‘Gold doesn’t always move with the news’: Economist explains record price

Gold's Unexplained Surge to $4,000 [00:00]

• The price of gold has reached $4,000.
• The Goldman Sachs commodity index has been flat year-to-date, with no significant movement.
• In contrast, the price of gold has been consistently rising.
• Traditional indicators do not seem to support gold's ascent:
  • The 10-year Treasury yield is around 4.10-4.11%, not significantly rising.
  • The dollar (DXY) is holding strong around 98.
  • Oil prices are stable or decreasing, with OPEC loosening production.

I must confess I don't understand it. Uh I'll add to this um these are my editorial biases, but nothing seems to back up the gold.

This section highlights the perplexing rise of gold's price to $4,000, noting its divergence from the performance of broader commodity indexes and key economic indicators such as interest rates, the dollar, and oil prices. The speaker expresses bewilderment at this trend, as conventional economic drivers do not provide a clear explanation.

Central Bank Demand as a Key Driver [01:19]

• There is one additional buyer for gold that is not present for other commodities: central banks.
• Demand from central banks is a significant factor at the margin for gold prices.
• This trend started after the assets of the Russian central bank were frozen.
• Central banks decided to hold more physical gold, which cannot be seized, rather than fiat currencies.
• There is a consistent demand for gold from the central bank sector.
• Central banks are still actively buying gold.
• While central bank buying initiated the rally, it has since broadened out.

So what we're seeing is at the margin a lot of the demand is coming from banks and it's starting for something that has nothing to do with the US economy.

The primary explanation offered for gold's price surge is the significant and ongoing demand from central banks. This shift in strategy, driven by concerns over asset seizure, has led to a sustained purchase of physical gold by these institutions, a unique driver not seen in other commodities.

Gold's Performance Relative to the Dollar and Crypto [02:01]

• The current gold rally is not necessarily anti-dollar.
• This can be inferred by looking at the cryptocurrency space.
• Many in crypto claim to be anti-dollar, yet they have self-selected stable coins.
• Stable coins are pegged to the dollar, indicating significant global demand for dollar-tied assets.
• This suggests that gold's price increase is not signaling a problem against the dollar, but rather some other underlying factor.

which tells you gold is not signaling any problem against the dollar. It's something else that's going on.

The analysis suggests that gold's current price movement is not a reflection of weakness in the U.S. dollar, as evidenced by the continued demand for dollar-pegged stable coins in the cryptocurrency market. This implies that other, external factors are driving gold's appreciation.

Inflation Protection and Investor Behavior [02:47]

• Gold does not always move in lockstep with the news, exhibiting a "bull whip effect."
• During a period of ramping inflation under the Biden administration, gold prices remained relatively stable, contradicting the notion of it always being a safe haven.
• It is possible that the current demand for gold reflects a continued flight to inflation protection.
• Investors may be seeking to avoid being "burned again" by inflation, as they were in the past four years.
• If this were the sole driver, bond yields would be higher (above 5%) and broad commodity indexes would be booming.

And maybe one of the things that we're seeing right now is that continued flight to inflation protection because investors are essentially saying, "I don't want to get burned again like I did the last four years."

One perspective suggests that investors might be seeking inflation protection through gold, aiming to avoid losses experienced during past inflationary periods. However, this argument is challenged by the lack of corresponding positive movements in other inflation-sensitive markets like bonds and commodities.

Gold's Performance in the Broader Commodity Context [03:47]

• Gold needs to be watched in the context of the overall commodity picture and inflation picture.
• Bonds would need to validate gold's price action for the inflation protection theory to hold.
• The CRB index and the Goldman Sachs commodity index are not showing strong upward trends.
• The dollar is not collapsing, which would typically correlate with a strong gold rally if it were solely about dollar weakness.
• The speaker references Bunker Hunt and the silver bubble of the early 1980s as an example of a market that became overheated and eventually collapsed.

But but there's that monetary speculation to gold, right? Like what Mark was talking about with all these central banks buying gold, they're not doing that with other commodities.

The speaker emphasizes that gold's performance should be analyzed alongside other commodities and inflation indicators. The current trend is not supported by strong movements in bonds or broad commodity indexes, and the dollar's stability further complicates the narrative, suggesting that unique monetary factors are at play.

Monetary Factors and Money Supply [04:38]

• There is monetary speculation in gold, largely driven by central banks' purchasing of gold, which they do not do with other commodities.
• Gold and silver possess unique monetary capabilities.
• This unique capability likely explains some of the current run-up in gold prices.
• From a monetary perspective, there is no clear explanation for gold's price increase:
  • The Fed is still shrinking its balance sheet.
  • Reserves are down to $3 trillion.
  • The balance sheet was once almost $10 trillion.
  • The M2 money supply is growing at 3-4%, a significant decrease from the 30% growth seen five or six years ago coming out of COVID.

So, I just I can't even find a monetary explanation for it.

The transcript highlights gold's unique monetary attributes, distinguishing it from other commodities and suggesting this could be a factor in its price surge. However, a traditional monetary explanation is absent, as key indicators like the Fed's balance sheet reduction and moderating money supply growth do not support this price action.

Global Investor Concerns and Foreign Demand [05:51]

• The discussion shifts to a global perspective, with many investors outside of America concerned about high debt levels worldwide, particularly in Europe and Japan.
• These investors fear that other countries may have to choose inflation as a solution to their debt problems.
• Gold can increase in price if people in other countries expect inflation, even if it's not occurring in the U.S.
• The current demand for gold is believed to be largely foreign.

And so it might not be inflation in the US, but gold can go up if people are expecting it in other countries as well. And the demand is is foreign, I think, right now.

A significant portion of gold's current demand is attributed to foreign investors. These investors are concerned about the high debt levels in other countries and the potential for them to resort to inflation to manage their debt, driving demand for gold as a hedge.

Stocks vs. Gold as an Investment [06:20]

• Profits are rising at a double-digit pace, which is seen as the foundation for stock market growth.
• Interest rates are coming down.
• There are business incentives, leading companies to put capital to work.
• Despite short-term market fluctuations (e.g., a 100-point drop), the stock market has experienced a "fabulous rally."
• Stocks are considered a more attractive investment compared to gold for some.
• Better tax policy and regulatory policy are seen as bullish for stocks.

I'd rather own stocks. Stocks with profits. Real profits and tax incentives. Sorry.

The speaker expresses a preference for investing in stocks over gold, citing strong profit growth, falling interest rates, and supportive business policies as key drivers. While acknowledging potential short-term volatility, stocks are presented as a more fundamentally sound investment opportunity.