Last week, I called to your attention to both silver and the miners being in the process of leading gold higher. This indeed was setting up the gold price for a weekly close above $2400 this week, while silver has moved above stiff multi-year overhead resistance at $30 to close at a 4-year high.
Along with geopolitical risks from war, both military and trade, precious metals are being supported as the financial system has risks coming from many different angles - housing, commercial real estate, rising bankruptcies, the potential for a collapse in the banking system, the potential for a sovereign debt collapse, and a currency crisis.
Meanwhile, the New York Federal Reserve reported Monday that American households set a new record after plummeting into $17.69 trillion of debt, a 1.1% ($184 billion) increase from Q4 2023. Worse, the number of delinquencies is rising as households struggle to make ends meet amid a cost-of-living crisis.
Inflation is not waning, taxes are rising, and America’s debt burden has become utterly unmanageable. Americans are in serious debt with credit card interest rates at +20%, and out-of-control spending in Washington is all but ensuring this trend continues.
U.S. economic data is in for Q1 and nothing indicates that inflation is easing, therefore, we should expect the Fed to hold rates. Although the Fed is reluctant to signal the start of a new easing cycle anytime soon, it is clear interest rates aren’t going any higher which is providing solid support for both silver and gold.
The Labor Department noted this week that the Producer Price Index (PPI) rose to 0.5% in April from May, up 2.2% since the year prior. Personal Consumption Expenditures (PCE), the Fed’s primary inflation indicator, rose 2.7% in March from 2.5% in February. The U.S. economy overall advanced 2.7% from October to December. Investors are looking at inflation beginning to rise faster than economic growth, which will lead to stagflation.
Stagflation fears have investors rotating into gold to capitalize on the biggest macro themes driving the markets. After Q1 economic data has rekindled fears of 1970s stagflation, stickier-than-expected inflation has seen Google searches for the term “Stagflation” surge over 600% this month.
Persistent inflation, loss of faith in government, and geopolitical tensions has also resulted in strong central bank buying as red-hot demand from China is being seen as a hedge against economic instability in the world’s second-largest economy.
Recent data showed global demand for gold has never been stronger, while the shift from the west to more eastern demand began not long after the UK "Brown Bottom" in 2001. In the first quarter of 2024 central banks bought 290 tonnes of gold, the biggest start to any year on record.
More impressively, gold demand over the last 7 quarters has exceeded 40 million ounces on average. That is almost 2 million ounces higher than the quarterly average from Q1, 2010 to Q2, 2022.
U.S. monetary policy has become a secondary factor as Asian markets evolve from price-taking to price-setting, while geopolitical concerns remain elevated.
Besides being the world’s largest gold producer, accounting for more than 10% of global production, China also imported 1,480 tonnes of gold last year, a five-year high. At the start of April, gold premiums on the Shanghai Gold Exchange reached a high of $85 above prices set in London.
Sky-high imports, unprecedented ETF demand, and elevated price premiums show that China’s gold market continues to lead the world, according to Ray Jia, China Research Head at the World Gold Council (WGC) this week.
With all the current uncertainty, central banks everywhere, particularly outside the EU and North America, continue to load up on bullion. And that is another reason gold is embarking on what potentially could be a multi-year bull market ala 1971-1980 and 2001-2011.
In a speech at Stanford last week, Gita Gopinath, the First Deputy Managing Director of the International Monetary Fund (IMF), said that central banks, particularly in emerging markets, have been hoarding gold in recent years as a hedge against the risk of, among other things, sanctions imposed by the West.
“Gold purchases by some central banks may have been driven by concerns about sanctions risk. This is consistent with a recent IMF study confirming that FX reserve managers tend to increase gold holdings to hedge against economic uncertainty and geopolitical including sanctions risk,” said Gopinath. This view is also backed up by recent data from the WGC showing strong demand in 2024 from central banks.
Russia and China have been the two largest central banks that have added to gold reserves to possibly back their currency (ruble, yuan) with gold. Some other emerging and developing countries have done the same.
Russia, led by China, is developing its own version of the International Monetary Fund (IMF), the World Bank, and the global payments system (SWIFT) in a move towards de-dollarization.
This poses a threat to the global world order dominated by U.S. hegemony. In the past, countries went to war when challenged economically and may be playing a role in today’s proxy wars and economic sanctions.
The world is already seeing deglobalization and the potential for more trade wars with tariffs. Worsening relations with China this week, the U.S. just hit the country with a new wave of extremely high tariffs.
Around $18 billion worth of Chinese goods will be affected, but the White House deems the tariffs necessary to help American industry. China will retaliate and mark up American goods, while continuing to offload their purchases of U.S. Treasuries to buy more gold.
This added tariff slap on China will also cause the price of goods to rise and harm the supply chain, adding to the Fed's losing battle against higher-for-longer inflation.
Although the U.S. ceased accumulating bullion after WWII ended, they continue to hold the world's largest gold reserves even after the gold standard ended back in 1971. Since then, money, debt and markets have exploded to the upside bringing on a whole new set of problems.
Back in the early 1980s, central bank gold reserves represented 75% of total reserves. Today they represent 20%, so there is plenty of catching up to do as de-dollarization is expected to continue. With sanctions expanding particularly on Russia, Iran, and others, the search for alternatives to the IMF, World Bank, and SWIFT has been ongoing.
Given the heightened tensions in the Middle East, Ukraine and the increasingly polarized stand-off between the BRICS nations and U.S.-led allies, this trend is expected to keep gold prices supported after a recent major breakout above 13-year resistance at $2000-$2100.
Meanwhile, more 60/40 portfolios are adding to their hard assets including gold, while fund managers can ill-afford to continue ignoring the mining sector much longer as strong Q1 results are calling attention to this historically undervalued sector.
After the miners have shored up their respective balance sheets since bottoming in late 2022, by building up large cash reserves with manageable debt, they must now concentrate on adding more ounces. There is only so much gold supply, and acquiring junior developers is the best strategy for adding to depleting reserves.
After 52-week high closes across the miner ETF board last week, silver juniors continue to lead both gold and its miners. With the market cap of the entire silver mining sector being just $15 billion, we could see significant upside in the long-forgotten silver space into summer. Especially now that silver has broken out above multi-year stiff resistance at $30.
This Crescat Capital chart shows the performance of the Van Eck Gold Miners versus gold prices, silver prices, and the TSX Venture Exchange’s Precious Metals & Minerals Index over the past year.
With the silver price now joining gold for breakout above multi-year resistance this week, the juniors should not only eventually catch up but surpass the performance of the large cap miners and gold and silver.
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