Gold News

A New Gold Standard: Orderly or Chaotic?

James Rickards — Tue, 07 Jan 2020 22:21:07 GMT

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Over the past century, monetary systems change about every 30 to 40 years on average. Before 1914, the global monetary system was based on the classical gold standard.

Then in 1945, a new monetary system emerged at Bretton Woods. I was at Bretton Woods this past summer to commemorate its 75th anniversary.

Under that system, the dollar became the global reserve currency, linked to gold at $35 per ounce. In 1971 Nixon ended the direct convertibility of the dollar to gold. For the first time, the monetary system had no gold backing.

Today, the existing monetary system is nearly 50 years old, so the world is long overdue for a change. Gold should once again play a leading role.

I’ve written and spoken publicly for years about the prospects for a new gold standard. My analysis is straightforward.

International monetary figures have a choice. They can reintroduce gold into the monetary system either on a strict or loose basis (such as a “reference price” in monetary policy decision making).

This can be done as the result of a new monetary conference, a la Bretton Woods. It could be organized by some convening power, probably the U.S. working with China.

Or they can ignore the problem, let a debt crisis materialize (that will play out in interest rates and foreign-exchange markets) and watch gold soar to $14,000 per ounce or higher, not because they wanted it to but because the system is out of control.

I’ve also said that the former course (a conference) is more desirable, but the latter course (chaos) is more likely. A monetary conference would be far preferable. Why not avoid the train wreck rather than clear up the wreckage? But will probably be ignored until it’s too late. Either way, the price of gold soars.

The same force that made the dollar the world’s reserve currency is working to dethrone it. It was at Bretton Woods that the dollar was officially designated the world’s leading reserve currency — a position that it still holds today.

Under the Bretton Woods system, all major currencies were pegged to the dollar at a fixed exchange rate. The dollar itself was pegged to gold at the rate of $35 per ounce. Indirectly, the other currencies had a fixed gold value because of their peg to the dollar.

Other currencies could devalue against the dollar, and therefore against gold, if they received permission from the International Monetary Fund (IMF). However, the dollar could not devalue, at least in theory. It was the keystone of the entire system — intended to be permanently anchored to gold.

From 1950–1970 the Bretton Woods system worked fairly well. Trading partners of the U.S. who earned dollars could cash those dollars into the U.S. Treasury and be paid in gold at the fixed rate.

Trading partners of the U.S. who earned dollars could cash those dollars into the U.S. Treasury and be paid in gold at the fixed rate.

In 1950, the U.S. had about 20,000 tons of gold. By 1970, that amount had been reduced to about 9,000 tons. The 11,000-ton decline went to U.S. trading partners, primarily Germany, France and Italy, who earned dollars and cashed them in for gold.

The U.K. pound sterling had previously held the dominant reserve currency role starting in 1816, following the end of the Napoleonic Wars and the official adoption of the gold standard by the U.K. Many observers assume the 1944 Bretton Woods conference was the moment the U.S. dollar replaced sterling as the world’s leading reserve currency.

In fact, that replacement of sterling by the dollar as the world’s leading reserve currency was a process that took 30 years, from 1914 to 1944.

In fact, the period from 1919–1939 was really one in which the world had two major reserve currencies — dollars and sterling — operating side by side.

Finally, in 1939, England suspended gold shipments in order to fight the Second World War and the role of sterling as a reliable store of value was greatly diminished. The 1944 Bretton Woods conference was merely recognition of a process of dollar reserve dominance that had started in 1914.

The significance of the process by which the dollar replaced sterling over a 30-year period has huge implications for you today. Slippage in the dollar’s role as the leading global reserve currency is not necessarily something that would happen overnight, but is more likely to be a slow, steady process.

Signs of this are already visible. In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.

It is equally obvious that a major creditor nation is emerging to challenge the U.S. today just as the U.S. emerged to challenge the U.K. in 1914. That power is China. The U.S. had massive gold inflows from 1914-1944. China has been experiencing massive gold inflows in recent years.

Gold reserves at the People’s Bank of China (PBOC) increased to 1948.31 tonnes in the fourth quarter of 2019. For comparison, it held 1,658 tonnes in June, 2015.

But China has acquired thousands of metric tonnes since without reporting these acquisitions to the IMF or World Gold Council.

Based on available data on imports and the output of Chinese mines, actual Chinese government and private gold holdings are likely much higher. It’s hard to pinpoint because China operates through secret channels and does not officially report its gold holdings except at rare intervals.

China’s gold acquisition is not the result of a formal gold standard, but is happening by stealth acquisitions on the market. They’re using intelligence and military assets, covert operations and market manipulation. But the result is the same. Gold’s been flowing to China in recent years, just as gold flowed to the U.S. before Bretton Woods.

China is not alone in its efforts to achieve creditor status and to acquire gold. Russia has greatly increased its gold reserves over the past several years and has little external debt. The move to accumulate gold in Russia is no secret, and as Putin advisor, Sergey Glazyev told Russian Insider has said, “The ruble is the most gold-backed currency in the world.”

Iran has also imported massive amounts of gold, mostly through Turkey and Dubai, although no one knows the exact amount, because Iranian gold imports are a state secret.

Other countries, including BRICS members Brazil, India and South Africa, have joined Russia and China in their desire to break free of U.S. dollar dominance.

Sterling faced a single rival in 1914, the U.S. dollar. Today, the dollar faces a host of rivals. The decline of the dollar as a reserve currency started in 2000 with the advent of the euro and accelerated in 2010 with the beginning of a new currency war.

The dollar collapse has already begun and the need for a new monetary order will need to emerge. The question is whether it will be an orderly process resulting from a new monetary conference, or a chaotic one.

Unfortunately, it’ll probably be chaotic. Don’t count on the elites to act in time.

Regards,

Jim Rickards
for The Daily Reckoning

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Rickards: Here’s Where Gold Will Be in 2026

James Rickards — Tue, 07 Jan 2020 22:18:42 GMT

This post Rickards: Here’s Where Gold Will Be in 2026 appeared first on Daily Reckoning.

Dear Reader,

Gold spiked after last Friday’s drone strike that took out a top Iranian military official and is trading at seven-year highs.

Yes, the news was dramatic and made a major impact. But geopolitics is just one factor driving gold. Even without the latest geopolitical tensions, gold is poised for a historic run.

The first two major gold bull markets were 1971–80 and 1999–2011. Today, gold is in the early stages of its third bull market in 50 years.

If we simply average the performance of the past two bull markets and extend the new bull market on that basis, we would expect to see prices peak at $14,000 per ounce by 2026.

