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“They look at the weathervane for the direction of the wind.” – Sumerian text, ca 1600 BCCurrent Spot Prices:
8:38 am Sat. October 21, 2017
(Time = USMT)
2016 was a very good year for both gold and silver in aggregate global mint sales
by Michael J. Kosares
I have always considered sales of modern gold and silver bullion coins a bellwether on the general health of the global precious metals market. In reality, though, bullion coin sales comprise only a very small portion of the physical gold and silver markets. According to the World Gold Council, modern gold coins make up only about 13% of investment demand and a little less than 5% of overall demand.* Yet, as is often the case in statistical inquiry, it is the small and often unobserved, sometimes even ignored, that can accurately tell the larger story – particularly when it reflects the net effect of human action within the greater economy and financial markets.
So how is it that such a small aspect of the global gold market in terms of the overall volume can at the same time be so important?
In a nutshell, it is because the demand among ordinary private investors is telling us something very important: The level of confidence people have in the economy and the plan being carried out by the central planners in charge. Twentieth-century economist Joseph Schumpeter (1883-1950), most famous for his theory of creative destruction in capitalist economies, said it best: “The modern mind dislikes gold because it blurts out unpleasant truths.” I am quite certain that the “modern mind” to which Schumpeter referred was a collective term for the social and economic planners responsible to this day for the construction and maintenance of the fiat money economy.**
With that for initial spade work, let’s take a look at the demand for modern gold and silver bullion coins to see what they might be “blurting out” at this juncture in economic history. First and foremost, the numbers tell us that though Washington and the mainstream media may have recovered psychologically from the 2007-2008 crisis, the investing public has not. In fact, by implication the numbers tell us that concerns about a repeat, or better put, an extension, of that crisis still run high among investors.
The charts depict two different eras for gold and silver bullion coins – the one before the crisis and the one after. The strong consumption in 2016, in that respect, is decidedly a continuation of a well-established trend that began in 2008. For gold, 2016 was the fifth best year on record in terms of sales and in a virtual dead heat with 2015. For silver, 2016 was the fifth best year on record coming after last year’s record sales. Since 2016 was a relatively calm year in financial markets, the question arises how high demand might go if another crisis were to suddenly ignite.
Another lesson in these charts, and one that should not be overlooked, is that the record performances in both precious metals since 2008 did not occur in an inflationary environment, but in a distinctly disinflationary one. The strong and continuing post-crisis demand, running consistently at five to nine times pre-2007 levels, belies the mainstream media’s unremitting mantra that the precious metals are an inflation hedge and inflation hedge only. In that regard, silver is the big surprise. Prior to the current period, silver was generally viewed as an industrial metal with some investment potential and rarely a safe-haven or crisis hedge. Now investors give silver nearly the same credence they do gold for asset preservation purposes.
FREE SUBSCRIPTION and access to this month’s edition of News & Views. This month we explore the big issues in Washington and how they are likely to affect gold in the months ahead; the mechanics of how algo-trading might create a stock market panic and much more. Several timely charts are included. We invite your free subscription at no obligation.
* These totals include only current year bullion coins and does not include the large volume in previous mintages traded in the secondary market globally. There is no accurate accounting available for the secondary market, but it would add significantly to the annual turnover demand if it were tracked.
** Complete quote: “In the first place, the ‘classic’ writers, without neglecting other cases, reasoned primarily in terms of an unfettered international gold standard. There were several reasons for this but one of them merits our attention in particular. An unfettered international gold standard will keep (normally) foreign-exchange rates within specie points and impose an ‘automatic’ link between national price levels and interest rates. The modern mind dislikes the this automatism, as much for political as for economic reasons: it dislikes the fetters this automatism clasps on government management of the economic process – dislikes gold, the naughty boy who blurts out unpleasant truths. But most of the economists of the period under survey liked it for precisely the same reasons. Though they compromised in practice as in theory and though they admitted central-bank management, the automatism – a phrase beloved by Lord Overstone [Samuel Jones Loyd, 1st Baron Overstone] – was for them, who are neither nationalists nor etatistes, a moral as well as an economic ideal.” –– Joseph Schumpeter, History of Economic Analysis (1954) Published posthumously
Charts compiled and designed by USAGOLD’s Jen Dentry with the assistance of the mints surveyed.
. . . in the age of quants and the madness of machines
“In recent decades, mainstream economists insisted that markets are highly efficient, and do a near perfect job of digesting available information and correctly pricing assets today to take account of future events based on that information. In fact, nothing could be further from the truth. Markets do offer valuable information to analysts, but they are far from efficient. Markets can be rational or irrational. Markets can be volatile, irrationally exuberant, or in a complete state of panic depending upon the emotions of investors, herd behavior, and the specific array of preferences when a new shock emerges.”
MK note: I might add that the volatility, irrationality, potential panic and the rest when applied to the markets extends beyond humanity itself to machine-driven algos as well – hence the madness of machines, as I have called it past writings. We should keep in mind that computer driven trading models mimic human behavior by design. As a result, the bad behviour necessarily comes with the good. Computer driven trading is an extension of human psychology, not set aside from it. After all, the goal in the end is get ahead of the competition, a decidedly human endeavor.
This morning’s Wall Street Journal features an article on algo/quant trading platforms. In it, the authors bemoan the lockstep trading of the various quant funds and their potential to exacerbate a trend. The lemmings in short can take the market higher; they can also take it over a cliff.
Quants today comprise 29% of stock market trading volume – a percentage large enough to dictate momentum in either direction depending upon if they are buying or selling. I agree with James Rickards. There is a peril in being complacent and thinking that all of this will end well, or that because the trading is dominated by algos and quant platforms that somehow the markets have suddenly become immune to the history of panics, mania, crashes and collapses that frequent economic history. That quant is every bit as human in the way it acts and reacts as the programmers that gave it cyber-life.
