Monthly Archives: April 2020
“The president of the Shanghai Gold Exchange (SGE) called for a new super-sovereign currency to offset the global dominance of the U.S. dollar, which he predicted would decline long term, while gold prices rally.”
USAGOLD note: He went on to say that gold’s gains since the start of the year were likely to be sustained and that he Fed’s opening of the “liquidity tap” will send the dollar into a “long-term depreciatory trend.” We do not believe that a super-sovereign currency is likely any time soon, though deep crises have a way of upending the current order – whatever the current order might be.
While stocks dominated headlines, gold quietly performed
“For twelve consecutive years, gold was up every single year whether there were inflation fears, deflation fears; strong dollar, weak dollar; political stability, political instability. It didn’t matter – strong oil, weak oil. . . Gold went up for twelve years. . . When gold embarks upon its next move, I believe that you will see that long wave take gold relatively quickly, but it will be measured in years, up to a $3000 to $5000 target that I believe is fundamentally justified based on the facts we have today.” –– Thomas Kaplan, Electrum Group (Bloomberg’s Peer to Peer Conversations with David Rubinstein)
1. Gold has produced positive returns in 16 of the last 19 years.
2. Gold’s average annual return compounded since 2001 is 9.47%. (2001-2019)
3. Gold’s appreciation over the last twelve months (from 3/20/2019) is 14.2% – even with the recent correction taken into account.
4. Gold has been a portfolio stalwart. A $100,000 investment in gold in January 2001 would be worth about $550,000 today. At gold’s peak in 2011, it would have been worth over $700,000.
5. Gold does not have a political preference – something to keep in mind as we move through another presidential election year. Its ascent has occurred during the terms of four presidents – two Democrats (Bill Clinton and Barack Obama) and two Republicans (George Bush and Donald Trump). Its largest gain – 31.92% in 2007 – came under a Republican (Bush). It’s second-largest gain – 29.24% in 2009 – came under a Democrat (Obama).
6. Gold is not swayed by who leads the Federal Reserve. Its ascent has occurred during the terms of four different Fed chairmen with four distinctly different styles and approaches to monetary policy – Alan Greenspan, Ben Bernanke, Janet Yellen, and Jerome Powell – and under a variety of economic circumstances and events.
7. Contrary to popular belief, gold does not need inflation to appreciate in value. In 2001 the average inflation rate was 2.8%. In 2018, it was 2.4%. Between those bookend years, the inflation rate exceeded 3% only three times. Its lowest reading was 0.1% in 2015. In short, some of gold’s best years were the result not of inflation but disinflation – a stubborn circumstance that has carried over to the present.
8. Gold’s price history is only loosely connected to that of the dollar. In January 2001, the U.S. Dollar Index stood at 113.39. It now stands at just under 102 for a decline of 10% during the period. The price of gold, on the other hand, rose 5.5 times – a pace well ahead of the dollar’s performance against other national currencies.
9. The 21st century has been gold’s century, not the stock market’s. In January 2001, the Dow Jones Industrial Average stood near 9,850. With its recent sharp decline taken into account, it is now just over the 19,000 mark for a gain of roughly 193%. By contrast, gold is up over 550% over the same period (from roughly $270 to $1500 per ounce). While stocks dominated headlines, gold quietly performed.
The question becomes whether or not an investment that has performed so well in the past is likely to perform equally well in the future. Though nothing in the world of finance and economics is certain, we rest the bullish case for gold on the understanding that none of the economic and financial system problems that created a positive price environment for gold over the last nearly nineteen years have been removed from consideration. In fact, a case could be made that they have only intensified – and dangerously so.
Thus, we return where we began for an answer – to the well-conceived forecast from Electrum Group’s Thomas Kaplan at the top of the page. (The interview is highly recommended.) Perhaps a decade hence, we will post another chart at USAGOLD similar to the one you now see at the top of the page. At $5,000, by the way, the appreciation from the current $1500 price would amount to roughly 330%. Thomas Kaplan, we add in conclusion, began his investment career with $10,000. He is now a billionaire. Gold was priced at $1280 per ounce at the time of the Bloomberg interview.
–– Michael J. Kosares
Disclaimer – Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.
USAGOLD note: We are often asked why the gold price isn’t rising when demand for coins and bullion is high. Jan Nieuwenhuijs provides a detailed analysis of the disconnect ……
Repost from 4-23-2020
“Fitch was able to identify the gated funds by scrutinizing their respective investment managers’ disclosures. But the actual scale of the problem is likely to be a lot larger than the numbers suggest. ‘The true extent of gating is even greater given that funds’ public disclosures are limited,’ Fitch said. According to the European Securities and Markets Authority, funds totaling €100 billion in AUM suspended redemptions or applied other extraordinary liquidity measures in March.”
