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The price of gold took off in the 2000s. As I wrote about in The Unchained Man, I greatly benefited from this and never forgot how much I profited from gold back then even though all the mainstream economists and financial “experts” denigrated it.
-By Caleb Jones
During the 2010s it mostly hung around at its new highs and didn’t do much. Lots of guys I follow are “gold bugs” meaning they worship gold and always seem to think it’s just about to take off in price, yet it seemingly never does.
There are many reasons for this, mainly because, like with silver, the price of gold is heavily manipulated and suppressed for various reasons. I’ve always thought the price of gold will shoot upwards, but I wasn’t quite sure when it would happen.
The Bank for International Settlements (BIS) is located in Basel, Switzerland. It’s often referred to as “the bank of central banks.” Its members consist of 60 central banks from the world’s largest economies.
It facilitates transactions – notably gold transactions – between central banks, the biggest players in the gold market.
The BIS also issues Basel Accords, or a set of recommendations for regulations that set the standards for the global banking industry.
On April 1, 2019, Basel III went into effect around the world.
Buried among what was mostly confusing jargon was something of huge significance for gold:
A 0% risk weight will apply to (i) cash owned and held at the bank or in transit; and (ii) gold bullion held at the bank or held in another bank on an allocated basis, to the extent the gold bullion assets are backed by gold bullion liabilities.
What this means in plain English is that gold’s official role in the international monetary system has been upgraded for the first time in decades.
Banks can now consider physical gold they hold, in certain circumstances, as a 0% risk asset. Previously, gold was considered riskier and most of the time could not be classified in this way. Basel III rules are making gold more attractive.
If accurate, this does indeed represent a significant paradigm shift in regard to central bankers, the men who control most of the world’s economy. Historically, central bankers, Keynesians, and monetarists have hated gold with a passion and get upset whenever anyone brings it up. Just like with cryptocurrency, any form of currency or medium of exchange that can’t be easily regulated, inflated, or taxed by big government deeply offends these people. If they are now publicly admitting that it’s a 0% risk asset, that’s a big change, and one that could signal good things for gold.
In 2010, something remarkable happened. Central banks changed from being net sellers of gold to net buyers of gold. Remember, central banks are by far the biggest actors in the global gold market.
This trend has only accelerated since…
The World Gold Council reports that in 2018, central banks bought a record 651 tonnes of gold. This is the highest level of net purchases since 1971 when Nixon closed the gold window. And it’s a 75% increase from 2017.
Central bank purchases in 2019 are on pace to be even bigger than 2018’s record year.
I can confirm this is correct. I’ve mentioned before how China, Russia, India, and other governments are buying up gold in record amounts. I’ve been watching these countries very carefully. The fact they’re buying up all this damn gold is the biggest reason why I too have been quietly buying up gold over the past few years while its price has been more or less stagnant (though it did have a nice bump in 2019; my gold made a 15% return).
Just look at this page here. Notice the insane amount of gold all of these countries have been buying up over the years. That means A) less gold on the open market; B) an incentive for these countries for gold to go up instead of staying the same; C) countries opting out of the U.S. Dollar which will drive gold upwards.
In 2017, when tensions with North Korea were rising, Trump’s Treasury secretary threatened to kick China out of the U.S. dollar system if it didn’t crack down on North Korea.
If the threat had been carried out, it would have been the financial equivalent of dropping a nuclear bomb on Beijing.
Without access to dollars, China would struggle to import oil and engage in international trade. Its economy would come to a grinding halt.
China would rather not depend on an adversary like this.
Last year, the Shanghai International Energy Exchange launched a crude oil futures contract denominated in Chinese yuan. For the first time in the post-World War II era, it will allow for large oil transactions outside of the U.S. dollar.
Of course, most oil producers don’t want a large reserve of yuan.
That’s why China has explicitly linked the crude futures contract with the ability to convert yuan into physical gold – without touching the Chinese government’s official reserves – through gold exchanges in Shanghai and Hong Kong. (Shanghai is already the world’s largest physical gold market.)
Bottom line, China’s Golden Alternative will allow oil producers to sell oil for gold and completely bypass any restrictions, regulations, or sanctions of the U.S. financial system.
With China’s Golden Alternative, a lot of oil money is going to flow into yuan and gold instead of dollars and Treasuries.
As I’ve already analyzed several times at this blog (particularly here), rightly or wrongly, countries like China and Russia have had quite enough of the USA bullying everyone else by controlling the world’s currency. These big nations are doing everything in their power to opt out of the U.S. Dollar as fast as they can so they can conduct commerce on the world stage without having to go through the corporatists at the U.S. Federal Reserve.
While it won’t happen tomorrow, it will happen in the next few years. This will be a serious problem for the USA (what else is new?) but it will be great for China and for anyone who owns a decent amount of gold. Why not join that club?
The Fed announced it would not raise interest rates in 2019.
The Fed also began increasing its balance sheet in the fall.
Previously, the Fed was slowly winding down its balance sheet by about $30 billion a month. At such a snail’s pace, it would have taken the Fed over 10 years to drain its balance sheet back to its pre-crisis normal level.
This whole charade is indicative of how utterly dependent the U.S. economy has become on artificially low interest rates and easy money.
If the Fed couldn’t normalize interest rates when the debt was $22 trillion, how is it ever going to raise rates when the debt is $30 trillion or higher?
The Fed couldn’t shrink a $4.5 trillion balance sheet. How is it going to shrink, say, a $10 trillion balance sheet or higher?
The answer is it can’t and won’t. It’s impossible for the U.S. government to normalize interest rates with an abnormal amount of debt. The Fed is trapped.
After nearly six years of 0% interest rates, the U.S. economy is hooked on the heroin of easy money. It can’t even tolerate a modest reduction in the Fed’s balance sheet and 2.5% interest rates, still far below historical averages.
The next move is a return to massive amounts of QE and 0%, and perhaps negative, interest rates. These moves would, of course, weaken the dollar and be good for gold.
The argument is that when the next economic crash comes (and it’s definitely coming), the only option for our big corporatist government is to print up even more money and/or drive interest rates even lower than they are, which would be pretty difficult considering they’re almost at 0% now. This would likely do well for gold.
I don’t disagree with the logic. The problem I have with that argument is that A) gold didn’t go up much the last time they did that; B) there might be some other international options government has to artificially prop up the economy a little longer that doesn’t directly involve direct manipulation of our currency or interest rates.
Don’t get me wrong: the U.S. Dollar is completely screwed in the long-term and will eventually collapse. I just don’t think you’ll see any radical problems with it in the very next economic downturn. (Though I could be wrong. As I've said many times, it's impossible to tell the future with any pinpoint accuracy.)
Regardless, the other pro-gold arguments are very sound. I have a decent amount invested in gold. It wouldn’t hurt for you to do the same.
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