The trend is your friend!...

The trend is your friend!

https://marketsandmoney.com/goldilocks-is-gonna-get-it/

Goldis trading at $2,211 per ounce this afternoon. Since its interim lowof $1,832 per ounce on Oct. 5, 2023, gold has posted a 21% gain.That’s in less than six months. Almost half of that gain occurredin the one-month period from Feb. 11 to March 11.

That overall gain is especially impressiveconsidering gold had been stuck in a fairly narrow range of$1,650–2,050 for the past two years. That’s a range of about 10%above and below the midpoint of $1,850. Starting from the high end ofthat range, gold traversed the entire range to the upside and beyondin just one month.

Now, any reference to “gold prices” is aninteresting one. If you treat gold as a commodity, then the price perounce measured in dollars is one way to think about price.

On the other hand, if you think of gold as money(as I do) then the dollar price is not really a price — it’s across-rate similar to euro/dollar (about $1.08 today) or dollar/yen(about 152 today). When analysts say the “price” of gold is$2,211 per ounce, I think of that data as showing the gold/dollarcross-rate = $2,211.

That’s useful because there are two sides to across-rate. While most analysts say that gold has rallied from $2,000to $2,211 per ounce, it is just as valid and perhaps more useful tosay that the dollar has crashed from 1/2,000 per ounce to 1/2,211 perounce.

In this analysis, gold is constant (by weight) andthe dollar gets stronger or weaker relative to gold. All of therecent market action points to a weaker dollar.

This mode of analysis also solves another marketriddle. Given huge U.S. budget deficits, unprecedented levels of U.S.national debt, slow growth, rising unemployment and persistentinflation, how is it possible that the dollar has been so “strong”lately?

The answer is that it’s only been strongrelative to the euro, yen, sterling and some other reserve currenciesand as measured by certain dollar indexes (DXY, Bloomberg, etc.)composed of baskets of currencies (but not gold).

But that’s often because those other currenciesare issued by countries with debt and growth problems even worse thanthe U.S.’ Those currencies dropping against the dollar have thelook and feel of a good old-fashioned currency war.

It’s only when you use gold as your metric thatthe real weakness in the dollar becomes apparent, as it should. Ineffect, certain currencies are weakening against each other but allcurrencies are weakening against gold.

Returning to the “higher gold price” frame,there are a number of reasons for this trend. The first factor issimple supply and demand. Mining output and recycled gold have beenabout flat for the past eight years running between 1,100 metrictonnes and 1,250 metric tonnes per year.

At the same time, central bank demand for gold hassurged from less than 100 metric tonnes in 2010 to 1,100 metrictonnes in 2022, a 1,000% increase in 12 years. Central bank golddemand remained strong in 2023 with 800 metric tonnes acquiredthrough Sept. 30, 2023. That puts central bank gold demand on trackfor a new record in 2023. There’s no sign of that demand slowing in2024.

Constant output with surging demand by centralbanks does not by itself explain the recent surge in gold prices, butit is a contributor. Importantly, continued strong demand by centralbanks puts a floor under gold prices. This sets up what we describeas an asymmetric trade where downside is limited but upside isopen-ended.

The second factor driving gold prices higher isthe need for hedging. This is not the same as inflation hedging. Itcovers a larger list of risks including geopolitical risk, risks ofescalation in the Ukraine and Gaza wars, Houthi efforts to close theRed Sea and Suez Canal, increasing risks of war with China and theintrinsic risk of a senile president of the United States.

As the list of risks grows longer and potentiallymore dangerous, the need for a hedging asset such as gold that doesnot rely on any nation-state for its value increases. I call gold theeverything hedge.

Finally, gold prices are being driven higher byU.S. threats to steal $300 billion in U.S. Treasury securities fromthe Russian Federation. Those assets were legally purchased by theCentral Bank of Russia as part of their reserve position.

The actual securities are held in custody indigital form at European banks, U.S. banks and the Brussels-basedEuroclear clearinghouse. Only about $20 billion of those Treasurysecurities are held by U.S. banks; the majority are held byEuroclear. Those assets were frozen by the United States at theoutbreak of the war in Ukraine.

Freezing assets means the Russians cannot collectinterest or sell or transfer the assets or pledge them as collateral.Asset freezes are used frequently by the U.S. including in the casesof Iran, Syria, Cuba, North Korea, Venezuela and other nations. Oftenthe assets are frozen for years but ultimately released to the owneras happened in the case of Iran after 2012.

Now the U.S. wants to go further and actuallyseize the assets, which may be viewed as outright theft underinternational law. The U.S. proposes to use the $300 billion tofinance the war in Ukraine. European entities have expressedconsiderable uncertainty about this plan but the U.S. has maintainedthe pressure and wants to complete the theft before the June and Julysummits of G7 leaders and NATO members.

If the U.S. steals these assets, Russia willlikely confiscate an equivalent amount of industrial and commercialassets located in Russia and owned by German, French, and Italianinterests among others.

The bottom line is that if U.S. Treasurysecurities are not a safe investment, then securities of Germany,Italy, France, the U.K. and Japan are no better. The only reserveasset free of this kind of digital theft is gold. Nations arebeginning to diversify into gold in order to insulate themselves fromdigital confiscation by the collective West.

Finally, there’s an interesting bit of mathhere, which I’ve explained in the past that shows each $100 perounce increment in the price of gold is a smaller percentage gainbecause the denominator is larger.

That makes each $100 milestone ($2,400, $2,500,$2,600) easier to reach than the one before. People don’treally notice this; they just focus on the dollar amount of thegains. But this explains how price rallies gather crazy momentum.

All of these trends — flat output, risingcentral bank demand, hedging, protection against digital confiscationand simple momentum — will continue. Based on those trends, onewould expect the gold price rally to continue as well.

The trend is gold’s friend.