What’s driving the new gold bull market?

From both long-term and short-term perspectives, there are three principal drivers: geopolitics, supply and demand and Fed interest rate policy (the dollar price of gold is just the inverse of dollar strength. A strong dollar = a lower dollar price of gold, and a weak dollar = a higher dollar price of gold. Fed rate policy determines if the dollar is strong or weak).

The first two factors have been driving the price of gold higher since 2015 and will continue to do so. Geopolitical hot spots like Iran, Korea, Crimea, Venezuela, China and Syria remain unresolved. Some are getting worse.

Each flare-up drives a flight to safety that boosts gold along with Treasury notes, as the latest incident shows.

The supply/demand situation remains favorable with Russia and China buying over 50 tons per month to build up their reserves while global mining output has been flat for at least five years.

The third factor, Fed policy, is the hardest to forecast and the most powerful on a day-to-day basis.

But there’s little chance that the Fed will be raising rates anytime soon. It’s much more likely to cut rates as the U.S. economy faces strong headwinds, especially from rising debt levels. Debt is growing faster than the economy.

Debt is now at the highest levels since World War II. We’re nearly in the same position on a relative basis as we were in 1945.

Because of the natural deflationary state of the world and the high debt-to-GDP ratio, growth has been snuffed out.

And based on Congressional Budget Office (CBO) projections — which I think are conservative — the debt-to-GDP ratio is going to keep going up.

There is no way out except inflation.

Add it all up and the environment is highly favorable for gold. But if you want evidence that owning gold is probably the best way to guard your wealth, just look at the “smart money.”

I’m sure you’ve seen plenty of billionaire hedge fund managers on business TV or streaming live from Davos. They like to discuss their investments in Apple, Amazon, Treasury notes and other stocks and bonds.

They love to “talk their book” in the hope that other investors will piggyback on their trades, run up the price and produce more profits for them.

What they almost never discuss in public is gold. After all, why have gold when stocks and bonds are so wonderful?

Well, I worked on Wall Street and in the hedge fund industry for decades. I also lived among the players in New York and Greenwich, Connecticut, at the same time. I’ve met the top hedge fund gurus in private settings. And here’s the thing:

I’ve never met one of them who does not have a large hoard of physical gold stored safely in a nonbank vault. Not one.

Of course, they won’t say so on TV because they don’t want to spook retail investors into dumping stocks and bonds. But watch what they do, not what they say.

If gold bullion is the go-to asset for billionaires, why don’t small investors have at least a 10% allocation to gold and silver bullion just in case?

Some do, but most don’t. They’ll find out the hard way what individuals have learned over centuries and millennia. Gold preserves wealth; paper assets do not.

Below, I show you why a global monetary reset is coming, with gold at its center. It can either be an orderly process — or a chaotic one.

Which will it likely be? Read on.

Regards,

Jim Rickards
for The Daily Reckoning

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Not All That Glitters is Gold

Nilus Mattive — Sat, 07 Dec 2019 17:00:44 GMT

This post Not All That Glitters is Gold appeared first on Daily Reckoning.

Dear Rich Lifer,

Are diamonds the biggest scam in history?

Before the 19th century, diamonds were scarce. It wasn’t until the discovery of huge diamond mines in South Africa in the late 1800s that diamonds flooded the market.

Except they never did…

For most of the twentieth century, the diamond market was entirely controlled by one company: De Beers.

The Diamond’s History

De Beers manipulated supply, signed agreements with global suppliers to control distribution, and set prices. In addition to having total control over the price and supply of diamonds, De Beers also found a way to manipulate market demand.

In the late 1930s, De Beers hired ad agency N. W. Ayer to come up with an advertising campaign to help sell more diamonds.

At the time, Americans considered diamonds to be a luxury reserved only for the super wealthy. If De Beers was to sell more diamonds, it needed to give consumers at different income levels an excuse to buy.

The concept of an engagement ring had existed since medieval times, but it had never been widely adopted. And before World War II, only 10% of engagement rings contained diamonds.

Because diamonds are a naturally resilient stone, N. W. Ayer decided to portray a diamond as something eternal. And what could be more eternal than love and marriage?

According to the New York Times, N.W. Ayer’s game plan was to “create a situation where almost every person pledging marriage feels compelled to acquire a diamond engagement ring.”

For the first half of the twentieth century, De Beers ran ads promoting this new narrative. The ads always featured an educational tip called, “How to Buy a Diamond.” The instructions said: “Ask about color, clarity and cutting, for these determine a diamond’s quality, contribute to its beauty and value. Choose a fine stone, and you’ll always be proud of it, no matter what its size.”

In four years between 1938 and 1941, they reported a 55% increase in U.S. diamond sales. The next phase in the marketing plan was to convince Americans that marriages without diamonds were incomplete.

This birthed the slogan, “A Diamond Is Forever.” These four words completely changed the way Americans perceived diamonds and AdAge even named it the #1 slogan of the century in 1999.

The slogan was exactly what De Beers needed. It reinforced the fact that a marriage should last forever and it discouraged people from reselling their diamonds.

If a mass re-selling happened, it would have disrupted the market and revealed the alarmingly low intrinsic value of the rocks.

I hate to say it, but diamonds are crap. And even though you know the truth now, it doesn’t change the fact that we live in a society that buys into this narrative.

Now you could boycott buying diamonds altogether but I doubt your wife or girlfriend would like that very much.

So, what should you do?

If diamonds are on your buy list in the next couple months, might I suggest a few tips to save you some cash.

Tip 1 – Never Buy Diamonds from Chain Jewellers

Major jewellers like Kay, Zales, Jared, Tiffany’s, etc. have inflated prices and they’re hard to negotiate with.

The harsh truth is as soon as you leave the jeweller, a diamond loses over 50% of its value. So you need to make sure you’re getting the absolute lowest price possible and you won’t find it at major chains.

Tip 2 – Shop Independent Jewellers or Online

You’ll find the best deals on engagement rings and diamonds at independent jewellers or diamond wholesalers. If you happen to live in New York, you have a lot of options for wholesales — take advantage.

The good thing about independent jewellers and wholesalers is you can typically negotiate on price. You’ll also be more likely to find something unique versus the major chains.

If you want to get the absolute lowest price on a diamond ring, try shopping online. Blue Nile and James Allen are two popular and reputable sites. You choose the price, size, and quality specifications with dozens of setting options.

You can expect to save nearly half compared to rings in major retail stores when you shop independent or online. Plus most online stores offer you free shipping and free returns.

