December 2023 - Week 2 Edition

Gold and Silver Price Increases Are Likely Just Beginning

Gold and silver took off after the Fed left rates untouched and used “dovish” language about future rate cuts, most notably saying that they would cut rates before inflation reached 2%.  Previous to that press conference and statement, the “Nervous Nellie” trading markets pushed gold down based on their fears that the Fed would say “our work is not done,” or their fear about inflation remaining too high.

Stocks and precious metals both rose almost like a rocket between 1:40 p.m. and 2:30 p.m. Wednesday, with spot gold prices rising 2%, from $1,980 to $2,020, and silver rising over 5%, from $22.50 to $23.75. Thursday morning’s gold and silver prices were up early at $2,035 and $24.12 an ounce, respectively.

November Inflation Statistics Came in Relatively “Tame” (As Expected)

The two major inflation indexes were released this week, and they both came in “tame,” as expected:

The Consumer Price Index (CPI) for November came in fairly low on Tuesday at 3.1% (the 12-month rise), with the core rate (minus food and energy) coming in at +4%. Both figures are the same as they were in October and right in line with market expectations, so they didn’t budge gold or the stock markets much. Gold rallied at first and then dropped in anticipation of Wednesday’s PPI and the Fed meeting.

The Producer Price Index (PPI) was unchanged in November when seasonally adjusted, and the index increased 0.9% for the 12 months ending November 30.  The “core” index for final demand (less food, energy, and trade services) rose a tiny 0.1% but that was the sixth consecutive advance. For the 12 months ending November 30, prices for final demand less food, energy, and trade services rose 2.5%.

As Inflation Rates Decline, Gold is Getting Stronger – Why is That?

After the Federal Reserve began raising rates in April 2022, gold declined from $1,950 (in March) to $1,635 (in October). Although gold rallied to $2,000 after the banking crisis of March 2023, it dipped back down to $1,815 in early October.  Now, gold is rising again, at $2,035 Thursday morning, after a peak of $2,135 last week.

So, why is gold rising more when inflation rates are dropping than when the rates were rising in 2021, and gold was flat most of that year? We’ve been taught to believe that gold only goes up when inflation is rising because it acts as a hedge for investments but gold does not always follow that trend. As I have said many times, gold holds its value when the dollar is weak but its price is also affected by interest rate expectations. We’ve seen gold go up more than 11 percent this year but it’s up nearly 600 percent since 2000. Some of those times were good and some were bad but gold’s performance has been steady, almost like a stairstep effect – climbing, then settling or falling slightly and then climbing, again. Gold’s price is based on a complicated formula of outside factors, including economic conditions, supply and demand, speculation by traders and world events.

This simplistic analysis of tying gold’s price only to interest rates is not completely justified by historical data but the repetition of a cause-and-effect mantra by the press tends to influence gold traders. When the Fed raised interest rates at the fastest rate in history, gold tended to be flat, or declined, and the dollar gained strength. Many investors assumed the dollar would attract more investors at higher interest rates. But they forgot to factor in the much higher budget deficits that would make higher interest rates push deficits even higher through the increased costs of service on $34 trillion in public debt at 5% average rates rather than just 1%.

Gold made an all-time high above $2,150 basically because gold traders finally saw the end of the Fed’s latest rate hiking cycle and the top in long-term yields. They also foresaw the end of King Dollar.  The U.S. Dollar Index rose strongly when rates were rising, until October 2022. Since then, the U.S. Dollar Index is off 10 points (-9%), and many major central banks have been exchanging their weak dollars for gold. Central bank gold buying set a 55-year high in 2022, and the 2023 rate is 14% above 2022 through the first three quarters. That has helped push gold to new highs, but gold has been in record-high territory in several other currencies for many years, including since 2019 in the European (euro) currency.

Gold soared to new highs a week ago, after Fed Chairman Jerome Powell’s dovish comments about the end of rate hikes and the anticipation of several rate cuts in 2024. Also, the U.S. dollar has dropped significantly (down 3% in November), due to these anticipated rate cuts. There is also concern over our budget deficit of nearly 8% of GDP, which is unnerving European allies and firming up the pound and euro.

Gold Backing to the Dollar is the Ultimate Answer

Lyn Alden wrote in her recent book, “Broken Money” that gold provides something paper money can’t: All of the newly gold mined each year (about 1.5% of the above-ground supply) roughly matches global population growth, hence gold represents zero inflation of the global per capita hard-money (gold) supply.

She writes: “Scarcity is often what determines the winner between two competing commodity monies … an important concept is the stock-to-flow ratio, which measures how much supply there currently exists in the region or world (the stock), divided by how much new supply can be produced in a year (the flow). For example, gold miners add about 1.5% new gold to the estimated existing above-ground gold supply each year, and unlike most other commodities, most of the gold does not get consumed; it gets repeatedly melted and stored in various shapes and places. Gold does not rot, rust, or corrode as readily as most other materials do. It is chemically inert and … practically indestructible.” – “Broken Money” (p. 15-16)

She also wrote of the most successful currency of all time, the British pound, but it has lost over 90% of its namesake value – a pound of silver: “The pound sterling of the UK is the world’s oldest continuously used currency that is still in use today. In Anglo-Saxon England during the eighth century, the pound sterling was defined as a pound of silver…Today a pound sterling is worth less than two grams of silver.”

--“Broken Money,” page 102.

Our friend Steve Forbes said that gold rescued the British pound – for about 200 years – under Sir Isaac Newton, but Britain then went off the gold standard in 1931.  In his 2022 book on Inflation, Steve wrote:

“In 1717, Sir Isaac Newton fixed the value of the British pound to gold at three pounds, 17 shillings, and ten-and-a-half pence (3.89 British pounds) an ounce, a ratio that held for more than 200 years. Britain’s commitment to unchanging, gold-based money formed the foundation for the country’s rising wealth and its emergence as a global financial center…. The reliable British pound helped turn that small island from a second-tier nation to the mightiest industrial power on earth.”

Gold and silver are still the missing ingredients in modern money, the “secret sauce” that made currencies valuable and desirable for centuries. Until our central banks wise up to this fact, you and I can collect and own these valuable gold and silver rarities from America’s past – by calling your account representative today. I strongly encourage people to have gold, silver and gold and silver rare coins in their portfolios and to routinely add to that amount. Even with increased values for precious metals, we have seen a number of our rare coin recommendations outpace their gold or silver values and realize an even greater returns.

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