Gold faces a strange split. Over the next 10 years, prices should do very well. The next three or four months could be rough. A rising nominal interest rate strengthens the dollar. Gold is priced in dollars, so a stronger dollar hurts it. Higher rates also mean more given-up interest, which makes holding gold more expensive. If nominal rates keep climbing, that pressure on precious metals continues.
The bigger danger sits underneath the rate question. There is political pressure to let rates rise, but there is stronger political interest in holding them down. If politics forces rates to fall, and the market gets the same signal it got in 1975 - that short-term American politics matter more than the health of the US dollar - gold will rip. Whether that happens is a guess. The biggest risk to gold may not be higher rates at all. It may be policymakers deciding the dollar's credibility is up for trade. Temporary weakness could set up a much larger repricing later.
Who really sets interest rates
Behind the scenes, some people argue rates should be set by the market. The new Fed head sounds fairly intelligent on this: the Fed should not try to move markets up or down with its signals, and the market should ultimately set rates. Good ideas. The problem is that neither the economic nor the political powers will let this happen without protecting their own interests.
Most American voters care more about their car payment and whether they can buy a house than about the strength of the economy or the fact that debt and deficits steal from their children's future. That voter focus creates steady pressure to keep spending and to hold rates artificially low.
The long end of the yield curve shows the market taking back control from the Fed. The Fed has been printing short-term paper and using the money to buy long-term debt, but that has not been enough to pull long rates down. The Fed still holds short-term rates artificially low, yet it appears to have lost control of the 10-year and the 30-year. Short rates are easy to command. Forcing investors to buy 30-year debt is not. That is where the Fed's credibility gets tested, and where higher government financing costs meet stronger demand for gold. If the Fed fails there, that is the case for gold to go much higher.
A telling sign: when the US helped Japan defend the yen a couple of weeks ago, the US government printed fresh dollars and lent them to Japan at very low interest, so Japan could buy yen without selling its US Treasuries. Japan holds $1.6 trillion in US Treasuries. Rather than let those be sold, the US lent new dollars instead. That reveals how worried the Treasury is about the float and the resale market for US debt given the government's borrowing needs. Not pleasant thoughts.
China's challenge to Western gold pricing
Any government meddling in markets is bad. But China building an alternative system for trading gold is welcome. It pulls control of the gold trade partly away from COMEX and the LBMA and opens up more markets for gold. The LBMA fix is an anachronism that helps nobody except the member banks. The US COMEX metals futures system could use a competitor.
If China drops paper claims and honors only deposit receipts or physical gold, let the market decide. The hope is that China opens its gold market to foreigners so Shanghai can truly compete internationally. Having six or seven trading venues with different rules is good - an exchange is just a service provider, and people should be able to pursue their interests through many of them.
This could quietly change who defines the gold price. If competition against COMEX and the LBMA spreads out price discovery, and physical settlement grows in weight, Western paper markets may lose their grip. The risk for a portfolio: it can be priced by financial contracts while the actual metal grows scarcer.
Buying gold as savings, not a trade
The usual pattern is to sell when prices get euphoric and buy when they are depressed. At the Boca Raton conference, gold sat at 4,000; it has since risen another 300 to 400 dollars. Even so, about half of an upcoming conference paycheck will go straight into physical gold, price insensitive.
That gold is not expected to leave the market for 10 years. The only thing that would trigger a sale is a liquidity-driven event, a 2008-style crash where other asset classes fall hard and greed makes it worth selling some gold to buy something cheaper. Short of that, the sell decision may be left to heirs.
Gold works as insurance, as savings, as wealth itself. The approach is systematic saving in gold: whenever a liquidity event happens, some or much of that cash goes into gold. When there is heavy selling on the downside, savings get front-loaded - shifting dollar-denominated savings into gold out of a current paycheck rather than waiting. For long-term savers, patience beats trying to time every move.
Where the next gains hide in mining stocks
Mining equities fell sharply, then rallied hard. Wheaton Precious Metals (WPM) bought around $104 has run up to about 135. There is not enough euphoria in gold stocks yet to make them a trading sell.
The shift now is toward smaller, riskier stocks. At age 73, that goes against the usual advice to get more conservative, but the reasoning is different: large positions in Franco-Nevada (FNV), Wheaton (WPM), and Agnico Eagle (AEM) are already held, and the investment side of the portfolio is full. When prices jump like this, generalist money entering the space flows into the best-known names first, which leaves smaller companies overlooked.
A strong M&A market is coming. So speculative "morning money" is being used more aggressively than in the past two years to get ahead of likely takeover targets. When big investors pile into a sector, capital concentrates in established names, and the companies set up for consolidation get missed. If M&A speeds up, valuation and buyout potential can matter more than broad momentum.
Seabridge: one bidder and the price that decides the deal
Seabridge Gold (SA) may hold the largest undeveloped gold project in the world. An acquirer that buys it solves its depletion problem for a decade, and the big majors all face depletion. It is one way to fix a balance-sheet problem for a very long time.
The downside is capital intensity - the upfront cost to build the project is enormous. The feasibility study likely needs updating because construction and other costs have inflated a lot. Rudi Fronk has signaled, including at the conference, that the field is down to one bidder: 12 or 13 companies signed confidentiality agreements, and exclusive negotiations are now underway with one.
An auction with a single bidder is hard - there is no deal tension. At $5,500 gold, that bidder would have had to move aggressively, because at $5,500 the huge upfront cost is paid back much faster than at $4,400. With gold at $4,400, the pressure is off the acquirer. Rudi Fronk thinks the Tudor Gold litigation is not much of an issue; with only one bidder and gold at $4,400, the acquirer can afford to wait for Rudi and Tudor to resolve their dispute rather than solve it itself. At $5,500, time favors the seller. At $4,400 with one bidder, time favors the buyer. A falling gold price can strengthen the buyer's hand even as it makes the asset more strategically valuable. Watch the deal structure, not just the metal price.
On rate fears: a few big institutions put a 30% chance on a hike at the last Fed meeting, and the Fed held. A hike would make borrowing far more expensive for a US government already running a huge deficit. As for tricking investors, the Fed is not smart enough to trick anybody. Yield curve control stays on the table, since the Fed has a history of buying government debt, backstopping the government, and pushing rates down.