Although diamonds are one of the biggest scams in history, it’s fair to assume you’ll still end up having to break down to buy some now and then. Just know you don’t have to pay full price ever.

To a richer life,

Nilus Mattive

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A Golden Opportunity for a Scam

Nilus Mattive — Sat, 09 Nov 2019 17:00:29 GMT

This post A Golden Opportunity for a Scam appeared first on Daily Reckoning.

Dear Rich Lifer,

If a rising tide floats all boats, what do rising gold prices get you?

Con artists…a lot of them!

With talk of a looming recession, the price of gold has risen to a level we haven’t seen in over five years.

And with climbing gold prices, we’re seeing more and more con artists crawl out of the woodwork.

A U.S. Senate Special Committee on Aging report found that over 10,000 Americans have been the victims of precious metal cons, with losses amounting to $300 million.

The stories are tragic, with some couples losing their entire life savings to the scams.

Con artists will do anything to get your money. From ads claiming gold prices below market value, to bait-and-switch tactics, and overcharging.

But have you ever wondered why gold attracts so many bad characters?

The Largest Gold “Scam” in History

Part of the reason could stem from the fact that gold as an investment was illegal for 42 years.

Executive Order 6102 — often considered the largest gold “scam” in history — was signed in 1933, by President Franklin Roosevelt, “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens.

This led to a massive seizure of gold from safety deposit boxes around the country.

Some U.S. citizens were lucky and able to transfer their gold to countries like Switzerland, but others had to take the $20.67 per ounce offered by the government in exchange for their gold.

The gold prohibition lasted until 1975. During this time the black market for precious metals grew rapidly and when Uncle Sam finally re-legalized gold, con artists took advantage.

The gold prohibition also led to a patchwork regulatory environment that lasted decades. The Securities and Exchange Commission said precious metals weren’t securities, and thus did not fall under its domain.

The Commodity and Futures Trading Commission had jurisdiction over some gold-selling arrangements, but not others.

Although the CFTC now has clear jurisdiction, there are still several exemptions that make enforcement tricky. That’s why today you see a lot of gold fraud scams being exposed through a state attorney general or financial regulator rather than a federal agency.

Why Is Gold So Attractive to Scammers?

There’s something about the yellow metal that makes it easy to pull the wool over the eyes of even relatively sophisticated investors. Probably due to the fact there are so many ways you can pitch it.

If you don’t want to buy gold bullion, you can buy gold “collector” coins. If you don’t like gold coins, you can invest in a gold mine. Scam artists can spin it any which way they want to suit their motives.

Now I’m not saying you shouldn’t invest in gold or that the aforementioned are illegitimate in any way. I’m just warning you that given the current climate, you need to be extra cautious.

So here are my five gold scams to watch out for:

Scam 1: The Bait-and-Switch

A common ploy is for fraudsters to lie about the condition of a gold coin. MS-70 is a “mint state” coin that has never been handled.

Con artists will try to sell you a mint condition coin and then swap it for a lesser grade coin hoping you won’t notice. For instance, a 2002-P $25 half oz. Gold Eagle is worth $857 at a grade of MS-65 — really good condition, but not perfect.

MS-70 for the same coin is worth $1,650. Inexperienced coin buyers might not be able to tell the difference, so they end up overpaying hundreds of dollars.

If you’re buying gold coins always check the grade of coins with a third party before buying. Reputable dealers will have no issue with third-party appraisal. And if they do, that’s a sign you should shop elsewhere.

Scam 2: Lipstick on a Pig

Another scam you’ll run into with gold coins is grading certificates and fancy plastic casings. Fraudsters will try to trick you with inferior grade coins by hiding them behind layers of plastic or sticking them to some kind of ornamental holder.

They might even go as far as selling you gold-copper alloy if they think they can get away with it. The fix here is to steer clear of collectors’ items and gold coins in fancy packages. Serious collectors and investors generally don’t care whether their gold coins are displayed in nice cases or not.

Scam 3: The Salomon Brothers Index

If the reason you’re buying gold is to make a decent return or hedge against inflation, beware of this next scam. Unscrupulous dealers like to reference the Salomon Brothers Index to make it seem like you’ll get rich quick if you buy now.

The annual index, was compiled by the New York investment bank Salomon Brothers, and often showed appreciation of 12% to 25% a year. The truth is the Salomon Brothers index was based on a list of 20 very rare coins.

The Gold Eagles you find at your local coin shop are more common than you know and don’t appreciate at nearly the same rate. So be realistic in your expectations for returns. Don’t let scammers pressure you into buying under the guise that what you’re buying is going to be worth a lot more in the future.

Scam 4: The Empty Safe

While it might seem inconvenient to store your own gold, or downright foolish if there’s a chance someone robs you, the alternative is you place your gold in the trust of someone else.

Shady dealers will prey off this fear by offering to store your gold in escrow for a small fee. The problem is these dealers don’t actually have any gold to sell you. They’re essentially charging you a storage fee for an empty safe.

Unless you find a dealer that can store your gold whom you absolutely trust, you’ll have to take the necessary steps to be able to store your own gold. Like any investment, gold carries its share of risk. Storage and theft is part of that risk you need to be willing to take on.

Scam 5: Swiss Procedure

Have you ever received an email, out of the blue, asking for your help to arrange a huge gold deal?

It’s surprising this works but it must, because this type of scam is still prevalent today.

The first question you need to ask is why would anyone need my help? If someone is mining gold in Afrifa or south-east Asia, why would they be contacting you.

Ignore any email that talks about “Swiss procedure,” or “release payments,” or “5,000 metric tonnes.” It’s all fake news.

Done right, investing in gold can be safe, lucrative, and fun. Just be overly cautious if someone is trying to sell you something that seems too good to be true.

To a richer life,

Nilus Mattive

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New Multi-year Gold Rally Has Emerged

James Rickards — Mon, 15 Jul 2019 21:07:24 GMT

This post New Multi-year Gold Rally Has Emerged appeared first on Daily Reckoning.

The dollar price of gold has been on a roller-coaster ride for the past six years. But the past six weeks have been a turbocharged version of that. Investors should expect more of the same for reasons explained below.

The six-year story is the more important for investors and also the more frustrating. Gold staged an historic bull market rally from 1999 to 2011, going from about $250 per ounce to $1,900 per ounce, a 650% gain.

Then, gold nose-dived into a bear market from 2011 to 2015, falling to $1,050 per ounce in December 2015, a 45% crash from the peak and a 51% retracement of the 1999-2011 bull market. (Renowned investor Jim Rogers once told me that no commodity goes from a base price to the stratosphere without a 50% retracement along the way. Mission accomplished!)

