When private money follows central banks, will there be enough gold to go around?
Having been a bank director, Alasdair MacLeod knows a thing or two about the health of the banking system, and how to spot one that’s contracted something. Talking to Liberty and Finance, MacLeod explained that the banking crisis we’ve been seeing is very much a top-down issue starting from central banks.
Watch here, or read on for my summary and analysis:
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It’s a tale as old as bailouts: if the average person managed their money as badly as big banks, they wouldn’t have a penny to their name. But then the same applies to an even greater extent in comparison between central and private banks, says MacLeod, with the former having basically zero accountability.
Liquidity is another thing they’re lacking, to summarize MacLeod’s lengthy and well-presented overview of the banking sector.
Most interestingly, perhaps, MacLeod says that central banks aren’t so much buying gold as they are getting rid of paper currency. We’ve all heard of this interpreted as diversification or de-dollarization. Maybe that’s just a polite way of talking around the issue. In reality, central banks are using paper money to buy gold – and not just foreign currencies, but their own as well.
Why would they do that? MacLeod says we only need to look to gold’s fundamentals for an answer. By 2025, the U.S. federal government will owe some $40 trillion in debt, which (if you’ll forgive the pun) there’s absolutely zero interest in ever paying off. Politicians might talk about balancing the budget, they might hand-wave about paying down the debt. Instead of listening to what they say, watch what they do. Find any elected government official willing to spend less on his own constituents – I challenge you.
I just don’t think the federal government is able to pay down its debt. Not without truly massive changes to “business as usual.” Interest payments already set us back over $1 trillion in the fourth quarter of 2023! As we’ve noted many times, inflation is the preferred method of “paying off” debt a government owes in its own currency.
To this end, MacLeod notes that governments are printing trillions in currency annually to prop up their economies with limited results – other than the certainty of inflation and higher interest rates down the line. As interest rates rise, money-printing will accelerate to match, resulting in even higher inflation to offset the debt and relieve pressure. (And to think, we’re yet to experience the effects of a single rate cut despite the current high rates!)
Despite gold’s price rising over the last three years, MacLeod believes we aren’t really seeing a bull market yet. He says that interest in gold is disappointing, with nearly every investor, public and private, severely underweight in gold. MacLeod estimates that, of the $150 trillion in global savings, less than 1% is currently in gold.
Nevermind prices: when these portfolios adjust to 5%, 10% or even what MacLeod finds a more reasonable 15%, where is the gold going to come from? Merely adjusting to 2% would require 23,000 tons of physical gold! That’s 10% of all the gold mined in human history…
We already know what a 1,000 ton annual purchase for two consecutive years does for gold. We’ve seen it over the past two years with the official sector. Since central banks aren’t likely to stop these purchases, MacLeod leaves us wondering just how soon the rest of the world will catch on.
When $150 trillion in global savings begins to diversify with gold, just how fast and how far will gold’s price rise?
Goldman targets $2,175 gold price; TDS predicts gold at $2,200 this summer
Will gold ever drop below $2,000/oz again? We’ve taken care to note how bearish outlooks have been coming in with increasingly lofty figures. Here is a quote from the research report:
The metal has been trading between $2,000 and $2,050, with the market adjusting to the Federal Reserve’s hawkish stance and delaying rate cuts until June 2024.
In other words, $2,000 to $2,050 are now “business as usual” targets. We find this to be a triumph of its own for gold prices, but of course, there is a whole lot more growth on the horizon. Goldman Sachs’ analysts are maintaining their $2,175 12-month target, citing both economic and geopolitical reasons for the forecast.
