Gold is on the cusp of setting a new all time high – and the current economic and financial environment provides three key factors that are bullish for gold to move higher. 

Gold Price Chart

1. Monetary policy is being forced to ease as bank problems continue and waning economic growth

Berkshire Hathaway’s annual shareholders meeting was held on May 6. At the event monikered the ‘Woodstock for Capitalists’ Warren Buffett and his right-hand man Charlie Munger answered investor questions. In regards to the economy, Buffett told the packed auditorium

“it is a different climate than six months ago”.

The Oracle of Omaha, Buffett went on to say,

“in the general economy, the feedback we get is that perhaps the majority of our businesses will actually report lower earnings this year than last year”. 

When asked about the banking problems, Buffett told the audience that fear in the banking sector has been contagious historically, sometimes it is justified and sometimes it isn’t. He recalled how it used to be that if you saw people lining up at the bank you should join the line.

But the sector has changed over the years and the FDIC was very logical and helps to keep fear lower. However, the fact there is still fear in the market is partly due to poor communication by politicians and the press.Munger added that bankers shouldn’t be in the investment industry, he stated

“I don’t think that a bunch of bankers all trying to get rich leads to good things, I think a banker should be more like an engineer he is more about avoiding trouble than he is about getting rich … it’s a conflict of interest.” 

Buffett added that the CEO and directors should be the ones to ‘suffer the consequences’ of bank failures.

One big red flag raised by the duo is the festering problems in the commercial real estate sector. Munger told the audience that

“hollowing out of the downtowns in the United States and elsewhere in the world is going to be quite significant and quite unpleasant”. 

He added that “America will get through it but it will require a different set of owners”, meaning that the banks will get the properties back. Buffett added that the banks don’t want the properties so

“the real estate operator comes on negotiating with them and the banks tend to extend and pretend … There are all kinds of activities that arrive out of commercial real estate development which occurs on a big scale. But it all has consequences and I think we’re about to see the consequences of people who could borrow it at 2 ½% and find out it doesn’t work at current rates, and they hand it back to somebody that gave them all the money they needed to build”.

Continuing problems in the banking sector and commercial real estate will keep central banks printing presses going to support these sectors – the amount of quantitative easing by central banks is essentially limitless, which devalues the fiat currencies!

2. Geopolitical tensions are high

Moreover, the East vs West divide is becoming more apparent. A Wall Street Journal headline on May 8 read “EU Targets Eight Chinese Companies in Russia Sanctions Push”. 

The article went on to say that “The European Union is considering sanctioning eight Chinese companies over Russia’s war in Ukraine, diplomats said, with the bloc looking to target firms they believe have provided Moscow electronic items, including semiconductors, that can be used for military purposes”.

The sanctions are not the first that targeted non-Russian companies but “they target a country with which Europe has important trade ties and which France and other EU countries had been hoping to prod to play a constructive role in Ukraine. The measures echo the Biden administration’s sanctions warnings against Chinese firms for supplying Russia not only with weapons but with products that can be used militarily”. The continuing tensions will likely accelerate the de-dollarization trend, which is a key factor in record central bank gold demand!

In an op-ed article published by Project Syndicate on May 3 titled No Respite from the Slow-Motion US-China Collision, Nouriel Roubini states “despite US officials’ efforts to establish guardrails for strategic competition with China, and Chinese officials’ insistence that they have no interest in economic decoupling, prospects for cooperation look increasingly remote. Fragmentation and decoupling are becoming the new normal, the two countries remain on a collision course, and a dangerous deepening of the ongoing “geopolitical depression” is all but inevitable”.

The continuing tensions will likely accelerate the de-dollarization trend, which is a key factor in record central bank gold demand!

3. Inflation is likely to stay higher than pre-covid levels for a significant period

The shift of central banks to easing is in contrast to their inflation-fighting tightening. Central banks are in a tug-of-war between fighting inflation and saving their banking system and economies. As more vulnerabilities are exposed over the coming months the banking system and economy are likely to take precedence over higher than 2% inflation growth. See our March 30 post The Fed is now in a tug-of-war between fighting inflation and saving the banking system. Remember the 2% inflation targets are set by a fluke and could be changed either temporarily or permanently as the economic and political environment evolves.

Our message for this week remains resonant with each past week. The ‘systems’ are designed around maximizing banker leverage instead of minimizing counterparty risk. So, in the long-run silver and gold benefit from coming structural changes in how the world is financed.

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