By Peter Reagan
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- Gold’s roughly $300 surge – and why blaming one jobs report misses part of the story
- Why BRICS gold buying still doesn’t add up to a gold standard
- The better question behind Washington’s battle with the Fed: Whom should the central bank actually serve?
Gold gained $300 – but not because of one jobs report
Gold has suddenly become a media darling again after gaining roughly $300 in a matter of days.
Reuters reported Friday that gold climbed over 7% for the week, reaching a seven-week high over $4,300 an ounce.
Why? Well, the obvious explanation was the July jobs report.
The Bureau of Labor Statistics (BLS) reported that U.S. payrolls declined by 23,000 jobs, a massive miss compared to the +80,000 median forecast.
Yes, that’s significant – but the report gets more interesting the deeper you look.
The BLS also revised May and June payroll growth downward by 103,000 jobs combined. Labor-force participation has fallen 0.7% since January. With these revisions, the average monthly payroll gain over the last 12 months was just 34,000.
In other words, Friday’s report didn’t suddenly reveal a problem. Instead, it added another piece of evidence to a slowdown that has been developing for some time.
I wrote about some of those early warning signs earlier this year.
So yes – the jobs report mattered to gold. Weak employment data changed expectations about what the Federal Reserve might do next. (That matters because interest-rate expectations affect the dollar’s strength, inflation forecasts, the economy and the relative appeal of physical gold compared to other assets.)
But here’s the part I think gets lost in the headlines:
Gold’s rally had already begun before Friday’s jobs report arrived!
Gold was trading around $4,030 on Monday. By Thursday, before the official payroll report, the price of gold had already climbed over $4,200. Economic concerns, changing expectations for Fed policy and developments around the Strait of Hormuz were all being repriced.
Then the jobs report added fuel.
That distinction matters because financial headlines have a bad habit of treating gold like a vending machine: Insert one disappointing economic report. Receive higher gold price.
If I’ve taught you nothing else over the years, I hope I’ve taught you this: The real world is a lot more complicated than that.
One weak jobs report doesn’t tell us the economy is headed for recession. Neither does one week’s $300 move tell us where gold goes next.
What concerns me is that the evidence of a slowdown is really piling up… Consider:
- Hiring has slowed
- Previous job gains are being revised downward
- Labor-force participation has weakened
- Inflation remains troublesome (Update: As of Wednesday August 12th, CPI reads 3.4%)
- The Fed is trying to balance all of these pressures simultaneously
That’s a much bigger story than, “Jobs report sends gold higher.”
And there’s another lesson here.
A decade ago, $300 was close to the price of a 1/4 oz. gold American eagle. Today, you can’t even buy a 1/10 oz. gold eagle (the smallest made by the U.S. Mint) for $300! Today, gold’s price can move that much in a few trading days.
That’s not to say anyone should chase a rally. I can’t tell you whether gold’s next $300 move will be up or down.
Here’s what I think is important: This level of volatility means the old assumption that you can simply wait for the “perfect” moment to pull the trigger on diversifying your savings with gold may be a waste of time.
Diversification isn’t about predicting next week’s price. It’s deciding how much of your savings you want exposed to the debt-based financial system. The same forces that have driven gold’s price up 2.3x over the last decade.
Yes, BRICS keeps buying gold – but that still doesn’t mean a new gold standard is coming
An interesting article on the Mises Institute made the rounds over the weekend. Its headline is unusually direct: Why a BRICS Gold Standard Is a Fiction.
I admit I have to agree with its basic conclusion.
For years, every BRICS summit, central-bank gold purchase and discussion of alternative payment systems has inspired another round of speculation that a gold-backed BRICS currency is right around the corner. I was one of the many who so clearly saw the writing on the wall…
News flash: So far, it hasn’t happened.
Now, BRICS have made significant progress on their parallel global financial system (as my colleague Philip Patrick and I described from the BRICS conference in Rio de Janeiro last summer). Most recently, with major changes to the Shanghai Gold Exchange, what some more strident analysts were calling China’s Gold Reset.
But there’s an important distinction I need to make here. Deciding to buy gold is not the same thing as adopting a gold standard.
China demonstrated that distinction rather nicely just last week.
Reuters tells us that the People’s Bank of China added nearly 20 metric tons of gold to its reserves in July – its largest monthly addition since October 2023. China’s officially reported holdings rose to just over 76 million troy ounces.
That’s real news!
China is still adding to its central bank gold reserves. Other central banks have been doing the same thing. I recently addressed the broader trend of world central banks rethinking safe havens after they set a new second-quarter gold buying record this year.
We know why central banks own gold – as an inflation hedge, as a universally-accepted store of value, as a hedge against sanctions/dollar weaponization and so on. Gold bullion is essentially an emergency fund, at a national level.
But none of those benefits of gold require a gold-backed currency.
The thing is, in order to enjoy the “benefits” of an unbacked currency (things like running a budget deficit and suppressing interest rates), a central bank cannot have a truly gold-backed currency. That was my big mistake. To me, the benefits of a gold standard more than outweigh the drawbacks. I still believe that the first nation to launch a viable, fully-convertible gold-backed currency will have a massive advantage over the rest of the world.
But I was thinking like a citizen. To a central banker, control is way more important than purchasing power. The first nation to adopt the gold standard today would have to give up many modern conveniences, including deficit spending and currency manipulation. Can you imagine any central banker in the world simply giving up the power to print currency?