During that precipitous decline after 2011, gold hit a level of $1,417 per ounce in August 2013. It was the last time gold would see a $1,400 per ounce handle until last month when gold briefly hit $1,440 per ounce on an intra-day basis. At last, the six-year trading range was broken. Better yet, gold hit $1,400 on the way up, not on the way down.

The range-bound trading from 2013 to 2019 was long and tiring for long-term gold investors. Gold had rallied to $1,380 per ounce in May 2014, $1,300 per ounce in January 2015, and $1,363 per ounce in July 2016 (a post-Brexit bounce).

But, for every rally there was a trough. Gold fell to $1,087 per ounce in August 2015 and $1,050 per ounce in December 2015. The bigger picture was that gold was trading in a range. The range was approximately $1,365 per ounce at the top and $1,050 per ounce at the bottom, with lots of ups and downs in between. Yet, nothing seemed capable of breaking gold out of that range.

The good news is that gold has now broken out to the upside. The $1,440 per ounce level is well within reach and the $1,400 per ounce level seems like a solid floor, despite occasional dips into $1,390 per ounce territory. Gold’s trading at $1,416 today.

More importantly, a new multi-year bull market has now emerged. Turning points from bear to bull markets (and vice versa) are not always recognized in real time because investors and analysts are too wedded to the old story to see that the new story has already started.

But, looking back it’s clear that the bear market ended in December 2015 at the $1,050 per ounce level and a new bull market, now in its fourth year, is solidly intact. The recent break-out to the $1,440 per ounce level is a strong 37% gain for the new bull market. This price break-out has far to run. (The 1971 – 1980 bull market gained over 2,100%, and the 1999 – 2011 bull market gained over 650%).

The price action over the past six weeks has been even wilder than the price action over the past six years. As late as May 29, 2019, gold was languishing at $1,280 per ounce. Then it took off like a rocket to $1,420 per ounce by June 25, 2019, an 11% gain in just four weeks.

Gold just as quickly backed-down to $1,382 per ounce on July 1, rallied back to $1,418 per ounce on July 3, and fell again to $1,398 per ounce on July 5. These daily price swings of 1.5% are the new normal in gold. Again, the good news is that the $1,400 per ounce floor seems intact.

What’s driving the new gold bull market?

From both a long-term and short-term perspective, there are three principal drivers: geopolitics, supply and demand, and Fed interest rate policy; (the dollar price of gold is just the inverse of dollar strength. A strong dollar = a lower dollar price of gold, and a weak dollar = a higher dollar price of gold. Fed rate policy determines if the dollar is strong or weak).

The first two factors have been driving the price of gold higher since 2015 and will continue to do so. Geopolitical hot spots (Korea, Crimea, Iran, Venezuela, China and Syria) remain unresolved and most are getting worse. Each flare-up drives a flight-to-safety that boosts gold along with Treasury notes.

The supply/demand situation remains favorable with Russia and China buying over 50 tons per month to build up their reserves while global mining output has been flat for five years.

The third factor, Fed policy, is the hardest to forecast and the most powerful on a day-to-day basis. The Fed has a policy rate-setting meeting on July 31. There is almost no chance the Fed will raise rates. The issue is whether they will cut rates or stand pat.

The case for cutting rates is strong. U.S. growth slowed in the second-quarter to 1.3% (according to the most recent estimate) from an annualized 3.1% in the first-quarter of 2019. Inflation continues to miss the Fed’s target of 2.0% year-over-year and has been declining recently. Trade war fears are adding to a global growth slowdown.

On the other hand, the June employment report showed strong job creation, continued wage gains, and increase labor force participation. All of those indicators correspond to higher future inflation under Fed models. The G20 summit between President Trump and President Xi of China led to a truce in the U.S.-China trade war and the prospect of continued talks to end the trade war.

In short, there’s plenty of data to support rate cuts or no cuts in July. The Fed is biding its time. Meanwhile, the market is highly uncertain. A good headline on trade results in a stronger dollar and weaker gold. The next day, a bad headline on growth results in a weaker dollar and stronger gold.

This dynamic explains the erratic up-and-down price movements of the past week. The dynamic is likely to continue right up until the July 31 Fed meeting in two weeks.

With so much uncertainty and volatility in the dollar price of gold lately, what is the prospect for a rally in precious metals prices and stocks that track them?

Right now, my models are telling us that the gold rally will continue regardless of the Fed’s action on July 31.

Expectations today are that the Fed will cut rates at the next FOMC meeting, but the probabilities are far from a sure thing. If the Fed cuts rates, the market will simply move its expectations of further rate cuts to the next FOMC meeting (September 18). The weak dollar/strong gold rally will continue.

If the Fed does not cut rates, gold may suffer a short-term drawdown, but markets will assume the Fed made a mistake. Expectations for a 50bp (0.5%) rate cut in September will start to build.

That new forward expectation will power gold higher just as surely as the missed July rate cut. That covers gold. But what about silver?

Many investors assume there is a baseline silver/gold price ratio of 16:1. They look at the actual silver/gold price ratio of 100:1 and assume that silver is poised for a 600% rally to restore the 16:1 ratio. These same investors tend to blame “manipulation” for silver’s underperformance.

That analysis is almost entirely nonsense. There is no baseline silver/gold ratio. (The “16:1 ratio” is an historical legacy from silver mining lobbying in the late 19th century, a time of deflation, when farmers and miners were trying to ease the money supply by inflating the price of silver with a legislative link to gold.

The result was “bimetallism,” an early form of QE. The ratio had nothing to do with supply/demand, geology, or any other fundamental factor. Bimetallism failed and was replaced with a strict gold standard in 1900).

This does not mean there is no correlation between gold and silver prices. As Chart 1 below reveals, there is a moderately strong correlation between the two. The coefficient of determination (expressed as r2) is 0.9.

This means that over 80% of the movement in the price of silver can be explained by movements in the price of gold. The remaining silver price factors involve industrial demand unrelated to gold prices.

Chart 1

Recently, a huge gap has opened up between the rally in gold prices (shown in blue on Chart 1 with a right-hand scale) compared to silver prices (shown in orange on Chart 1 with a left-hand scale).

Given the historically high correlation between gold and silver price movements, and the recent lag in the silver rally, the analysis suggests that either gold will fall sharply or silver will rally sharply.

Since I have articulated the case for continued strength in gold prices, my expectation is that gold will continue to outpace silver.

