Author Archives: USAGOLD
Part 2 of 5 . . . . .
What makes this gold market rally
different from all others
Day-to-day price reversals often originate
in Asia and Europe, not just the United States
For decades, the U.S. commodity markets set the tone for gold pricing and the rest of the world was content to follow. Even the old London price fix tended to follow along with trends established in the United States. That all changed when the Shanghai gold market began offering its own pricing mechanism and the effects of Brexit began to have a profound impact on both sides of the English Channel. Now, price reversals often begin in Asian or European markets overnight and carry over to the open in New York rather than the other way around. All of this is a reflection of ramped up global investor interest in gold and a leveling of the playing field in terms of who and what influences the price on a daily basis. As such, it comprises our second important difference between the current gold price rally and rallies in the past.
When the United States owned
most of the gold on Earth
Chart courtesy of GoldChartsRUs
Few Americans know that just after World War II the United States owned most of the official sector gold bullion on earth – about 22,000 metric tonnes or 80% of the world total. As part of the 1944 Bretton Woods Agreement, though, the United States allowed unrestricted redemptions from its reserves at the benchmark rate of $35 per ounce. In the 1960s, a group of European countries, led by Germany and France, got the idea that U.S. trade and fiscal deficits had undermined the dollar, making gold a bargain at the $35 benchmark price. Steadily over the next decade, they exchanged dollars for gold at the U.S. Treasury’s gold window. By the early 1970s, 14,000 tonnes of gold – or 64% of the stockpile – had departed the U.S. Treasury never to return (See the chart above).
The transfer of gold finally ended in 1971 when President Nixon halted redemptions, devalued the dollar and freed the greenback to float against other currencies. The era of global fiat money with the dollar as its centerpiece had begun. Gold transformed from its official role as backing the dollar to serving as a hedge against its depreciation. Since that role reversal, gold has risen in fits and starts from the $35 official benchmark in 1971 to a peak of over $1900 in 2011. It is trading now in the $1750 range. For the central banks and private investors who redeemed their dollars for gold at $35 per ounce, the gains have been extraordinary – over 4800% at current prices or 8.25% annually compounded over the 49-year period. Simultaneously, the 1971 dollar has lost more than 84% of its purchasing power.
The crisis ready investment portfolio
In a recent essay published at Project Syndicate, Harvard economics professor Kenneth Rogoff sets an ominous tone. Humanity, he says “is facing something akin to alien invasion” – an apt analogy, we thought. “With each passing day,” he goes on, “the 2008 global financial crisis increasingly looks like a mere dry run for today’s economic catastrophe. The short-term collapse in global output now underway already seems likely to rival or exceed that of any recession in the last 150 years.”
At the moment, as shown in the chart below, the level of stress in financial markets is at its highest point since the credit crisis of 2008. Keep in mind the current high reading is without the impetus of any financial institution or fund of consequence reporting serious difficulties and/or requesting a bailout. Note with that in mind the acceleration in the index after the Bear Stearns and Lehman failures in 2008.
Below we have reconstructed the same chart only with the price of gold superimposed. As you can see, gold responds directly to stresses indicated in financial markets and that the effect can persist even after the initial threat dissipates. Gold ownership, in short, is a way to make one’s portfolio crisis ready on a permanent basis – a means to batten down the hatches against recurring financial storms and, for the minority who own it, an effective and ever-ready defense.
“If you look at the history of currency, gold has a unique role and I don’t think it’s accidental,” writes Rogoff in his latest book, The Curse of the Crash which predates the coronavirus crisis. “Some people say that if gold hadn’t been selected as a currency thousands of years ago, it would not have a role today. I don’t agree. Gold has a lot of useful properties and unique features so I don’t think its status is in any way accidental. It’s a monetary asset and I think if you replayed history another way, you would come out with gold again.”
