…If gold is the ultimate safe haven for investors and the world is dangerously unsafe, then the price of gold must be skyrocketing, right? [Not quite.]…Gold is 10% lower today than it was two years ago…so, we’re back to the original question. With inflation, shortages, and war all around and getting worse, why is gold not surging past $2,000 per [troy] ounce and making its way to $3,000 and beyond?
This version of the original article by James Rickards (dailyreckoning.com) has been edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
Gold Should Be Soaring
Supply/demand conditions favor higher gold prices. Global production of gold has remained fairly constant for the past six years. Over the same six-year period, during a period when global output was flat, central banks – arguably the most knowledgeable about the real condition of the global monetary system – increased their official holdings by 6%…[That begs the question why] individual investors in the U.S. still seem indifferent to gold as a monetary asset…[and] what retail investors are waiting for.
Gold Prices Are Tied to Interest Rates
Interest rates are also poised to play a supporting role. Many of the directional moves in gold prices over the past two years have been tied to interest rate moves. The correlation is not perfect, but it is strong.
The rally in gold prices in late 2020 was tied to a fall in interest rates (yield-to-maturity) on the 10-year U.S. Treasury note…[and] I believe that interest rates on the 10-year Treasury note will fall again and will continue to fall as global growth weakens. That’s good news for gold investors.
Short-term rates are going up because of Fed policy, but long-term rates will go down because investors see that the Fed will cause a recession. That correlates with higher gold prices.
What’s the Problem?
While market supply/demand conditions are favorable for gold, and the overall interest rate environment is also favorable for gold, neither seems to have the power needed to push gold solidly past $2,000 in the short run. What’s the problem?
Look No Further Than the Dollar
The real headwind for gold and the main reason gold has struggled for the past two years is the strong dollar. After all, the dollar price of gold is really just the inverse of the strength of the dollar. A weaker dollar means a higher dollar price for gold. A stronger dollar means a lower dollar price for gold. It may seem paradoxical to imagine a strong dollar in the midst of all the inflation we’re seeing, but that’s the case.
What’s extraordinary over the past two years isn’t that gold hasn’t soared; it’s that gold has held its own in the face of a persistently strong dollar so that leads to the next question: What’s behind the strong dollar and what could cause the dollar to suddenly weaken and send gold prices into the stratosphere?
- The strong dollar has been driven by a demand for dollar-denominated collateral, mostly U.S. Treasury bills, needed as collateral to support leverage on bank balance sheets and in hedge fund derivatives positions and that high-quality collateral is in short supply (partly because U.S. Treasury issuance is lower due to smaller than expected deficits). As banks scramble for scarce collateral, they need dollars to pay for the Treasury bills. That fuels dollar demand.
- The scramble for collateral also speaks to weaker economic growth, fears of default, decreasing creditworthiness of borrowers and fear of a global liquidity crisis….[and,] as weak growth turns into a global recession, a new financial panic will be on the horizon…[and] when this panic hits and the dollar is deemed no longer reliable, the world will turn to gold…
Investors should consider today’s prices a gift and perhaps a last chance to acquire gold at these prices before the real safe haven race begins. Gold is so cheap right now, it’s practically a steal.