There are numerous factors supporting the gold market and driving gold prices higher – several of which I’ve covered in previous blog articles here.

In this article, I want to address two of the most fundamental factors that are likely to continue driving the prices of gold and silver to new heights –

• Hedging against uncertainty
• Basic supply and demand issues

In addition, I also want to point out one less frequently discussed economic factor that could help to fire gold higher –

• Economic warfare waged by the U.S.

As I write this, gold and silver prices are both zooming to the upside. Spot gold is at $2,282 an ounce – just below a new record high it scored just a couple of days ago, and spot silver is nearing recent highs, trading at $26.71 per ounce. Let’s look at some of the key reasons why.

Hedging with Gold Against Everything in the World

Gold has long been touted as the ultimate inflation hedge, the most reliable protecting asset to hold when inflation is reducing the purchasing power of fiat currency. But gold isn’t just an inflation hedge. It also serves as a general hedge against any type of uncertainty in the world – economic uncertainty, political uncertainty, or any general public feeling of apprehension about the future.

Economic fears and uncertainty continue to persist. Inflation is still spiraling consumer prices for virtually everything higher and higher. In the US, from 2010 to 2020, the average price of an average loaf of white bread was relatively steady, at a bit below $1.50. What’s the average price in early 2024? - $2.03. That’s a whopping increase of more than 33%. But the cold, hard fact is that that’s one of the relatively smaller price increases on everyday food items, some of which have more than doubled in price in less than five years. (Come to think of it, the price of the Perrier water I’m sipping has also gone up by more than 30%.)

Also looming over the heads of the global economy are fears of rising interest rates and possible recession. As I’m writing this, the US stock market appears to be starting to falter in the face of uncertainty about the Federal Reserve’s possible future interest rate moves. Fewer and fewer economic analysts appear optimistic about the Fed’s ability to engineer a “soft landing”. Instead, many are either predicting that the US central bank will trigger a recession through its attempts to slow the rate of inflation – or that, in order to avoid such a recession, the Fed will again cut rates, triggering higher inflation.

Adding to economic and political uncertainty is the US border crisis. The current practice in major US cities such as New York and Los Angeles of doling out hundreds of thousands of dollars in aid to immigrants every single day is simply unsustainable. Eventually, something has to give – and when it does, the result isn’t likely to be pretty.

Geopolitical risk is higher than it’s been in quite some time. Added to the seemingly everlasting Russia-Ukraine war, we now have the growing conflict in the Middle East and China appearing as an increasing threat to the sovereignty of Taiwan and other countries in the Asia-Pacific region. Already stretched to the limit with aid to Ukraine and Israel, it’s not likely that the US and other major western powers are in any position to run to the rescue of any other countries.

Gold – Current Supply and Demand Situation

One of the most basic of economic tenets is that when demand for a commodity exceeds supply, the price of that commodity will rise. The current supply and demand situation with gold definitely signals higher prices.

The annual supply of gold removed from mines has remained relatively constant, at around 1,000 metric tonnes, for approximately the last decade. However, the demand for gold has risen sharply over just the past three years. Somewhat surprisingly, gold mining production has only very recently begun to increase in response to that huge increase in demand. Investor demand for gold continues to increase as gold prices soar, but there’s a new, and very significant, key factor in the gold supply and demand equation – central bank gold buying.

Central banks, particularly in the west, have, historically, been major sellers of gold. But their stance has now flipped, and central banks are loading up on gold at an astonishing rate. In 2022, worldwide central bank gold buying soaked up nearly all of the newly mined gold that year. Their buying represented roughly a 1,000% increase over the level of central bank gold buys in 2010.

The sharp rise in the number of central banks buying gold, and in the amount of gold that they’re buying, indicates that demand for gold will remain strong, driving gold prices higher, for at least several years to come. Because of the current central bank gold demand being so large, that should be true even if private investor demand should sag a bit (although it’s not looking like private investor demand is likely to do that anytime soon).

It's no small thing that central banks have made a massive policy shift in regard to their attitude toward investing in gold. And that’s certainly a factor that precious metals investors should pay attention to.

Gold as the Only Safe Asset from Confiscation

A third factor pushing gold prices higher is the economic warfare being waged by the US government on Russia (as part of its apparent “support Ukraine at any cost” foreign policy stance).

Early in the Russia-Ukraine war, one of the economic sanctions that the US imposed on Russia was freezing approximately $300 billion worth of Russian central bank assets that are in the form of US Treasury Securities. The bulk of those assets are held in a number of European banks or in the Euroclear clearinghouse, but the US government was nonetheless able to successfully freeze them.

Such as asset freeze essentially amounts to a sort of temporary theft, since the freeze bars Russia from selling the securities or receiving any interest payments due from them. The theft is “temporary” only in the sense that the assets are likely to be unfrozen and returned to the control of the Russian central bank at some point in the future. At least, that’s been the pattern when the US has frozen other countries’ assets in the past.

However, the US has upped the ante now, threatening to actually seize the assets (in short, outright, and permanently, stealing them). If the US follows through on this threat, then since the bulk of the assets are held in various European financial institutions, Russia might retaliate by seizing assets of several European countries that are US allies, such as Germany or France.

So, what does all that have to do with the price of gold? – Well, it simply points out the vulnerability of any type of paper or digital asset such as US Treasury securities. It’s worth noting that such securities have, historically, been considered as being among the safest assets to hold. But they can hardly be considered safe when they can be confiscated in the blink of an eye.

Which brings us back to gold. One of the major advantages of holding physical gold is that, unlike paper assets, it is much less vulnerable to this kind of governmental threat of seizure. That fact, along with the US sanctions, are driving both central banks and private investors to diversify more of their assets into gold as a means of protecting their financial position.

Investing in gold and silver mining stocks or ETFs can certainly be profitable, but the safest and surest way to invest in gold or silver is through buying physical coins or bullion.

Three Reasons for Higher Gold Prices – Summary

As I noted in the beginning, there are numerous factors driving gold and silver prices steadily – and, at the moment, rather sharply – higher. The three examined here are, I believe, three of the strongest reasons for higher gold prices.

• Basic supply and demand issues
• Hedging against uncertainty
• US economic warfare

First, these are all very large, very significant factors – factors that have worldwide impacts. That gives them stronger momentum to continue pushing the price of gold up. Second, they all represent major economic trends that are likely to continue for the foreseeable future. That means that the upward pressure they are putting on gold prices is likely to persist for some time to come.

• J.B. Maverick

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Sources:

https://www.zerohedge.com/markets/gold-everything-hedge

https://www.moneymetals.com/news/2024/03/28/gold-and-silver-a-hedge-against-currency-risk-003080

https://fred.stlouisfed.org/series/APU0000702111

https://investingnews.com/don-hansen-gold-silver-stocks/

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