AEP: Gold is sniffing out Monetary and Geopolitical dystopia
GoldFinger1969
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Ambrose Evans-Pritchard, UK Telegraph financial columnist, is one of my "must-reads." I don't agree with 100% of his stuff -- including the belief that Green Energy can be made cost-effective solely through technology -- but he is a great writer and has fantastic insight (and sources).
I've read his commentaries and analyses on the Euro, ECB, and EU for over 15 years. Like most columnists, pay more attention to his bearish calls than his bullish forecasts.
A powerful force is stalking the world’s gold market. It is operating in the shadows.
None of the normal footprints are visible on the London bullion market or the Chicago Mercantile. Retail goldbugs have not been buyers: ETF gold funds have been shrinking since December. The crowd is piling into the Bitcoin scam instead.
Yet gold has smashed through a four-year barrier around $2,000 an ounce, rising in parabolic fashion since mid-February, and hitting an all-time high of $2,431 on April 11. Is somebody preparing for an escalation of the shadow Third World War?
“It is not a Western institution behind this. It is a massive player with very deep pockets. I have never seen this kind of buying before,” said Ross Norman, a veteran gold trader and now chief executive of Metals Daily.
Gold has been ratcheting up fresh records against the headwinds of a strong dollar, a 70 point jump in 10-year US Treasury yields, and hawkish talk from the Federal Reserve. This mix would normally spell trouble for gold.
Whoever it is – or they are – seems insensitive to cost. Central banks do not behave like this. “They buy on the London benchmark and they don’t chase the price,” said Mr Norman. This rally is happening off books in the OTC market.
Yes, China’s central bank has been adding to its declared gold reserves for 17 consecutive months, part of the gradual portfolio shift away from US Treasuries and European bonds by the Global South.
Dollar weaponisation since the war in Ukraine has unnerved every country aligned with the authoritarian axis of China and Russia. None can feel safe parking money in Western securities after Russia’s foreign reserves were frozen.
Yet the scale is modest. The World Gold Council said central banks bought a net 18 tonnes in February: 12 in China, six in Kazakhstan and India, four in Turkey, partly offset by Russian sales. This hardly moves the needle.
The Chinese people certainly have been buying gold, creating traffic jams at the Shuibei jewellery hub. Precious metal is the only refuge from the property crash and the slump on the Shanghai bourse. Tightening capital controls make it hard to smuggle serious sums abroad.
But this alone cannot account for the price surge, either. Mr Norman says the gold flow to Asia has been within normal bounds.
So let me take two stabs at this mystery, one geopolitical and one financial. It has been clear for three years that Russia, China and Iran are operating in collusion, each feeding opportunistically on each other. All three have fostered belligerent hyper-nationalism as a means of regime survival, and all aim to press their advantage against a fatally complacent West before the window of opportunity closes.
This menace on three fronts has reached a dangerous juncture. None of the major democracies have put their economies on a war-time footing despite the obvious threat.
The West has dropped the ball on Ukraine – or worse, it is preventing Ukraine from hitting Russian oil facilities – and has therefore left the door wide open for a knock-out blow by the Kremlin this summer.
Iran has been emboldened by Putin’s military comeback. It is also flush with money. Joe Biden is so worried about rising petrol prices that he has turned a blind eye to sanctions busting, letting Iran sell as much crude as it wants. This has enabled Tehran to advance its pawns in the Middle East, and now to risk a direct missile strike against Israel.
The third shoe has yet to drop but China knows that the West has run down its stock of military kit trying to contain these other two crises. Xi Jinping may never have a better moment to tighten the noose on Taiwan with a naval and air blockade, gaining a stranglehold over the West’s supply of advanced semiconductors that can then be used as a bargaining chip. How would the democracies respond to this?
There is a strong suspicion among gold experts that China is behind the surge in buying, building up a war-fighting bullion chest through state-controlled banks and proxies. But others, too, can see that we are living through a fundamental convulsion of the global order, and that the dollarised financial system will not be the same at the end of it. Gold is the hedge against dystopia.
However, there is a parallel explanation. Covid finally broke our spendthrift governments. The talk in hedge fund land is that some big beasts are taking bets against “fiscal dominance” across the West.
It is a collective judgment that too many countries have pushed public debt beyond 100pc of GDP and beyond the point of no return under prevailing economic ideologies and political regimes. Budget deficits have broken out of historical ranges and are running at structurally untenable levels for this stage of the cycle.
