Posted 28th Mart 2024

Gold Breaks Out Amid Stock Bubble That Looks All Too Familiar

The bull move and breakout by gold (and soon silver) has been completely ignored by the mainstream financial media, with one notable exception. A columnist recently published an article titled: “Gold is no longer a good hedge against bad times” filled with assertions that will be disproven throughout this article.

In particular, he labels gold “a boring commodity” and states that China buys gold for “commodity uses.”  Other than for the specialised use of gold in the manufacture of electronics, there are few – if any – “commodity uses” for gold.

Gold is no longer used in dentistry for cavity fillings because much less costly substitutes have been developed. The stock market might also be considered boring because, since the beginning of the secular precious metals bull market in 2001, gold has outperformed the S&P 500 up until the tail-end of the stock bubble inflated by the Fed in the spring of 2020:

Mainstream Media Misconceptions

The author also states that gold is just “another cyclical economic asset” that rises and falls with economic cycles – that the price increases or decreases with supply and demand. How can this be when almost all of the gold ever mined throughout history exists in some form that sits above ground in safekeeping storage or as valuable gold jewellery? In that sense, the supply of gold increases with every ounce mined. This is a large supply of gold that grows larger, daily. Yet, the price is up 61-fold since Nixon closed the gold window in 1971, in defiance of the author’s supply/demand/price thesis.

On gold price 

The article asserts that “gold prices are no longer followed so closely or seen as useful harbingers of social and economic collapse.” In fact, the gold price is closely watched by many, including the Fed – with acute interest – even though most Americans don’t pay attention to the gold and silver prices. Beyond the US, owning gold and silver in eastern nations is much more commonplace, where the majority of the population follows gold and silver prices. 

On gold’s societal role 

As for gold maintaining its role as a warning beacon of social and economic troubles, gold is breaking out because it “smells” the financial system instability of the United States, which is host to the world’s reserve currency.

The rising volatility of the stock market, particularly the volatility of the extraordinarily overvalued tech stocks with high P/E ratios and a limited history of demonstrative profitability, reflects the stock bubble condition of the U.S. stock market and the likely eventual and resultant stock and credit market crash. The rug could well be pulled out from under the U.S. stock and credit markets this year. 

The ongoing and increasing distress in commercial real estate debt could be existential for several large regional banks. The problem is not confined to the regional banks as advertised by mainstream media. It affects the big Wall Street Banks to the extent that they have off-balance-sheet OTC derivatives exposure – and that “extent” is extensive. The recent price action in gold is signalling this problem. It also reflects that, at some point, the Fed will be forced to start printing copious amounts of money or face a collapsed financial system.

US Treasuries 

The CRE problem is just one among several ticking time bombs. The amount of U.S. Treasury debt outstanding, and the quantity that will be issued for the foreseeable future, has gone parabolic. Interest expense alone runs over a trillion dollars on an annualised basis. The majority of households are increasingly squeezed financially by price inflation and a record level of household debt. Corporate debt defaults are at the highest level since 2009 (S&P Global Ratings Credit Research & Insight). 

Based on the recent tenor of the Fed, it looks like its “hawkish” monetary policy is winding down. Despite the ongoing QT program and the Fed’s rhetoric, the Monetary Base has increased 9.8% since March 2023. The Monetary Base (bank reserves + coin/currency in circulation), as opposed to M1 or M2, is the most powerful form of money because it is readily accessible. This, along with rising financial and economic distress as well as heightened conflict overseas, is why the price of gold is breaking out. 

These factors together may force the Fed to flood the banking system with liquidity and further devalue the dollar relative to gold. Then again, the price of gold in October 2022, which is when the latest move higher began. It is likely the gold (and silver) price will soon surge higher as it becomes more apparent that the U.S. financial system is at high risk of collapse unless or until the Fed re-opens the liquidity floodgates. 

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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