USAGOLD note: Having worked with investors of all description for a very long time, we are very much aware of the primeval fear of being “gated” – i.e., being deprived of jurisdiction over one’s assets. A lockdown of €100 billion in assets is not a minor problem, particularly among those directly affected.
Repost from 4-23-2020
“Can you conceive it? The lubricating grease of the world’s economy – oil – you must hand away at a loss. It is as if the clocks ran suddenly backward… or that gravity pushed rather than pulled.”
USAGOLD note: Since Daily Reckoning posted this article oil has recovered to positive levels, however, some veteran analysts say it could sink again – about the time the May contract becomes eligible for settlement. And then there’s the problem of other storage facilities beyond those in Oklahoma meeting a similar fate.
Repost from 4-23-2020
(USAGOLD – 4/30/2020) – Gold tracked down to the $1700 level just before the Fed meeting results and press briefing. It then reversed course on Fed chairman Powell’s assurances the central bank would continue forcefully with the heavy stimulus package put in place to combat the economic ill-effects of the virus. This morning it is trading quietly at $1717 in the carryover – down $5 on the day, but up $15 from just before the chairman’s press conference. Silver is down 29¢ at $15.11 on the latest initial jobless claims report of another 3.84 million Americans heading for the unemployment rolls – a deflationary indicator.
The World Gold Council is out with its quarterly report (Q1) on global gold demand this morning. It details a mixed bag of radically reduced jewelry demand in Asia coupled with an 80% increase in physical bullion demand among private investors in the West. The safe-haven rush was led by institutional investors buying through gold ETFs, and to a lesser extent, retail coin and bullion buyers. It is worth noting that the report cuts off in March and, as a result, does not fully reflect the impact of heavy retail coin and bullion demand that began in March and gathered pace in April. The mixed results also raise a question as to how future physical supplies are likely to be affected once Asian demand returns from its understandable decline.
Chart of the Day
Chart note: We have monitored this chart over the past several months and thought it worth a rerun today due to the developing spike you see on the far right of the chart. It also shows a correlation we have not brought to the attention of our readers in years – gold and the money supply. The powerful upward trajectory in MZM, a broad money supply measure, began in May 2019 and has been relentless ever since. Whether or not it will translate to price inflation down the road remains an open question, but at the very least we can say that money supply growth is showing healthy signs of life and gold is reacting accordingly.
Important client note: Due to our long-standing relationships with key market-makers and our own inventory planning, we are still working from a strong inventory position and are able to deliver most of the standard gold and silver bullion items – American Eagles, American Buffalos Canadian Maple Leafs and Krugerrands. Even our sources though are strained under the circumstances and our inventory, of course, is finite. We do not know, as a result, how long the supply will hold up. All deliveries are running on schedule with occasional minor delays due to the order and shipping volume, and we think you will find our pricing as advantageous when compared to most sources. The one thing we have no control over is rising premiums which, unfortunately, we have no choice but to pass along. Please contact us to discuss prices and availability. 1-800-869-5115 x 100
“Economists refer to this phenomenon as moral hazard, and it hasn’t been this big a concern in a long time, perhaps not even during the 2008 financial crisis. ‘It’s an exquisite irony,’ said Nathan Sheets, chief economist of PGIM Fixed Income. ‘What the Fed is doing is necessary to get the markets going again, but on the other hand they leave investors thinking the Fed has their backs.’”
USAGOLD note: Haven’t heard much about moral hazard of late but the Federal Reserve, it can be said without much in the way of push back, is dishing it out in spades. It won’t be long until the old criticism that Wall Street and the Federal Reserve privatize profits and socialize losses is back in vogue. That might seem to be a rather banal comment at this stage of the game, but the socialization of Wall Street’s losses, in the end, amounts to a tax on the citizenry either in the form of direct levies on income or the more insidious process of inflation – and that’s a big deal.
“Jay Powell sent an unmistakable message to investors and the public on Wednesday: hopes for a quick economic rebound in the second half of the year risked being an illusion and the Federal Reserve was gearing up for a long fight against the effects of the coronavirus pandemic.”
USAGOLD note: In this article, Financial Times does a good job of capturing the mood during last Wednesday’s Fed-related events.
