Which Is More Likely To Happen First--- Inflation UP, or Gold DOWN?

Just bought a new car for my daughter this week. Nothing real fancy, an entry level 2025 Subaru. The 2026 models will be out in a few more weeks and most will see substantial increases in price with fewer choices at the entry level. The Impreza for instance will go from 3 trim levels to only 2, with the current base level eliminated. The next higher trim level (Sport) will be $2,200 more than the 2025 base trim level, with virtually nothing extra aside from slightly larger alloy wheels.

At any rate, the $27,500 all-in cost including transportation, documentation, sales tax and all the other mickey mouse fees came to only 7-1/2 ounces of gold. I'm fairly certain that in the 140 year history of the automobile, that's the cheapest it has ever been in gold. By way of contrast, back in 1999 when Gordon Brown was Chancellor of the Exchequer and liquidating all of England's gold holdings, a similar priced car in US dollars would have required 100 ounces more for a total of 107-1/2 ounces of gold. Now granted you would have gotten a slightly more prestigious car for $27,500 back then, say an Acura CL, but with far less safety enhancements.

That all said, I would propose that there is a significant disconnect between current spot gold prices and current pricing for durable goods. Yes, there is a massive deficit and the national debt continues to grow exponentially. And yes, healthcare costs continue to rise at an astonishing rate. But when softening real estate prices and especially lower rent in many markets is factored in, not to mention a possible collapse of used car prices after a tsunami of repossessions, it sure looks like deflation might well be more of a threat than inflation.

In that scenario, I don't see how gold prices can maintain their current lofty levels. Silver has a better shot at preserving recent gains if only because of the delay in it's run-up. The current gold price may well be taken out and driven much, much higher when the wheels finally fall off the bus. But I sense that is at least 3 or 4 years away, and the chances of the current spot gold prices treading water until then is almost nil even with zero interest rates if everything else including equities sustains a massive decline.

 

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I'm at a 12 to 1 ratio of silver to gold, but with most of the gold having substantial numismatic premiums; --not MS66 Saints either, but very rare world gold coins in mint state.

The pattern that seems to reoccur the past few years whenever there is a meaningful correction in equities (and there hasn't been much of a correction in reality, even including 2022) is that the stock market takes a hit and gold gets liquidated to cover margin calls. In a really brutal market downturn (for which we are long overdue) - I would expect that same pattern to continue, at least initially. If the 7 trillion in money market funds on the sidelines then goes all-in on precious metals, gold could bounce back with a vindictive rally. I don't think that will happen, I think most will continue sitting on their cash as if it's actually worth something, frozen like a deer in the headlights.

 

Gold will definitely maintain current levels and go up some, go up a lot, even silver will surprise the naysayers! All you gotta do is some research and you'll realize quickly that gold doesn't go down as much as some think, it just don't! Gold to the moon, buy now or sigh later!

 

I sure hope you're right. Yet, at the same time taking some chips off the table feels like the prudent thing to be doing right now. Could have sold off gold mining stocks, but dumped common date pre-1933 coins instead.

 

Gold has institutional and CB support that silver does not have.

Gold will move on its own supply and demand dynamics and for me they continue to point to a super-bull peak of about $7,500 sometime between 2030 and 2035. Longtime readers will recall that pre-Covid I was calling for $5,000 by 2035 and $3,000 by 2030 (too conservative, in retrospect).

Predictions are useless, I freely admit. But the Big Picture is not and there supply continues to dribble out while demand today adds tens of millions of potential buyers every year.

 

I've been in the markets as a professional and investor for over 40 years and I have NEVER seen margin calls being met with the sale of gold or any PMs except an individual here or there in small quantities, and nothing to extrapolate to a system-wide process worth monitoring.

In 1980, gold traded $1 billion a day...and so did the foreign exchange (FX) markets. Today, gold trades about $75 billion a day and the FX market is about $7 trillion a day.

The point is....the dollar and bond/money markets are where funds are stored including money seeking safety during turbulent times, not so much gold.

I've also worked for 2 Private Banks -- you just don't see margin calls (very rare, more common for hedge funds) being a problem with retail or HNW accounts unless someone is being advised by a moron (of which there ARE some !! ).

 

Agree with your assessment of the dollar and US bonds being the default flight to safety destination for many (most) investors. But why would anyone with a position in gold view the dollar as a more suitable store of value during market volatility? If they aren't covering margin calls in other areas of the market with net gold sales proceeds, why get out? Makes no sense at all to me.

 

The U.S. has the most liquid, deepest, most transparent financial markets in the world. Trust me, as someone who had to sometimes purchase $1Bn in bonds right before the Fed Wire deadline of 3 PM, you need to be able to buy or sell in size.

If you want to move $5 or $10 or $20 Bn (or more !) you need markets that trade hundreds of billions of dollars daily. You can't do that in the Gilt or OATs market or the Eurobond market. Ditto munis or corporates (assuming you would take on the credit risk).

Plus, presumably many/most of these people utilize dollars for their lifestyle purchases. You want a yacht or $50 Mn penthouse in Miami or NY, you need dolllars.

 

Good and the other PM’s go up almost daily. Yes they do have a few days but they are going up daily. Inflation happens all the time as well. Every week I go to the market and prices are higher. Inflation is going up before PM’s drop in price.

 

Well, that's true with even more humble purchases like a new car; have to convert other non-depreciating investments into depreciating dollars to consummate the transaction. But the timing of it doesn't make sense, --in volatile markets when the VIX is skyrocketing, gold doesn't get dumped to facilitate yacht purchases or penthouse apartment transactions. Yet gold almost always declines just the same as equity markets unless it looks like bank runs are coming (Silicon Valley Bank, etc). Then again, maybe equities and gold have decoupled and no one knows it yet because we haven't had a big sell-off in the stock market for a long while now. And next big market correction will see gold rally farther instead of selling off as it has in prior equity corrections.

 

Maybe....it might depend on the dollar or other variables.

But generaly, in the last 35 years, when stocks get slammed hard, gold goes down in a general liquidation. Money moves to Treasury bonds, ever since The 1987 Crash when 30-year bonds were up 3 points on the day of the Crash.