“Haven’t gold prices gone up quite a lot in the last year or so? So why buy gold now? Isn’t it too late to buy?”
That’s one of the common responses we get when we mention we are involved in selling gold and silver bullion. Unlike a number of years ago the average guy or girl in the street now knows that gold has risen a fair bit since the start of the millennium. And even more so in recent months. But – they think that because prices are up compared to where they were, that there’s no need to buy gold now.
Table of Contents
- Why Buy Gold – Reasons to Buy Gold Right Now in 2023
- • Markets in General Are Still Very Risky
- • Geopolitical Risk is Still Very High
- • Inflation Rates Are at Multi-Decade Highs
- • Central Banks Rock and a Hard Place: Inflation vs Easy Money
- • Real Interest Rates are Negative
- • 5 Major Bank Failures Already in 2023
- • Mine Supply Has Peaked
- • Chinese Are Buying – But Are Likely Much Larger Holders of Gold Than They Declare
- • Central Bank Buying Pushes Global Gold Reserves to Almost 30 Year Record
- • Reasons to Buy Gold in New Zealand Now
- Why Buy Gold? Here’s Some Timeless Reasons
- • Why Buy Gold Timeless Reason No 1: To remove some of your wealth from the banking system
- • Why Buy Gold Timeless Reason No 2: Protection from devaluation
- • Why Buy Gold Timeless Reason No 3: To become your own central bank
- • Why Buy Gold Timeless Reason No 4: Protect your purchasing power with history’s best ever store of wealth
- •Why Buy Gold Timeless Reason No 5: Every fiat (government decreed) currency has eventually gone to zero throughout history
- •Why Buy Gold Timeless Reason No 6: Used as money for millennia
- Why Buy Gold? Final Thoughts…
Looking back at past articles, while we’ve mentioned many reasons as to why to buy gold in the past, we’ve never actually written them all down in one place.
So today we turn our thoughts to the question “Why buy gold now in 2023?”. While there might appear to be some risks, aren’t the economists and central bankers telling us the likes of high inflation will pass in the next year or two? If everything seems fairly stable, why bother to buy gold?
Why Buy Gold – Reasons to Buy Gold Right Now in 2023
Off the cuff without too much thought we can come up with a multitude of reasons currently as to why to buy gold in 2023 including:
• Markets in General Are Still Very Risky
Up until 2022, share markets globally had been rising steadily for many years. In fact, it was the longest bull market ever. But this changed in early 2022, with stock markets falling for the remainder of the year. In the last few months, most share markets have bounced back a bit. However while some may say the 2022 fall was just a correction, what if in fact we are only at the start of a current cycle where sharemarkets go nowhere for many years? Likewise with property prices. Real estate has been falling since 2022. Again there are good arguments to be made that while interest rates remain high, demand for property will be dampened.
Our guess is that gold is just at the beginning of a cycle where it will outperform both property and sharemarkets. For more on this see:
• Geopolitical Risk is Still Very High
In recent years we have had warships amassing in the Strait of Hormuz over murmurings of Israel attacking Iran. There has been a lot of “sabre rattling” going on between China and Japan over the disputed Senkaku Islands. In 2017 we had the agitation between the USA and North Korea added to the mix. We also had the trade war between the USA and China added into the mix.
We also have a possible conflict between China and Taiwan, which could draw the USA into the fight.
But now we have an actual war in Ukraine, with tensions between Russia and the west continuing to rise. (See this article for more on that topic: How Does War Affect the Gold and Silver Price?). Gold usually performs well in times of geopolitical tension and the stress levels are certainly high at the moment.
• Inflation Rates Are at Multi-Decade Highs
Inflation rates the world over have recently hit the highest levels since the 1980’s. While central planners say this is likely to be temporary, we think it may be the start of a much longer term cycle. Either way, it means a loss of purchasing power. The only argument is over how long a period this loss may occur. But even if inflation has peaked (something we are not so certain of), past history shows it can take a long time to get back to below 3%.