Please see Mapping the COVID-19 Recession by Kenneth Rogoff, Project Syndicate
The coronavirus pandemic will forever
alter the world order
In a recent Wall Street Journal editorial, former Secretary of State Henry Kissinger said that the pandemic has created “political and economic upheaval that could last for generations” and that this crisis is even more complex than the one that began in 2008. “When the Covid-19 pandemic is over,” he says, “many countries’ institutions will be perceived as having failed. Whether this judgment is objectively fair is irrelevant. The reality is the world will never be the same after the coronavirus.” If global authorities – governments and, in this case, central banks – will be perceived as having failed, then what will be the knock-on effect in financial markets that have leaned heavily on their largesse since 2008? The new normal may be in the process of being replaced by a new abnormal that every investment portfolio should take into account.
Of 17th-century tulips, 21st-century stocks and ageless gold
During the Dutch Tulipmania, the price of one special, rare type of tulip bulb called Semper Augustus sold for 1000 guilders in 1623, 1200 guilders in 1624, 2000 guilders in 1625, and 5500 guilders in 1637. Shortly thereafter, the bottom fell out of the market and prices plummeted to 1/200 of their peak price – a mere 27 guilders. In the artwork above an individual, portrayed in fool’s garment, is shown trading a hefty pouch of gold for a handful of tulip bulbs. It is no mystery who got the better part of that bargain. History teaches us that no era is immune to financial mania including our own. As a matter of fact, a good many believe that we are fully immersed in a stock market mania right now.
Since the earliest days of the USAGOLD website (the mid-1990s), we have enshrined a quote from Thomas Bailey Aldrich at our home page: “The possession of gold has ruined fewer men than the lack of it.” Aldrich’s axiom has held true down through the ages. It applied in ancient Greece and Rome, in 11th century China, in the time of the Medicis, the Dutch Tulipmania, the South Seas Bubble and French fiat money mania, during the long string of panics in the late nineteenth and early 20th centuries (Aldrich’s time), the spate of post World War I and II hyperinflations (Austria, Germany, Greece, Hungary, et al) and it still applies today.
Part 5 of 5 . . . . .
What makes this gold market rally
different from all others
Yields in economically important parts of the world
are negative, not positive
Negative interest rates are a reality in both the European Union and Japan, and Alan Greenspan said recently that it is “only a matter of time” before they spread to the United States. One of the arguments against gold over the years has been that it costs money to own it. Now it costs money to own euros and yen, and before too long it might cost money to own the dollar as well. The advent of negative rates is perhaps one of the more profound differences between this gold rally and rallies of the past. It might also prove to be the most enduring. “One of the reasons,” Greenspan added in that same CNBC interview, “the gold price is rising as fast as it is – you know, at $1500 a troy ounce . . . What that is telling us is that people are looking for resources they know are going to have a value 20 years from now, or 30 years from now, as they age and they want to make sure they have the resources to keep themselves in place.”
Chart courtesy of the World Gold Council
“In bear or bull markets, billionaires are constantly worried about one thing: protecting their wealth. This video shows how some billionaires protect themselves from downturns – including turning to uncorrelated assets such as gold.”
USAGOLD note: Most billionaires do not take delivery of their gold because of the storage problem. That is not the case for the small private investor. A quarter of a million dollars or less in gold coins stores neatly in a modest-sized safe deposit box. Of course, if you would rather store your gold and/or silver at a depository, we can help with the arrangements. Safe storage includes insurance and the costs are not prohibitive. In fact the annual fees on storing are roughly comparable to what most ETFs charge with the added benefit of a delivery option on the coins or bullion stored. To learn more, we invite you to contact our Order Desk directly.
