A Historical Gold Reversal Just Occurred. Here’s What it Means...
Jim Rickards contact “Goldfinger,” a gold industry insider, first clued us into an important gold flow reversal happening. You might recall their live broadcast. In the months just before that meeting in Zurich with Goldfinger, over 170 tons of gold flowed back into London. Instead of coming out of London, into Switzerland, and then heading over to China and India, China and India slowed down their imports and gold starting to flow back into London.
Since then, the U.S. has become a significant gold importer, if you can believe it. Gold is flowing from vaults in London, Switzerland and even Dubai to destinations in the U.S. (If you’re wondering, there are no gold mines in Dubai; it’s all warehouse gold.)
In May, the U.S. imported more than 50 times the monthly average amount of gold, as compared to the past.
The most interesting thing?
This year, investor demand was the largest component of gold demand for two consecutive quarters (Q1 and Q2) – the first time this has ever happened. This means that more and more U.S. investors are diversifying their assets into gold. They are looking for ways to protect themselves from the monetary tricks that central banks are experimenting with around the world.
We’re familiar with those tricks here at the Daily Reckoning. The biggest two are the war on cash (see yesterday’s DR issue on that topic) and negative interest rates. The truth is governments don’t want people holding currency on the sidelines of the economy. Governments desperately want people to spend their money as fast as they make it. They know that the global economy is fundamentally weak, even as they try to convince the rest of us otherwise.
After a minor, but much-anticipated, Federal Reserve interest rate hike last December — the first rate increase in 7 years — gold prices bottomed. For a moment, the Fed seemed to convince people that the economy was picking up strength, and investors didn’t need the safe haven of gold anymore. Then, on January 21, 2016, news broke that the Bank of Japan had adopted a policy of negative interest rates. That hit the market hard and gold prices soared.
Not long ago, a study by Merrill Lynch concluded that roughly $13 trillion of government bonds, world-wide, offer negative yield. Here’s a chart to show the rapid growth in negative yielding financial instruments.
As bad as this chart looks, however, it doesn’t tell the full story. Of that “positive”-yielding debt, about $14.5 trillion pays between 0 and 1%. Overall, about 3/4ths of the world’s sovereign bond market trades at 1% or lower. Just over $2 trillion, or 6%, of outstanding government bonds offer coupon rates better than 2%.
Once negative interest rates were introduced, gold prices began to climb, and they’ve been rising steadily ever since. Here’s the one-year chart of the London gold fix, showing the progress since last winter:
Seven months ago, gold prices began to move upwards from its December-January low of $1,050 per ounce. This was right around the time the physical gold flows began reversing due to heightened investor demand.
Now, more than halfway through summer, gold has solidly broken through a major resistance at $1,300. We could see $1,550 to $1,600 by March 2017, just six months from now. Silver could make a similar climb, moving from the current $20 range to a near-term level of $25 per ounce. Thanks to the strange world of negative interest rate bonds and bumbling central banks, demand for gold and silver is consistently growing.
Numbers don’t lie. The gold bulls are out in full force. People are buying gold and silver, and putting large amounts of money into small packages of yellow metal.
People are finally waking up to the fact that the global economy is not strong. We have sky high bubbles in the markets, and the Fed apparently can’t explain it all away with academic-sounding gobbledygook. The bottom line is that our U.S. economy is not recovering — indeed, it’s on the brink of a recession. This increases demand for safety. And safety means gold.
Yet now, we confront a problem: What about future supply?
Not long ago, I was in Yukon Territory, in northern Canada. I was visiting Kaminak, a gold mining company that has worked-up a major new gold prospect which is still a few years away from becoming a mine. Back in May, Goldcorp, one of the largest gold producers in the world, announced that they would buy out Kaminak for $520 million. I spent much of one day on-site with Kaminak and Goldcorp representatives. They were all open and straightforward. And what they told me about gold supply was astounding.
According to Goldcorp, there are “significant supply constraints ahead’ for future gold production. One main reason is found in what they call the “Peak Gold” approach. Across the world, gold discovery peaked in the 1990s. However, according to one Goldcorp rep, “it takes about 20 years to move a project from discovery to initial production.”
It’s basic logic that production would trail discovery by a significant period of time — you can’t produce what you haven’t discovered. But now, as gold discoveries continue to decline, future production will decline as well. Goldcorp management calculates that gold production peaked in 2015. The trends are all downhill from here.
Now, if a company wants to remain a major producer, it must grow reserves and invest in new discoveries and production.
Goldcorp’s preferred method to stay in the gold game is through “brownfield” exploration and expansion. This means that they focus future growth in existing mine districts that host established discoveries and/or developments and production. Along the way, they’ll seek partnerships with junior companies that are active in these kinds of areas to cultivate a future production pipeline.
But even if more gold discoveries are made today, we still need to wait roughly twenty years for the pace of production to catch up. Meaning the supply of available gold in the world today is declining, just as investor demand for gold is increasing.
And as I noted earlier, China and India have slowed their gold imports in recent months. If their demand increases even back to early 2016 levels, there won’t be enough gold to go around — at least not at the current price…
Let’s make the most of this opportunity.
Right now, in our Strategic Intelligence model portfolio, we have several gold and silver royalty and streamer companies. We also have an exchange traded fund of gold miners. These ideas offer exposure to the up-side of rising gold-silver prices via capital gains and dividends over time.
This is an ideal time to buy the physical metals, too. Jim and I expect that gold and silver prices will climb in the months to come, through the rest of 2016 and into 2017. Still, I understand that you may be reluctant to purchase coins or bullion, due to markups by dealers, storage issues, insurance, and so on. But there are ways for you to buy in at your own pace, without the hassles, yet still have ownership of metal that you purchase.
All in all, governments across the world are cracking down on cash. Bonds are a zero-yield play, if not negative. Most stocks are sky-high, and market bubbles everywhere await their needle. You are left with preserving wealth via classical, real money — gold and silver. But as demand builds and the production declines, we expect prices to skyrocket.
That’s why it’s imperative that you start getting a 10% allocation of your investable assets into physical bullion now. If you aren’t already building your stash of actual metal, now’s the time.
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