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Why gold’s run has plenty more steam in it

If you believe the world’s financial system is robust, gold is probably not for you.
Flows into gold ETFs have been outpacing flows into S&P 500 stocks this year. Image: Waldo Swiegers, Bloomberg

The case for buying gold has always been to hedge against risk, and those risks have become radioactive.

Look at the following chart from Crescat Capital, a hedge fund manager leading the Bloomberg US performance rankings for three months in a row to August this year. Crescat is bullish on precious metals, and believes the best is yet to come for gold.

The graph shows a correlation between the ‘twin US deficits’ (budget and current account) and the gold-to-the-S&P 500 ratio. The higher the deficit, the higher gold ratio seems to move.

Given the meteoric rise in the twin deficits, gold could be poised for another major move up.

Another factor in favour of precious metals producers is the relative health of their balance sheets. They have spent the last few years paying down debt, leaving them strongly positioned to benefit from any further rise in the metal price.

Crescat points out that miners have been reluctant to spend capital even though gold prices have been moving higher. The result is a constrained supply pipeline that provides further underpinning to the metal price, and a huge increase in free cash flow that will either go into expansion or to shareholders.

At the start of 2020, the rate of inflows to gold exchange-traded funds (ETFs) started to outpace flows into S&P 500 stocks.

Gold and silver junior stock prices have outperformed the broader stock market since 2019.

Despite all these positives, precious metals stocks are still near record lows when compared with global stocks.

Krishan Gopaul of the World Gold Council points to another development that could put further fire under the gold price: with so many UK property companies putting a freeze on withdrawals by investors, liquidity risk is now rising – and not just in the UK.

“Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. In these instances, when liquidity may fall for other investments, gold can act as a genuine diversifier over the long term,” says Gopaul in a recent commentary.

Gold suffers none of the liquidity constraints imposed by property managers on their investments. Physical holdings of gold by investors and central banks total £2.7 trillion (R58.1 trillion), with an additional £700 billion (R15 trillion) in financial market instruments such as derivatives.

“In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of acute financial stress,” says Gopaul.

Source: ShareMagic

Another development highlighted by Crescat is the renewed interest in junior miners, which are now starting to outperform the seniors.

The bottom line is that central bank money printing, such as we are now seeing around the world, will only support financial asset bubbles for so long.

“Ultimately, quantitative easing drives flows out of overvalued stocks and credit and into undervalued precious metals,” says Crescat.

“Fiat currencies around the world are in a race to the bottom. The price of gold has been rising across all of them.”

Legendary investor Warren Buffett once remarked that Martians would marvel at earthlings who dig up gold and then rebury it in vaults. Buffett was never a fan of gold, but appears to have changed his tune, loading up recently on 21 million shares in Barrick Gold. He appears to be betting against the US, and has been selling US banks JP Morgan and Wells Fargo (though he is also loading up on Bank of America).

The easiest way buy gold is through Krugerrands, ETFs, and – and a more recent development – digital gold in the form of Paxgold. This is digital investment fully backed by physical gold and is available through Revix.

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The real issue is not whether the price of gold rises or not. The investor needs to be convinced that the price of gold will rise faster than all the known alternatives. Investment returns are a function of the time value of money or opportunity cost. We have to choose between alternatives. It is never a simple choice, a feeling or a fad.

The question should be – will the price of gold rise faster than the Dow Jones, NASDAQ and SP500? Then we have to ask under what circumstances gold actually did outperform shares in the past? Now, we are getting to the point. When we plot a graph of any share index, not in terms of dollar or rand, but in terms of gold, then the picture is a thousand words. Gold outperforms shares, or shares crash in terms of gold, during periods of stagflation. A stagnant economy, low growth, high debt levels, and interest rates below the rate of inflation.

Gold does not pay a dividend or interest, while shares and bonds do. When the dividend or the bond yield is below the rate of inflation, it implies that the opportunity cost of holding gold is lower than that for bonds and shares. It is cheaper to park your cash in gold than in government bonds. This is not an attempt to profit from a rise in the price of gold though. This is an attempt to protect the portfolio against the loss of purchasing power that result from the devaluation of the currency. Reserve Banks are responsible for the outperformance of gold, not because they intend to favour gold, but simply because they devalue the fiat currencies relative to gold.

I believe we are at the beginning of a decade of negative real interest rates. Gold and the shares of gold mines outperform everything else under such circumstances.

Yes the only alternative further up the risk curve is growth stocks which are already priced sky high.

Re introducing the Gold Standard would probably even the playing field a little and stabilize this commodity as a competent and reliable investment. Now that China is the most powerful player economically, and the largest of the BRICS economies, they might consider motivating for this.

In my opinion, the motivation to rid the Global economy of a Gold value benchmark was pushed by the USA, the largest economy at the time and a non Gold producer! The BRICS countries ( and Canada) control gold production ( Russia, South Africa) and China and India are its largest consumers….so there is a real chance that China could push for more control of the value of this commodity.
I think that Goldman Sacks have already recognized this possibility. And it appears somethings up with ARM…or is that just my imagination?

Removing the gold standard at Bretton Woods was the USA’s tactic to reduce global financial markets to virtual and not actual. Virtual in that the Fed could and did simply print dollars and now simply creates dollars electronically instead of having actual assets like gold or even a percentage as reserve.

Currently the US has a national debt of $27 trillion.

3 months in a row! Wow they have been lucky. Too early for evidence of any skill though. Ignore.

Anyone buying Gold at these levels is either able to read the future on a crystal ball or maybe experiencing Gold fever.

I love Gold also, but you pay to safe keep it plus insurance every month. You could also sit with Gold at a lower price for many years until the price recovers.

I respect and commend your conviction because many individuals who share your point of view enable me to buy gold at these levels. There is a seller for every buyer and they act according to diametrically opposed points of view.

In ten years’ time the scoreboard will tell us who made the correct assumptions.

That US Deficit to GDP graph shows the dramatic extent of the precipice Central Bankers have driven the World Economy towards over the last 100 years of the petrodollar hegemony.

Greece was strung out and dried for a decade in the stocks for crossing the covenant of -10% of GDP. What happens to the USA at -25%?

Also of little surprise the century was distinguished by two World Wars and multiple immane and genocidal social experiments.

Now the virtual destruction of biodiversity and the animal Kingdom c/o industrial production and unrestrained conspicuous consumption which always results in polluting spillovers to the air, water, earth… or us as it turns out.

Shout anything loud enough, money for grotesque medical experiments can be freely available. Pandemonium in a pandemic for anyone?

To you and your opposition, that is! The double-edged sword of the military-industrial complex that divides and rules now vests deeper than the “dark web”. Should we be alarmed if not armed?

Another question is, will the lemmings continue to throw their savings, investments, asset values and family members over the cliff of monetary politicians or will they start shifting to sound alternatives?

A gold & silver standard integrated with blockchain technology for a safer, humane and environmentally optimised solution perhaps?

A blockchain solution for every form of regulation, from municipalities, social grants, electrification, sewage and gas to health, nutrition and fertility even… any takers?

The Great Global Reset is here… the ushering of the New World Order.
TEOTWAWKI is long gone. Welcome to feudal system, hello slavery.

End of comments.



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