Bloomberg says gold is rallying, but I see something deeper: Not emotion, but acceptance. As central banks continue their gold buying spree and silver nears $50, we may be witnessing not a rally – but a global repricing of risk itself…
By Peter Reagan
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- Bloomberg asks how long gold’s rally can last…
- …and I try to unpack that convoluted question
- Central banks may set another gold-buying record this year
- Silver passes $48: Are you positioned for a breakout?
A closer look at the “gold rally”
The normally gold-conservative Bloomberg’s The Forecast column by Frick and Xie assessed the rally in the price of gold in their October 5th installment. After pointing out that we’ve seen the price double in less than two years, they soft-capped gold’s price at $4,000, and broadly covered gold’s tailwinds.
I’ll go over those points, but first I want to touch upon the idea of gold “rallying” to begin with.
That is what it looks like, with Bloomberg noting we’re dealing with high inflation, a cycle of rate cuts, high government spending and concerns about the Federal Reserve’s independence. Easing us into economics, Frick and Xie explain gold rises when the U.S. dollar falls because it’s priced in U.S. dollars (like other commodities) and, uniquely, gold competes with cash as a store of value.
And this is where we meet my opening question head-on: Is gold rallying to begin with, or are we seeing a repricing and an upside correction? Remember that, for the longest time, gold price was lagging in dollars and posting all-time highs in all the other major currencies, and absolutely crushing the Japanese yen in the process.
When we say an asset is rallying, that seems to suggest the usual boom and bust cycles. Speculators chasing momentum – prices going up because they went up.
But I’m not really convinced that’s what’s happening with gold today, given the economic backdrop.
Frick and Xie say, like most others, that gold’s rally began in October 2023 at about $1,850. But that is one perspective, and not necessarily an accurate one. I’d argue that gold has been “rallying” for a minimum of five and a half years, breaking out to $2,000 in August 2020 amid pandemic panic and the subsequent lockdowns.
The problem with that is that this historic black swan event buried a quiet run in gold that began way back in 2016, when gold reversed course from the post-2011 lows.
Gold’s 2011 peak came not from 2008 as a start, but rather 2000, when gold began climbing from $280 thereabouts and onwards to $1,910.
By the time gold bottomed out to $1,100 in 2015, it was still 4x-5x the rally’s starting price.
That brings us to present day. Perhaps we shouldn’t so much ask how high gold can go, but rather how low it could go? Because the real lesson is that gold doesn’t rise because of headlines – it rises when confidence in promises, like the promise of currency, erodes.
Based on the previous run, taking $1,100 as the bottom, the end of this gold “rally” should leave gold with a new “minimum price” of $4,000 or so. That analysis is based on the 2000s price moves, by the way. It’s not adjusted for the massive increases in both sovereign debt and currency supplies over the last 25 years. History suggests that gold’s “rally” will continue until it reaches 7x its starting price, as in 2000-2011.
Extrapolating, that means this rally won’t conclude until gold hits $6,000-$7,000 (however long that takes).
Sound excessive? Would you believe, that’s the kind of forecasts I keep running into week after week?
Where is all the gold going? Your friendly neighborhood central bank vault
When it was announced in 2022 that central banks bought 1,136 tons of gold, it was the biggest news in a long time. I know, I covered it extensively. The description of 2022 as “the biggest year for central bank gold buying since 1967” was later shifted to 1950, making it the highest figure since records have been kept.
Now, TradingView informs us that central banks have, as of September, already bought 1,650 tons this year. I can’t verify that figure based on authoritative data (and there’s no data cited in support of the claim), so between you and me I think that number is way too high. I would not be surprised if we see a fourth year in a row of 1,000+ ton gold buying from central banks, but I seriously doubt that 2025 will shatter the 2022 record by such a huge margin.
However, we do need to consider a few complicating factors. China’s habit of obscuring most of its gold operations and acquisitions, for one thing. That issue very much applies to Russia as well, and who knows how many other buyers, big and small.
We’ve all heard the phrases. Follow the money, and so on.
In this case, it’s a funny thing where the money trail is doubly revealing.
You see, not only is it pointing to central banks as the boogeyman, but it also tells us that they view gold as money.
