May 2023 - Week 3 Edition

Gold’s Move Below $2,000 Likely A Temporary Fluctuation Before Jump

Gold dropped below $2,000 on Tuesday, May 16 after staying above that important historical level for the first half of May – 11 trading days – its longest-ever string of days over $2,000 per ounce. The drop is attributable to nervous markets over the debt ceiling debate but that is only a partial and misleading interpretation, since the last major debt ceiling debate saw a U.S. credit rating downgrade and gold soaring to record highs in August 2011. The U.S. Dollar Index is up since Friday and the 10-year Treasury bond rate is steady-to-down. Both indicate the market thinks a resolution to the debt ceiling is near or a “given” or it’s irrelevant, so gold has fallen. However, if the debt limit is serious, gold could suddenly soar.

Debt is Rising Faster and Inflation is Still Serious as Politicians Ignore Root Causes 

As most taxpayers could guess, April is usually a big tax-income month due to the April 15 tax deadline but not in 2023, when April saw the monthly budget surplus decline 73% from April 2022, according to The Wall Street Journal (“Spending Soars, Revenue Falls”). The Journal added these sobering details:

“The deficit for the first seven months [of FY’23] is already $928 billion, or 236% higher than in 2022 with timing adjustments. Keep in mind that this is happening when the economy is still growing, and the unemployment rate is still low. The big culprit is spending, which is up 12% in the first seven months, or nearly $400 billion…Entitlements are up 11% and education spending owing to student-loan changes is up 56% …. Interest on the national debt rose 40%, or $107 billion, and is already $374 billion for the first seven months” (Wall Street Journal, May 8, 2023)

This has pushed the “debt ceiling” deadline up to June 1, according to U.S. Treasury Secretary, Janet Yellen. That is just two weeks from now, although she may be fudging a bit to get her boss, President Joe Biden, to the negotiating table. The Treasury could probably “borrow from Peter to pay Paul” for a few more weeks before hitting a hard brick wall of “no more money in the till.” There may come a day when Uncle Sam’s checks will bounce, perhaps in June or maybe leading up to July 4th, so those checks should not be written, unless Congress acts very soon.

The inflation statistics keep nagging the Biden team, as well, with 12-month CPI rates still near 5%. Last Wednesday, May 10, the Labor Department announced that the Consumer Price Index (CPI) rose 0.4% in April and 4.9% in the past 12 months. Energy prices rose 0.6%, so the core CPI, excluding food and energy, also rose 0.4% in April and 5.5% in the past 12 months. The core Producer Price Index (PPI) rose 0.2% in April and 3.4% in the past 12 months but the worst news was wholesale service costs rose to the highest level in six months. That “transitory” inflation touted by Yellen in 2021 is still stubbornly high going into a third straight year.

Investors Favor Buying Gold Now

We are noticing a huge surge in demand for gold bullion products – either bullion coins or common-date $20 Gold Liberty and Saint-Gaudens double eagle gold coins even in circulated condition. Many more investors than before – or at least since the Great Recession of 2008-09 through the last major debt ceiling debate and dollar downgrade of 2011 – are buying gold, and like it did then, will eventually push gold prices upwards. We are seeing evidence of this throughout America in several markets and in some recent polls. Here are two – a Gallup Poll, and a Bloomberg poll:

A recent Gallup poll showed that Americans’ choice as one of their favorite investments for the long-term is gold, second only to real estate. In the last year, gold leaped over stocks, rising from 15% to 26%, from third place to second place and reaching its highest level in this annual poll (taken every April) since 2012.

In addition, Bloomberg took a poll of investors last week called “Markets Live Pulse” and found that gold was the #1 choice for investors now, with a special focus on protection from the debt ceiling crisis. Over half of those surveyed chose gold as protection against this risk. In the week of May 8-12, Bloomberg asked, “What will you buy if the U.S. hits the debt ceiling?” Gold led by a long shot:

No wonder we are seeing such interest in gold bullion products in this time of multiple financial and geopolitical challenges. I’m sure we will also see a good percentage of these gold bullion buyers move up to rare coins within 18 to 24 months, as we have seen in all gold bull market cycles in the past. I cannot stress enough how important it is for you to contact our professional account representatives to strategize your long-term plans for investing in gold.

Major Banks See Gold Rising to Record Highs in Debt Default Scenarios

Besides bullion demand, we now see rising gold ETF demand among Wall Street investors and rising demand for gold on the futures market, as well. The leading Australian bank, ANZ (Australia and New Zealand Banking Group), said on Monday, May 15 that, “We expect gold ETF flows to turn positive for the rest of this year,” explaining that “the U.S. banking sector issues, elevated interest rates and uncertainty around the debt ceiling are dampening the economic outlook and boosting safe-haven demand for gold.”

ANZ Bank has forecast gold rising to a record $2,100 an ounce by the end of 2023 and $2,200 in the second half of 2024. They see any price dips, like this week’s dip below $2,000, as buying opportunities.

Commerzbank analyst Thu Lan Nguyen, added, “Any debt default by Washington, even if only temporary, would doubtless have serious negative repercussions for the U.S. economy, which makes it more likely that monetary policy will be loosened – to a greater extent than is already priced in on the market – and make gold more attractive in relative terms as a non-interest-bearing investment.”

Any debt default – however brief – could result in a series of potentially “cataclysmic” events, according to a new report released by Moody’s Analytics. Credit ratings agencies would downgrade U.S. debt, by definition, if it failed to meet its obligations of timely payment. Moody’s “worst-case” scenario sees a replay of 2008 with a 20% stock market decline and huge (7.8 million) job losses. Let’s hope Washington DC smartens up in time, but history (and Biden’s track record) concern us and we remain cautiously optimistic.

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