The best way to guard against the power of quants moving against you and your portfolio is to own gold and silver. The lemming with the parachute owns precious metals.
“This crowd couldn’t sell gold bars to inflationists.” – Today’s lead Wall Street Journal editorial with reference to the Trump administration’s handling of Comey’s termination
MK note: Though the Wall Street Journal confuses use of the term “inflationist,” the point is well-taken. It is not the perpetrator of inflation (the inflationist) who seeks the safety of gold in most cases. It is the victims, i.e. ordinary citizens. I say “in most cases” because there is one notable instance of an inflationist taking refuge in the metal. He was one of the most infamous perpetrators of them all, John Law, who in 1720 was ultimately caught in escape mode at the French border with a wagon load of gold and silver booty he had accumulated against the currency hyperinflation he had created.
History aside, as a firm that has placed millions in gold coins and bars over the years with investors hedging an assortment of potential disasters, we can say with confidence that USAGOLD can and does sell gold to “inflationists” under the WSJ definition. . . . . and plenty of it. If anything, the level of confusion, angst and partisan politics on the loose in Washington DC these days only adds another good reason for the rest of us to own gold. The swamp, in short, requires hedging. I am not surprised to see gold moving back to the upside under the current circumstances. As noted yesterday, the euphoria bubble is in the process of being deflated by events.
“After the dollar and stock market euphoria of late 2016 and early 2017, there are already signs that the Trump reflation trade may be more an expression of hopeful sentiment rather than a new paradigm of actual higher economic growth and inflation. Treasury yields, the dollar, equity valuations and inflation expectations are all reversing their previous gains, to the benefit of gold. Though it remains too early to say with any certainty, bullion may even end up benefiting further from the Trump administration’s changes to the regulatory environment and the promotion of US manufacturing. As Trumponomics, in whatever form it ultimately takes, brings a new set of political, economic and trade uncertainties over the coming four years, gold should have plenty of opportunities to shine as a safe-haven asset and portfolio diversifier.”
MK note: Somehow this argument seems considerably more credible now than 24-hours ago. The quote above leaves out another important argument made several times in this Alchemist article. The Trump administration is likely to have a great deal of difficulty pushing its programs through Congress, a direct blow to the reflation trade. Slowly, sentiment is beginning to turn from the post-election euphoria that has governed trading in financial markets since the November election.
Whenever I am concerned about gold’s price performance, I return to this chart and it restores my faith in the metal without reservations. I could write many paragraphs about what I see here, but I think the chart speaks for itself. It explains at a glance why gold in the fiat money era, in which we are still firmly esconced, is a good thing to own. Simply put, it transcends. . . . . . .During the gold standard era, the chart is a flatline. The day the United States severed the dollar’s tie to gold, it registered a pulse.
“Stocks are at record highs, the VIX is at a 10-year low, and while investors are relieved the French presidency did not go to an anti-euro candidate, new risks are filling the void. Topping the list of market worries is China, which has been on the back burner for months now. Some weaker-than-expected data, however, has put a spotlight on the country’s economy.”
MK note: Those wondering why gold didn’t stage one of its quick rebounds following the Fed meeting might want to throw the slowdown in China into the analysis. News of problems in the Chinese economy took on renewed concern almost immediately following the meeting. Commodities took a hit, particularly copper and some of the other industrial metals, but that bled into the gold and silver markets as well. Simultaneously, however, reports surfaced of strong demand for gold from China. So maybe the post-Fed-piling-on in the gold and silver markets lacks justification, and more importantly, depth given the fact that gold demand in China went in the opposite direction.
I’ve written extensively of the madness of machines and the large segment of trading governed by them, i.e., the primary influences in today’s financial markets. You can either attempt to ascertain the madness and join the fun (while your luck holds out), or you can bet against it with a solid core portfolio position in gold and silver. Diversification into something real and detached from the paper-based madness makes a great deal of sense.
All of which reminds me of an Ed Stein cartoon. . . . . . .Sometimes the algos simply do not get the reality quite right.
With the steady drizzle on gold’s parade, it’s nice to see something positive come out of one of the big international banks. Credit Suisse is calling for gold to hit $1400 an ounce by the end of the year citing ––
a) “surprise” low real rates of return (something we’ve emphasized in past posts + articles),
b) “waning strength in the U.S. dollar” (which we have yet to see),
c) dovish monetary policy (which is commonly misinterpreted as hawkish) and
d) the “probability of a disruptive geopolitical event”
Every year the hedge fund and money management elite gather at New York’s Lincoln Center for the Sohn Conference where they elaborate on their view of the markets and the economy. They also provide insights as to what they are touting these days – a chance to talk their book to a room full of fellow traders.
This year, amidst the otherwise boring touts, a couple interesting tidbits surfaced that I thought worth passing along:
- I did not know that Kevin Warsh, the youngest to ever take a seat at the Federal Reserve’s governors table, was the front runner to take over for Janet Yellen, but according to Forexlive’s Adam Button that is apparently the case. Warsh is currently an advisor to the Trump administration. Forexlive reports that Warsh took centerstage last Friday “with a savage assessment of the Fed.” He believes the Fed should “engage in a fundamental rethink of strategy and how it thinks about the world.” He says the so-called dot plot that nearly everyone on Wall Street uses to diagnose future Fed direction on rates has been wrong for nine years. He also says the Fed can fix itself without the help of Congress and that there is considerable waste in its $2.5 billion budget. All of that might fit in nicely with the mindset at the White House these days.