Either way, both metals are heading higher.

Regards,

Jim Rickards
for The Daily Reckoning

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The War of Stocks and Bonds

Brian Maher — Thu, 20 Jun 2019 12:56:55 GMT

This post The War of Stocks and Bonds appeared first on Daily Reckoning.

Jerome Powell dangled the morsel yesterday — rate cuts are on the way.

And like Pavlov’s famously conditioned dogs, Wall Street heard the opening bell this morning… and began drooling.

The major indexes were instantly up and away.

They lost momentum after the president intimated he may take a swing at Iran for downing a U.S. drone.

“You’ll soon find out” was his response when asked if the U.S. would retaliate.

The bulls nonetheless won the day…

The Dow Jones was up 249 points at closing whistle. The S&P gained 28; the Nasdaq, 64 points.

Gold, meantime, went skyshooting $44.50 today — $44.50!

Combine the prospects of vastcentral bank easing with possible fireworks in the Persian Gulf… and you have your answer.

What about the bond market?

Stocks vs. Bonds

The bellwether 10-year Treasury slipped to 1.98% this morning… its lowest point since the 2016 election.

And so the infinitely expanding gulf between stock market and bond market widens further yet.

One vision is bright, cheery, trusting. The other is dark, dour… and morose.

One of these markets will be proven right. One will be proven wrong.

Our money is on the bond market.

We have furnished ample evidence that recession is likely on tap within three months of the next rate cut.

Here analyst Sven Henrich reinforces our deep faith in the calendar of misfortune:

Every single time the Fed cut rates when unemployment was below 4%, a recession immediately ensued & unemployment shot to 6–7%. Again: Every. single. time.

We remind you:

The United States unemployment rate presently stands at 3.6% — the lowest in 50 years.

“A Gorgeously Wrapped Gift Box Containing a Time Bomb”

An unemployment rate below 4% is a false prize, a sugar-coated poison… a gorgeously wrapped gift box containing a time bomb.

Unemployment previously slipped beneath 4% in April 2000 — at the peak of the dot-com delirium.

The economy was in recession by March 2001.

Prior to 2000, unemployment had previously fallen below 4% in December 1969.

The economy was sunk in recession shortly thereafter.

The pattern stretches to the 1950s.

The proof, clear as gin… and equally as stiff:

And unemployment often bottoms nine months before recession’s onset… according to the National Bureau of Economic Research.

Meantime, it is 10 years into the present economic “expansion.” Next month will establish a record.

A Very Strange Expansion

An expanding economy is generally a time of surplus.

It is a time to store in reserves, to squirrel away acorns, to save against the rainy day — the inevitable rainy day.

These savings will see you through.

But during this economic expansion, during this season of bounty… the United States has only sunk deeper into debt.

The cupboards are empty.

Trillion-dollar annual deficits are presently in sight.

The national debt rises to $22.3 trillion — some 105% of GDP.

And interest payments on the debt alone will likely eclipse defense spending by 2025.

Come the inevitable recession, Uncle Samuel will plunge even deeper into debt.

That is, he will reach even further into the future… to rob it for our benefit today.

Deficits may double — or more.

How is the business at all sustainable?

But it’s not only a doddering old uncle going under the water…

The Corporate Debt Bomb

Corporations have loaded themselves to the gunwales with cheap debt — cheap debt coming by way of the Federal Reserve.

First-quarter nonfinancial corporate debt increased to $9.93 trillion. That is a record.

And this we learn from the Treasury Department:

Today’s nonfinancial corporate debt-to-GDP ratio is the highest since 1947… when records began.

And here we spot a straw swaying menacingly in the wind…

Fitch informs us nearly $10 billion of high-yield corporate bonds have already defaulted in the second quarter — double the amount of first-quarter defaults.

Warns Troy Gayeski, co-chief investment officer at SkyBridge Capital:

“Whatever the cause [of the next recession] may be, the acute point of pain will be in corporate credit.”

Depends on it.

Finally we come to the fabulously and grotesquely indebted American consumer…

Consumers Drowning in Debt

Total U.S. consumer debt notched $14 trillion in the first quarter — exceeding the roughly $13 trillion before the financial crisis.

Twenty-three percent of Americans claim that life’s essentials — food, rent, utilities — constitute the bulk of their credit card purchases.

And 60% of Americans hold less than $1,000 in savings.

How will they keep up come the next recession? How will they meet their debts?

They already groan under the load — and the economy is still expanding.

Meantime, the cost of a middle-class lifestyle has surged 30% over the past two decades.

But Pew Research reports the average American worker wields no more purchasing power today… than he did 40 years ago.

That is, he has jogged in place 40 years.

Utter and Complete Failure

The past 10 years of central bank intervention on a grand and heroic scale have worked little benefit.

The coming recession will bring yet more intervention— on an even grander and more heroic scale.

But why should we expect it to yield any difference whatsoever?

For the overall view, we turn to Mr. Sven Henrich:

The grand central bank experiment of the last 10 years has ended in utter and complete failure. The games of cheap money and constant intervention that have brought you record global debt to the tune of $250 trillion and record wealth inequality are about to embark on a new round… The new global rate-cutting cycle begins anew before the last one ever ended. Brace yourselves, as no one, absolutely no one, can know how this will turn out…

We are witnessing a historic unraveling here. Everything every central banker has uttered last year was completely wrong. Every projection they made over the last 10 years has been wrong… Why place confidence in people who are staring at the ruins of the policies they unleashed on the world and are about to unleash again?…

All the distortions of 10 years of cheap money, debt, wealth inequality, zombie companies, negative debt… will all be further exacerbated by hapless and scared central bankers whose only solution to failure is to embark on the same cheap money train again. All under the banner to “extend the business cycle” at all costs. Never asking whether they should nor considering the consequences. But since they are not elected by the people and face zero consequences for failure, they don’t have to consider the collateral damage they inflict.

Unfortunately, the rest of us do…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post The War of Stocks and Bonds appeared first on Daily Reckoning.

The Coming Gold Breakout

James Rickards — Sat, 08 Jun 2019 20:30:49 GMT

This post The Coming Gold Breakout appeared first on Daily Reckoning.

I read headlines all day and focus extensively, if not exclusively, on gold. If gold is the best form of money (it is), and if gold had unique properties as money (it does; it’s the only form of money that is not also debt), then gold is well worth the focus.

With that said, it’s hard to surprise me on the subject. After a while, you think you’ve seen it all. Yet, there are exceptions. This headline stopped me in my tracks: “Bank of Russia may consider gold-backed cryptocurrency.”

