GOLD AND SILVER: BULL OR BEAR? / MACLEOD FINANCE

Gold and silver: bull or bear?

Having topped out above current levels before crashing lower, opinions are divided over whether prices are now going higher or lower. We examine the evidence…

ALASDAIR MACLEOD

The primary bull market is gold. 

Or rather, the primary bear market is fiat currencies. 

This is why central banks, Asian governments, and now wider Asian populations particularly in China and India are buying gold.

Unbeknown to US and European investors, gold, not the dollar, is legally money in everyone’s common law. 

The dollar is a fiat currency and as such is credit unanchored to any value. 

The fact that gold’s exchange rate against the dollar and other fiat currencies has been rising strongly is only partly due to gold rising, but mainly due to the dollar and other currencies declining. 

Asians and others in the global south have not bought into the US’s longstanding propaganda war against gold.

To be fair, investors in the west do understand that the dollar’s purchasing power is declining, but at the rate of the CPI index. 

They also learned the difference between unlimited and restricted credit creation from bitcoin.

However, investors seem unclear about gold’s true role beyond it being some sort of fear trade. 

Because they account in dollars, they think it is gold rising and they treat it like any other financial asset. 

They think in cycles, because that’s their experience of other financial assets. 

Furthermore, in the last 55 years there have been two gold bull markets followed by two bear markets, cycles by any definition.

No one can define future price relationships accurately. 

But we can examine the evidence that drives them. 

And this time, we are entering a financial war between the US and China, where it is becoming obvious that the dollar will be the casualty

China is now actively undermining the dollar

Since 1983, China embarked on a policy of mining, refining, buying, and standardising gold which she has accumulated in very large quantities. 

We don’t know how much, but it is clear from 1983’s Regulations of the Peoples Republic of China on the Control of Gold and Silver that this was the intention. 

Between 1983 and 2002, by examining the PBOC’s foreign currency flows I estimated that in those nineteen years she would have accumulated approximately 20,000 tonnes if 10% of those flows were diverted into gold. 

Only a small fraction of China’s gold is held as monetary reserves, the rest spread among various national entities, such as the army and the youth wing of the CCP.

Until 2002, the public were banned from owning gold. 

Then the state obviously decided it had accumulated enough and opened the Shanghai Gold Exchange (SGE), allowing the general public to buy. 

Since 2002, the public has taken delivery of about 28,000 tonnes gross of scrap, mostly turned into jewellery alongside coin and small bars.

While China’s public can buy gold, they cannot export it. 

China is Hotel California for gold. 

In addition to the state and the public’s gold withdrawn from the vaulting system, there are unknown quantities of bullion stored in the SGE’s vaults backing gold accumulation accounts offered by banks alongside their yuan deposit accounts and ETF gold. 

So, both the state and its general public have accumulated vast amounts of gold in the 43 years since 1983.

Against this background, the US has made various attempts over the years to disrupt China’s trade and technological development. 

All these attempts have failed and China’s stature as a hegemonic rival has grown. 

The Chinese had a policy of not responding to US provocation.

This changed last April, when for the first time, China took deliberate steps to protect herself and her currency in the wake of Trump’s 2 April Liberation Day. 

Xi did a quick tour of the major ASEAN nations to reassure and secure a free trade area, followed up with plans to establish SGE vaults in Hong Kong and Saudi Arabia, where gold could be exchanged exclusively for yuan. 

And her CIPS trade settlement system was made widely available where foreign exchange transactions would bypass the dollar completely.

The signal was clear. 

The mechanism was now in place for the offshore yuan to be put on a gold standard, and an efficient payment facility was established. 

China and those who trade with her were insulated from a dollar collapse.

The second stage of her new approach was restrictions on rare earth exports, particularly to the US in late September. 

Unannounced at the time, the rare earths policy appears to have been extended to silver as a critical mineral, because on 9th October a severe physical shortage developed in the West, driving silver’s lease rate to as high as 40% in London.

The shortage continues. 

Surprisingly, perhaps, there is very little speculative interest in the west. 

The silver price is being driven by a bear squeeze on the paper shorts. 

Commentators make a mistake by attributing the rise to trend chasing speculators. 

It is the inevitable consequence of China no longer exporting silver.

We know this, not because of the new export licensing system introduced in January, but silver prices in Shanghai are consistently higher than in London and New York. 

In other words, it is domestic Chinese demand which sets the price and silver is flowing out of Comex and London to China.

The idea that prices are being driven by retail trade in the West misses the point: it is demand in China and other Asian centres which sets the pace. 

And the Chinese authorities seem happy to permit, even encouraging the squeeze on the West’s derivative markets.

You may ask what silver has to do with China deliberately undermining the US dollar. 

The US has recently named silver as a critical mineral, and it is clear that it has none. 

It’s not the only metal being driven higher either. 

You can add copper, tin, platinum group metals, aluminium, lithium, cobalt, neodymium, indium, and uranium. 

In all these metals, the dollar’s purchasing power is weakening, reflected in other commodity groups as well.

China sees this as evidence that the dollar is sinking. 

The fiat dollar is on course for total failure, the eventual fate of every fiat currency. 

Furthermore, earlier in the month China instructed insurance companies, other investment institutions, and the banks to reduce their holdings of US treasuries. 

The signalling is unmistakeable: the gloves are off. 

China is now waging a full-on financial war against the US at a time when the US’s international credibility is hitting all-time lows.

As the dollar goes down, gold, silver, and all commodities rise. 

The Commodity Research Bureau (CRB) index illustrates the point:

These are the points that commentators miss. 

It’s not just gold and commodities rising, but their unit of account is falling — failing is a better description.

The dollar is now staggering from crisis to crisis. 

Over the weekend, the US supreme court ruled Trump’s tariffs illegal. 

Petulantly, Trump said the judges should be “absolutely ashamed” and lacked the courage “to do the right thing”— extraordinary statements by a president disregarding the law. 

He then announced a new global 10% tariff, quickly raised to 15%.

Trump is also mounting military pressure on Iran, from which he either backs down or starts a war likely to collapse the dollar against oil ($300pb has been mentioned by Goldman Sachs). 

US bases in the region will then be targeted by Iran, and Tel Aviv attacked by hypersonic missiles. 

He appears to have boxed himself in.

And there’s the USG’s debt trap, made worse by illegal tariffs having to be refunded. 

So China has a point with her timing, and it would be unwise to bet against her.

The one shoe yet to drop is China revealing the extent of her physical gold accumulation. 

But she knows that the moment she reveals her true gold position, the dollar is finished. 

She will announce this in a time of her own choosing.