Gold often has its own reasons to rise or fall. Still, it’s not just mountain dwarves who want large stockpiles of gold for when times are tough. @JONOGG
Gold has enjoyed its status as the world’s most valuable safety trades for centuries during periods of great uncertainty. And you have also heard the term “Don’t fight the Fed!” So what happens when the safety trade just cannot win against the might of governments and central banks? Before you gold bugs give up hope, the thesis for gold to rise to $3,000 an ounce still seems alive and well.
The Federal Reserve’s Open Market Committee voted unanimously to keep the Federal Funds rate static with no interest in rate cuts looking any closer to kick off the month of August (2024). The hawkish Fed statement led by Jerome Powell and his Fed presidents also indicated that the Fed is not likely to begin cutting interest rates until they are more confident inflation will get back to 2%. That means a September rate cut is off the table. It also means “higher rates, for longer!”
Gold bugs have been calling for gold prices to surge when interest rates do begin to come lower. The issue to consider is that interest rates are going lower. It’s just not happening yet. And perhaps more importantly, it’s just not “officially” happening yet. Can gold rise even if interest rates remain higher than they should (and for longer than they should)? Yes, with some outside factors coming to pass.
Tactical Bulls remains bullish for the long-term on gold. It’s even possible that $3,000 gold may only be the starting point of upside projections in the years ahead. Keep in mind that, even if above $2,400 is a new recent high, this $3,000 call is only 25% gold appreciation in the coming years.
There are many reasons for gold bugs to be betting so strongly on gold. The demand for safety-trade assets seems insatiable. Governments have decided to monetize debt. Monetizing the debt servicing is now also a consideration to help budgeting that would otherwise leave mandatory spending in the dust. Politicians are running on free-money policies with endless cash giveaways. Government deficits are now the norm. And no one wants to let asset prices correct to whatever natural price point they might go to.
We all do have to remember that this is all speculative at this point because it has not happened yet. Let’s see why gold can go much higher even if it feels like you are fighting the Fed.
China created a stir when its central bank decided to stop buying gold. Other central banks have been buyers gold, and China must at some point likely go back to gold buying to support its currency and reserves. It is very likely that China decided it was overpaying after continually hitting the buy button.
The endless strength in the U.S. jobs market is no longer assured. Automation and A.I. haven’t made us all obsolete yet, but jobless claims are rising and layoff announcements from major companies are becoming more common. Companies like Intuit, UPS, Dell, eBay, Wayfair, Disney and Intel have all been going through layoffs while the economy is still fairly good. Companies are no longer having to crater to every single demand by employees. And the July-2024 unemployment rate just jumped up to 4.3% when economists were calling for 4.1% — and the BLS formal U.S. payrolls number only rose by 114,000 when economists were calling for payrolls to rise by 185,000.
The gold-related ETFs remain quite impressive and these can be a key driver for gold demand ahead. SPDR Gold Shares (NYSEArca: GLD) closed at $225.81, now up about 5% from when China’s gold buying spree ended. This is by far the world’s largest gold fund and it currently has $66.7 billion in total assets. The VanEck Gold Miners ETF (NYSEArca: GDX) is also up about 10% since China’s gold buying spree was interrupted. The Van Eck “gold companies” ETF has $14.2 billion in assets under management, which makes it larger than most of the gold miners themselves.
Tactical Bulls will warn investors that predicting an exact or absolute dollar price for gold by an absolutely certain date is a fool’s errand. That said, the view of Tactical Bulls remains in place that the stage is set for $3,000 gold at some point in the not-so-distant future.
Is that in 2024? Unlikely.
Is that 2025? Probably not.
Is that 2026? We are getting much warmer…
Forget what Jerome Powell and the Fed-Heads are saying today. Why? Isn’t “higher for longer” bad? If you look forward rather than just at the present it start to makes more sense. The next 100 basis point directional move in interest rates is still probably at a 95% probability of being down 100 basis points rather than up 100 basis points. Even if that rate cut is no longer set for September or even ahead of the U.S. elections in November, it still seems more likely a “when” rather than “if” the next rate change is coming.
The market is doing what the Federal Reserve refuses to do on interest rates. Fed Funds remain stuck at a 5.25% to 5.50% range. That’s just not where Treasury yields are for longer-term debt. One-month and three-month T-bills are still over 5%, but the yield on the 2-year and 3-year notes are closer to 4% — and 5-year, 7-year and 10-year Treasury notes are all back under 4% at the moment. The market is cutting rates for the Fed, but the market cannot as easily control the short-end of the yield curve in T-Bills under a year.
The U.S. debt clock is now at an atrocious $35 trillion. Pointing out only the U.S. is almost unfair because most other global central banks have all been bad about issuing too much debt at the same time. No one cares that this will catch up to all of us one day. And when it does, the “safety” assets will be the most important assets of them all. We have to keep in mind that austerity is only brought up in times of crisis — and no one is ever a popular leader when they take the money out of the economy.
The U.S. political landscape is no longer easy for foreign investors to bank on and that better scare any investor into holding at least some safe assets. It doesn’t seem that difficult to admit any longer that “indivisible” and “united” just aren’t the case here if we are all being open and honest. The old mantra “we all really want the same thing” isn’t even on the same page any more. Some of us wonder how many more years the U.S. can hold on to its status of being the global reserve currency.
Russia and Ukraine are likely going to keep being in the headlines. The situation in Israel is not getting better. China still has ambitions for Taiwan. Iran doesn’t feel any pressure to back down at the moment. And nations like Venezuela and Ecuador are not exiting the news either.
The cost of mining for gold has continued to rise. It seems that $1,000 to $1,200 per ounce in all-in sustaining costs (AISC) now seem to be normal. A company named Endeavour Mining just fessed up that its all-in sustaining costs reached $1,287 in its last earnings report. The only things that seem likely in helping to cut costs are more automation in mining efforts and concentrating on projects with higher grades of gold. Some companies just cannot get there yet (or may not be able to at all).
While there are very few hard data points contained in this outlook, Tactical Bulls was calling for $3,000 gold earlier this year when gold was $2,300 and $2,200 an ounce. That’s the case for $2,400 gold and it will be the case when gold hits $2,500 and then $2,600 an ounce. Admittedly this should say “if” rather than “when” but everyone seems to appreciate confidence. Just don’t interpret any of this as a guarantee because your views and your decisions are solely your responsibility. The stance of this “tactical bull” has been firmly planted for several years.
The rise of Bitcoin and other cryptocurrencies may be an ongoing threat to gold. Despite some political promises, none of the major global economies have decided to back a strategic reserve of bitcoin and other cryptocurrencies. Many nations have reserves in gold, oil and other assets. What if the nations decide to opt for crypto mining rather than buying endless tonnes of gold?
Now, for the next question assuming that $3,000 gold does come to pass — does that mean that silver will then rise to $40 or $50 an ounce too?