Gold Prices Decisively Break Out to New All-Time Highs Surging 4.5% This Past Week
What do you need to know about what's happening and why? - Article #41
In this 15 min article, The X Project will answer these questions:
I. Why this article now?
II. What did The X Project cover previously about gold?
III. What should you know about gold and real yields?
IV. What should you know about ETF holdings of gold?
V. What should you know about the price of gold miner stocks?
VI. Is this a new gold bull market?
VII. What happened in prior gold bull markets?
VIII. How high might gold prices rise?
IX. What does The X Project Guy have to say?
X. Why should you care?
Reminder for readers and listeners: nothing The X Project writes or says should be considered investment advice or recommendations to buy or sell securities or investment products. Everything written and said is for informational purposes only, and you should do your own research and due diligence. It would be best to discuss with an investment advisor before making any investments or changes to your investments based on any information provided by The X Project.
I. Why this article now?
Here we go again! The glittering metal we all covet—and you should if you don’t—just did it again! Gold prices surged 4.5% this past week, decisively reaching and closing at a new all-time high price of $2,178.64 per ounce. And yet, given the lack of attention from traditional and financial media and news outlets, there's a good chance you had no idea this happened.
The biggest reason for this article now is, as the title states, that gold prices have decisively broken out to new all-time highs. What do I mean by “decisively”? The 56-year gold price chart above certainly shows the recent move higher, but let’s zoom in on a five-year chart to get a better idea of recent price action.
Until recently, the prior all-time high price in gold was $2,075 per ounce, set in August 2020. (Note: all gold prices referenced from now on are “per ounce” unless stated otherwise.) Then, the gold market moved sideways for a few years with a couple of attempts to push higher, including March 2022, when the price rose to $2,070 and May 2023, when it rose to $2,072. But to understand the context of a “decisive breakout,” let’s zoom in again to a six-month chart.
On Friday, December 1, 2023, gold prices rose to match the previous all-time high of $2,075 and closed at $2,071. The following Monday, December 4, 2023, gold prices reached a new intraday high of $2,135 but closed lower at $2,030. Those new high prices prompted The X Project’s first article on gold, which we’ll review in the next section below. However, it was not a “decisive breakout” since prices fell back that same day and and continued to fall over 4% within two weeks.
On December 27, 2023, gold prices again closed at a new all-time high of $2,077 after reaching $2,084 intraday. Again, this was not a decisive move, as prices started out higher reaching $2,088 the next day and then retreating and continuing to fall by 4% over the next month and a half.
But then, on March 1, 2024, gold prices ended the day (and the week) at a new all-time closing high price of $2,083. And unlike the last two times, gold prices continued marching higher every day last week closing at $2,178.64 per ounce. As you can see in the charts above, this recent move is a “decisive” breakout to new all-time highs.
II. What did The X Project cover previously about gold?
As mentioned above, on December 7, 2023, The X Project published “Gold Prices are at New All Time Highs: Why now? And what does it possibly mean? - Article #13.” This first article was meant as a primer that provided a lot of background information, and the ten section headers for the article are as follows:
I. What just happened?
II. What is gold?
III. What is the history of gold prices?
IV. Why do people historically buy gold?
V. What historically causes gold prices to go up and down?
VI. How much gold is there in the world today?
VII. What are the supply considerations for gold?
VIII. Are Central Banks buying or selling gold?
IX. What are The X Project Guy’s comments?
X. Why should you care about gold?
Last month, on February 4, 2024, The X Project published “Navigating the Golden Tide: A summary of the World Gold Council's Report: ‘Gold Demand Trends: Full Year and Q4 2023’- Article #31.” The ten section headers for this article are as follows:
I. Why this article now?
II. What is the World Gold Council?
III. Where is this perspective coming from?
IV. What is the top takeaway from this report?
Colossal Central Bank Buying Continued in 2023
V. What is another top takeaway?
Jewelry Demand Firm in the Face of Record Gold Prices
VI. What is a third takeaway?
Investment Demand Declined Led by ETF Outflows
VII. What is a fourth takeaway?
Strong Gold Prices Indicate Robust Demand
VIII. What is a fifth takeaway?
2024 Outlook
IX. What does The X Project Guy have to say?
X. Why should you care?
You should read both articles if you have not already done so.
III. What should you know about gold and real yields?
In Section V of The X Project’s first article on gold, I stated there's often an inverse relationship between interest rates and gold prices. When interest rates are low, the opportunity cost of holding non-yielding assets like gold is lower, making gold more attractive to investors. Here is a chart, courtesty of Luke Gromen of FFTT, of 10-year Treasury Inflation-Protected Securities (TIPS) yields inverted with the price of gold.
