Here is the substack version with charts and graphs to make the point even more vivid.
In case you've been living under a rock, gold prices have been on fire, jumping 20% in just the past 2 months. That takes gold to a near doubling in price since pre-pandemic when it was meandering along at just $1500. Yesterday it closed at $2,400, so if you don't own any gold it might make sense to get some in case it catches on; plus, Peter Schiff can now buy nice shirts The soaring price is a new experience for many gold investors, who are long accustomed to taking the slow and steady stairs while the stocks take the elevator. Granted they take it up, they take it down, but here we are with stocks flat over the past two months and gold is up 20%. In fact, at this point, gold has now matched the S&P 500 throughout the pandemic and, of course, it runs circles around the US dollar which is melting like ice cream in the sun thanks to federal spending a very obliging fed that has knocked a fifth off the dollar's buying power since the pandemic.
So what's driving the gold rally? Three things: 1) inflation, Central Bank buying, and geopolitical tensions, including Russian sanctions with a guest appearance by some large mystery buyer rumored to be backed by the Chinese government. Taking each in turn, we are coming up on 6 months now of rising inflation as the "transitory inflation" narrative turns out to have been a head fake. I also mentioned recently how central banks are now openly admitting that they're preparing for some major financial catastrophe. A senior Dutch Central Banker said the quiet part out loud a couple of months ago, and presumably, the crisis they have in mind is sovereign debt and the bank collapses that tend to come along for the ride. And then of course the geopolitical tensions, above all Russia and China. Now Russia itself is not very important; it really is Mexico with nukes with a fairly inconsequential economy. The problem is the U.S. sanctions, particularly the effort to seize the assets of the Russian Central Bank. Those have put countries around the world on notice that their dollars are not safe, that they can be seized anytime you look at Joe Biden funny. That sends those banks to the next best asset, including gold. Now gold is a pretty small market. All the gold in the world is worth about $16 trillion, while all the government debt is worth closer to $100 trillion, so that means if money is moving out of government debt it can move the needle a lot on gold.
At this point, Wall Street is falling over each other trying to up their gold targets. So Goldman is saying $2,700; Bank of America says $3,000 by next year; UBS is saying $4,000 in the next "two to three years." If that happens, we'll be looking at a near tripling of gold prices which would be the biggest rally since the 2008 crisis. Before that, you'd have to go back to the 1970s but given inflation and sovereign debt are both getting worse and actually speeding up and given that wars and geopolitical tensions appear to be cranking out assembly-line style, these numbers may actually end up being conservative for gold prices. Fundamentally, gold is insurance, and when the world is as badly run as it is today it's the last line of defense, and investors are finally realizing that.
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