- Warsh also said that “he believes the market is dangerous when measures of risk appear to be so low,” as reported at Bloomberg. He is probably referring to the VIX, i.e. the Volatility Index which is just as subject to speculative pressure as anything else listed and traded on the commodity exchange. One wonders if it can be viewed as a reliable indicator given those speculative pressures, but that might be precisely why so many believe it to be reliable. The Wall Street Journal published a front page article on the VIX this morning citing the measure at the lowest level since just before the 2007-2008 financial crisis. Some see that new low as a major positive while others see it as a contrary indicator.
- Stanley Druckenmiller in introducing Warsh at the conference said he sold his gold on election night then bought a bunch of it back after it corrected.
Sales of our Canadian Silver Polar Bear 1.5 ounce coins have been brisk, with well over 4000 units sold in just under two days of availability, leaving about 1500 units still available for sale. Silver prices have come down nicely as well, making these an even more attractive entry point than when initially offered.
At just $2.75/oz over the spot price of silver per ounce, these limited run (only 17500 struck), first year of issue (2013) Polar Bears are LESS per troy silver ounce than either a modern Silver Eagle or Silver Maple Leaf. Moreover, at roughly $30.50 per coin, they are a full $4 per coin cheaper than our nearest competitor. At such a great price, it’s no wonder these have been so popular.
Please visit our special offers page link for more details.
• All coins dated 2013, which is the first year these were produced. Only 17,500 total coins were minted in 2013, which means the grouping offered here is roughly 1/3 of all the coins made during that inaugural run.
• Other dealers are charging $35-$36 per coin at best (and in some cases substantially more), making this offer the absolute lowest price for this product in the market right now by a wide margin.
Quick Update/Michael J. Kosares
Now let’s take a look at gold from the same perspective:
In 2015, the United States imported 265 tonnes of gold for consumption. Of that, 41% (109 tonnes) came from Mexico and 19% (50 tonnes) from Canada, or 60% of the total consumption. The United States is in somewhat better shape on gold than silver in terms of domestic availability, i.e., it exports 500 tonnes per year, a somewhat nebulous figure in that it includes outflows from foreign stocks at the New York Federal Reserve. The U.S. produces 200 tonnes per year from domestic mines and holds 8100 tonnes at the Treasury Department. Nevertheless, Mexico and Canada’s imprint on U.S. gold fundamentals is noteworthy.
Quick Update/Michael J. Kosares
With reports circulating in the media that the Trump administration is preparing an executive order to withdraw the United States from NAFTA, I thought it might be interesting to review how much of the silver consumed in the U.S. annually comes from Mexico and Canada. In a nutshell, according to the U.S. Geological Survey, of the 8100 tonnes consumed by the United States during 2015, 6700 tonnes were imported. Of that, 54% came from Mexico and 26% from Canada. In tonnes that translates to 3600 tonnes from Mexico and 2100 tonnes from Canada, or over 70% of the silver consumed (5700 tonnes). The U.S. Treasury strategic stockpile is less than 500 tonnes.
by Michael J. Kosares
“In the absence of a credible monetary standard, we expect no escape from the treadmill of rising debt, both US and globally, that outpaces economic growth. Income inequality, wage stagnation, overvaluation of financial assets, and speculation instead of productive investment are likely to be prolonged under the current monetary regime. Whether or not policy makers take a proactive approach to address monetary reform, the fact remains that gold is massively underpriced in all paper currencies. It would be preferable if the necessary adjustments could occur without a repeat of a 2008-like financial crisis. We give this possibility a chance, albeit slim. In any event, we expect a significant repricing of gold higher during the current administration, either by design or because of market events. Whenever a repricing happens, we expect broad grassroots support for that outcome.” – John Hathaway, Tocqueville Funds
The past few days illustrate an important event in the gold market that both beginning and accomplished investors should try to understand thoroughly. I say that because by such an understanding you will become a more educated, patient and successful gold owner.
On April 19th, over $3 billion in paper gold was sold in the London over-the-counter market dropping the gold price by $14 per ounce in a matter of minutes. Just as quickly, the cries of foul play rose among gold punditry across the internet. Just before the “hit,” gold was trading in the $1286 range. It plunged to $1272. Since this morning’s AM London Fix, gold has been in recovery mode and it is now trading again in the $1286 range. Except for those who took the drop as a buying opportunity, these events will be seen essentially as a sound and fury signifying nothing. At the same time, quietly the notion of gold’s indestructibility has been reinforced – not so much with respect to its physical qualities, but with the place it occupies in the minds of investors across the globe. The recovery today in a certain sense is a fractal event in both amplitude and duration – a hint of a greater manifestation that might be coming down the road in the not too distant future.
More. . . . .
The gold price is determined in the futures markets, but the effects of that determination are in the physical market, i.e., the price for bullion, coins, jewellery, etc. Those who feel that the gold market price is controlled solely by forces within the paper market do not fully understand the constraints on paper imposed by physical supply and demand.
In a nutshell, if the paper market is successful in suppressing the price for too long and at too low a rate, the physical demand globally will eat up the physical supply and threaten the existence of the primary source of the metal – the mines. That is why top-level analysts like John Hathaway (Tocqueville Funds) often talk about the inevitability of one-off repricing events. As long as gold can be freely owned, the market at some point finds the real price of gold, reconciles the books and exposes the power of price manipulators for what it is – a temporary, staying action rather than a successful long-term program. It is the time period before that happens which presents the best buying opportunities – times like the present. The events of April 19th through today illustrate the point in a microcosm.
