The price of gold is coiled to surge above $6,000.
June 2 (King World News) – John Ing: Independent monitoring body, Global Trade Alert’s models found that if the war continues, global trade will collapse by the end of the year, with the biggest hit in the Middle East and Africa. The dangers of war is obvious. Oil reserves have collapsed as 2 billion barrels are lost with buffers and inventories almost depleted. A protracted war would lay bare a financial disaster from spiraling energy costs, gas lines, rationing, forced closures and famine. Today no one sees the chances of recession or even double-digit inflation. After all, things are different, aren’t they?
Not surprisingly then we expect a huge inflation fiasco. Inflation this time will not be transitory. The price of oil itself has fed inflationary pressures but the fallout is only just beginning. The risk is great, even after the stalemate, that in a few weeks jet fuel shortages will follow oil shortages, let alone the prospect of food supply shortages. Fast growing Asia is particularly hard hit as supplies of energy and fertilizer are stuck in the Strait, raising prospects of shortages and famine. In response to the crisis, countries are exploring stockpiling and resource pooling as part of their national security issues, underpinning higher inflation in the future.
Today, the surge in velocity and inflation is part of a war psychology with trillions of anticipatory stimuli coming. Prior to the Weimar hyperinflation, there was a comparable golden age when overheated markets gave rise to blind pools, speculation, and gambling that permeated everyday life (hello Polymarket). Back then the German government’s printing press ran for nine years eventually causing the dreaded hyperinflation. With government debt above 100% of GDP and an abused monetary policy today, it is disconcerting that the US has started down a similar path today, where spending has become more addictive. At the same time government has run huge deficits not for years but decades and the war has crystallized risks. It is inflation that we should worry about since it happens to any nation that decides that inflation is an acceptable price to pay to achieve their economic goals.
The bond market is the first to trigger economic trouble with yields near multi-decade highs. Higher inflation has pushed 10-year Treasury yields 100 points on inflation angst. The yield on a 30-year Treasury bond has reached historic heights, the highest since the financial crisis of 2008. Each auction brings fewer foreign buyers. Mortgage costs, corporate borrowing rates and the interest on the nation’s debt keep rising forcing the government to borrow even more to service the growing debt bill. Despite a roaring stock market, markets are fragile and the rallies have become increasingly narrow in breadth. Although there are appearances of a greater risk appetite, the inflation shock is only just beginning. Interest payments on US government debt today exceeds what they spend on national defense. Higher rates go hand in hand with higher inflation and that means the eventual need for the new Fed chair to rein in money supply which has been growing at double-digit levels.
It is this contradiction and contraction that central bankers fear most in shades of the Great Depression. However, it is not the Great Depression that should worry us, it is hyperinflation. Today the politics of debt reduction or spending cuts is nowhere to be seen, not with a president doing everything to lower rates and boost the economy. To finance wars, tax cuts, bailouts etc. and growth, the government has become increasingly debt dependent but higher inflation and higher rates remove the props to that growth. While there is ample evidence of the link between fiscal profligacy and subsequent inflation, inflation increases when demand exceeds supply, while deficits raise demand. If the fiscal deficits are not accommodated by money supply, the deficits push up rates. That is when the tide goes out. That is what happened in 1929.
The Golden Constant
The US has been living way beyond its means for some time and amid currency worries, gold reached new highs at $5,500/oz this year. What damages trust in the US damages the world. Today, the dollar currency system, the bedrock of the Western financial system is broken, after a series of stress from moving off the gold standard in 1971, to the US-Japan crisis in the 1980s that led to the Plaza Accord, to the 2008 financial crisis and the inflation crisis of today. All this suggests that the US is losing its unilateral status in a multi-polar world and they will soon face a financial crisis, without sufficient wealth or friends to purchase their enormous amounts of debt. The US has reached a tipping point when the dollar failed to act as the traditional safe haven, due to the scale of its US budget and expenditures.
Gold consequently has been a beneficiary of this dollar debasement as the proverbial canary in the coal mine. Gold is an alternative investment to the dollar for central banks. Except for last month, central banks have been major buyers of gold for the past three years, as an alternative to the dollar buying up to a quarter of supplies. Their purchases were part of an almost two centuries old tradition reflecting gold’s role as a safe haven or store of value. China bought 160,000 ounces in March for the eighteenth month in a row of continuous purchases. We believe gold will top $6,000/oz which is our interim target.
Gold’s main driver is US policy volatility which makes investors wary of holding dollar assets. Gold now exceeds Treasuries held at central banks’ foreign reserves. Ironically the world’s biggest holder of gold is the US with 8,134 tonnes, followed by Germany and IMF with 2,814 tonnes. China has joined the 2,000-tonne club of Italy and France. Gold is simply seen as a less risky alternative to the dollar, and a hedge against geopolitical uncertainty.
China Paying Massive Premiums For Silver
To listen to James Turk discuss China paying massive premiums for physical silver as well as what surprises are happening in the gold and mining share markets CLICK HERE OR ON THE IMAGE BELOW.
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