The idea itself is not exactly new. I first suggested that Russia might be acquiring gold with a view to a new gold-backed currency at a financial war game hosted by the Pentagon at a top-secret laboratory in 2009.

Your correspondent at the Homestake Mine in Lead, South Dakota. Homestake was one of the largest and most productive gold mines in U.S. history, and was the foundation of the Hearst family fortune. Global gold output has flatlined in recent years while demand for gold remains strong.

In my upcoming book, Aftermath, I describe a more sophisticated monetary arrangement among Russia, China, Iran and other nations to use a gold-backed cryptocurrency for international settlements.

Still, theory is one thing, reality is another. Here was a real central bank taking real steps toward a gold-backed cryptocurrency. Of course, the announcement came with lots of caveats about the need to stick to hard currencies. This gold initiative involves review of a report, not a live plan at this stage.

Still, it was a significant moment in the move away from the hegemony of the U.S. dollar as the dominant global reserve currency toward another system that included gold.

By itself, this announcement is not a reason to load up on gold. In fact, the spot price of gold barely budged on the news. Gold prices are far more likely to be affected by strength or weakness of the U.S. dollar, real interest rates, inflation prospects and geopolitical stress.

But, the announcement is highly significant in another way. It signals that the demand for physical gold by major central banks is here to stay. Whether a new gold-backed cryptocurrency emerges next year or five years from now does not alter the fact that you need gold to have a gold-backed currency.

Neither Russia nor China has all the gold it needs for that purpose yet. Therefore, demand for physical gold will remain strong even as supply has flatlined.

This creates an asymmetric trading pattern where gold has good potential to rise, but only limited prospects of a material fall. Those are the best kinds of markets for trading and investment. Taking into account both these fundamental and technical factors, what is the outlook for the dollar price of gold and gold mining stocks in the near term?

Right now, the evidence is telling us that the dollar price of gold is poised to breakout to the upside after a prolonged period of range-bound trading.

Chart 1 below illustrates recent price action in gold and shows why the prospects are good for near-term price appreciation.

After a rally from $1,215 per ounce in late November 2018 to $1,293 per ounce in early January 2019, gold remained in a tight trading range.

Over the past five months, gold has traded between about $1,270 and $1,345 per ounce (as of yesterday after gold’s big run over the past week).

That’s a range of about 2.8% above and below a mid-point of $1,305 per ounce. A 2.8% range is not unusual when governments try to peg two currencies to each other. In effect, gold has been pegged to the dollar at $1,305 per ounce.

Chart 1

However, this trading range exhibits another pattern called “lower highs.” Each spike at the high end of the range is slightly lower than the one before. Conversely, the bottom in each gyration has been more tightly bunched forming a kind of floor under gold prices.

The combination of a strong floor and declining highs results in a compression of the trading range. What this pattern presages is a breakout. Of course, the question is whether gold will breakout to the downside or the upside. This week we saw gold break higher, to $1,345.

The evidence is strong that gold is poised for a sustained upside breakout. The reason for the floor around $1,270 per ounce has to do with fundamental supply and demand. Russia and China continue to buy gold at a prodigious rate.

Russia has been buying between 15 and 25 metric tonnes per month, sometimes more, for over ten years. Russia’s gold reserves now stand at 2,183 metric tonnes, over 25% of the U.S. total with a far smaller economy. China is less transparent in its gold buying but also has over 2,000 metric tonnes, perhaps much more.

Neither Russia nor China have their targeted amount of gold yet, which would be 4,000 metric tonnes for Russia and 8,000 metric tonnes for China to achieve strategic gold parity with the U.S.

Iran and Turkey have also embarked on major gold accumulation efforts.

What all of these gold buying strategies have in common is a desire to escape from dollar hegemony and the imposition of dollar-based sanctions by the U.S. The practical implication for gold investors is a firm floor under gold prices since Russia and China can be relied upon to buy any dips.

The primary factor that has been keeping a lid on gold prices is the strong dollar. The dollar itself has been propped up by the Fed’s policy of raising interest rates and reducing money supply, so-called “quantitative tightening” or QT. These tight money policies have amplified disinflationary trends and pushed the Fed further away from its 2% inflation goal.

However, the Fed reversed course on rate hikes last December and has announced it will end QT next September. These actions will make gold more attractive to dollar investors and lead to a dollar devaluation when measured in gold.

The price of gold in euros, yen and yuan could go even higher since the ECB, Bank of Japan and People’s Bank of China will still be trying to devalue against the dollar as part of the ongoing currency wars. The only way all major currencies can devalue at the same time is against gold, since they cannot simultaneously devalue against each other.

A situation in which there is a solid floor on the dollar price of gold and a need to devalue the dollar means only one thing – higher dollar prices for gold. A breakout to the upside is the next move for gold.

Regards,

Jim Rickards
for The Daily Reckoning

The post The Coming Gold Breakout appeared first on Daily Reckoning.

Dollar Dominance Under Multiple, Converging Threats

James Rickards — Tue, 16 Apr 2019 19:08:36 GMT

This post Dollar Dominance Under Multiple, Converging Threats appeared first on Daily Reckoning.

For years, currency analysts have looked for signs of an international monetary “reset” that would diminish the dollar’s role as the leading reserve currency and replace it with a substitute agreed upon at some Bretton Woods-style monetary conference.

That push has been accelerated by Washington’s use of the dollar as a weapon of financial warfare, including the application of sanctions. The U.S. uses the dollar strategically to reward friends and punish enemies.

The use of the dollar as a weapon is not limited to trade wars and currency wars, although the dollar is used tactically in those disputes. The dollar is much more powerful than that.

The dollar can be used for regime change by creating hyperinflation, bank runs and domestic dissent in countries targeted by the U.S. The U.S. can depose the governments of its adversaries, or at least blunt their policies without firing a shot.

But for every action, there is an equal and opposite reaction.

As the U.S. wields the dollar weapon more frequently, the rest of the world works harder to shun the dollar completely.

I’ve been warning for years about efforts of nations like Russia and China to escape what they call “dollar hegemony” and create a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.

These efforts are only increasing.

Russia has sold off almost all of its dollar-denominated U.S. Treasury securities and has reduced its dollar asset position to almost zero. It has been amassing massive quantities of gold, and has increased the gold portion of its official reserves to over 20%. Russia has almost 2,000 tonnes of gold, having more than tripled its gold reserves in the past 10 years. It has actually acquired enough gold to surpass China on the list of major holders of gold as official reserves.