As it is, annual mine production has leveled out over the past several years and there has not been a major gold find anywhere in the world for decades. Meanwhile global demand for the physical metal has not only sustained itself in recent years, it has grown rapidly, and clearly at a rate that far exceeds the rate of growth in mine production. Just this past week, we have seen reports of renewed strong demand in China and India – two traditional powerhouses when it comes to physical ownership of the precious metals. Generally speaking, the East buys on price while the West buys on momentum, thus one might conclude that anecdotal evidence shows that the price has been “right” in recent months. This time around, as reported here previously, professional money managers have positioned themselves as buyers in concert with the East, something that happens only on occasion. The two together though are currently an imposing presence in the global gold marketplace.
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The only way the gap between mine production and physical demand can be made-up is from above-ground sources, or by trading paper to the extent that it masks the wide gap between physical demand and physical supply. At some point, the paper price will succumb to reality of shortages as it always does. Those short the metal will need to find it and deliver on the price promises made previously, a process that usually excites the price discovery mechanisms in the paper market. If the pressure exerted by the traders of gold paper were powerful enough to overcome these realities in the physical gold market, the price never would have traversed the enormous gap between $250 per ounce in 2000 and $1850 per ounce in 2011, and roughly $1300 per ounce at present.
So no matter how much we lament the impositions of paper traders, i.e., their corruptions of the market and restraints to the upside, gold’s opponents can only win the occasional battle; they will never win the war. As I have said before, the paper traders must equally curse the ever-present power wielded by physical buyers of the metal, and over the years, the true believers in the precious metals, have only viewed episodes of price suppression as buying opportunities.
Ultimately, the end result might be another unprecedented price explosion, as Mr. Hathaway suggests, when the impotence of the controls becomes apparent on a far larger scale than what occurred in the gold market over the past few days. At a time, as has been the case since 1971, when the production of fiat money rules the roost, gold’s natural inclination will always be to rise in price in terms of that currency. In fact, if that were not the case, it would be unnecessary for anyone to attempt controlling the price. That affinity to rise is only compounded in the end by attempts to restrict the natural price level.
USAGOLD – Celebrating our 43rd year in the gold business and 20th on the world wide web
“Source has reported that its Source Physical Gold ETP (LON: SGLD) has recorded over $500m of net new assets year to date (5 April), as the gold price has risen 9% during the same period. According to the ETF issuer, the figures show investors are returning “aggressively” to gold. . .
ETF Securities also reported strong flows into gold, with its gold ETPs seeing a combined $42m of inflows in the week beginning 3 April. The largest of these is ETFS Physical Gold (LON: PHAU) which has AUM of $5.9bn and fees of 0.39%.”
MK note: We have reported consistently over the past several weeks that while retail private investors seem to be either enamored with the stock market or in a quandary as to what they should do next, professional investors, for reasons of their own, are anteing-up decisively in this gold market. My thinking is that professional investors, i.e., hedge funds, institutional investors, money managers, etc., know full well what the impact of Fed policy will be on the gold market (as outlined in my previous post and more extensively in the March issue of our News & Views newsletter). They also understand the growing market risks associated with the build-up of potentially implacable geopolitical tensions since the beginning of the year. As shown in the chart immediately below, gold and silver, in fact, have already amply rewarded professional investors who have been in this market since January (as well as their equally astute counterparts among private investors). At this writing, gold is up 10.5% on the year and silver is up a cool 15%.
Many who offer up their analysis on the gold market will attribute today’s sharp rise to the geopolitical environment, which is fraught with danger to say the least and certainly a contributor. But that’s not the whole of what is driving the gold market in recent days. A second, and not-to-be-underplayed, factor is the prevailing and publicly well-cultivated policy of the Federal Reserve toward interest rates, up to and including Janet Yellen’s most recent comments.* The first provides momentum to the second – license.
* “Looking forward, I think the economy is going to continue to grow at a moderate pace. Our job is going to be to try to set monetary policy to sustain what we have achieved.” Janet Yellen as quoted in New York Times/4-10-2017
The markets will read “accommodation” in those words meaning the Fed will do what it can to make sure the interest rate tracks behind the inflation rate and creates a negative real rate of return on yield bearing assets. That latter, a negative real rate of return, has underscored, driven and sustained bull markets for gold in the past.
Stalling engines: The outlook for
U.S. cconomic growth your long-term investment portfolio
“I’ve detailed this dynamic extensively in the financial markets. Given present valuation extremes, the skateboard is so far ahead of the car that we expect S&P 500 annual nominal total returns to average just 0.6% over the coming 12-year period, even if underlying economic growth accelerates to historically normal rates. Combine that with depressed interest rates, where poor 10-12 year total returns are baked-in-the-cake, and our estimate of the prospective total return on a conventional portfolio mix of 60% stocks, 30% bonds, and 10% T-bills has never been lower.
Given that typical pension fund return assumptions are vastly above our current estimates, it follows that we expect a rather severe pension funding crisis in the coming years. If the resolution of the present valuation extremes is anything like what has followed other speculative peaks like 2000 and 2007, investors will likely face a substantially different (and better) menu of investment opportunities within a small number of years. Dry powder has considerable option value.”
MK note: In this month’s edition of News & Views we talk about pension fund instability as a possible unforeseen negative “left field” event that could deliver the next systemic crisis to financial markets’ doorstep. Mr. Hussman communicates that same concern along with additional concerns about the economy itself wherein he cites “challenging arithmetic already baked into the cake.”
WARNING! Do not read the article linked above if you believe that the stock and bond markets are perpetually solid long-term investments without periods of regression, losses and stalled wealth building. Do not read this article if you do not want your media-oiled assumptions about the markets and your portfolio challenged.