• Central Banks Rock and a Hard Place: Inflation vs Easy Money
Central bank balance sheets have been ever expanding since the 2008 crisis. The European Central Bank, the US Federal Reserve and also the Bank of Japan all engaged in massive money printing programs over the past decade. Then in 2018 and through to 2019, the US central bank attempted “quantitative tightening”. But in September 2019, the Federal Reserve had to reverse course when troubles arose in the overnight interbank “repo” market . (Read more on that here: Federal Reserve Balance Sheet Reduction: What Impact Will it Have?)
Since then the Fed’s balance sheet has been increasing at the fastest pace since the height of the 2008 financial crisis. But in 2022, central banks started to reduce this stimulus and also raise interest rates as inflation started to get out of control.
So they face an impossible exit.
Raise interest rates too much and cause markets to crash. Gold could dip initially in this situation but is likely to come back fast like it did in the 2008 crash.
Or don’t raise them enough and let inflation run wild. High inflation is indirectly positive for gold. See below for more on this.
So in the long run, which ever way the central banks go, we think it will be positive for gold.
• Real Interest Rates are Negative
A common misconception is that gold performs poorly when interest rates rise as gold pays no dividend or interest. However the key is what real interest rates are doing. The real interest rate is the nominal interest rate less the rate of inflation. Currently interest rates are rising. However after inflation is taken into account there is still no reward in the form of interest for keeping your money in the bank. Compare this to the increased purchasing power when holding gold. Learn more about real interest rates and gold: Real interest rates in New Zealand | What can they tell us about when to buy gold
• 5 Major Bank Failures Already in 2023
Overnight First Republic Bank, became the 4th US bank to be shut down by authorities. It was “sold” to JP Morgan Chase. Counting the Credit Suisse sale that makes 5 major failures already this year. JPM CEO Jamie Dimon said, “the system is very very sound”. But as they noted on ZeroHedge “Doesn’t seem like it Jamie, old chap?” We wager there are plenty more bank failures to come yet. See further down the page about how gold has no counter-party risk, so unlike a bank account you are not reliant upon your bank to remain solvent.
• Mine Supply Has Peaked
While up in 2022, mine supply peaked in 2018.
In 2022 total gold supply was up 2% from 2021.
Recycling was up 1% but is 30% below all-time highs.
With many gold mines due to reach the end of their life in the coming decade, gold production is not likely to increase significantly in the coming years. If it just stays relatively flat and if demand then continues to rise, prices will likely continue to rise too.
• Chinese Are Buying – But Are Likely Much Larger Holders of Gold Than They Declare
China increased their central bank gold reserves for the fifth month in a row in March. Prior to this stretch China hadn’t reported any addition to their official gold reserves since 2019. Despite China being the largest miner of gold in the world, it is illegal to export gold from China. So what gold is mined in China, stays in China. This interesting report outlines why China likely has much much more gold than their official 2068 Tonnes. As the report mentions, eventually the Chinese may announce their true gold reserves, and that may have a significant impact on the price when they do.
• Central Bank Buying Pushes Global Gold Reserves to Almost 30 Year Record
Central banks turned from net sellers to net buyers of gold in 2011. In recent years these have included Russia, South Korea, Mexico, Kazakhstan, Ukraine, Sri Lanka, Philippines, Turkey and China. “Central banks currently hold 20% of all the gold ever mined—33,000 metric tons.” Source.
Word Gold Council data showed that central banks were net buyers of gold for the 13th consecutive year in 2022.
2022: strongest year for gold demand in over a decade
Colossal central bank purchases, aided by vigorous retail investor buying and slower ETF outflows, lifted annual demand to an 11-year high.
…A second consecutive quarter of huge central bank demand (417t) took annual buying in the sector to a high of 1,136t, the majority of which was unreported.
Central banks are looking at gold as an important diversification tool during uncertain times. On top of this, the recent US and western sanctions against Russia has shown other nations that gold is also an attractive alternative to the U.S. dollar. More central banks are now likely to look to further de-dollarize their holdings.
Just last week we reported that record “Central Bank Record Gold Buying Continues” in 2023:
“On a y-t-d basis, central banks have reported net #gold purchases of 125t. This is the strongest start to a year back to at least 2010 – when central banks became net buyers on an annual basis. Read more here.”
