As gold prices approach $3,000 per ounce, many are questioning whether this rise has been too rapid. Let’s explore the dynamics behind these escalating prices and their implications for investors.
One year ago, gold was trading at approximately $2,000 per ounce. Since then, it has surged by about 46 percent. However, is gold genuinely worth 46 percent more than it was just a year ago?
This increase primarily reflects the declining value of the U.S. dollar rather than a newfound intrinsic worth in gold itself.
For decades, the U.S. government has exploited the dollar by significantly increasing its supply through credit issuance. Presently, the national debt stands at a staggering $36.4 trillion, creating an unsustainable situation where neither the government nor the American taxpayer can feasibly repay these obligations. The two options to escape this fate are either outright default or a gradual devaluation of the currency.
Over the last 110 years, dollar debasement has been the U.S. government’s go-to strategy for fiscal management, yet this approach is fundamentally flawed. In a debt-fueled fiat system, to inflate away debt means incurring even more debt, exacerbating rather than solving the underlying financial crisis.
The rapid growth of debt has outstripped economic expansion, creating an economy that simply cannot sustain its current debt levels. Therefore, the relentless devaluation of the dollar through debt issuance is not the answer; it is the root of the problem.
Record Gold Demand
As we near the endpoint of this economic strategy—the swift decline of the U.S. dollar and the potential end of its status as the world’s reserve currency—gold’s role becomes increasingly critical. Gold, with no counterparty risk, cannot be defaulted on, nor can it become worthless like fiat currencies.
Gold is universally accepted worldwide and allows central banks to diversify their reserves, reducing reliance on the dollar. This trend is evident as central banks ramp up their gold purchases.
According to the World Gold Council’s Q4 and Full Year 2024 Gold Demand Trends report:
“Total annual gold demand reached a record high of 4,974 tons, driven by extensive central bank buying and increased investment demand. The combination of high gold prices and demand levels resulted in an unprecedented total demand value of $382 billion.”
“In 2024, central banks continued their purchasing spree, exceeding 1,000 tons for the third consecutive year, with a notable increase in Q4, reaching 333 tons and bringing the annual total to 1,045 tons.”
The largest gold buyer in 2024 was the National Bank of Poland, which added 90 tons to its reserves. Other significant buyers included the Central Bank of Turkey (75 tons), the Reserve Bank of India (73 tons), the State Oil Fund of Azerbaijan (72 tons), and the People’s Bank of China (44 tons).
Wealth Preservation
For the 15th consecutive year, central banks have been net buyers of gold. These institutions—responsible for issuing fiat currency and setting interest rates—recognize the instability inherent in our current debt-driven monetary system.
While they compel populations to use their currency, they actively accumulate gold as a safeguard against impending financial turmoil. When fiat currencies falter, gold will form the backbone of a new monetary system and facilitate commerce.
This rationale applies not only to central banks but also to individual investors. Holding physical gold serves to preserve wealth in a universally acknowledged asset free from counterparty risk.
Government actions, including President Trump’s tariff policies, may soon trigger a trade war, leading to unpredictable effects on global currencies. Additionally, persistent consumer price inflation continues to pose a risk; recent data shows consumer prices rose by 0.5 percent in January, reaching an annual rate of 3.0 percent.
These factors underscore the importance of holding physical gold for wealth preservation, while also presenting speculative opportunities.
Gold Fever
As an asset, gold is subject to periods of speculation and frenzy. Historical gold booms, such as in the 1970s, saw prices skyrocket from approximately $35 per ounce to around $850 by 1980—an increase exceeding 2,300 percent.
After entering a bear market for two decades, gold found a bottom near $270 per ounce in early 2000 before climbing to nearly $1,900 by September 2011—a remarkable 600 percent jump.
Following a dip to around $1,050 per ounce in 2015, gold has regained momentum, nearing $2,928 per ounce—an impressive 178 percent increase since its 2015 low.
Comparing current trends to previous bull markets, gold appears poised for even greater gains. If your goal is wealth preservation, fluctuations in price should not be your primary concern; instead, prospective buyers might find better entry points in the coming weeks.
For those interested in speculation, however, gold mining stocks become a viable avenue. Unlike physical gold, these stocks are not wealth preservation tools but rather vehicles for potential gains, particularly in junior mining stocks that often yield the most explosive growth.
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The VanEck Junior Gold Miners ETF (GDXJ) has seen a 67 percent increase over the last year, closing at $52.55 per share on February 13.
In the months preceding the last gold bull market peak in September 2011, GDXJ reached $166 per share. If a gold rush occurs within mining stocks similar to past bull markets, this ETF could potentially double or triple from its current price.
That said, investing in mining stocks carries inherent risks. If you seek substantial gains, consider the individual junior mining stocks. GDXJ’s top five U.S.-listed holdings—Alamos Gold, Harmony Gold, Pan American Silver, B2Gold, and Iamgold—have posted impressive annual returns of 101 percent, 117 percent, 102 percent, 5.7 percent, and 170 percent, respectively, as of February 13.
Further down GDXJ’s portfolio, companies such as Hecla Mining, Equinox Gold, Osisko Gold Royalties, Coeur Mining, and New Gold have also shown remarkable growth: 85 percent, 60 percent, 45 percent, 174 percent, and 165 percent, respectively, over the past year.
These gains surpass many technology stocks, indicating that the true excitement surrounding gold may be just beginning. Among these mining companies, there is likely a golden lottery ticket that could yield significant returns as gold fever builds.
Your financial advisor might caution against such speculative avenues, but if you are feeling adventurous, this list offers a promising starting point.
As previously mentioned, pursuing prices that are climbing is rarely advantageous. GDXJ has already risen over 17 percent this year, leading some to speculate about potential overvaluation.
To navigate this volatility, exercise patience and strategy. Utilize limit orders and carefully select your entry points to enhance your chances of capitalizing on golden lottery tickets before the cycle concludes.
Best of luck!
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Sincerely,
MN Gordon
for Economic Prism
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