“Governments have no savings, Western citizens have almost no savings, and the outlook for future savings is bleak. In 2008, central bank money printing and government borrowing was deflationary for the mainstream economy because the money went to financial markets, banks, and governments. The banks didn’t put the money into the mainstream economy. I’ve suggested that this time is different. There is still enormous money being printed and poured into financial markets, but small business lending programs are in play, and this may be only the beginning of printed money that flows into the mainstream economy. Dave Kelly, chief global strategist for JP Morgan Asset Management, says this about the future: ‘(US govt) Borrowing at this pace, particularly when other governments around the world are also running fast-rising deficits, might be expected to result in higher interest rates, even in a deep recession.’”
USAGOLD note: We referenced the Kelly report in our DMR and on this posting board yesterday. Thomson has a point about involving Main Street in the bailout this time around. It could encourage a much different result than what we got after the 2008 credit crisis when Wall Street and Wall Street alone was the beneficiary of central bank and federal government largesse.
Deflation is the Voldemort of the coronavirus era
“It’s understandable that the human tragedy of climbing unemployment and the nosedive in the broader economy is taking precedence for policy makers. Inflation targets seem arcane, even churlish, in times of existential crisis. Certainly, there’s little prospect of a meaningful spike, if history is anything to go by. A decade ago, conservative economists wrote an open letter to then-Federal Reserve Chairman Ben Bernanke warning that the Fed’s quantitative easing would provoke runaway inflation and dollar debasement. Didn’t happen.”
The world has more to fear from deflation than hyperinflation
Financial Times/Editorial Board/4-28-2020
“[C]entral banks have printed money, partly to finance government spending, while production of everything from cars to kitchen extensions has collapsed. Worries about inflation, therefore, are understandable. But they are misplaced: the world economy has more to fear from deflation.
Inflation never materialized after the last crisis. JPMorgan thinks this time Is different
Institutional Investor/Christine Idzelis/4-27-2020
“JPMorgan Chase & Co. is warning investors that an inflation bomb may go off in the aftermath of the coronavirus recession — even though it failed to ignite in the record-long expansion following the 2008 financial crisis. ‘Investors would still be well advised to structure their portfolios with an eye to the possibility that it could,’ David Kelly, chief global strategist of JPMorgan’s asset management unit, wrote in a Monday note. He recommended real assets such as real estate and precious metals, saying they ‘can serve an important, although long-redundant role, in protecting a portfolio against the risk of inflation.’” [Emphasis added]
USAGOLD note: Who’s right? It’s a flip of the coin. There is a course of action, however, that makes a great deal of sense and alluded to in the second offering above by JPM”s David Kelly. A gold diversification can go a long way in protecting against either or both and all the hybrids in between. We referenced this report in this morning’s DMR and repost it now for those who may have missed it.
“It’s increasingly clear this pandemic is striking powerful blows at the most fragile Fault Lines – within communities, regions, societies, nations as well as for the world order. To see this disease clobber the most vulnerable ethnic groups and the downtrodden only compounds feelings of inequality, injustice and hopelessness. It is as well stunning to watch COVID-19 hasten the partisan brawl. A nation terribly divided is split only more deeply on the process of restarting the economy. To witness rival global superpowers plunge further into accusation and enmity. And to see the coronavirus viciously attack Europe’s fragile periphery, further splitting a hopelessly divided Europe and pressuring a critical global Fault Line.”
USAGOLD note: It was the worst of times and, as Noland summarizes, it’s not getting any better …
Repost from 4-25-2020
“U.S. gross domestic product will plunge by nearly 40% on an annualized basis in the second quarter, according to the nonpartisan Congressional Budget Office. But the CBO forecast an economic resurgence in the second half of the year, and said unemployment would crest at 16% but remain in double digits throughout 2021.”
USAGOLD note: This Reuters report captures the scope of the problem facing the federal government and the central bank in some hard, bleak numbers. A year ago this situation, about as dire as one could imagine, was not on anyone’s horizon ……
Repost from 4-25-2020
“[Saxo Bank] sees gold prices pushing to $1,800 an ounce by the end of this year, hitting a new record high by 2021 and sees a long-term gold price above $4,000 an ounce. If ever there was a time where it made sense to put a part of your savings into something tangible, then I think that is now.”
USAGOLD note: Given the complexities involved with the evolution of three major crises simultaneously – the pandemic, the oil collapse and the slow-motion unraveling of credit and financial markets – it is going to be very difficult to time short-term gold market speculation. Anything can happen in this chaotic situation. The best approach, in our view, is to buy the physical metal outright for long-term storage in order to be fully positioned for the time when the gold price does go into a full-out, upward trajectory.
