The 5 Catalysts behind gold’s outperformance of markets in 2022

Few recognize that, on a relative basis, gold has outperformed literally every other asset class on Earth in 2022. Even with year-to-date performance of 6 percent, gold has outshone Bitcoin (BTCUSD-55% YTD), the S&P500 (INDEXSP: .INX -23.52% YTD), the Dow Jones Industrial Average (INDEXDJX: .DJI -19.38% YTD) and the NASDAQ100 (INDEXNASDAQ: NDX-30.83% YTD).

Even fewer recognize the geo-political factors behind fold’s relative outperformance, which collectively bear scrutiny as those trends are poised to define the financial markets landscape in 2023. So here they are, as I see it, in order of magnitude of impact on gold’s strength:

1. Evaporating demand for US bonds: Multiple mainstream news channels are reporting that  the usual buyers or US debt are largely absent from markets, while wildly fluctuating futures prices in treasuries add to the reluctance. With the Fed officially in “quantitative tightening” mode, where they seek to reduce the US debt on their balance sheet by finding new buyers, it underscores how the market is not willing to act as the Fed’s exit strategy for its excessive gorging on debt, which is part and parcel of the illusion that the $32 trillion US debt is in fact not unserviceable.

This, in turn, as implications for the entire global financial system, since, by the UK’s example, they can broadcast QT all they want. But they might still have to buy government debt if nobody else is willing to take it. The result is that gold, from the perspective of “safe haven asset” looks more solid than gilts or treasuries.

2. The growing threat World War 3 a Russia-Ukraine drags on: I’ve said it before and I’ll say it again; the reason China is so silent on the Russian invasion of Ukraine is because it plays into their longer term interest in a militarily weakened West. Since China became Russia’s biggest natural gas customer in 2014, the orbit of these two historically ideologically aligned superpowers has only grown tighter.

And now with Saudi Arabia and  its murderous leader Mohammed bin Salmon (MBS) gravitating naturally toward oppressive governments of China and Russia, the alliance of the western nations versus those of the east are starting to take on the contours of the new Allies vs Axis. Even Vladimir Putin is vocalizing increasingly about nuclear strikes and World War III.

3.  Inflation: I hate that term. It makes it sound like inflation is some kind of natural phenomenon when it is anything but.  Central banks sewed the seeds of runaway price inflation with their own runaway money inflation. And now, as is in the 1980’s, their only available avenue to induce a reduction in inflation is by spiking interest rates. Which in turn begins to undermine every aspect of financial market positive catalysts. Housing prices: down. Stocks? Plummeting. Commodities: crashing (except gold). Bonds? See section 1 above.

4. Crypto rugpull by central banks imminent: Just as it served the interest of central banks to permit the unregulated proliferation of crypto currencies when it was inflating the monetary supply, it now is adverse to central bank interests to allow crypto currencies to compete with sovereign currencies during quantitative tightening.

Bitcoin was an acceptable sponge of plenty of the excess liquidity created by central banks, and was at least in part responsible for delaying the onset of runaway inflation. As the G7 moves closer toward the rollout of their own Central Bank Digital Currencies, you will see that the rules enacted around cryptos of every flavour will tend incrementally toward defining them as securities, and outright barring their use as a currency.

As this intention becomes the reality, all of the trillions wrapped up in shitcoins and the lesser shitcoins, the cyrpto crowd will be forced to acknowlege reality, and will likely gravitate toward gold, since it exhibits the properties that attracted them to crypto in the first place.

No sovereign nation will permit the privatization of the monetary system simply because it is the means of control over their populations and political systems.

5. Scarcity: Since 2010, annual total mine production has remained more or less constant between 2,200 and 3,500 tonnes per annum. In that same timeframe, the averagre price of gold per ounce has nearly doubled. Yet the doubling of the sale price per ounce fails to catalyze new production on any sort of scale.

Why? Because gold resources just can be extracted any faster than they are currently. And the average grade of gold being mined has been drastically falling within that time frame, meaning that the ounces of gold are increasingly more expensive to produce.

The World Gold Council states that there are roughly 53,000 tonnes of gold in the ground in the form of proven reserves. Given the annual gold demand of roughly 5,000 tonnes, this means that gold from mines will last no more than another ten or eleven years. Without gold recycling, which provides around 1,000 tonnes per year, that supply could be exhausted much sooner.

No matter how you look at it, and compared with the alternative safe haven assets like cryptos, gold’s appeal as a preservation of purchasing power has only strengthened during the last 10 years. With geo-political tensions rising quickly and on many fronts, don’t be surprised if gold has another breakout run before the end of 2022. And look for its relative outperformance to remain solid throughout 2023.

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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