SOMETHING TO CONSIDER? Given the returns Hussman forecasts, perhaps that portfolio mix cited above would be better-served with a 10%-30% diversification into gold and silver – the level USAGOLD recommends depending upon your level of concern. If you are locked-into a government or corporate sponsored pension or retirement fund, you might want to consider a diversification on the personal side.
Why gold coins and bullion are the better option for most investors.
Editor’s Note: You decide that the time has come to include gold in your investment portfolio. You contact your investment advisor and he or she puts you into a gold ETF. Did you do the right thing? In this article, which originally appeared at Forbes magazine, Olivier Garret tells why gold coins and bullion owned outright are the better option.
Gold ETFs are rising in popularity due to their convenience. They’re easy to trade, there’s no need to store anything, and no one is going to break into your house to steal your GLD shares.
But there are a lot of hidden dangers inherent in the structure and operation of gold ETFs that few investors are aware of — and these risks are more pronounced than ever, as the threat of another financial crisis is always around the corner.
Considering the public’s waning trust in the banking system, many investors find themselves wondering how GLD stacks up to owning the real thing. When you look at both assets more closely, it’s clear that gold ETFs and gold bullion are very different investments.
Why GLD is not the same as gold
SPDR Gold Trust (GLD), the largest, most popular gold ETF, is an investment fund that holds physical gold to back its shares. The share price tracks the price of gold, and it trades like a stock, but the vast majority of investors don’t have a claim on the underlying gold.
The reason for this is that you can only request physical delivery of metal if you own a minimum of 100,000 GLD shares (most investors don’t: at $1,000 gold, 100,000 shares is more than a million dollars). Even if you do own enough shares, the GLD ETF reserves the right to settle your delivery request in cash.
So why is GLD appealing to investors if you never actually own any gold?
For one, the fund is both convenient and low cost. If you’re looking for an inexpensive way to invest in the direction of the gold price, GLD is ideal.
The other advantage is you can employ leverage with options, which can be risky, but it’s something you can’t do with gold bullion. If you’re an investor who doesn’t plan to take delivery and you’re comfortable with a higher degree of risk, GLD can be a good way to gain exposure to the price of gold.
Counterparty risk on all levels
While gold ETFs can be a fine investment, they come with a lot of counterparty risk inherent in their chain of custody. And this risk will only grow commensurately with systemic uncertainties.
Think about it: If you own GLD, you must rely on a counterparty to make good on your investment. If the fund’s management, structure, chain of custody, operational integrity, regulatory oversight, or delivery protocols break down, your investment is at risk.
It all raises too many questions. Can you be sure the bank doesn’t front-run its customers? How safe are the fund’s holdings? Is the fund protected by adequate insurance? Is the custodian bank trustworthy enough to safeguard the gold?
The best reason to own gold is as a hedge against risk. It can be your last line of defense in an economic crisis—a form of wealth insurance, if you will. But since gold ETFs are part of the very banking system you need protection from, you must ask yourself if they serve one of the primary purposes for owning gold.
In a period of financial crisis, the risks inherent in holding GLD would only rise. In fact, the frequency and severity of counterparty risks with gold ETFs are already rising.
When you consider how these ETFs function, the problem of counterparties quickly becomes apparent:
When you invest in GLD, you buy shares through an Authorized Participant, which is usually a large financial institution responsible for obtaining the underlying assets necessary to create ETF shares.
When it does so, it is buying shares in the fund’s trustee, the SPDR Gold Trust. The trustee then uses a custodian (HSBC) to source and store the gold for it.
Trust in the custodian is paramount: If you’re buying gold as a hedge against a failure in the financial system, you must be confident that the custodian would not be impaired if a crisis were to happen.
As HSBC is one of the world’s largest banks, you simply don’t have that assurance. If there’s a systemic disruption, your GLD shares would likely be negatively affected.
Custodians like HSBC can use sub-custodians, such as another bank, to source and store gold. So in addition to the risk you assume with the fund’s primary custodian, you’re now exposed to even more risk because it has added another counterparty.
There are no written contractual agreements between sub-custodians and the trustees or the custodians, which means if a sub-custodian drops the ball, the ability of the trustee or the custodian to take legal action is limited.
This leaves the trustee on the hook for any negligence. But trustees don’t insure the gold for gross negligence; they leave that to the custodian, who secures limited general insurance coverage for the contents of the vaults. The value of the gold in the vaults is likely to be much greater than this limited policy would cover.
What this all boils down to is that if anything happens to any of the counterparties, you’re the one who loses. And you have zero recourse.
This article originally appeared at GoldSeek and is reprinted at USAGOLD with permission.
Reading that story about the sovereigns in the piano this morning reminded me of the story of Saudi Arabia’s King Ibn Saud reproduced below as originally posted in 2015:
When Saudi Arabia’s King Ibn Saud sold oil concessions to the major oil companies in 1933, he demanded a payment of 35,000 British sovereigns — a coin many of you hold in your own sovereign wealth funds. The good king understood the difference between the value of gold and the value of a paper promise.
At the time, British sovereigns were valued at $8.24 each, or $288,365 for the 35,000 coin lot. The price of oil in 1933 was about 85¢ a barrel. A British sovereign, as a result, could buy about ten barrels of oil. Today those same sovereigns would bring a little less than $9 million at melt value ($256.50 each/$1090 per ounce gold price) and a barrel of oil is selling for about $44. Thus, a British sovereign can buy almost six barrels of oil — a statistic that gives you an inkling of gold’s current under-valuation. For gold to buy the same amount of oil now that it did in 1933, the price would have to go to $1880 per ounce.
MK 2017 note: Prices have changed but the point remains. Gold is undervalued at current prices when weighed against the price of oil – even at the current reduced price ranges.
