Rather than an issue, today we’re going to cover a commodity and trend that underpins an excellent opportunity for most portfolios.
The Setup
The gold bull thesis isn’t about the apocalyptic death of the dollar, BRICS conspiracies, or a New Great Depression, but simple arithmetic. The United States is $35 trillion in debt, deficits continue to widen despite economic expansion, debt-to-GDP continues to deteriorate, and off-balance sheet liabilities like Social Security and Medicare get little-to-no attention at all, despite being ~3x the national debt in scale. Can the world’s largest economy grow its way out of this? History says no. From 2000 to 2024, debt-to-GDP ballooned from 58% to over 120%, while real growth averaged 2%.
Betting on a sudden economic miracle from deflationary technologies like AI to outgrow this is the kind of bet a thinking man doesn’t make.
Even the most ardent Trump/Musk supporters have become disillusioned with U.S. fiscal largesse.
The Implications
The failure of the self-proclaimed most fiscally responsible administration that the U.S. is likely to see for decades doesn’t leave many options on the table, with Elon Musk and his DOGE departing government and tax cuts with spending increases making progress in the U.S. Congress.
If austerity isn’t an avenue and growth won’t fix it, what’s left? Two paths: negative real interest rates or overt dollar devaluation in real terms. Negative real rates, where inflation outstrips yields, erode the purchasing power of a currency, making gold a hedge against wealth destruction. Devaluation, whether sudden or creeping, reduces the dollar’s value against hard assets like gold. Looking at history, Roosevelt devalued the dollar 59% against gold in 1934 by raising the official price to $35/oz. Nixon did it in the early 1970s, entirely decoupling the dollar from gold (don’t read too much into the gold standard component, not the point).
It may seem more difficult to devalue the dollar with a pseudo-independent central bank and free floating currency, but that just isn’t so. Schemes like minting trillion-dollar platinum coins propose that the U.S. Treasury mint platinum coins with a nominal value of $1 trillion to deposit at the Federal Reserve, effectively printing funds to cover government obligations or repay the debt. It exploits a legal loophole allowing the Treasury to mint platinum coins of any denomination and though it risks inflation and credibility concerns, those concerns never stick around during a crisis.
What’s most likely? The administration’s stated goal is lower (negative real)rates. I take them at their word, with a compliant candidate to replace Federal Reserve Chair Jerome Powell at the end of his tenure the most likely avenue.
Obvious, But Not Consensus
This isn’t consensus thinking, yet. Central banks get it. They’ve been hoarding gold at record levels, with 2022 marking an all-time high for purchases at 1,136 tonnes. 2024 wasn’t far behind at 1,045 tonnes. China, Russia, India, and Turkey are leading the charge, notably diversifying away from U.S. Treasuries. While the motivations of the largest buyers may be to shield against dollar weaponization, like the freezing of Russian reserves in 2022, central banks in other notable nations like Poland and Hungary are seeking to maintain a neutral reserve asset without devaluation risk.
In retail, China’s investors are piling into gold ETFs, with inflows of $164 million in March 2024 alone, pushing assets under management to $5 billion in a nation with a closed capital account and government-sponsored ownership. Meanwhile, U.S. ETF holdings in SPDR Gold Shares are down 25% from their 2020 peak, with Western investors yet to show up to the party.
The generalist crowd? Gold’s not sexy when tech stocks are doubling, but that’s the point. These people pile in at the top, not the start. When Wall Street’s FOMO kicks in, as it did in 2005-2007, 2009-2012, and 2019-2020, gold ETF inflows surge, often 30 tonnes a month, tightening supply and driving prices higher. We’re not there yet, but the setup is.
Gold holdings of the largest and most liquid western physical gold ETF, SSGA’s $GLD.
The Supply Story
Now, let’s talk supply, because gold isn’t like oil or soybeans. Gold doesn’t get burned or eaten, with virtually all gold ever mined, about 216,265 tonnes as of 2024, sitting above ground in vaults, jewelry, or circuits, recyclable and enduring. This makes gold’s supply dynamics unique as new mine production adds just 2-3% annually to the existing stock, so prices hinge more on demand shifts than production swings. But mining isn’t a spigot you can just turn on. Building a new gold mine takes 10-20 years from discovery to production, with less than 0.1% of prospected sites becoming viable. Exploration, permitting, and construction eat time and capital in an industry that is not nearly as well capitalized as it was pre-GFC.
Go back 15 years to 2010, the midpoint of that lead-time range. Gold traded around $1,200/oz, down 33% from its GFC peak and solidly in a bear market. Global discoveries were already tapering. Large, low-cost deposits like South Africa’s Witwatersrand were fading, and new finds were smaller, costlier, or in risky jurisdictions. Today, supply is tighter. In 2024, only five new gold mines or restarts began production, with a combined annual capacity of about 13 tonnes. This follows just four new mines in 2023, adding 13 tonnes of capacity. Peak gold may not be a cliff, but production has flatlined, with declines looming as old mines deplete.
Supply constraints don’t bite as fast as with consumable commodities. Still, new production can’t ramp up quickly to meet demand spikes. Recycling, up 4% in Q2 2024 to 335 tonnes, helps but remains 30% below 2009’s peak, with low distress selling outside China. When demand surges from say, central banks buying 1,500 tonnes or ETFs adding 500 tonnes in a year (combined 1% of total tonnage) incremental supply lags, and prices climb.
Equinox Gold's Greenstone Mine, the poster child of delays and challenges associated bringing a major production online in recent years.
Wrap Up: The Outcome
Prices are set at the margin, central bank/sovereign buyers are HODLing, Chinese retail has no alternative with the blow up of their property market and abysmal equity returns, and western buyers are about to be pressed to reevaluate their exposure in the face of global fiscal and trade uncertainty.
Where will the price go? Gold’s market capitalization as of today is ~$23 trillion, or 43% of the S&P 500. This compares with 243% in 1980 or 94% in 1975. Those historical bull markets, ignoring that the U.S. was in a much more sustainable fiscal position prior, point to the probability of a double from 2025-2030, or a move in progress from $2,708/oz to $5,416/oz, a CAGR of 14.87%, solidly ahead of the average annual return from equity markets.
Is the best way to express this thesis with direct asset exposure via physical ETFs or bullion? For most people, probably. For savvy investors that are willing to do the work, opportunities in royalties and streaming, prospect generation, and mining may offer substantial leverage to an already consequential move, which will be covered in my next note, part two.
If you’re interested in further reading on the yellow metal, I encourage you to visit the World Gold Council’s website. The group is an industry association of producers and financiers that put together wonderful, easy to digest charts and data packages.
Thank you for reading - please share any questions or comments here or on 𝕏 and have a wonderful week!
Kindly,
Chris
Founder, Rynok Insight
Disclaimer
The author of this article has gold equity exposure and may increase/decrease the size of this exposure at their discretion.
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