Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 46th year in the gold business

APRIL 2020

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.

Line chart showing the St. Louis Federal Reserve's Financial Stress Index with even annotations

Click to enlarge.

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.

Line chart showing the St. Louis Fed Stress Index and the price of gold 1990 to present

“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 Cash 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

Former Secretary of State Henry Kissinger says the world is in danger of “political and economic upheaval that could last for generations” as a result of the coronavirus pandemic and that this economic crisis is even more complex than the one that began in 2008. 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 relied on their largesse for value over the past few decades – and particularly since 2008? The new normal may be in the process of being replaced by a “new” new normal.  “When the COVID-19 pandemic is over,” says Kissinger, “many countries’ institutions will be perceived as having failed. Whether this judgement is objectively fair is irrelevant. The reality is the world will never be the same after the coronavirus.”

Cartoon depicting the world as coronavirus cell with inscription Brave New World

Cartoon courtesy of

Gundlach sounds alarm on ‘paper gold’ ETFs raking in billions

DoubleLine Capital’s Jeffrey Gundlach raised the caution flag on gold ETF’s yesterday during an interview with Bloomberg.  “While ETFs such as GLD are backed by physical gold,” reads the article, “the process for an individual investor to acquire the actual bullion isn’t as simple as selling shares of the ETF.” Calling ETFs “paper gold,” he goes on to ask “What happens if physical gold is in short supply and everyone wants to take delivery of their paper gold? They can’t squeeze blood out of a stone.”

Along these lines, ABN Amro recently informed holders of one of its bullion funds that the bank was exercising its option to close the fund and pay account holders in currency rather than the precious metal. About 2000 customers were told they no longer owned the gold they thought they did – a situation which illustrates with a high degree of clarity why it is important to take seriously the warnings of market experts like Mr. Gundlach.

We cannot help but note that ABN Amro’s closure of paper gold fund comes at a time when bullion is in short supply and owners of the fund are likely to have a stronger than average desire to take delivery of their positions.  Investors of the fund, instead, were forced to sell at a time when it is very difficult to find replacement metal in the open market. There is another aphorism to go along with Gundlach’s allusion of squeezing blood from a stone: “A bird in the hand is worth two in the bush.”

‘Want to buy gold coins or bars? Good luck finding any’ ……
Unless you happen to be a client of USAGOLD

graphic image of stacks of gold and silver coins“Investors are snapping up gold bars and coins, seeking the security offered by the precious metal as the coronavirus pandemic trashes economies and forces central banks to print trillions of dollars in new money,” wrote Hannah Zlady in a recent CNN Business article. “But with major gold refineries across Europe shut because of government-ordered lockdowns, online shops out of stock and many of the passenger planes that move bullion grounded, physical gold is becoming harder to track down.”

We first warned that the coronavirus could translate to a supply problem in the gold market in last month’s newsletter.  “At the moment,” we wrote, “the supply lines in the precious metals business are still functioning smoothly. There could come a time, though, when they are not – a possibility, by the way, that has received scant attention in the context of the coronavirus contagion”.

That said, 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, as of publication date, most of the standard gold and silver bullion items – American Eagles, 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. 

“First, if you can buy physical gold and silver, do so.  Yes, you’ll have to pay significant premiums, if you can find anything. And yes, those premiums should decrease if/when the current supply disruptions abate. But gold and silver prices are headed much higher and should well overcome the current premiums. For the record, I’m buying bag silver now at considerable premiums over the spot price, so I’m putting my money where my mouth is on this.” – Brien Lundin, Gold Newsletter

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cartoon image of Dr. Moneywise with pointer and lecturing about gold “Scientists have just discovered something new about gold. When extreme crushing pressure is applied quickly, over mere nanoseconds, the element’s atomic structure changes, becoming more similar to metals harder than gold.” – Michelle Starr, Science Alert

Dr. Moneywise says: History teaches that under the crushing pressure of a financial meltdown gold hardens the portfolio, makes it more resilient!

Physical gold demand at record levels, paper gold price disconnects

“Given that international gold price discovery takes place on derivatives markets which have little or no connection to the physical gold market,” writes Bullion Star’s Ronan Manly, “and that the prices are merely blips on a screen (screen gold), we can, therefore, say that the gold price plunge last Friday was driven by trading in these markets, led by the COMEX, and also that the gold price fall last Friday was unconnected to the physical gold market.”

“While the mainstream financial press will never question gold price discovery or the difference between screen gold and physical gold,” he goes on, “they do predictably try to come up with reasons to explain price movements. Unfortunately, most of these reasons are often not based on anything other than off-the-cuff the remarks of stockbrokers, trading desks, and buy side investment bank analysts. Unfortunately also, by not explicitly distinguishing between prices derived in an electronic casino and the real physical safe haven asset of tangible gold, the reasons provided by these reporters will fall into the trap of jumbling up two different things.”

cartoon image of tail wagging the dog

Editor note 1:  The tail wags the dog and quite often, as the cartoon above suggests, to the surprise of the dog or, better put, to the surprise of the dog’s owners. In this piece, Manly makes a distinction between the price “taker” (physical gold) and the price “maker” (the paper gold markets). That dichotomy has been the centerpiece discussion in the gold market for the past quarter-century. Though a source of great frustration to speculators in the short run, big price drops like the one we had this past Friday create opportunities for knowledgeable, strong-handed buyers to accumulate physical metal. Asia comes to mind. So do American professional money managers who have joined them in loading up on the dips.

Editor note 2: Sooner or later, demand for the physical metal translates to the paper markets, even if cause and effect do not always match-up precisely on the timeline. If that were not the case, the price of gold would still be at $35 per ounce and physical supplies would have disappeared from the face of the earth long ago.

With thanks to Ronan Manly, Bullion Star, Singapore

Annotated Gold Chart
2008-2009 – The first years of the financial crisis

Annotated gold chart showing Bear Stearns bailout, Lehman bankruptcy and launch of QE

Chart courtesy of the St. Louis Federal Reserve [FRED]
Source:  ICE Benchmark Administration (IBA)
Annotations by USAGOLD

– Presented without comment –

If you think you could benefit from a concise review of the latest news, analysis, and opinion on the gold market from a variety of expert sources, then News & Views is the newsletter for you. Since the early 1990s, we have offered it free-of-charge as a monthly service to our regular clientele and as an incentive to prospective clients. By subscribing, you will automatically receive future editions and occasional in-depth Special Reports by e-mail.



Editor’s note:  This is an update and rewrite of an earlier News & Views piece that got considerable attention on the internet about a year ago.  It is as timely now as it was then. We repost it now for the benefit of all the new subscribers who have joined us over the past few weeks.

Gold’s Century
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)

Bar chart showing gold's annual returns since 2000 including year end 2019

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.

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Disclaimer – Opinions expressed on the 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. The views and opinions expressed at USAGOLD are those of the authors and do not necessarily reflect the official policy or position of USAGOLD. Any content provided by our bloggers or authors ids solely their opinion and is not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Michael J. Kosares is the founder of USAGOLD and the author of The ABCs of Gold Investing – How to Protect and Build Your Wealth With Gold. He is also editor and commentator for USAGOLD’s Live Daily Newsletter and editor of the News & Views monthly newsletter.