Read more about central bank buying, particularly in the eastern hemisphere: Why Does Gold Demand Remain Strong in the East? and Why is Russia Selling US Treasuries and Buying Gold?
• Reasons to Buy Gold in New Zealand Now
Here’s 7 factors that will help you determine if now is a good time to buy gold in New Zealand: Is Now a Good Time to Buy Gold in New Zealand?
Why Buy Gold? Here’s Some Timeless Reasons
On top of the current reasons above, there are also a number of what you could call “timeless” reasons as to why to buy gold:
• Why Buy Gold Timeless Reason No 1: To remove some of your wealth from the banking system
Gold is the only financial asset that has no counter-party risk. Physical gold in your possession has no debt obligation, so there is not someone else on the other side of the trade whom you rely upon to remain solvent. Learn more: Why Gold Bullion is Your Financial Insurance
• Why Buy Gold Timeless Reason No 2: Protection from devaluation
Paper currencies have steadily been losing value over the past century. Precious metals “store of wealth” characteristics offer protection against government devaluation of currencies. Be they of the slow and steady kind by inflation of the money supply, or overnight devaluations by government decree.
• Why Buy Gold Timeless Reason No 3: To become your own central bank
In case you didn’t know the Reserve Bank of New Zealand has no gold reserves, so don’t expect any help from them in terms of maintaining the purchasing power of the NZ dollar. Buy gold and become your own central bank instead. For more on this see: Why You Should Become Your Own Central Bank – Even if Your Nation’s Central Bank Has Gold Reserves.
• Why Buy Gold Timeless Reason No 4: Protect your purchasing power with history’s best ever store of wealth
An often quoted point is that a fine toga and sandals in roman times cost an ounce of gold. Today an ounce of gold still buys a fine mens suit and pair of shoes. But, the same can not be said with any fiat or paper currency of only 100 years ago. $20 may have bought a suit in the early 20th century. It doesn’t buy much more than a couple pairs of socks a century later.
•Why Buy Gold Timeless Reason No 5: Every fiat (government decreed) currency has eventually gone to zero throughout history
Today we are in the unique situation where every currency on the planet is a totally unbacked fiat currency. And history has shown that no fiat currency lasts forever. So, if a few thousand years of history is any indication, then buy gold as it can’t go to zero and will always be worth something. Learn more: No Fiat Currency Lasts Forever – What About the NZ Dollar?.
•Why Buy Gold Timeless Reason No 6: Used as money for millennia
Because gold is a store of value, unit of account and medium of exchange. Learn more about why gold is money: What Good is a Bar of Gold When the Shelves are Empty?
Why Buy Gold? Final Thoughts…
It’s interesting that people have no trouble believing property prices can go up year after year, but struggle to comprehend why it is that gold is rising in price. Even though both are often driven by the same factors such as easy money, low interest rates and expanding debt.
We believe it is paper currency (or digital currency these days) that is in a bubble not gold. That is, because gold reflects the amount of paper currency in existence we can therefore state that there is no limit to how high gold can go. Any future crisis is likely to be met with the same response as we have seen in the past. Where Central Banks the world will create even more currency out of thin air, so the paper bubble can be inflated much higher yet.
What is the Inflation Adjusted Gold Price?
The current inflation adjusted price for gold to reach its 1980 high clearly shows how much upside gold likely still has left. Today gold would need to reach US$3,516.89 just to match the 1980 high of US$850.
How about if we use the CPI figures from Shadow Government Statistics? – a more reliable measure than the current US government inflation numbers. The 1980 high now becomes $28,641. There is potentially a lot of upside to come in gold.
In fact by this measure gold is almost as cheap today as it was when the current bull market started in 2000. Even more significantly gold is close to the cheapest it has been for 300 years.
For more on what price gold could reach check out: How Do You Value Gold | What Price Could Gold Reach?
So you can see there are still plenty of valid reasons as to why to buy gold.
Or more information on the process of how to buy gold see: How to Buy and Invest in Gold >>
Can you think of any other reasons to buy gold? Share them with us and other readers – Leave a comment below!
Editors Note: Initially published on 26 September 2012. Last updated 2 May 2023 to include new CPI adjusted gold price charts and updated reasons to buy gold now.