I miscalculated.
Having said all that, I think the Mises article goes too far. I don’t think we need to claim BRICS countries secretly want hyperinflation, or speculate about enormous secret Chinese gold reserves, to explain why a formal gold standard is unlikely.
The simpler explanation is enough.
A real gold standard restricts monetary flexibility and therefore government power. Promising to redeem a currency for a fixed amount of gold means an end to deficit spending.
How many modern governments – East or West – are eager to do that?
I can’t think of any.
So all the gold-standard speculation can distract us from the much more interesting development happening under our noses.
Central banks don’t need to turn their currencies into gold certificates for gold to become more important.
They simply have to keep stockpiling gold – and that’s already happening.
The great monetary shift of this decade may not arrive with a dramatic press release announcing that “The gold standard is back.”
It may look more like central banks gradually deciding they don’t trust currencies. That they want a larger share of their reserves in an asset that nobody else can print, freeze or sanction.
The Fed should be independent – but not unaccountable
President Trump’s renewed effort to remove Federal Reserve Governor Lisa Cook has revived another argument that never seems to go away:
How independent should the Federal Reserve really be?
Reuters reports the White House has given Cook three weeks to respond to mortgage-fraud allegations that her attorney calls “baseless.” The allegations remain unproven, and the Supreme Court blocked an earlier attempt to remove her, ruling that she had not received the procedural protections required by law. (Frankly, that decision was a cop-out.)
This is a truly unusual case. No president since the Fed’s founding in 1913 has attempted to remove a sitting Fed governor. So this truly is a test of both executive branch power and Fed independence.
I’m not going to pretend I know how Cook’s case should be resolved – that’s what courts are for.
But the controversy raises a larger question worth asking: Who does the Federal Reserve serve?
The answer is not supposed to be President Trump. (It wasn’t supposed to be Presidents Biden, Obama, Bush or Clinton either, for the record.)
And it certainly isn’t supposed to be the Federal Reserve itself.
The Fed describes its status as “independent within the government.” Governors are appointed by the president and confirmed by the Senate, but serve staggered 14-year terms specifically designed to insulate monetary policy from short-term political pressure. Yet the Fed reports to Congress, publishes its financial statements and meeting minutes and operates under goals established by Congress.
Granted, there’s a sensible reason for that structure.
Imagine a central bank whose governor knew he could be fired whenever an elected president wanted cheaper money before an election. (This is exactly what happened to Arthur Burns under President Nixon, and we know how that ended up.)
Central bankers should be free from political pressure to make tough decisions. They should be independent.
But “independent” should never be confused with “beyond criticism,” or even with “always right.”
The Fed has made consequential mistakes.
Just in the last few years, the Fed kept monetary policy extraordinarily loose after the pandemic. It badly underestimated the inflation that followed. Americans then lived through the fastest rise in consumer prices in over 40 years.
That’s not a record to be proud of!
At the same time, we can’t blame every economic failure on the Fed.
Congress writes spending laws. Presidents sign them. Fiscal deficits and the national debt are not created by seven Federal Reserve governors at their conference table.
Our monetary problems are institutional.
That’s why I think the most useful question isn’t whether any President should “control” the Fed or whether the Fed should be “independent” of Trump.
It’s whether an institution with this much influence over the purchasing power of our money has the right incentives, the right accountability and a playbook capable of surviving the pressures Washington keeps putting on it.
I’ve made a similar argument before: the people change, but the underlying forces don’t. We can argue all we want about Fed independence, but with our national debt on the brink of $40 trillion, how much does it matter?
The debt makes the rules.
That’s what matters for everyday American families.
Presidents change. Fed governors change. Economic theories fall in and out of fashion.
Your retirement date doesn’t care who’s in the White House or who’s chairing the next FOMC meeting.
Three different stories, one timeless lesson
At first glance, these stories have almost nothing to do with one another.
- One is about a lousy employment report and a $300 move in gold
- One is about BRICS nations and a gold standard that probably isn’t coming
- One is about a feud between the White House and the Federal Reserve
But underneath all three is the same issue: Trust.
How much confidence should we place in an economic forecast?
In the governments’ promises about money?
In a central bank (independent or not) to preserve our purchasing power?
Now, I don’t think the answer is “None.”
Modern economies require institutions. Governments aren’t disappearing. Central banks and their unbacked currencies are here to say.
But I also don’t think we should completely trust these things. Hope for the best, plan for the worst.
That’s where physical gold has always occupied a unique position among financial assets.
Gold doesn’t derive its value from a gold standard or a central bank.
Gold’s price doesn’t depend on an unemployment report beating expectations next month. Or on quarterly profits coming in exactly as forecast.
Best of all, gold is one of the very few financial assets you can own outright. It isn’t just someone else’s promise to pay.
None of that guarantees its price will rise, of course. Gold can be volatile, and while diversification can lower risk, nothing can eliminate risk of loss.
Those are a few of the reasons why many investors and nearly all central banks continue owning physical gold alongside other forms of savings.
Diversification is, at heart, an admission of humility. It says: I don’t know exactly what happens next, so I don’t want everything I’ve worked for depending on one answer being right.
Given this week’s news, it strikes me that this sort of humility is a timeless lesson worth remembering.