More Gold Catalysts to Think About

Gold, silver, tech stocks, housing ETFs, and crypto all have one thing in common this Q4 2022: They are all experiencing price degradation associated with diminishing liquidity. Essentially, the money is leaving the market.

This is precisely what the Fed intended upon embarking on its Quantitative Tightening (QT) mission; weaken demand by removing liquidity from the market.

The only problem now is this giant recession we are faced with in 2023. Less money, less demand, less productivity, less work, less consumer discretionary income. You can see it already in falling home prices. And buyers walking away from deals because suddenly the house has lost value before the closing date arrived.

But we’ve seen this before. And historically, a bear market begets a bull market, and vice versa. So really, the only consideration we have before us is which assets and when, are going to rebound?

And this is where gold may be poised to be one of the better performers once this recession starts to recede into the rearview mirror.

Why?

Because there are increasing headwinds in the market for Treasuries that could make gold the more attractive bet.

“We’re getting to the point now where the interest expense on the debt is so high that it’s going to eat up basically our ability to service the next generation and I’m not even sure about the current one,” said Stanley Druckenmiller, Chairman and CEO of the Duquesne Family Office. Druckenmiller is most famous for delivering average absolute returns of 30% or better to his clients for the 30 years preceding his retirement in 2010.

With the BRICS  group of countries BRICS (Brazil-Russia-India-China-South Africa) now intent on launching a competitive trade currency to the US dollar in an effort to “de-dollarize” an increasing proportion of  global lending.

China’s launch of the “petro-yuan” and associated futures on the Shanghai Futures Exchange has not only gobbled up a significant percentage of the US dollar trade volume of oil, but China implemented a mechanism whereby it can be easily transferred into gold.

This is probably the most significant factor for gold going into 2023, and is one of the principal drivers of gold movements from west to east.

Considering that the US dollar is still in the driver’s seat but losing market share fast, the US is moving toward the launch of its Central Bank Digital Currency, a move that has conspiracy theorists claiming that your spending will be under tight control by the government. The United States is the main driver of negative gold sentiment and has been accommodating price determination in the futures market through coordinated opaqueness and delayed reporting in the Commitment of Traders disclosure of commodities market movements.

According to a study published in March 2022 by Cambridge University, “the share of the US dollar in Russia–China bilateral trade settlement fell from nearly 90 percent in 2015 to 46 percent in 2020 (Reference SimesSimes, 2020). Moreover, Russia and China have launched their own cross-border payment mechanisms as alternatives to the US-dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.”

The last time we projected a major move higher in the price of gold was at the end of 2008 after gold crashed along with everything else, as the housing collapse caused the last deflationary recession.

The landscape this time is inverted because the US does not have the option to lower rates in the current environment or print more liquidity. Though many believe these twin policies are the only inevitable avenue available to the Fed to restore economic growth, it likely won’t do so until we see some backtracking in the inflation numbers.

With the deflationary effect now evident in key commodity prices like copper and lumber, it appears as though that reversal should show up in CPI at some point in the next quarter.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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