The Golden Rule:
He who has the gold rules!
There have been a number of recent events in the gold sector that may dictate the near term movements in the price that are different from the usual mixed cocktail. This mix is still geopolitical tensions, massive global debt almost everywhere, Populism, Brexit and Euro Zone implosion, China’s real estate bubble and trade wars plus dedollarization. All need to taken into serious consideration when navigating this volatile space. I could restate the many variables covered in my last two statements that are still relevant but I feel the most interesting topic currently demanding focus is the latest ability of the Central Banks to count gold as cash or equivalent on their balance sheets, a reserve on which they can now create monetary inflation as a way to increase the gold price, to build up equity in line with the vast debt mountain in the system.
Economists say that this is the reason Central Banks have been stocking up on gold (last year they added 74% more to their reserves than they did in 2017). This is the highest annual purchase since 1971, the year the US came off the Gold Standard.
Known as the ‘Basel III’ rule imposed by the Bank of International Settlements (BIS), on March 29th, it means that the Central Banks will now be motivated to increase rather than suppress the gold price which should therefore lead to gradually higher levels. By way of explanation in recent years Central Banks have been deliberately supplying an excess of gold derivatives (synthetics and paper gold) to scare sellers into liquidating positions on variable futures contracts. As more gold future prices fell the more investors sold the synthetics causing a spiral down that could then be exploited by Central Banks to accumulate the physical gold at ever lower prices.
This is not conjecture. As one notable industry authority said, it is now widely admitted that this strategy was indeed adopted to depress the gold price thus enabling countries and their Central Banks to buy and build up their physical reserves at lower and lower prices as larger quantities of artificially created synthetic gold (much via ETF unallocateds) triggered layer upon layer of lower priced derivative gold, as unaware private investors were scared out of their positions.
So all the large amounts of physical purchased into the weakness can now be officially recorded on Central Bank’s balance sheets as an unencumbered asset waiting to be leveraged in order to once again print new money, ie more QE, in effect remonetising gold.
As a result, the tightness in the London gold market (the physical delivery market) is getting critical. This shortening supply plus the lack of new gold discoveries (the metal is naturally limited, it cannot be printed and needs to be mined) point to a long awaited floor under the current levels. Hence both JP Morgan and Goldman Sachs are suddenly recommending gold to their clients and going long themselves as principals.
The world’s total debt has now topped more than $247 trillion USD, which is much higher than at the height of the financial crisis in 2008, and has now forced the IMF to sound alarm bells about excessive global borrowing.
At the Fed they do not expect to raise interest rates this year. They have turned dovish as the yield curve has now become inverted (apparently the first time since 2007). An inverted rate means that the yield on the 10 year treasury bill falls below the 3 monthly T bill which is regarded as a reliable recession warning signal. Increase in Central Bank gold reserves could be seen as strong evidence of growing distrust in the dominance of US Dollar and global money and the credit system associated with it.
It is not totally surprising that governments would have much to lose by agreeing to a new Gold Standard. The debt mountains they have built up are so enormous that no government is going to give up its ability to print its way out of trouble by fixing an exchange rate system. Remember old can never be printed!
With a recession possibly looming the Fed needs to make a monetary U-turn including cutting rates, finally ending QT and reverting to another period of QE leading to a softer US Dollar.
Thus gold’s perfect storm investment thesis, argues that gold is at the beginning of a new multi year bull market. This view is also supported by the fact that the relative performance of gold vs the S&P 500 is bottoming out. The M&A wave amongst the miners might also be signalling an upswing or end to the bear market. The ‘peak gold’ factor will additionally not harm the case for bullion’s brighter prospects.
In the stock market for gold and silver equities, the bulls and bears are still engaged in their usual tussle with neither getting the upper hand. According to a survey geopolitical tensions (mainly the fear of events in China and Russia) was the biggest factor likely to drive investors towards safe haven assets.
Year to date gold is up in almost every major currency apart from the USD (in fact in AUD and CAD gold trades close to all time highs). Yet investor sentiment has still been low with gold only representing 2% of all global assets. It’s the world’s most polarising asset, like Marmite, people either love it or hate it. The asset class remains relatively unloved and the quoted miners are testing 2011 lows.
Finally, to the bears who say gold is not money, then why does the US hold 8000 tonnes, why does the IMF have 3000 tonnes, why has Russia quadrupled its reserves in the last 10 years and why does China, which has tripled it’s reserves over the past decade, buy everything it can get its hands on (thanks to the power of the Asian gold exchanges which grow rapidly).