This combination of fewer Treasuries and more gold puts Russia on a path to full insulation from U.S. financial sanctions. Russia can settle its balance of payments obligations with gold shipments or gold sales and avoid U.S. asset freezes by not holding assets the U.S. can reach.

And Russia is providing other nations a model to achieve similar distance from U.S. efforts to use the dollar to enforce its foreign policy priorities.

Certainly any talk of a monetary reset must involve China. Despite its present weakness, China is still the second-largest economy in the world and the fastest-growing major emerging market. Like Russia, China is amassing gold, and likely has far more gold than it officially lists. It has also been helping to suppress gold prices so that it can buy gold cheaply without driving up the price.

Europe has also shown signs that it wants to escape dollar hegemony. For example, German Foreign Minister Heiko Maas has called for a new EU-based payments system independent of the U.S. and SWIFT (Society for Worldwide Interbank Financial Telecommunication) that would not involve dollar payments.

SWIFT in the nerve center of the global financial network. All major banks transfer all major currencies using the SWIFT message system. Cutting a nation off from SWIFT is like taking away its oxygen.

In the longer run, these are just more developments pushing the world at large away from dollars and toward alternatives of all kinds, including new payment systems and cryptocurrencies. The signs of a reset are everywhere, but at least for now the dollar is still king of the hill.

The dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales. With such a dominant position, the dollar will not be easy to replace. Still, the trends are not good for the dollar. The international reserve position may be 60%, but as recently as 2000 it was over 70% and just a few years ago it was still at 63%. That trend is not your friend.

Another challenger to the dollar is the IMF’s special drawing rights or SDRs. The SDR is a form of world money printed by the IMF. It was created in 1969 as the realization of an earlier idea for world money called the “bancor,” proposed by John Maynard Keynes at the Bretton Woods conference in 1944.

The bancor was never adopted, but the SDR has been going strong for 50 years. This article describes how the IMF could function more like a central bank through more frequent issuance of SDRs and by encouraging the use of “private SDRs” by banks and borrowers.

At the current rate of progress, it may take decades for the SDR to pose a serious challenge to the dollar. But that process could be rapidly accelerated in a financial crisis where the world needed liquidity and the central banks were unable to provide it because they still have not normalized their balance sheets from the last crisis.

In that case, the replacement of the dollar could happen almost overnight. Individuals will not be allowed to own SDRs, but you can still protect you wealth by buying gold. That’s what Russia and China are doing. Both countries have more than tripled their gold reserves since 2009.

But attacks on the dollar are not limited to gold or SDRs themselves. The most imminent threat to the dollar actually comes from a combination of gold and digital currency.

The fact that Russia and China have been acquiring gold is old news. Still, there are practical problems with using gold as a form of currency, including storage and transportation costs. But Russia is solving these transactional hurdles by combining its gold position with distributed ledger, or blockchain technology.

Russia and China could develop a new cryptocurrency that would be transferred on a proprietary encrypted ledger with message traffic moving through an internet-type system not connected to the existing internet. Other countries could be allowed into this new system with permission from Russia or China.

The new cryptocurrency would be a so-called “stable coin,” where the value was fixed with reference either to a weight of gold or another standard unit such as the SDR. Goods and services would be priced in this new unit of account. Periodically, surpluses and deficits would be settled up in physical gold.

Such net settlements would require far less gold than gross settlements (where every transaction had to be paid for in real-time). This type of system (also called a “permissioned blockchain”) is not pie-in-the-sky, but is already under development and will be deployed soon. But you can count on the U.S. government being the last to know.

The development of a gold-backed digital currency is just one more sign that dollar dominance in global finance may end sooner than most expect. And we may be getting dangerously close to that point right now.

Regards,

Jim Rickards
for The Daily Reckoning

The post Dollar Dominance Under Multiple, Converging Threats appeared first on Daily Reckoning.

“Money Is Gold, and Nothing Else”

James Rickards — Mon, 01 Apr 2019 13:12:51 GMT

This post “Money Is Gold, and Nothing Else” appeared first on Daily Reckoning.

Following the Panic of 1907, John Pierpont Morgan was called to testify before Congress in 1912 on the subject of Wall Street manipulations and what was then called the “money trust” or banking monopoly of J. P. Morgan & Co.

In the course of his testimony, Morgan made one of the most profound and lasting remarks in the history of finance. In reply to questions from the congressional committee staff attorney, Samuel Untermyer, the following dialogue ensued as recorded in the Congressional Record:

Untermyer: I want to ask you a few questions bearing on the subject that you have touched upon this morning, as to the control of money. The control of credit involves a control of money, does it not?

Morgan: A control of credit? No.

Untermyer: But the basis of banking is credit, is it not?

Morgan: Not always. That is an evidence of banking, but it is not the money itself. Money is gold, and nothing else.

Morgan’s observation that “Money is gold, and nothing else,” was right in two respects. The first and most obvious is that gold is a form of money. The second and more subtle point, revealed in the phrase, “and nothing else,” was that other instruments purporting to be money were really forms of credit unless they were redeemable into physical gold.

So much of the gold market is “paper gold.” This paper gold market is so manipulated, we no longer have to speculate about it. It’s very well documented. A central bank, for example, can lease gold to one of the London Bullion Market Association banks, which include large players like Goldman Sachs, Citibank, JPMorgan Chase, and HSBC.

Gold leasing is often conducted through an unaccountable intermediary called the Bank for International Settlements (BIS). Historically, the BIS has been used as a major channel for manipulating the gold market and for conducting sales of gold between central banks and commercial banks. The BIS is the ideal venue for central banks to manipulate the global financial markets, including gold, with complete nontransparency.

But it all rests on a tiny base of physical gold. I describe the market as an inverted period with a little bit of gold at the bottom and a big inverted pyramid of paper gold resting on top. There’s just not that much gold available. But in the paper gold market, there’s no limit on size, so anything goes.

Leasing of paper gold by bullion banks allows them to sell the same gold as much as 10 times over to 10 different buyers. It’s like a game of musical chairs, only with more participants and fewer chairs.

Someday, probably sooner than later, somebody is going to show up and say, “I want my gold, please,” and the custodian won’t be able to give it to them. What if a major institution wants its gold but can’t get it?

That would be a shock wave. It would set off panic buying in gold, driving prices through the roof.

Meanwhile, the physical fundamentals are stronger than ever for gold.

It appears that peak gold production is already here. There are no new gold fields of any significance waiting to be discovered. There is no new technology that can extract gold from places where it cannot now be recovered. This does not mean gold production stops — just that output does not increase and will start to go down.

