Gold: Where It Has Been and Where It's Going

If ever one needed more reason to accept gold as the new reserve asset in a backdrop of unsustainable global debt, objectively over-valued risk assets, openly debased fiat money and a critical period of clear inflationary and geopolitical risk, the events of early August make gold’s case almost too obvious.

There are countless needles pointing at the current $300T+ global debt bubble, any of which can, have and will continue to threaten global financial markets.On August 5th, for example, the latest “needle” came from Japan, which was not surprising to any (including Warren Buffett) who track markets.
 

Warnings from Japan

The sudden reversal of the so-called “Japanese carry trade” sent markets into a panic, reminding us all of just how fragile, over-indebted and liquidity-thirsty global markets are. For years, Japan has served as a veritable “rate-based prop desk” for the rest of the world. That ended this month.
 

With interest rates lower than Wall Street rates, the shadow banking system has been happily borrowing yen for almost free (rather than paying 6% or more in the US) and then re-investing (and levering) that borrowed money primarily into tech stocks, accounting for nearly 10% of the tech trade in the US markets.
 

This rate arbitrage worked great so long as Japanese rates stayed low and tech stocks stayed high. But those are dangerous assumptions. All it took to unwind this risky game was an August Japanese rate hike of 15 bps to unwind $20T of “carry trade” liquidity in a matter of hours.
 

In short, rates went up and tech went down—way down, making a mockery of the so-called “magnificent seven” tech names and the AI/semi-conductor mania leading an otherwise narrow US stock market. We’ve been warning of this carry-trade/rate-risk for over a year. 
 

Market Bugs Looking for a Windshield

It’s likely no coincidence that Buffet’s Berkshire Hathaway had gone $200B to cash prior to the Tokyo rate hike because the writing was on the wall: These markets are a bug looking for a windshield.
 

In addition to crushing the big tech names, the rate hike in Tokyo sent Japan’s two largest banks downward 12-15% in a day; the Yen spiked against the dollar; the Nikkei 225 Index saw its worst day in history (losing over 4,500 points) while the NASDAQ futures collapsed to levels not seen since the 2020 crisis (-6.5%).
 

Perhaps most importantly, BTC saw greater than 13% losses in a single day, reminding us all that “digital gold” is not really gold, and that, at least for now, this so-called “alternative currency” behaves precisely like an over-levered tech security than a global store of value. Just saying…
 

The End of the Beginning

August 5th, however, was not the beginning of the end for global markets, but certainly the end of the beginning in the slow-then sudden drip to a global financial crisis, which no-one can time but for which anyone can prepare. In many ways, this was more of a mean-reversion than it was a panic, and the S&P 500’s 200 moving day average is still well above 5000.
 

In other words, these markets face a lot more mean-reversion, needles and “pops” ahead. The volatility of August is just a small taste of what’s to come. 
 

Golden Signposts

Gold too, saw negative price movement in the eye of the recent carry trade storm, but its volatility was minimal compared to all other asset classes. Its global Sharpe ratio is the best in the world.
 

Between the S&P, BTC and gold there can only be one winner, and what we saw this month makes us all the more confident that gold is that winner. But far more important than the symbolic and telling ripple effects out of Japan, gold’s outperformance is made evident by much greater forces already in play.
 

Yes, gold can be temporarily sympathetic to crashing markets, as bloodied investors sell their only stable asset (gold) to cover losses and margins in their risk asset allocations. We saw this in 2008.
 

But 2024 is not 2008. And gold is smiling. Why?




























 

Play Where the Ball Is Heading, Not Where It Sits

Just look at the world around you, and look at what is happening with gold’s directional moves. The list of now obvious facts and movements in gold’s favour is plain to see.
 

1. Eastern central banks have been net-stacking gold and net-dumping USTs since 2014. Why? Because they know gold will be playing the key role as a reserve asset now and in the years to come. Nations and central banks trust this metal far more than paper IOUs backed by increasingly debased paper money.
 

2. More than 45 countries are net-settling their trades outside of the USD. China is buying oil from Russia and net-settling in gold.
 

3. Major oil nations, including Saudi Arabia and the UAE, have joined the BRICS+ alliance and are slowly but surely stacking gold while selling oil outside the petrodollar system.
 

4. Over the last year and a half, more than 30 nations, from Germany to Ghana or France to Saudi Arabia, have been repatriating their gold out of the London and New York exchanges while the financial media stays silent. Why the repatriation? Because nations no longer trust those uber-levered exchanges or jurisdictions to hold their most prized asset.
 

5. The IMF has been telegraphing CBDC ever since the pretext of the COVID Crisis gave them the opportunity to do so—and this new digital direction, love or hate it, openly speaks of a gold-backing.
 

6. The BIS, which is the mother of the world’s central banks, made gold the only other Tier-One asset besides the UST in 2023. Why? Because even this otherwise nefarious bank sees that gold is replacing the UST as a reserve asset, for the simple reason, again, that gold, unlike dollars, can’t be debased by broke(n) sovereigns like the USA.
 

In short, the rest of the world is not playing where the hockey puck or polo ball is sitting currently, but like Wayne Gretzky, is playing where the golden puck, or ball, is heading. The world, quite simply, is moving in a new direction. They see the backswing against the USD and UST in motion, and are turning their horse toward gold and away from the UST/USD.
 

A Major Re-Valuation in Gold

This is not fable but fact. Decades of living beyond their means in debt has destabilised the USA and its reserve currency. Now the world is slowly but surely (and then all at once) losing faith in the dollar as a reserve asset and using it instead as a liquidity asset. This means the USD will not be replaced; it will simply be repriced.
 

All of the foregoing facts further suggest that gold is heading toward an equal and significant re-valuation in the coming years. This is not because gold is somehow growing stronger, but simply because global currencies, risk assets and debt levels are growing so dangerously weaker.
 

Investors therefore face a critical choice in this otherwise obvious global setting. Do you want to measure your wealth in paper money or nature’s money? For us, the answer is now (and always has been) clear: Gold is a superior store of value than paper currency. The reasons for this involve a complex understanding of math, history and markets; but sometimes a simple example and image can speak for itself (Please see gold bar image above):

Again, each of us are responsible for preserving and hence growing our wealth. Gold is an essential asset for doing precisely that.   EG