NEWS &VIEWS
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 47h year in the gold business

JUNE 2020


‘A mirror image of the early 1980s’

“To propose a return of inflation is to be inflammatory,” writes Lightman Investment Management’s Rob Burnett in an opinion piece for the Financial Times.  “Investors are committed to a deflationary thesis — and such is their fervor that many believe inflation cannot return in any circumstance. Yet if we look beyond today’s demand shock from the Covid-19 crisis, the forces driving the disinflation of the past 40 years appear to be in retreat. … [T]oday appears like a mirror image of the early 1980s. We have moved from inflation peak to deflation trough.”

Evidence is beginning to mount that the new paradigm Burnett describes – moving from disinflation to inflation – might not be too far off the mark. During the financial crisis that began in 2008, the Fed sterilized its money creation by routing money back to its coffers in the form of commercial bank excess reserves – a strategy that kept the inflation rate from running out of control. As you can see in the first chart, the current level of sterilization, at least in the short term, is greater than what occurred in the 2008-2014 period. At the same time, as you can see in the second chart, the rapid growth in the money supply this time around goes beyond anything that occurred during the prior crisis. Whether or not Burnett is correct and the growth in the money supply translates to price inflation down the road remains to be seen. (Please take note that the growth in the money supply began roughly a year ago – well before the onslaught of the coronavirus pandemic.)

To understand what gold’s role might be in a historical shift of this magnitude, we turn to Atlantic House Fund Management’s Charlie Morris. “The point,” he says in a report published recently in The Alchemist quarterly review, “is that there is a rational framework from which you can understand the dynamics of the gold market. Owning gold does not mean you have to fly blind. The current gold premium is telling us that higher inflation is coming. The implications for asset classes are immense. Higher inflation implies a weaker dollar, which implies higher commodity prices and a surge in emerging market equities. It will make bonds unattractive and potentially drive down equity valuations in the developed world. The last time we saw this was in the 1970s. Those that thrived owned gold.” 

The third chart in our grouping supports Morris’ thesis. Since late 2019, gold and the money supply have risen in tandem hinting that perhaps the inflation genie might yet escape the bottle.

bar chart showing excess reserves on deposit at the Federal Reserve
Source:  Federal Reserve Bank of St. Louis

chart showing rapid growth in the money supply

Source:  Federal Reserve Bank of St. Louis

overlay chart showing gold tracking growth in the money supply

Source:  Federal Reserve Bank of St. Louis, ICE Benchmark Administration (IBA)


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Gold demand strong across the spectrum of investors 

Funds and financial institutions:

The World Gold Council released a monthly update yesterday chronicling the rise in gold ETF stockpiles.“Year-to-date,” it says, “inflows (623 tonnes, US$33.7 billion) now exceed the highest level of annual inflows (591 tonnes) seen in 2009. Positive flows combined with a rising gold price also pushed assets under management in gold ETFs to new record highs of $195 billion, even as stock and bond prices increased. Global gold ETFs had inflows in all but two trading days during April and May (41 of 43 days). The only other historical period with similarly consistent inflows occurred in May and June of 2016 when funds experienced inflows in all but four trading days. North American-listed gold ETFs led regional inflows during May.” The strong showing is a reflection of continued interest in gold bullion among funds and institutions hedging an array of economic, financial, and geopolitical concerns. North American stockpiles were up 20.1% in May.

Central banks:

Central banks in 2020 continue to add to their gold reserves though the pace has slackened a bit from 2019’s strong showing.  Nevertheless, a recent World Gold Council survey reveals that 20% of central banks intend to add to their reserve holdings this year – up from 8% last year. In a piece published in the June edition of The Alchemist, the London Bullion Market Association’s quarterly review, the central bank of Hungary tells why gold reserves remain an important aspect of its planning and why it is important to store those holdings within a nation’s borders.  “Gold,” it says, “especially in physical form, is an asset that can strengthen trust towards a country both within and across national borders. One of the important changes in central banks’ behavior after the Global Financial Crisis was that the need arose to store gold in domestic locations, not in distant financial centers. One by one, central banks announced their repatriation programs.”