Of course, gold exists in minute quantities in everything from seawater to distant asteroids, but the costs of recovery from those sources are astronomical and make no commercial sense. When it comes to gold, what you see is what you get.

Yet global demand continues to rise from central banks and sovereign wealth funds in Russia, China, Iran, Turkey, and other countries around the world (not including America, it seems). You don’t need a Ph.D. to realize that if supply is declining and demand is increasing, then gold prices have nowhere to go but up.

With limited output but massive ongoing demand, it’s only a matter of time before a link in the physical gold delivery chain snaps and a full-scale buying panic erupts. Then the price of gold will soar regardless of paper gold manipulations.

Meanwhile, Fed has paused in its path of rate hikes. The perception of the Fed flipping from tightening to ease has removed a major headwind to higher gold prices and created a tailwind.

Regards,

Jim Rickards
for The Daily Reckoning

The post “Money Is Gold, and Nothing Else” appeared first on Daily Reckoning.

The “Axis of Gold” Will Drive Gold Higher by the End of 2018

James Rickards — Thu, 24 May 2018 20:54:37 GMT

This post The “Axis of Gold” Will Drive Gold Higher by the End of 2018 appeared first on Daily Reckoning.

A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems.

This is the Axis of Gold.

This gold-based payments system will dilute and ultimately eliminate the impact of U.S. dollar-based sanctions.

Gold offers adversaries significant defenses against these dollar-based sanctions. Gold is physical, not digital, so it cannot be hacked or frozen. Gold is easy to transport by air to settle balance of payments or other transactions between nations.

Gold flows cannot be interdicted at SWIFT, the international payment system. Gold is fungible and non-traceable (it is an element, atomic number 79), so its origin cannot be ascertained.

We have a lot of data to support the claim that the Axis of Gold exists and is gaining strength.

We know that for example, Russia has tripled its gold reserves in the last ten years. It’s gone from about 600 tons to over 1800 tons of physical gold, and is moving very quickly towards 2,000 tons. That’s an enormous amount of gold.

China is also amassing physical gold at an astounding rate. Like Russia, it has tripled its gold reserves, officially from 1,600 tons to 1,800 tons.

But we have very good reason to believe China actually has a lot more gold than that.

China might actually own up to 4,000 tons of physical gold. We don’t know the exact number because China is highly secretive about its gold acquisitions. But that’s a reasonable estimate. China is also the world’s largest gold producer with mining output of about 450 tons per year.

Iran also has an enormous amount of gold. Iran received billions of dollars in gold from the Obama administration as bribes to join in the now discredited nuclear deal (the “JCPOA” or Joint Comprehensive Plan of Action) to limit Iran’s nuclear weapons program.

Iran has also received gold imported from Europe via Turkey, but the exact amount is unknown.

We don’t have any insight into how much it has because it’s also highly nontransparent. But in the first quarter of 2018, Iranian gold bar and coin purchases more than tripled.

Turkey is also acquiring enormous amounts of gold, which should not be surprising given Turkish president Recep Erdogan’s recent comments questioning the role of the dollar in global trade.

The Turkish central bank has almost doubled its gold holdings since last May, according to the World Gold Council. And it was the second largest buyer of gold among central banks for the first quarter of 2018.

So that’s the Axis of Gold. Again, evidence for this Axis of Gold is overwhelming.

I have contacts in the national security industry community who have, in their own roundabout way, been able to confirm that to me, so it’s very clear that’s what’s happening.

This is the type of information you don’t see in the headlines. This is very granular, but it’s all going on behind the scenes.

I’ve explored the implications in many financial war games and other meetings as I’ve described in my books.

I’m also on the Board of Advisors of the Center for Sanctions and Illicit Finance, which is the leading think tank on this subject. I meet with others who are expert in this area, including current and former government officials.

I’ve warned the Pentagon and the Treasury Department about this threat for years. But the message has yet to sink in. The U.S. is still unprepared for this coming strategic alternative to dollar dominance.

Meanwhile, U.S. trade sanctions on China, Russia and Europe are just beginning to bite. Trump’s new sanctions on Iran may be the last straw in the world’s willingness to tolerate what is perceived as U.S. bullying through the use of dollar-based sanctions.

These headwinds are illustrated in the chart below. This shows the customers for oil exported by Iran. China is Iran’s largest oil customer by a wide margin. China’s need for imported oil is huge and Iran’s need for hard currency from its oil exports is existential.

If the U.S. makes it impossible for Iran to pay or receive dollars or other hard currencies for its oil exports and machinery imports, Iran will have to resort to other payment channels. China would be willing to pay Iran in yuan, but Iran’s appetite for yuan is limited.

As mentioned above, an obvious solution is for Iran and China to settle their balance of payments accounts in gold.

Trump’s sanctions on Iran are a double-whammy.

On the one hand, they impede global trade and growth; especially in Europe where growth was already slowing down before the sanctions. On the other hand, the Axis of Gold will create enormous demand for physical gold as an alternative to dollar payments vulnerable to U.S. sanctions.

At the same time, the Axis of Gold creates huge embedded demand for gold as the Axis nations build out an alternative to the dollar payments system.

But right now gold mining output is flat, western central bank sales of gold have ceased, and acquisition of gold by the Axis is increasing.

With limited output, limited western sales, and huge eastern purchases, it’s only a matter of time before a link in the physical gold delivery chain snaps and a full-scale buying panic erupts. Then the price of gold will soar regardless of paper gold manipulations.

Meanwhile, Fed tightening combined with weak growth will push the U.S. economy to the brink of recession later this year.

That will cause the Fed to reverse course and pause in their path of rate hikes. The pause will come possibly in September, and almost certainly by December. The perception of the Fed flipping from tightening to ease will remove a major headwind to higher gold prices and create a tailwind.

Future Fed ease combined with strong demand for physical gold will result in much higher gold prices by year end. The next few months could still be a bumpy ride for gold, but late summer and fall look promising for much a push to $1,400 per ounce or higher.

Last week’s drawdown in gold prices should be seen for what it is, a temporary reversal in a new bull market. The current gold price of about $1,300 per ounce is a classic “buy-the-dips” opportunity that won’t come again soon.

But before long it may be too late for investors to benefit because the ready supply of physical gold will be gone. The time to take a position is now.

The days of dollar dominance are numbered. The process won’t happen overnight, but the signs all point in one direction.

Got gold?

Regards,

Jim Rickards
for The Daily Reckoning

The post The “Axis of Gold” Will Drive Gold Higher by the End of 2018 appeared first on Daily Reckoning.