of a treasury debt crash, and subsequent brewing banking crisis.
One can look at the bull market in gold dating back to the 1970s as a continuous one. Specifically, the date at which Nixon removed gold from dollar convertibility started a new gold era, one in which the market, and not government, set the prices. The first part of the era was stable until 2000, when excessive debt and deficits began a series of financial calamities in the decade.
The charts indicate clearly that gold is measuring the financial stability of the post-Bretton Woods financial system. Each of the bull and bear market periods from the 1970s till now merely represents the stages of progression through the fiat dollar era.
Gold is rising now because we are nearing the end of the current system and the players are organizing around the emergence of a new one and the digital currencies that will populate the new financial system. Those that own gold and silver will make out better than those who do not.
What about silver? This time is different for the metal, and we will break it down in a future article.
I am going to highlight the younger brother to the American Gold Eagle, the Buffalo gold coin. It was introduced in 2006 as one of the first 24k gold coins in American history. A gorgeous design, the Buffalo is a nice add to a well-rounded American coin collection.