History buffs will appreciate this additional quote and comment from the September 2000 edition of News & Views:
“The only remaining problem was how to obtain that much gold. Because America had just gone off the gold standard, Socal’s efforts to dispatch the gold directly from the United States were turned down by Assistant Secretary of the Treasury Dean Acheson. But finally, the Guaranty Trust’s London office, acting on behalf of Socal, obtained thirty-five thousand sovereigns from the Royal Mint, and they were transported on a ship belonging to the P&O line. Care had been taken that all the coins bore the likeness of a male English monarch, and not Queen Victoria, which it was feared, would have devalued them in the male-dominated society of Saudi Arabia.” – Daniel Yergin, “The Prize”, on the signing of the first oil exploration concession with Saudi Arabia in 1933
The good King Ibn Saud, back in 1933, demanded 35,000 gold British Sovereigns in payment for oil exploration rights in his country. Had he known that he was sitting on a massive pool of oil that would make Saudi Arabia the most important piece of real estate in the world, he might have asked for more. Ibn Saud did however understand the ultimate value of a paper promise, hence the payment in hard, yellow metal. To this day, the Gulf (as it’s come to be known) becomes squeamish whenever it appears the Fed is printing too much paper currency.
Old British sovereigns, like the ones in the photo below, are a preferred acquisition among safe-haven gold IRA rollover investors. We now have a quality selection of George V sovereigns available at attractive bullion-related prices. We invite you to call the Trading Desk at 1-800-869-5115, extension #100 to learn more. British sovereigns were a guardian of wealth in 1933 and remain a guardian of wealth today.
Value+history+gold money = portfolio safety for the long run
“British officials are trying to trace the owner of a trove of gold coins worth a ‘life-changing’ amount of money found stashed inside a piano. A coroner investigating the find on Thursday urged anyone with information to come forward. . . Anyone wanting to make a claim has until April 20, when coroner John Ellery will conclude his inquest.”
MK note: This post is made in the public interest.
Ahem. . .
By the way, British sovereigns happen to be one of the most sought-after, accumulated and stored pre-1933 gold coins in the world. We sell many thousands of this item annually. Some go into safe deposit boxes. Some get buried out on the property. Some get stashed in the piano. All are kept in the event of a social, political or financial breakdown, or some other unexpected catastrophe against all of which the gold British sovereign has been a direct hedge for centuries.
Though not a new word to describe Fed policy intentions, using it in today’s statement in the context of obviously rising inflation and inflationary expectations is a new policy stance – one very favorable for gold and likely the Trump administration as well. It seems that the Fed is willing to chase the inflation rate rather than trump it (forgive the allusion), and as long as that’s the case, the markets will read inflation into the economic script for the future.
I think some were expecting “accommodative” to disappear from the Fed-speak particularly after Yellen’s speech earlier this month when she said the central bank is likely to pursue “a neutral” rates policy. “A ‘neutral’ policy stance,” said Yellen pre-meeting,” is one where monetary policy neither has its foot on the brake nor is pressing down on the accelerator.” Post-meeting, the word “accommodative” was still there though – like a bright and shiny gold coin sitting on the sidewalk waiting to be pocketed. It was. Gold and silver shot higher and so did stocks and even bonds.
All of this blends nicely with themes raised in our March newsletter:Watch movie online The Transporter Refueled (2015)
Will banks’ excess reserves fuel a new monetary crisis?
Don’t look now but inflation and a new gold rush might be in our future.
“At the end of February, total holdings in gold-backed ETFs and similar products stood at 2,246.1t (72.2 moz), up 90.6t from January. These holdings were valued at US$90.7bn, 8% higher than a month earlier.”
MK note: We’ve been reporting on the surge in ETF purchases for several weeks now. Following up on the previous post on a hedge fund manager’s commitment to gold, this chart is indicative of professional interest in gold. As you can see, that interest is strong and on both sides of the Atlantic. German interest in ETF gold, obviously a reflection of concern with the French election and future of the euro, is particularly strong – up 16% in February. Private investors at the moment are content to sit on the sidelines while the professionals scoop up what they see as cheap gold. Don’t allow yourself to be mesmerized by the stock market and neglect gold. . . . . . .I will leave you with this cartoon from our old friend, Ed Stein. It kind of says it all. . . . . .
“Cutler has around 5 per cent of the fund deployed in gold. He told What Investment, ‘if you look at the different possible economic scenarios we are faced with now. The first is that we are all going to become like Japan, with no growth, and very low bond yields. Well, the number one reason not to own gold is that it pays no income, but in this scenario, bond yields are very low or negative so nothing pays an income, and that’s good for gold.’
Cutler continued, ‘The second scenario people look at right now is that we end up like in the 1970s, with stagflation, very high inflation and very little growth. Well in times of very high inflation, gold does well as a store of value. It did well the last time we had this scenario.’”
MK note: That’s the way I see it as well. Neat, simple and directly to the point. Either way you are protected with an adequate diversification in gold and silver coins.
“Gold has often been referred to as a relic. But from a behavioural perspective, this may also mean it is ingrained in our subconsciousness and related actions. Put differently, as long as humans remain tangible, it is likely that they maintain a desire to hold real and tangible assets.
Very few companies on the US stock exchange, for example, are older than 50 years. By comparison, gold has existed for thousands of years and any gold coin or gold bar will most likely outlive any company and their stocks and bonds. Put together, it is unlikely that a company that sells claims on gold, such as a gold ETF, will beat physical gold’s longevity.”
