Gold Price Rises: There Is Reason for Optimism

The price of gold continues to break records, with the symbolic threshold of $2,500 now exceeded. In euros, which concerns us more directly, an ounce of gold has reached €2,300, double its value five years ago, a remarkable performance!

The question immediately arises: will this continue?

In our opinion, the answer is yes, and for several reasons:

• Inflation will remain relatively high, around 2% at best, rather than zero, as was the case before Covid. This is explained by the increased sensitivity of our European economies to energy costs, the prices of which are expected to remain at high levels: American liquefied natural gas (LNG) is more expensive than Russian gas, the European electricity market is indexed to the price of gas, the energy transition represents a colossal cost, and the price of oil will remain high due to the agreement between Saudi Arabia and Russia, as well as the need of the United States to make its shale oil profitable.
  Moreover, the price advantages of globalization are diminishing and, on the contrary, the regionalization of the world will make the price of goods more expensive. For example, the United States is building semiconductor factories to ensure its sovereignty, which is an excellent initiative, and Europe should follow this path. However, these products will be more expensive, if only to amortize the massive investments made.
• The level of public debt in the EU and the US is such that central banks will at some point restart their printing presses, or lower their interest rates excessively. We can bet on it.
• Individuals are turning to physical gold. Although the extent of the movement varies by country, it is nevertheless a general trend.
• Finally, a new player is buying huge amounts of gold: central banks, or countries themselves. This is what we are going to see.

For a long time generally sellers, central banks switched to a buyer position from the crisis onwards. subprimes in 2008. The awareness of the fragility of the banking system and the dollar led them to turn to an asset that was both resistant to everything and still very liquid: gold.

The BRICS’ desire to move as far away from the dollar as possible is pushing them toward gold, especially since no other currency is willing to take over from the greenback. China, in particular, does not want to assume the responsibilities that come with an international currency, such as letting it float freely. It prefers to remain pegged to the dollar to protect its exports.

As a result, commodity or product exporting countries, such as those in the Middle East and Asia, which are consequently accumulating foreign exchange reserves, mainly in dollars, are now turning to gold.

And yet, this movement seems to us to be underestimated. In 2015, we already said that China is playing liar’s poker and that its reserves probably exceed 10,000 tons of gold today, more than the amount of American reserves held at Fort Knox: “China extracts 400 tons of gold every year and none of it leaves the country, which at the same time imports a little less than a thousand tons per year according to various estimates. Even if not everything ends up in the coffers of the Central Bank, the reality is well above the 1,658 tons announced.”.

It has recently been announced that Saudi Arabia has “secretly purchased 160 tonnes of gold in Switzerland since the beginning of 2022, contributing to the current rise in gold” (Cointribune). Central banks and countries have every interest in not revealing the extent of their gold purchases, because that would push prices up and make their acquisitions more expensive.

So don’t worry: in addition to persistent inflation, the powerful buying movement from Middle Eastern and Far Eastern countries will continue to push up the price of gold.

No, it’s not too late to buy some.