Image courtesy of Visual Capitalist
Repost from 4-23-2020
“Therefore, I advise people amass gold now not because I have no faith in human civilization, but precisely because I do. The division of labor will live on, and amassing the means through which it will survive, is going to make its current holders very, very rich in real terms. If and when the dollar is destroyed, human civilization will not simply end. It will continue to use gold as money, just as it does right now, but without the dollar intermediate. Unfortunately, most people will be very poor, because they only have the intermediary. Those people will have to work for those who have the real thing. The real thing will then filter down and through the new economy.”
USAGOLD note: This is an extraordinary argument in favor of gold ownership and gold’s value as money. Ayre strips away all the fluff on what money is and should be leaving the reader with a practical, down-to-earth philosophy on why it should inhabit significant space within the overall asset portfolio.
Repost from 4-23-2020
(USAGOLD – 4/29/2020) – Gold continued its wait and see approach to today’s Fed meeting and press conference. It is trading at $1715 – down $3 on the day. Silver is up 4¢ at $15.32. Few expect the Fed to go beyond promising to stay the course on its current policy agenda and attempting to keep financial markets calm in the face of the greatest level of economic uncertainty since the early 1930s.
In a report yesterday at Institutional Investor, JP Morgan’s chief global strategist David Kelly warns that an “inflation bomb” could go off in the future even though it didn’t in the aftermath of the 2008 financial crisis. This time around, he says, it could be different due to the “extremely aggressive” stimulus deployed both by the federal government and the central bank along with several other factors covered in the report. Though inflation never materialized during the last crisis, he says “investors would still be well advised to structure their portfolios with an eye to the possibility that it could.” He recommends buying real assets like real estate and precious metals, saying they “can serve an important, although long-redundant role, in protecting a portfolio against the risk of inflation.”
Chart of the Day
Reproduced with permission from Pew Research
USAGOLD note: ForexLive’s Adam Button explains the dangers of monetizing government debt. What was previously believed to be “mind-blowing” is the course of action the Fed has taken. The bursting of the dam, says Button, makes “the sky the absolute” limit for gold.
“With its $700 billion bond-buying expansion in response to the COVID crisis, the Federal Reserve has thrust itself into the limelight. Like a sixteen-year-old with a credit card, the Fed is salivating over what money-printing powers it shall seize next. How is the prudent investor to respond?”
USAGOLD note: Something to contemplate as we await the Fed announcement and press briefing …… The $700 billion mentioned, by the way, is only the tip of a roughly $6 trillion iceberg to be added, by some estimates, to the Fed’s balance sheet.
Image courtesy of AWeith / CC BY-SA (https://creativecommons.org/licenses/by-sa/4.0)
“In the ‘base case’ for the U.S. economy, published by his firm, Rosenberg Research, the economy ‘reopens’ in May, in a staggered approach across industries and regions. There are ‘periodic setbacks in terms of COVID-19 case counts…sufficient to make people less comfortable and confident about spending then they did prior to the crisis. A vaccine is not developed in this forecast, but treatment that alleviates the worst respiratory symptoms’ is developed within the next six months, he writes.”
USAGOLD note: The article goes on to a long list of forecasted events – a not too rosy Rosenberg future.
Image: Durer’s Four Horsemen of the Apocalypse
National Review/Jim Geraghty/4-23-2020
“At some point the coronavirus crisis will end, but one of the extraordinarily difficult lessons of this ordeal is that the catastrophic scenarios that sound like something out of science fiction can happen in real life, and that the vast majority of us are at the mercy of fate in these scenarios. … We in the United States never suffered another terror attack on the scale of 9/11, but that didn’t mean that the threat of terrorism did not shape our thinking for at least a decade afterwards, and probably even to today. We will be thinking about the risk of global pandemics and how to mitigate them for a long time to come. And that will start to influence Americans’ decisions about where they want to live.”
USAGOLD note: Things were trending in this direction long before the current crisis based on the sophistication of online systems including communication. Because of the virus and the long-term uncertainties it imposes, the outbounder trend has picked up significant momentum. And the possibility of future pandemics, the emphasis of this particular article, are just one of a longer list of concerns pushing the movement.
“There are a few similarities that we can identify by looking at the weekly charts of DJI today and DJI on the edge of1930s:
• First of all, there is a period of doubt where price increases (red zone on the chart), which is then followed by the last push of the price to record the high point of the entire period.
• Secondly, a very sharp drop of asset price (49% in 1929 and 38% in 2020) which by itself signals that the prevailing trend is under threat.
• At last, just before the general consensus that the economy entered a recession, we see a strong retracement from the drop . In both cases, the price retraced back by a half or even a little more.
The pattern is repeating itself.”
Chart courtesy of TradingView.com