Gold could go to $1800 to $2200 in the long run
A number of technical analysts have reverted to a more bearish forecast over the past few weeks with the $1250 area once again being touted as the downside support area. Many of those same technical analysts, though, have a significantly more positive outlook for the longer term. Among that group is Gary Wagner of the Wagner Financial Group who sees $1267 or even $1247 as possibilities in the short run, but also forecasts the possibility of $1800 to $2200 in the longer run. “Our research,” he explains in an article published recently at the Singapore Bullion Market Association website, “suggests that gold is in the final phase of a major long-term impulse cycle. This model also provides a look back at the final major bullish wave that could be traced back to end of 2015, following a correction to $1,040. This corrective fourth wave developed from the all-time high at $1,900 in 2011. The model suggests that gold could re-test the record highs that, if taken out, could see an extensive surge to between $1800 and $2200 per troy ounce.”
Caveat: At USAGOLD, it bears repeating, we have always advocated the ownership of both gold and silver coins and bullion for long-term asset preservation purposes rather than speculative gain. Though we pass along various projections, we do so with the caveat that anything can happen. The analyst who forecasts downside today can quickly change his or her outlook to the upside tomorrow – or vice versa. The long term charts for gold and silver, though, reveal a consistent upward trend that has served investors well in the period since 1971 when the global monetary system departed the gold standard and entered the fiat money era.
Repost from April 2019
(Update 5/15/2020) – So far so good on Gary Wagner’s forecast. We decided to leave the post as is so that you could see how much the outlook can change over the course of a single year. One wonders, too, what Wagner would forecast now given recent events and their impact technically on the gold chart.
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Gold in six easy lessons
1. Don’t buy it because you need to make money; buy it 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 the 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.
6. Don’t forget the golden rule: Those who own the gold make the rules!
“But with Europe stumbling from crisis to crisis, the German public has grown uneasy about keeping the gold abroad. Some even argue the world’s second biggest bullion reserve may be needed to back a new deutschmark, should the euro zone break up.“ – Reuters, 2-9-2017
“Germany has a stronger relationship with gold than most nations. The country’s experience with hyperinflation between 1919 and 1923, during the years of the Weimar Republic, is ingrained in the national consciousness. Gold, above all, stands for stability” – Financial Times, 11-10-2017
Germany completed its scheduled transfer of national gold reserves from the New York Fed and the Bank of France in 2017. It will now leave 1236 tonnes at the New York Fed and another 432 tonnes in London. The remainder of its 3378-tonne national holding will be stored in Frankfurt. The repatriation transfers to Frankfurt were completed three years ahead of schedule.
With respect to the gold left at the Fed, Bundesbank’s Carl-Ludwig Thiele told reporters: “We have a lot of discussions about (U.S. President Donald) Trump, regarding implications on monetary policy, macroeconomics, etc., but we trust the central bank of the U.S.”
Thiele’s confidence in the Federal Reserve brings to mind an old story about Germany’s relationship with the Federal Reserve and the storage of its gold reserves. When Hjalmar Schacht, head of Germany’s central bank in the 1920s, visited the New York Fed he asked to see Germany’s gold stored in its vaults.
“Strong**,” wrote Schacht in a 1955 autobiography, “was proud to be able to show us the vaults which were situated in the deepest cellar of the building and remarked: ‘Now, Herr Schacht, you shall see where the Reichsbank gold is kept.’” Storage staff went off to retrieve the gold. “At length,” Schacht goes on, “we were told: ‘Mr. Strong, we can’t find the Reichsbank gold.’” To which Schacht replied: “Never mind; I believe you when you say the gold is there. Even if it weren’t you are good for its replacement.”
One need presume that nearly 100 years later, the level of trust conveyed by Schacht remains in place. It is unlikely that Germany would depart the euro anytime soon and back a new Deutschmark with gold. Having an asset set aside, though, that is detached from erratic national currencies in this day and age is a wise move for the prudent nation-state – just as it is for the prudent private investor.
** New York Fed president at the time, Benjamin Strong
Repost from 2/10/2017, updated October, 2019. The Financial Times article linked at the top of the page tells the fascinating inside story of Germany’s gold repatriation.