Financial Conditions Supporting Higher Gold

In the last nine days, gold has moved up to over $100. This $100 move in gold is around 6%. Platinum moved up 10%, palladium over 13%, and silver rose 16% over the same few days. What gives? Today we will discuss the conditions surrounding these moves and why we are likely to see these trends continue at a slower pace. As we monitor these moves in precious metals, it is essential to remember there will still be down days even during the most bullish of markets. Up-days during a bear market (such as with stocks) can be good times to sell. Down days during a bull market (such as with precious metals) can be good times to buy. This is not advice for your personal financial situation but common principles that might prove helpful when discussing with your advisor.

The fuel and energy situation is both convoluted and complicated. While some of the pipelines have been blown up and rendered useless between Russia and Europe, other pipelines remain open and flowing. Many nations across Europe have nearly topped off their storage capacity and seen gas and electricity costs drop by half over the last couple of months. As discussed during Metals Minute in September, the newly elected Italian government seemed more likely to work out a solution to keep Russian gas flowing. As of today, they have done it.  For the sake of the Western world, including the United States, I hope this trend of energy trade continues and expands. But OPEC nations have announced a plan to reduce oil production, pushing fuel costs higher worldwide. Higher energy costs lead to higher precious metals prices.

The issue with Russian energy affects not only Europe but the United States and China as well. Earlier this year, the United States went from importing record amounts of Russian oil and petroleum products to exporting American diesel and petroleum products to help ease the high costs throughout Europe. This of course, reduced supplies available to American trucks and drivers, and was partially responsible for record fuel prices earlier this year. Prices temporarily came back down as oil inventories in the Strategic Petroleum Reserve were drained to the lowest level since 1982. Fuel prices are trending back higher, and Americans are being warned to expect higher gas and electricity prices this winter as we continue to export American LNG to Europe to help replace lost Russian gas. Meanwhile China is enjoying an energy bonanza, with excess Russian energy available to sell to Europe - sanction free.

Americans are struggling with inflation, even in months when government officials say there is none. After prices have risen, the pain will be felt until either income rise higher than the prices or prices drop to previous levels. 60% of Americans surveyed surveyed say they have had credit card debt for at least a year. Savings rates are down, and credit card balances are up, as families try to pay for the same lifestyles they had last year. Delinquency rates for credit card debts are beginning to inch up towards 3%, with some economists projecting rates above 7% - worse than the height of the Great Financial Crisis. The Federal Reserve is following a plan to reduce inflation by slowing down the economy, and recessionary signs are becoming more pronounced daily. These conditions and rising interest rates cause stocks and bonds to struggle and lead to increased demand for physical gold and silver.

Historically, the FED has moved the Federal Funds Rate higher than Core CPI during challenging inflation. Before declaring victory over inflation in 1980, for example, they moved rates to 18% when CPI was 14%. In 1984, they moved rates to 12% when CPI was 5%. In the 1990s, they moved rates to 10% to lower a CPI of 6%. In 2006, they raised rates to 5% when Core CPI was 3%, and so on. Today, Core CPI is 6.41%, while the Federal Funds Rate is half that (3.00-3.25% target). This indicates that more work remains before inflation can be controlled here in the United States. With current debt levels exceeding $31 trillion, it becomes more expensive than at anytime in history for the FED to raise interest rates. The fiscal and monetary uncertainty surrounding this dilemma seems set to continue and prompts many to consider the security of owning precious metals.

Many of the economic conditions we see today were not created with the conflict between Russia and Ukraine, but weaknesses have been highlighted and brought to the forefront quicker than perhaps they would have otherwise. The conflict continues to expand, with Russia now vowing to defend four provinces newly added to Russian territory that were considered part of Ukraine a couple of weeks ago. They now view an attack in those regions the same as an attack against Russia itself, and we can expect more severe resistance from both sides as the conflict intensifies. We also have saber-rattling in Asia, with North Korea, South Korea, and the United States launching missiles in the region. So far the only damage has been from a  South Korean missile malfunction in South Korea. War-related sanctions are affecting energy prices, fertilizer prices, and food prices worldwide. The resulting support for silver and gold prices seems set to continue.

Anytime we talk about metals prices, especially over the last couple of years, we have to distinguish between the paper “spot” price, and the price to receive physical delivery of gold, silver, platinum, or palladium. Our article discussing this was picked up by the Gold Anti Trust Action (GATA) site here. With central banks worldwide moving towards issuing Central Bank Digital Currencies (CBDC), physical precious metals offer a rare respite of financial privacy and security. While investment banks promote estimates of lower spot gold prices, the demand and price paid for physical gold has moved higher. Central banks worldwide have been net buyers of physical gold, and gold-related investments have ballooned on bank balance sheets (see chart). While often appearing to talk down gold in financial media, behind the scenes, they are buying hand over fist. Sometimes it is more advantageous to buy what they buy than to buy what they say.