Why are gold and silver soaring?

Key Takeaways

• The current precious metals bullish rally is being driven by the US dollar’s debt crisis
• Silver is expected to outperform gold in the short term
• A future retracement is possible, even likely 

What is causing the latest move higher in the gold price and silver prices? There are several facets to this and it’s certainly not as simplistic as “rate-cut expectations.”

A Dollar Crisis Unfolding

While major countries have contributed to the flood of money and debt that has been supplied globally, there may be a dollar crisis unfolding driven by the fact that Treasury debt issuance and debt service costs are going parabolic. This in turn is leading to a growing loss of confidence in the dollar by many of the US’ trading partners. In addition, and likely in response to an expected dollar crisis, eastern hemisphere central banks are accumulating an unprecedented quantity of physical gold on an ongoing basis.

For those close to the situation, the supply of gold available to deliver to the eastern buyers in London is tight. There may be a short-squeeze component to the rally in gold in the physical market. In other words, there’s a good chance the physical market is leading the paper market by the nose right now.

Price inflation on the rise again

The move in gold reflects a combination of factors including the fact that price inflation appears to be picking back up, the US banks have big problems with “bad debt” and the US is becoming increasingly unstable. If the stock bubble pops it will inflict major damage on the US economic and financial system.

Also, consider that China is and has been accumulating a massive amount of physical gold. We can’t track the true quantity because China intentionally does not report the gold that flows into the country through Beijing. It opened Beijing in 2014 for gold importation for the specific purpose of keeping the PBoC’s gold “purchases discreet.” 

Physical gold inflows into China 

On April 21, 2014, the South China Morning Post article announced the opening of Beijing for gold importation. The by-line discloses the PBoC’s intent is to keep its gold purchases “discreet.”

Many analysts tracking the quantity of gold flowing into China are not aware that unreported gold is imported through Beijing. This means that published reports of the amount of gold imported by China, particularly the World Council’s numbers, are understated. Moreover, it is impossible to know the extent to which published reports are too low.  Needless to say, the PBoC is accumulating considerably more gold than is widely understood.

China requires physical delivery of the gold that it buys which involves the removal of it from London vaults and shipping to China. In effect, China may well be cleaning out the deliverable gold from London vaults, and much of that gold sitting in those vaults has been hypothecated. This means the bullion banks have to scramble to obtain bars with clear title that can be shipped to China.

Gold price moving higher 

This may explain why the price of gold over the last few weeks has been consistently moving higher into the London a.m. price fix when, typically, the price declines going into the fix. This may be the “scrambling” of the bullion banks to obtain bars that can be sent to China and to other eastern Central Banks that continue to accumulate gold. If this is the case, supply and demand in the physical market may be dictating the price of gold rather than LBMA forwards and COMEX futures.

Additionally, gold may be benefiting from the re-emergence of rising price inflation. Even though the Fed has only hinted at possible rate cuts, it has unleashed liquidity into the banking system. The Monetary Base (bank reserves + currency/coin in circulation) is up 10% since March 2023. In addition, the M1 and M2 money supply measures continue to persist just below their all-time highs. This continued devaluation of the dollar is manifesting as a rising gold price.

The flight to safety

The prices of gold and silver may be higher as a result of the US market instability of the U.S. stock and credit markets. Since 2008 there’s been a staggering amount of money printed and an even more staggering amount of credit issued at all levels of the system (Government, corporate, household), this flood of money and leverage may contribute to the largest stock bubble in U.S. history. When the bubble eventually corrects itself, this will devastate the U.S. economically, financially and socially. The move in gold may also be attributable to a “flight to safety” component in addition to the other factors.