Which is confusing. From a modern economic standpoint, it’s considered irrational for central banks to buy gold, let alone by the ton. Gold stockpiles on a national level were necessary when gold was coined into circulating money. The modern monetary system doesn’t function on a “gold note” system where banknotes are redeemable for gold, like it used to.
Today, the unbacked banknote itself is supposedly money. That’s what central banks tell us.
So why are central banks worldwide scrounging up thousands of tons of gold every year, even as they print record numbers of banknotes?
Since the start of the whole BRICS drama, speculation about central bankers’ planned next moves has run rampant. The news that they’re actively competing with their citizens for gold bullion begs the question, “What’s next?”
I can’t answer that question. But could it be that they’re content to just do nothing more than accumulating real value, leaving citizens to swap increasingly-worthless paper?
Be that as it may, it’s an increasingly bad look that our official gold reserve vaults are both unaudited and rumored to be empty – while the rest of the world seems to be posturing with gold. Showing off their economic strength and national wealth.
Already, the utility and the value of the U.S. dollar is under question. If we no longer have the world’s largest gold hoard to back it up, what do we have instead?
Silver is still surging, and we’re reaching that crossroads we’ve discussed
Via Investing News Network, silver hit $48 in a recent trading session. Looks like silver will match its all-time high set way back in 1980 at $49.95 per ounce.
Now, new readers might be confused here, because silver has the weirdest price history of all precious metals. That article mentions 2011, but silver didn’t actually set an all-time high then. Instead it stopped right around – you guessed it, $48.
The 1980 record price came amid a massive speculative attack on the silver market, when two billionaires attempted the same sort of #silversqueeze we’ve seen a couple of times since the pandemic lockdowns. Silver’s price rose over 430% in 1979, then went on to fall 50% over the next two years.
Fast-forward to modern times. Silver hitting $48 in 2011 made sense. This surge returned the gold-to-silver ratio to its historical range of about 55:1. Usually, we see gold’s price rise first, then silver’s price explode “catching up” to gold’s, restoring the typical gold-to-silver ratio. I’ve been saying silver is a bargain since late last year – since an ounce of gold would get you anywhere from 90-110 ounces of gold.
Silver’s finally catching up. And rising to $48 or even $50 now doesn’t make sense, as that’s still a gold/silver ratio over 80. Imbalances like that are extremely uncommon – and history tells us that silver’s price will most likely explode to the upside. Back-of-the-envelope math gives me a $72/oz. silver price (based on gold at $4,000).
There are really only two questions in the silver market now.
The first is whether silver will run past $50. If it does, we should probably expect double-digit gains based on both momentum and investor psychology. Because $50 represents an important level (people love round numbers).
I’ve yet to come across a single compelling argument explaining why silver is priced this low relative to gold, to commodities in general and frankly to other financial assets.
I mean, zero compelling arguments! (Even deeply flawed and unconvincing ones.) Instead, silver’s posting yet another 200 million ounce annual deficit while the price barely moves. It’s not hard to see why nobody wants to take the “silver’s valuations make sense” side of the argument, because they don’t.
This brings me to the second question in the silver market, one that every precious metals investor is asking themselves: “Am I positioned well enough in silver?”
Because if silver does explode to $100 or higher, a massive physical squeeze can be expected. Yes, people will come out of the woodwork to sell their heirloom sterling silverware, but it takes a long time for that metal to be refined, recast and sold as silver bullion.
Today, investors are essentially competing with manufacturers. Many pundits say manufacturers have no problem bidding the silver price up significantly – because most just don’t use a lot of silver, although silver is critical to manufacturing.
So the resolution will have to do with silver price, but also supply. Because the silver market is significantly smaller than the gold market, and silver is not in a position to handle a multi-year supply glut.
Lots can happen here. For now, I urge investors to watch the $50 level and be especially attuned to any significant breaches of it. A breakout above $50 will very likely have lots of momentum.
But you never know. As the old saw goes, Markets can stay irrational longer than you can stay solvent.
If it’s one thing I’ve learned over my years of watching precious metals prices, it’s that they can always find new ways to surprise me.