Individual investors:

Gold and silver bullion coin sales at the U.S. Mint increased significantly in May. “For the first five months of 2020,” says analyst Mike Fuljenz in a NewsMax article, “sales of American Eagle gold coins total 335,000 Troy ounces, up 222% from the 104,000 ounces sold last year. This May, the Mint sold 11,500 ounces, down from April, but 187% above the 4,000 ounces sold in May 2019. Sales of American Eagle silver coins reached 490,000 ounces in May 2020. Although down from April and from last May, this brings the total American Silver Eagle sales for the year to 11,218,500 one-ounce coins, which is 25% more than the 8,987,000 coins sold through the same five months in 2019.” When reviewing these numbers, we should keep in mind that the 2019 mintages reflected record low demand at the U.S. Mint – so the impressive percentages are off a very low base. That said, demand for gold and silver bullion coins has been very strong thus far this year at USAGOLD. While many have had trouble fielding and filling orders, it has been business as usual for us (and our clientele).

Fed performs amygdalotomy on Wall Street

Haven’t heard much about moral hazard of late in the context of the COVID-19 inspired round of bailouts 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. 

The great downside to moral hazard, of course, is that it subtracts fear of loss from the investment equation. “One of the most dangerous forces currently threatening U.S. economic, financial, and public health is the intentional demolition of warning signs that would otherwise enhance survival … [T]he Federal Reserve,” says fund manager Jon Hussman of Hussman Funds in a piece published at Advisor Perspectives, “has performed an amygdalotomy on the investing public.” An amygdalotomy is a surgical procedure to disconnect the area of the brain that produces “the ability to detect, observe, and immediately respond to the fear.” 

 

Powell spills the beans in 60 Minutes interview

Scott Pelley: Where does it come from? Do you just print it?

Jerome Powell: We print it digitally. So we – you know, we – as a central bank, we have the ability to create money digitally and we do that by buying Treasury Bills or bonds or other government guaranteed securities. And that actually increases the money supply. We also print actual currency and we distribute that through the Federal Reserve banks.”

“Money printing by central banks and vast state stimulus packages are rekindling interest in one of the oldest stores of wealth,” says Bloomberg in a recent headline article on hedge fund interest in gold accumulation.  Though the focus at the moment is on inflation as noted in our lead article this issue, hedge fund luminaries are likely worried about more than just runaway inflation amidst the market and economic turmoil in which we now find ourselves. Disinflation, deflation, stagflation, and hyperinflation are all being prominently bandied about as possible endgame scenarios. Gold’s enduring strength is its versatility as a portfolio hedge. It has proven itself to be a worthy safeguard against each of those outcomes at one time or another in the course of modern economic history.

Where are we in Tyler’s historical cycle?

Dr. Moneywise makes his point with a flip chart“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasury. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world’s great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage.” – Alexander Tyler, 18th-century historian and jurist

Dr. MoneyWise says:  I always keep in mind Alexander Tyler’s historical cycle. I estimate that we are now somewhere between the “complacency” and “apathy” stages with “dependency” – if the recent bailouts and rescue plans are any indicator – loudly knocking on the door. History is replete with examples of a rapid debasement of the currency accompanying the latter stages of Tyler’s cycle and that is why I own gold.

National debt nears $26 trillion

bar chart showing national debt during 2020

The additions to the national debt thus far this year have been nothing short of astonishing – $2.72 trillion since January 1, 2020, and $972 billion over the past 30-days (through June 3). One wonders how much debt the U.S. Treasury can place with private and international investors and how much will be financed via the Federal Reserve’s bottomless checkbook.  Though few on Wall Street (or Main Street for that matter) would quarrel with the spending decisions governments have made in recent months, a good many are preparing for the potential consequences – whether those policies succeed or fail. That is where gold might come in handy.

cartoon showing giant sinkhole labeled the national debt

Cartoon courtesy MichaelRamirez.com

When the United States owned most of the gold on Earth

Chart showing the United Sates gold reserves 1870 to present
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.

Gold and silver outperform the DJIA year to date and over the past 12 months

While stocks continue to garner considerable attention in the mainstream financial media, gold and silver have quietly outperformed. Over the past twelve months (through 6/6/2020), gold is up 26.46%; silver is up 17.8%, and the Dow Jones Industrial Average is up 6.15%.  Year to date, gold is up 9.9%; silver is down 3.22%, and the Dow Jones Industrial Average is down 6.09%.

Gold, silver and Dow Jones Industrial Average – One Yearoverlay chart showing gold silver DJIA over the past twelve months through 6-5-2020
Chart courtesy of TradingView.com
Click to enlarge

Gold, silver and Dow Jones Industrial Average – Year to Dateoverlay chart showing gold silver DJIA year to date through 6-5-2020
Chart courtesy of TradingView.com
Click to enlarge


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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. 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 is solely their opinion and are 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.