It is crazy out there. Geopolitical strife, monetary chaos, record debt levels, and the leader of the free world described as a “well-meaning elderly man with a poor memory.” No wonder there is a fierce appetite for gold by central banks worldwide. Is this the wildest time of the 21st century? The debate is out on this subject, but it is clear that institutions are seeking shelter in the yellow metal as the world burns, er, turns.
Gold Demand Soars
According to the World Gold Council (WGC), total gold demand by central banks was the second highest on record in 2023, slightly below the 2022 level. Reporting in its “Gold Demand Trends,” the organization found that central banks fueled more than a fifth (21%) of total international demand, acquiring 1,037 tons of the precious metal. This was down 45 tons from the previous year.
The top central bank buyers of gold? The People’s Bank of China (225 tons), the National Bank of Poland (130 tons), and the Monetary Authority of Singapore (77 tons). Libya and the Czech Republic added a modest 30 tons and 19 tons, respectively. Kazakhstan (47 tons), Bolivia (25 tons), and Cambodia (ten tons) were the chief net sellers.
The main contributors to the gold-buying spree by central banks were monetary policy and geopolitical uncertainty, says Louise Street, a senior analyst at WGC. “In addition to monetary policy, geopolitical uncertainty is often a key driver of gold demand, and in 2024 we expect this to have a pronounced impact on the market. Ongoing conflicts, trade tensions, and over 60 elections taking place around the world are likely to encourage investors to turn to gold for its proven track record as a safe haven asset.”
As of February 9, gold prices were trading at around $2,040 per ounce on the COMEX division of the New York Mercantile Exchange.
Russia’s Impressive GDP
In 2023, Russia’s gross domestic product (GDP) growth rate was 3.6%, up from a 1.2% contraction in 2022, according to the Federal State Statistics Service (FSSS). However, observers should not expect the expansion to be fueled by market forces. Instead, around two-thirds of the GDP increase was driven by government-funded ammunition and arms production amid the military conflict with Ukraine. Manufacturing output surged 7%, retail and wholesale trade climbed 7.3%, and transportation services rose 3.2%. Hospitality and financial services soared 10% and 8.6%, respectively. On the spending side, household consumption advanced 6.1%, government outlays rose 3.6%, and fixed investment spiked 10.5%.
Looking ahead to 2024, Moscow expects a GDP reading of 2.3%.
The neo-McCarthyites in the realm of economics will assert two things from this data. The first is why anyone should believe anything coming out of the Kremlin. Second, much of the GDP print was led by state funding for the war effort. These are undoubtedly excellent points, but why should anyone believe the Bureau of Labor Statistics and the Bureau of Economic Analysis then? Plus, between one-quarter and one-third of the US gross domestic product is generated by government spending.
Deficits Galore
The Congressional Budget Office (CBO), a non-partisan budget watchdog, released the 2024-2034 outlook. The expectations? Not good. The CBO’s summary offers the best look at the report: “In CBO’s projections, federal budget deficits total $20 trillion over the 2025–2034 period and federal debt held by the public reaches 116 percent of GDP. Economic growth slows to 1.5 percent in 2024 and then continues at a moderate pace.”
A deeper dive indeed depicts an ugly fiscal picture for the nation’s capital. Outlays this year will represent slightly less than a quarter (23.1%) of GDP and hover around this level for the next ten years thanks to higher net interest costs and health outlays (Medicare and Social Security). Revenues will account for fewer than 18% of GDP in 2024 and beyond. Staffers noted that the deficit projections for the next ten years were reduced by about $1.4 trillion from last year’s forecast because of the Fiscal Responsibility Act. What’s $1.4 trillion when the federal government runs $20 trillion in cumulative shortfalls over the next decade?
What makes this report fascinating is that these are rosy projections. The CBO presumes there will not be a recession or more war in this span. Remember, these are astronomical numbers when the economy is in expansion mode. So, it is probably safe to assume they will worsen should the country slip into a downturn or enter a major war.
Perhaps it is time for the public to start scooping up gold bars and coins.