Central banks will bottle it – under this scenario – in order to mop up issuance of treasury bonds. They will let inflation run hot to help states whittle down debts by stealth default. You might argue that this is what they already did by letting rip with extreme money creation during the pandemic.
The Bank of Japan is refusing to raise rates above zero or halt bond purchases even though core inflation is 2.8pc and the Rengo wage round is running at 5.2pc. **This is what a debt trap looks like. **With a debt-to-GDP ratio above 260pc, Japan cannot return to sound money without risking a fiscal crisis.
Olivier Blanchard, global debt guru and former IMF chief economist, once told me how this would unfold by the mid-2020s. “One day the BoJ may get a call from the finance ministry saying please think about us – it is a life or death question – and keep rates at zero for a bit longer,” he said.
The European Central Bank is also in a debt trap. It continued to buy buckets of Club Med bonds even when inflation was over 10pc. This was patently a fiscal rescue for semi-solvent states. The ECB has backed off for now but will be forced to shield Italy again with fiscal transfers disguised as QE in the next downturn.
The Fed has largely monetised the Trump-Biden jumbo deficits. It now faces an invidious choice: either it stays the course against inflation, at the risk of a US funding crisis, a commercial property/banking crisis, and recession, all ending in a return to QE and fiscal dominance; or it cuts rates hard and fast before inflation is under control, also ending in fiscal dominance. Is gold sniffing this out?
Of course, the gold spike may be nothing more than wolf pack speculation by funds orchestrating a squeeze on bullion shorts through the options market, knowing that this sets off a self-fueling feedback loop. If so, the rally will short-circuit soon enough.
My bet is that a big animal with a Chinese accent is bracing for geopolitical or monetary disorder on a traumatic scale.
Comments
I like Ambrose as well.
Give Me Liberty or Give Me Debt
Acute eosinophilic pneumonia (AEP)? Huh? WTF!
The whole worlds off its rocker, buy Gold™.
It isn't just gold.
The price of silver has also been acting in an unusual manner recently.
I think the SGE price premium is letting the cat out of the bag on this one.
Yelling at clouds on pmbug.com
By unusual, do you mean up? LOL
Knowledge is the enemy of fear
I see it being dragged up with gold and other PMs, but I see nothing "unusual" lately. What have you seen ?
Up $27 overnight as Israel strikes Iran.
I wonder what gold and silver price fluctuations were like in the dawn of WW2? 😟
Quite the spike but down to unchanged by this morning.
https://www.pcgs.com/setregistry/gold/liberty-head-2-1-gold-major-sets/liberty-head-2-1-gold-basic-set-circulation-strikes-1840-1907-cac/alltimeset/268163
Price fixed at $35/oz. as bombs and bullets were more valuable.
Yes, that was the "official" price. I'm sure that the actual value of gold fluctuated wildly during that time depending on the country. Call it black market trading or whatever.
Some interesting history. Silver was used as a substitute for copper during WW2 on the Manhattan Project. Copper and brass was very scarce due to use in shell casings and bombs. The Manhattan Project required many huge electromagnets in the process to purify U-235 to desired concentration.
Nearly 28 million pounds of silver were used to construct electromagnets, busbars, electro-magnetic mass spectrometers (calutrons) , etc. for the project.
And of course.... silver was also used in the war nickels of the era also. Note sure how price was affected by the massive silver use back then... would be an interesting research project.
Thank goodness there was still enough copper available during WW2 to mint Lincoln cents. That would have looked weird if say steel would have been used. 😉
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The reason silver was used in the Manhattan Project was because it is the best conductor of electricity at room temperature. Copper is normally used for wire and it is a good electrical conductor. But silver is a little better.
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Well it looks like things have calmed down out there. At least for a few days anyway.
I've held off on beginning construction of my underground bunker. The plan includes a special place for my coins and cards. The last thing I would want to have happen is my collectibles becoming radioactive. 😉
I just had a wave of panic buyers on ebay this past week. I sold more than I have the last six months.
I was going to list more inventory but now I'm hesitant. I almost regret letting go of the pieces I did. These are wild times, gentlemen.
What's your bay handle, I'd like to see what's flying off the shelves.
Modern bullion 1/10s to 1/4. Cleaned, damaged and former jewelry pre 33 gold. Basically my death pile is now gone.