MK note: That’s the bottom line on ETFs, bitcoins and the like. . . . . . . . .Wannabes, not gonnabes. At least in the sense what constitutes real gold ownership. Good article for the thinking gold owner. . . . . . .The Italy 20 lira gold coins pictured above are over 120 years old, still reflect the purchasing power of gold in international markets despite their age and have survived the many turns in Italy’s history. One hundred and twenty years from now that will not have changed. “As long as humans remain tangible, it is likely that they maintain a desire to hold real and tangible assets.”
Speaking of old and valuable gold coins. . . .
March Special Offer
‘Proof-Like’ Schillings, Kroner ‘Mermaids’, ‘Hefty’ 50 Francs, and Deeply Discounted Angels…and a raffle!
We do not see the Austrian 100 Schillings and Mermaids often and the number offered – 50 and 165 respectively – is very low. These items are likely to be subscribed quickly.
In this month’s issue of News & Views, we do something a bit unusual. We celebrate USAGOLD’s 20th year on the World Wide Web by reprinting some of our more interesting and timeless short-form treasures from over the years. We think you will thoroughly enjoy this walk down memory lane. Newcomers, we hope, will find inspiration here and some very sound reasoning as to why gold should become a part of your long-term portfolio plan. The following is list of vignette titles in the retrospective. If you are new to USAGOLD and did not receive our latest newsletter issue by e-mail, we invite you to visit some time. . . . . . when you have a moment for quiet contemplation.
√ Gold in five easy lessons
√ Question: When is a billionaire not a billionaire?
Answer: When just about everyone else is a billionaire.
√ Yap stone money inflation
√ What it would take to make the dollar as good as gold
√ Computer software gone mad
√ The PhD standard and what to make of it
√ Nine lessons on investing your money
√ Approaching gold with the right attitude, Part 1
√ Approaching gold with the right attitude, Part 2
√ The ethics of interest rates
√ For gold owners, the inflation-deflation debate is purely academic
√ The seven ages of gold
√ Keynes would be buying gold hand over fist
√ A telephone call from an old client and friend
“The market worries more ahead of the event than after,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by e-mail. “Once the hike was out of the way, a more balanced picture emerged and that together with a reality check of the potential Trump impact did the rest.”
MK note: Gold continues to climb this morning though in somewhat subdued fashion probably a result of the holiday in the United States. Ole Hansen’s comments focus on the United States, but it seems that every area of the globe has its own unique concerns driving physical demand. China has a currency problem, massive debt and capital flight to contend with. In Europe, investors are worried about the rise of Marine LePen in France and her promise to take France out of the euro, possible debt default in Greece and teetering banks in Italy. In the United States, inflation expectations have begun to influence investment decisions across the boards. Altogether these singular, localized dimensions form an imposing whole.
“Using its sentiment analysis tools, however, Goldman managed to come to these conclusions as early as November—which is the same month the investment bank turned bullish on commodities for the first time in four years. Goldman’s line of reasoning? When business optimism goes up, capital expenditure (capex) also goes up, and when capex goes up, commodities tend to follow. I should add that the bank has historically been neutral on commodities, recommending an overweight position only four times in the last 20 years. So when it does become bullish, investors should pay attention.”
MK note: The expectation for rising commodity prices, needless to say, rolls into inflationary expectations and helps explain professional money’s big move into gold since the start of the year. Gold is up over 8% in 2017 while stocks are up only a little over 4%.
“While the stock surge and below-average volatility show investors are more optimistic, markets are underpricing global political risks, said Russ Koesterich, who helps manage the $41 billion BlackRock Global Allocation Fund. He recommends gold as insurance. Looming elections in Europe and political uncertainty in the U.S. are among developments that could shift investor sentiment, Koesterich said. Adding to the threat is the potential impact of Britain’s exit from the European Union and a debt crisis in Greece. Such concerns have helped boost haven demand for gold, which has climbed almost 8 percent this year after posting the worst quarter since 2013.”
MK note: All of a sudden Greece’s name keeps popping up in the litany of reasons to own gold, and with good reason. Marine LePen’s, who has a plurality in the upcoming first round of French voting, says she will take France out of the euro, an event that would surely sink both the currency and the European Union. That is an even bigger and more dangerous threat than what Greece brings to the table. Given the growing populist mood across Europe, I would think that European money managers might be as interested in gold for portfolio insurance purposes as BlackRock is in the United States.
“Do something. Help!”
Alan Greenspan, as quoted in the World Gold Council’s interview linked above:
Significant increases in inflation will ultimately increase the price of gold. Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection. I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counter-party signature. Gold, however, has always been far more valuable per ounce than silver.
No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counter-party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.
(Pictured below. Lydia gold stater, King Croesus, 561-541 BC, electrum blend silver and gold, ‘heavy’ stater specimens bring upwards of $30,000 in top grades. This specimen is from the British Museum collection and reproduced here with permission.)
MK note: Gold is not like other assets that depend upon another individual or institution’s performance for value. It stands alone and as Greenspan states without mincing words: “No one questions it value.” It is for those reasons that gold protects wealth no matter the economic malady visited upon the economy – inflation, hyperinflation, disinflation, stagflation, runaway stagflation and deflation. It is the ultimate armchair investment – the one asset you can rely upon no matter what happens politically or economically.
Greenspan believes stagflation is in our collective futures and he has made that prediction publicly on several occasions over the past few months. Here is what he said in the same interview linked above:
As productivity growth slows down, the whole economic system slows down. That has provoked despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!
At the same time, the risk of inflation is beginning to rise. In the United States, the unemployment rate is below 5%, which has put upward pressure on wages and unit costs generally. Demand is picking up, as manifested by the recent marked, broad increase in the money supply, which is stoking inflationary pressures. To date, wage increases have largely been absorbed by employers, but, if costs are moving up, prices ultimately have to follow suit. If you impose inflation on stagnation, you get stagflation.