In early March 2022, just before the Fed starting hiking rates, gold prices reached a high of $2,070. And then the Fed began with its first 0.25% rate hike in mid-March, followed by a 0.50% hike in May and a 0.75% increase in July and again in September. Gold prices predictably declined as interest rates rose, falling to a low of $1,614 by September of 2022. That was a fairly steep decline of 22% in six months for gold prices. But the Fed was not done. It hiked 0.75% in November 2022, 0.50% in December, and 0.25% each in months February, March, May and July of 2023. But gold prices surprised everyone by diverging from the historical pattern and started rising from those September 2022 lows. Gold bulls took heart that prices stopped going down and traded sideways in a range from $1,800 to $2,000, despite interest rates rising and then staying elevated. Gold bears took this as a temporary anomaly that would eventually correct by gold prices falling.
IV. What should you know about ETF holdings of gold?
The amount of gold held by Exchange Traded Funds (ETFs) had historically been strongly correlated with the price of gold. However, just as the divergence between interest rates or yields and gold prices started to diverge, so did the ETF holdings of gold start to diverge with gold prices. This likely occurred because holders of gold ETFs in large part believe in the historical relationship above, and therefore assume the divergence will correct by gold prices coming down and so are selling in advance of that expected move. What this means is despite net selling by gold ETF owners, gold prices continue to move higher led by demand by central banks and other sectors as described in the second article on gold by The X Project referenced earlier that is greater than the net selling by ETFs.
V. What should you know about the price of gold miner stocks?
While gold prices are hitting new all-time highs, the price of gold miners are far from their all time highs. The chart below shows the price of gold vs. the GDX gold miners ETF.
GDX’s all time high price was $66.98 in September 2011, and it closed Friday at $29.64. If gold prices continue marching higher, gold mining stocks are bound to catch up and eventually make new highs.
VI. Is this a new gold bull market?
That is a good question. Some will argue that the recent breakout to all-time highs starts a new bull market. In that context, the prior bull market was from the November 2015 low price of $1,052, ending with the August 2020 high of $2,075. That was a near doubling of price or a 97% increase in 58 months. Let’s zoom back out to the 10-year chart to see that perspective.
But this breakout starting a new bull market will be far from a unanimous opinion. Others will argue that the recent breakout is just a continuation of the third bull market that began in November 2015. So, let’s zoom back out and look at the bigger, long-term picture again.
VII. What happened in prior gold bull markets?
The first bull market began in March 1968 when the London Gold Pool, established in 1961 by eight central banks to maintain the Bretton Woods fixed exchange rate and control gold fluctuations, collapsed which led to the establishment of a two-tiered gold market: one in which gold was still used to settle international accounts at the old $35.00 per ounce price, and a private market where the price of gold was allowed to fluctuate. That first bull market topped out in January 1980 at $835 after 150 months and a 23.9x increase in price.
The second bull market started at the August 1999 low of $252 and ended with the September 2011 high of $1,920 after 145 months and a 7.6x increase in price.
And if we accept that the third bull market began in November 2015 at $1,052, then we are 100 months into it with a 2.1x price increase so far.
VIII. How high might gold prices rise?
This is perhaps the most important and interesting question. Of course, no one really knows for sure but if we consider the last two bull markets, we can make some quick guesses as to the potential. The last bull market saw a 7.6x increase in price, which would give us a price of ~$8,000 if we saw a similar increase from the November 2015 low. On the other hand, the first bull market after Bretton Woods saw a 23.9x increase, which would give us a price of ~$25,000. That is an impressive range of 3.6x to 11.5x from the current price.
But is that realistic? Let’s look at a real analysis by professional investors, and for that we turn to well known and respected natural resource investors Goehring & Rozencwajg. They posted an article titled “The Upcoming Gold Bull Market: How High Will Gold Prices Go?” on August 31, 2023 that is worth reading in its entirety, but I will summarize their answer to the question here:
“In past gold bull markets, the value of the Treasury’s gold holdings has surpassed the monetary base by over 1.5 times – including in 1980 after the US dollar was no longer backed by gold.
Given the Fed’s balance sheet explosion since 2009, a projected target price for gold seems outlandish. The Fed’s monetary base today stands at $5.6 tr. For the Treasury’s gold holdings to cover the monetary base by 1.5 times, gold would have to reach $32,000 per ounce. Critics might argue the monetary base is distorted by excess reserves left on balance at the Fed. At present, excess reserves foot to $3.2 tr, and the Fed has talked of someday draining them out of the system. If that were to happen, the Fed’s monetary base would fall to $2.4 trillion. Even under this conservative scenario, gold would have to reach $14,000 for the Treasury’s gold position to cover the monetary base by 1.5 times. Although these numbers sound outlandish, they represent relationships that have emerged twice in the past 100 years. The first time (the late 1930s) was during massive deflation, while the second (1970) was during inflation. In both scenarios, gold had become the “must own” asset class that all investors clamored for, and the valuation of gold was pushed to the extreme.
Could the dollar value of the Treasury’s gold holdings reach 1.5 times the monetary base-- as it has twice in the last 100 years? We believe it’s highly probable. As financial turmoil surges this decade, investors will aggressively buy gold as an asset class that provides both wealth protection and the opportunity for huge speculative profit. In such a scenario, gold’s valuation could very well be pushed to extremes just like it was in the late 1930s and 1980.
