How Currency Devaluation & Physical Demand are Driving The Gold Price

After two steep rallies in gold and silver from the end of February to mid-April and the beginning of May to May 21st, the gold and silver prices corrected to 6% and 10% respectively.  

However, based on the gold chart, it looks like the correction in the metals may be complete.

The chart above shows a 1-yr daily of gold through July 31st (front-month Comex futures basis) with the RSI at the bottom. Gold has been riding the 50 DMA (thin blue moving average line) higher since November 2023. In mid-February there was also a slight increase in the rate at which gold has been rising, the inflection point of which I marked with the blue arrow to show where the trend line steepened slightly.

The RSI has retreated from an overbought condition to a neutral reading. The chart for silver looks similar to the gold chart above though silver has fallen below its 50 dma. Offsetting that, the RSI has a slightly “oversold” reading. 

To learn more about the RSI as an analytical tool used in gold and silver trading, read this article here.

Fundamental Analysis Supportive of a Move Higher

The visually bullish chart and the potentially bullish technicals for gold and silver, the fundamentals supporting another big move higher in the metals continue to strengthen. First and foremost, of course, is the ongoing currency devaluation by Central Banks globally. Japan is a serial money-printer with artificially low interest rates. China has been injecting massive amounts of liquidity into its financial system and recently has begun cutting interest rates. This is why the Chinese populace, with encouragement from the Government, is loading up on all forms of gold and silver (coins, bars, jewellery). 

Preserving Purchasing Power with Gold Investment

The U.S. continues to devalue its currency, with the Fed engaged in “stealth QE”, negative real rates using a valid inflation index and the easiest financial conditions since just before the Fed began hiking rates. In addition, the Government continuously piles on Treasury debt, devaluing the dollar. Money raised from the issuance of debt behaves just like printed money until the debt is repaid.

Someone who believes that if they’ve been buying gold since 2000 and are yet to get rich from it, needs to remember that they may have more to show for their retained purchasing power of capital in gold. The dollar has lost 87.5% of its value versus gold since 2000 using $300 as the benchmark for the gold price. Currency devaluation may therefore be the most significant factor driving the price of gold. 

The amount of physical gold buying from the eastern hemisphere is the second most significant factor. This demand was given a big boost in India when the Government cut the import tax on gold from 15% to 6% on July 23rd. At $2400 gold, this effectively cuts the price paid by Indians by $216 per ounce. The recent run-up in the price as well as seasonal considerations put the brakes on Indian demand. This tax cut, however, will jump-start Indian demand as the country transitions into its seasonally strongest year for gold and silver buying. 

With currency devaluation and physical demand as the two biggest factors pushing gold and silver higher, there is also the haven appeal of gold, which is being stimulated by growing geopolitical instability globally as well as increasing political instability in the U.S. With all of these fundamental and technical factors at work, I would not be surprised if gold manages to hit $2,600 or higher by year-end, with silver trading into the high $30s.