I am firm in my conviction that the current market and political environment is quite similar to the third quarter of 2008.
During that time, the financial system was headed toward a meltdown and the price of gold was subject to manipulation by Western central banks prior to mass money printing, propitiously called “Quantitative Easing”.
The 2008 Precious Metals Bull Cycle
While the rest of the financial system headed lower at the end of October 2008, the precious metals sector took off in a torrid bull cycle.
The ensuing three years produced jaw-dropping investment returns. I believe that we are on the cusp of a similar move in the financial markets and the precious metals sector. The caveat is, I believe, an even worse implosion of dollar-based financial assets than in 2008.
Reevaluating the Case for Precious Metals
When examining the investment case for the precious metals sector, a primary concern might be the perception that gold and silver serve solely as wealth preservation assets and don’t offer a total rate of return investment opportunity.
However, this perspective is challenged by the fact that gold (and silver) prices are historically undervalued compared to financial assets like stocks and bonds. When considered in isolation, this positions the precious metals sector as an exceptionally valuable investment proposition.
Increased Eastern Hemisphere Gold Buying
The outwardly-termed major (and “minor”) Eastern hemisphere countries and their central banks have been accumulating physical gold at a record rate annually.
Aside from recognised gold-accumulating countries, Turkey, Singapore and Poland have also been buying large quantities of gold this year.
While increasing the percentage of gold in their currency reserves, the biggest foreign buyers of U.S. Treasuries in the past (China, Japan and Saudi Arabia) have been reducing their Treasury holdings and reserve dollars holdings.
The chart below shows the amount of Treasuries sold and gold purchased by official foreign entities (central bank primarily) between Q4 2014 and Q4 2022:
The majority of this buying and selling has occurred over the last few years, with a record amount of gold purchased in 2022 by foreign central banks (predominantly Eastern hemisphere/Asian central banks).
Aside from Japan, the BRICS bloc, which now includes Saudi Arabia, is working to advance a non-dollar trade settlement currency, challenging the dollar’s position as the world’s primary reserve currency. The East is clearly preparing for a world in which the reserve currency is not the U.S. dollar, which is highly bullish for the precious metals sector.
The rationale for investing in gold and silver as both a wealth preservation asset and an alpha-generating rate of return investment remains intact.
That leaves us to question why Western central banks and governments continue to suppress the price of gold so as not to signal that economic and financial policy implementation is headed toward catastrophic failure.
Based on the chart above, the manipulation perspective is confirmed by the market. The chart shows trading over a 24-hour trading period. When Eastern markets, like those in Asia, are open, there’s increased physical gold buying from central banks and regular investors.
When Western markets open, like those in London and New York, fewer investors are buying physical gold and silver. Instead, they trade in ‘paper’ versions of the metals, which drive the price lower.
The chart shows the actual prices people paid when they bought real gold bars. When the Eastern markets, like those in Asia, trade gold, the prices are more straightforward, but when Western markets, such as London and New York, take over, they often trade with complex computer systems and opaque standards of accountability.
Remember, though, that markets can’t be influenced forever. Over time, “water finds its own level”. Think back to 2008 when the gold market saw a huge surge. The market feels a lot like it did back then and I believe the precious metals sector is percolating for a move that will end up being much bigger, percentage-wise, than the move in 2008.
Market trading action and the wider economic environment are similar to 2008. I’m certain that the credit market/banking system disruption is developing, like then.
Just like the collapse of Bear Stearns was the early warning sign that big problems in the credit market were unfolding, the collapse of the three big regional banks earlier this year is the market’s signal that bigger problems lie ahead.
Political issues, worldwide and in the U.S., create prime conditions for a bull market in the precious metals sector that could dwarf any that came before.
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.
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