What about looking at the Dow-Gold relationship?
In the 1930s, the Fed aggressively shrunk its balance sheet by half, producing a deflation implosion that turned into the Great Depression. At the worst point in the crisis, the Dow traded at half its $80 book value. By 1934, gold (now at $35 per ounce) nearly reached parity with the Dow. Currently, the Dow’s book value is 8,000. Were the Fed to undertake equally draconian hawkish measures as in the 1930s (something we believe to be unlikely), the Dow could conceivably trade for half its book value, or 4,000. Were gold to trade at parity to the Dow, like it nearly did in 1934, it would more than double. In other words, in the most extreme deflationary scenario, the Dow would fall almost 90% while gold would double – similar to between 1929 and 1934. Investors, with a substantial gold allocation, would do very well.
In the late 1970s, the Fed ultimately raised interest rates to record levels in a final successful attempt to break the inflationary forces of the past twenty years. Record real rates put severe downward pressure on global equities. By 1980, the Dow traded at its book value of 850. Gold reached parity with the Dow in January 1980.
If we repeat the 1970s and the Fed raised interest rates significantly because of persistent acceleration in inflation, we should see a huge bear market in the Dow with a downside target of its 8000 book value. If history were to repeat the 1970s experience, the Dow to enter a huge bear market and potentially trade down 75% to its book value, and gold prices would rise four–fold. Again, investors with significant gold allocations would be the winners.
Finally, let us consider a third scenario that has never occurred in 230 years of US financial history. What might happen if the US directly monetized its debt?
Given the massive amount of sovereign debt held by governments worldwide and the inherent refinancing risks that it creates, countries (including the US) may attempt to directly monetize their debt in response to a potential failure of a government debt auction. Were this to happen, inflationary pressures would surge, and hyperinflation may ensue. Our hunch is that equities markets may rise, but gold would enter a massive bull market as investors sought assets to protect against currency debasement and the resulting inflation. In such a scenario, gold could easily surpass $35,000 per ounce – 1.5 times today’s $5.6 tr monetary base. Once again, the winners would be gold investors.
In our view, gold will emerge as the asset class with the most potential this decade, no matter the financial or geopolitical backdrop. Under the most extreme scenarios (a repeat of the deflationary implosion that produced the Great Depression or a period of inflation that verges on hyperinflation), gold will be the winning asset class.”
IX. What does The X Project Guy have to say?
First, owning gold is my highest conviction investment thesis. I currently hold 2.5% of my net worth in physical gold in my possession, and I am continuing to accumulate gold and aiming for at least 5% and hopefully as much as 10% within a year. More speculatively, I also have about 0.5% of my net worth invested in gold and silver mining companies - with half in blue chip miners and half in junior miners. I will be adding to those positions and looking to bring that allocation up to at least 1% and hopefully 2.5% of my net worth. If we get a recession and a sharp pullback in the equity market, then it is likely both gold and miners will go down as well. And that is why I also have a large cash and short-term U.S. Treasury bill position so I can take advantage of that opportunity should it come to pass.
How do I buy physical gold ? I buy coins and bars (a.k.a. bullion) in several ways… first, I buy American Gold Eagle coins from a local coin shop that is an “authorized purchaser” from the U.S. Mint. The coins are “circulating coins” but are in pristine condition with no visible signs of any wear and tear. You can see the U.S. Mint’s definitions here for proof, uncirculated, and circulating coins. You can buy directly from the U.S. Mint, but they usually are unavailable, and the premium is ~40% above the spot price of gold. The disadvantage of buying from a local dealer is that they also do not always have available inventory, so I have learned to call first. One of the advantages of buying locally is that I pay cash; therefore, there is no record of my purchase. This is important because the U.S. has outlawed the private ownership of gold, and it may do so again in an attempt to save and preserve their fiat currency. I have paid dealer premiums of between 7% and 11.5% locally.
I have also bought American Eagle coins and 1 oz—bars from online dealers such as www.nationwidecoins.com and www.goldsilver.com. The dealer premium is currently 8.5% at the latter. They often have promotions for first-time customers, offering a single 1 oz. American Gold Eagle with no premium or free 1 oz. silver eagle coins with your purchase that I have taken advantage of. The first time buying online was a little scary, but they are reputable firms, and I received what I purchased via insured FedEx shipments.
I also invest in gold via my brokerage account by buying the VanEck Gold ETF with the ticker OUNZ. I chose this ETF because it allows investors to redeem their shares for physical gold. While I have not yet done this, I intend to do so within the year. One advantage is that there is no taxable event when you take possession of your physical gold. The reason why I do not want to continue holding my gold ETF shares and instead take physical possession is in the event of a financial or currency crisis, there is no guarantee I will realize the entirety of the gold price appreciation.
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