Gold and silver prices have soared in the midst of global geopolitical uncertainty, concerns about the global role of the dollar, long-simmering inflation, and general economic uncertainty, including another potential shutdown of the U.S. government.
As this column is posted, gold is trading over $5200/ounce, and silver at $113/ounce.

Regular readers of my column know that I have always advised keeping a portion of your assets in gold and gold mining shares or mutual funds. (Search my columns at TerrySvage.com using the key word “gold” and going back more than a decade. ) But with today’s huge rise in gold prices, those investments have significantly increased in value, almost demanding you evaluate your long-term positions.

Some economic background is in order. CME Group Chief Economist Erik Norland has written a definitive guide to the economic forces moving the precious metals markets. He notes: “Gold . . . is up 80% as of January 21. Palladium is up 105%, platinum up 175% and silver prices have tripled, rising 212%.”
(You can read the entire report, including graphics, at www.CMEGroup.com/Insights.)

In an interview I asked about the dramatic rise in the price of gold. Norland explained there are five main drivers of demand:

1. Colossal budget deficits: It’s not just the United States that is running a budget deficit – currently 6% of GDP, without accounting for proposed increases in military spending. Norland notes that European nations are currently increasing their defense spending allocations, as is Canada. The Japanese have always had a huge public debt as a percentage of GDP, and now even China’s public debt is running at 8.5% of GDP. The implication is that all that spending will generate a new round of “money printing” – ie inflation.

2. Inflation: The key ingredient of Norland’s outlook is the fact that inflation is just barely under control around the world, running above targets set by all central banks. In the United States, for example, the latest report of the Fed’s preferred inflation indicator (PCE) came in at 2.8% — well above the Fed’s 2% target.

3. Global Interest Rates: Norland notes that despite the underlying inflationary pressures, almost every central bank is in the process of lowering interest rates. That’s the opposite of what Central Banks usually do to fight inflation. The exceptions are Japan, which already has such very low rates, and Brazil.

4. Perceived Erosion of Central Bank Independence: For nearly 80 years, central banks have “managed” currencies through interest rates and currency purchases or interventions. Their role has been to manage the balance of currencies needed for stability and world trade. But it’s not just the U.S. Federal Reserve bank that is feeling pressure to bend to political will. It’s happening around the world.
Norland reminds readers that the last time Fed chairman Arthur Burns and G. William Miller (under Nixon and Carter – both Republican and Democrat Presidents) bent to the political will, we suffered huge inflationary surges in the early 70s and again at the end of the decade.

5. Massive Geo-Political Risks: All you need to know about that risk is in the headlines these days.

Why Gold?
There are few good alternatives to the historic purchasing power preservation of gold – dating back through the centuries. Foreign currencies lack the breadth of the dollar, and crypto currencies have yet to be proved globally. Thus, the nearly 15% decline of the dollar against a basket of currencies, while Bitcoin is stalled.

It’s clear that foreign central banks have been the big buyers of gold in the last 15 years since the global financial crisis. They are known as strong holders, not speculators. In fact, German legislators are pushing for a return of their gold holdings – about 1,236 tons or one-third of their reserves, currently stored with the Federal Reserve in New York.

But the huge trading volumes in gold futures, as well as the cash market, suggest that other more speculative forces are at work.

About 95 million troy ounces of gold are mined annually, adding to supply. Shares of gold mining companies (and mutual funds that buy them) have risen even more on a percentage basis than the price of gold bullion. With mining costs at around $1300/ounce – depending on the company – rising gold prices translate directly to the bottom line, and to rising dividends for many of these shares.

What’s Next?
Before you go all in on gold, there’s one warning signal that Norland points out: If all this furor over gold is a result of future inflationary fears and concerns about currency valuations, why aren’t long-term interest rates rising?

His answer: That might be the next issue on the agenda if investors in gold and other precious metals have got it right. He points out that in the 70s, gold and silver prices soared first. Then came inflation. And after that, came rising interest rates in an attempt to control inflation. Anyone who remembers the 20% inflation of 1980 and the 21% prime interest rate of 1981 will remember the sequence.

Will history repeat? Or just rhyme? Only time will tell. But for Americans who have lived through a lifetime of dollar supremacy, and who must shop, invest, and plan to retire using dollars, it might still be time to take out some insurance against the future buying power of the dollar. That’s the long-term case for gold. And that’s The Savage Truth.