Our mission at USAGOLD is not to take sides politically and, anyone who has frequented these pages over the years will attest to the fact that we tend to shy away from partisan politics. What we do concern ourselves with, however, is the manner in which the policies pursued by politicians and central bankers might affect the investment portfolio. You might say that our business is the preservation of wealth. Alan Greenspan clearly sees gold and silver as means to that end. At the moment the political tide is running in the direction of inflation and inflationary expectations have taken hold of the investment markets, gold included. The “inflation trade” has played large in gold’s price appreciation thus far this year, and as I mentioned in an earlier post, professional money managers are leading the charge through their purchases in gold ETFs.
Investors last tangled with stagflation in the the decade of the 1970s, and we all know how gold performed during that period. For the record, here is a chart that shows how gold performed superimposed over the purchasing power of the dollar. As you can see, while the dollar declined by 85%, gold rose by 17-times. It tells at a glance the value of diversifying with gold and goes to the heart of the point Dr. Greenspan is making. (The Dow Jones Industrial Average over the same period gained only about 16%.)
MK note: Former Fed chairman Alan Greenspan is interviewed in the most recent issue of the World Gold Council’s Gold Investor magazine. As most of you already know, Greenspan is a long-time advocate of private gold ownership as well as the gold standard. Some see his chairmanship of the Fed and gold advocacy as contradictory, but in fact, Greenspan always saw the two as complementary. Here is a very interesting quote taken from the interview:
“When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard, I told him that even if we had gone back to the gold standard, policy would not have changed all that much.”
Many years ago, we catalogued those exchanges between then Texas congressman Paul and Greenspan. I was among the small group at the time who appreciated the dialogue as friendly intellectual exchanges between two heavyweights and not as contentious arguments. As I wrote in the preface to the transcripts several years ago, I think both enjoyed and relished the exchanges, and it is interesting that Greenspan would reference the banter between the two in such a telling way so many years later. Here is what I wrote in that preface:
In putting this page together, I was struck with Dr. Paul’s ability to cut through the political gamesmanship that necessarily comes with being chairman of the Fed to Alan Greenspan, the man and political/economic philosopher. What emerges is a powerful figure conflicted between the practical manager charged with operating within the current fiat monetary system and the philosopher-academic with a “nostalgia,” as he puts it, for the days of the gold standard. Without Dr. Paul’s incisive questioning, I doubt that this aspect of the Greenspan character would have found its way to the public venue and the historical record. Though the relationship appears adversarial at first blush, one also detects a certain amount of mutual respect and interest. Says Dr. Paul of the exchanges: “My questions are always on the same subject. If I don’t bring up the issue of hard money vs. fiat money, Greenspan himself does.”
Let me include one final short story from that preface that I have always appreciated:
In closing, I would like to pass along an anecdote reported by SmartMoney’s Donald Luskin in a 2002 interview of Ron Paul. Paul told Luskin the story of his owning an original copy of “Gold and Economic Freedom,” and asking Greenspan to sign it. While doing so, Paul asked him if he still believed what he wrote in that essay some 40 years ago. That tract, written during Greenspan’s days as a devotee of Ayn Rand, is a strongly worded, no-holds-barred attack on fiat money and the central banks as an engine of the welfare state. It also endorses the gold standard as a deterrent to politicians’ penchant for running deficits and printing money. Greenspan — enigmatic as ever — responded that he “wouldn’t change a single word.”
Perhaps later today, I will be back to comment on one or two more quotes from the Greenspan interview.
From our Gold Classics Library:
Consumer prices post largest gain in nearly four years
“Inflation is trending higher as prices for energy goods and other commodities rebound as global demand picks up.”
MK note: After a minor waterfall drop earlier this morning, gold has rallied sharply off the $1217 low. Now trading at near $1231. Not sure what prompted the rally, but one thing we’ve noticed in the trading pattern is that gold is finding significant support on downside corrections. It comes quickly and usually during the same trading session.
We have hinted here before that professional money is supporting this market which has begun to trade an inflationary bias. That bias was confirmed by the .6% gain in consumer prices in December, reported earlier today, and that could be what’s behind gold’s rally. Of course, chairwoman Yellen is talking an inflationary line with her warnings about another interest rate increase. As we have mentioned here consistently, the Fed is likely to chase the inflation rate higher rather than attempt to stop it in its tracks. Real rate of return will become an issue particularly among well-heeled, old line money managers, and that is where gold bobs to the surface as an important factor in portfolio allocations.
Gold is up almost 6% thus far this year and 9.2% from its December low of $1128 per ounce. Do you remember this chart and commentary first posted 12/10/16?
What are we advising now? The same thing we always advise. If you do not own gold and silver currently, fix your sights on a percentage of your portfolio you think would make for a proper diversification and then work toward achieving that target. None of the negative elements in the economy that launched and supported gold’s long-term secular bull market since the early 2000s has been addressed in a meaningful way. They are not likely to be for a long time to come, and watching the way Washington operates buttresses that notion. If you do not own enough gold and silver to afford adequate protection, add more now while the price is low.
As published in our most recent News & Views newsletter:
Gold in five easy lessons
1. Don’t buy it because you need to make money; buy it because you need to protect the money you already have.
2. Don’t look at price as a barrier; look at it as an incentive.
3. Don’t buy its paper pretenders; buy the real thing in the form of coins and bullion.
4. Don’t fall prey to glitzy TV ads; do your due diligence instead.
5. Don’t allow naysayers to divert your interest; allow yourself the right to protect your interests as you see fit.