Look at who just said ignore volatility because the price of gold is headed to $6,000.
He Who Owns the Gold, Makes the Rules
September 18 (King World News) – John Ing: Central banks have become the biggest drivers of the global gold market, purchasing up to a third of annual supplies, buying 2,500 tonnes in the first half. According to the ECB, gold has surpassed US Treasuries as the world’s top reserve asset. Noteworthy too is the change in the physical markets versus the paper market, as China overturns the international order and leads the charge on hard assets versus paper assets.
China is the world’s largest gold producer and consumer of gold, with the Shanghai Gold Exchange the largest physical spot gold exchange in the world. China’s appetite is insatiable and its gold mines are buying up gold mines around the world. China’s gold reserves increased by 20 tonnes in July, marking the 21st consecutive month of purchases making the People’s Bank of China the 5th largest holder in the world at 2,400 tonnes.
After China, Russia is the world’s second-largest producer of gold and uses Hong Kong as a clearinghouse. China has announced a gold settlement system and delivery connection making Hong Kong a bullion center along with London and New York, where gold has been trading for nearly two centuries. A new era is upon us. Today warehouse vaults and storage facilities to hold physical gold are at a premium as are physical supplies.
China is also building new vaults to hold bullion and Hong Kong is expanding its storage capacity to 2,000 tons as China and other central banks confront a new reality that in this modern day of finance; physical possession within one’s own borders has become more valuable than trust in another. Following the French action earlier this year, the Dutch central bank repatriated over half of its gold hoard, citing geopolitical uncertainty.
America is vulnerable. China has shifted its buying power to the East, strengthening Hong Kong, as well as internationalizing its currency. China’s purchases of gold is an exit or alternative to the dollar – good for gold but bad for the dollar. We also believe that de-dollarization will not sink the dollar nor will it soon be replaced by another currency. However given its deteriorating fiscal position, exacerbated by inflation triggered by Mr. Trump’s Iran war and tariffs, the US is isolated.
Second, amid America’s growing debt burden, a “made in America” derivative implosion would cause a spike in physical or hard assets which would be the tipping point of the dollar as a haven. Consequently we believe the gold market will be the key battleground where the geopolitical power game will be won or lost.
$6,000 Gold
Gold reached all-time highs at $5,500/oz in January, up more than 100 percent from a year ago and then corrected almost 18 percent in normal profit-taking, recovering about 10 percent from the lows. We continue to believe that gold will rise in value, so long as the United States remains at war, its balance sheet remains full of red ink and Donald Trump is in the White House. After all, he who owns the gold makes the rules. After correcting to $4,000/oz, our view is that gold will reach $6,000/oz, our interim target.
Gold is finite. It can’t be duplicated and is universally treated as a hedge against inflation. In the Sixties, President Johnson’s “guns and butter” era led to huge runaway deficits. Back then, the dollar stood for a sum of gold but that ended in 1971, when a run on the dollar forced President Nixon to sever the dollar/gold linkage. The dollar subsequently became a “fiat currency,” which became a crucible of US economic policy, causing the great world inflation of the 1970s and early 1980s.
Today with the deluge of dollars created to pay for the pandemic, wars, housing, tax cuts and entitlements, the guns and butter era has returned, bringing inflation with elevating prices at 3.4 percent in July, and consumer prices at 28 percent higher than before the Covid pandemic. When inflation runs out of control and bond yields begin to rise, cheap money that underpinned this excess vanishes, and stocks will fall. Central bank buying, de-dollarization and geopolitical uncertainty has made gold valuable again. Investors are buying gold instead of US Treasuries as a safe haven. Trust in the dollar is gone.
Gold Miners Represent Great Value
Gold miners have become value plays. Most have rock solid balance sheets, churning out record cash flows and will end the year with record dividend payments. Despite an all-time high in gold, the group remains unloved and underowned. Second quarter earnings were near records and margins held despite creeping costs. Copper contributions also helped cash flow and while gold production was in line with guidance, production flattened. Ironically, while Canada is pitching for more investment, the mining industry is a key part of the economy, but over-regulation, red tape and political indifference has led to its hollowing out and slowing investment. Reserve replacement is key but few miners have been successful, suggesting continued M&A activity.
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