A few weeks ago I wrote of a buying opportunity in Gold. After several weeks of rising prices, Gold consolidated and the price dipped to £821.76, its lowest in a year. Rather than see this as bad news, we believed it was good news – a chance to get back into the market, to keep buying and in the process to lower one’s average cost per ounce in a growing pot of personal gold.
True to expectations, the price of Gold has now risen right back up to £907.23 (as of time of writing). That’s a rise of £85.47 per ounce, or if we look at it the other way round, a saving of £85 per ounce if you did indeed buy on the dips. It is a rare opportunity to be able to judge it absolutely on the low of the dip but even if you bought half way down (or half way up – as the case now is), you could have saved over £40 an ounce. That’s roughly £321 on a 250 gram bar of Gold, one of the most popular bars we sell. Or saving of approximately £1286 on a 1 kilo bar. Not bad. Double those savings if the timing was right on the dip.
What’s the reason for this movement in price and more importantly, ask our readers, is it going to last? Well, I believe we’re getting into waters where there are many, many factors coming together to make investing and holding one’s savings in Gold (and Silver) a more and more attractive protection of one’s wealth.
Now, in retrospect, it was wise to have highlighted in our blogs this last month that billionaire investors such as George Soros piled back into Gold. In fact, if you ever fancy a read through our most recent Blog articles on a rainy day, here’s a list of titles.
So, what’s driving this price rise in Gold (and Silver)? The same unprecedented financial global event that has prompted Gold to rise 28% over the last six months: negative interest rates.
“Annual price growth has stood at 0.3 pc in every month so far this year. With inflation well below the Bank of England’s 2pc target, and the possibility of a withdrawal from the European Union on the horizon, investors gave up on an interest rate rise in 2019, and bet that there would be no hike until early 2020.” (The Telegraph, 14 June 2016).
Apart from this being great news if you’re trying to pay off that mortgage as quickly as possible, it is also great news for physical Gold and Silver. Many flock to buy physical Gold and Silver bars and coins when the interest rates are low, because that fact heightens further the attractiveness of holding one’s savings in Gold while bank returns are low, non-existent or even now negative by comparison.
This week, Mike Maloney’s excellent website and news analysis site GoldSilver.com published a well-researched video on “The Number One Reason This Gold Uptrend is Here to Stay.”
In it, Maloney and his writer, analyst Jeff Clark, highlight negative interest rates as the main reason the price of Gold (and Silver) will continue to rise. Maloney introduces this piece by saying;
“Like I’ve said before, negative interest rates is a concept that people wouldn’t have even considered [a few years ago]. No one had thought about the possibility of negative interest rates, because it just sounds so incredibly absurd. So, before 2008, there was no economist that was talking about this, there was no newsletter writer or commentator talking about it as it had never happened before in all of human history. And here we are – interest rates in countries that represent 25% of the worlds GDP.”
I was interested to research exactly what is the Global GDP. We’ve all heard of a nation’s GDP but globally? According to Statistics Portal, in 2014, the Global GDP was 77 trillion dollars. No exact figures exist for 2015, only predicted ones. So, taking the figure based on 2014, that means 25% of Global GDP is 19 trillion dollars – held in countries that have negative interest rates! That is insane. We are truly in the most wide spread period of global deflation in history.
So, that’s Global GDP. What about national debt? As Jeff Clark writes, “A third of all government debt in the world—over $8 trillion—now has negative interest rates. This absurd policy can’t have a positive outcome and shows you just how misguided and unstable global monetary policy has become. Negative rates also remove the cynic’s usual argument, that gold doesn’t pay any interest. But owning gold is better than buying a bond that is guaranteed to lose money. And that’s the advantage gold has over most other asset classes: it’s not just a hedge against inflation, or deflation, or negative rates, or stock market weakness, or political ineptness, or terrorism, or [insert more reasons here]. Gold is a hedge against all types of turmoil and crisis.” (9th June 2016)
In fact, Clark goes on to flag up a situation that will further propel Gold (and Silver) prices higher. He stated in his article last week that, “It is not far-fetched to think that gold could end up replacing sovereign bonds as the preferred safe haven among investors. Don’t think so? It’s already happening…Bloomberg reported that Ken Hoffman, senior metals analyst at Bloomberg Intelligence, said that an increasing number of hedge fund managers “are seeing gold as a currency.” He said that those worried about central bank consequences “think of gold as the alternative.”
So, over this last week I was on the look-out for further evidence and sure enough, bang on queue, yesterday this very development popped up om the financial news, somewhere a little too close to home:
“German 10-year bond yields have fallen below zero for the time in history as Brexit fears send investors scurrying into safe-havens, and Europe slides deeper into the psychological trap of deflation. The eurozone is rapidly running out of AAA and AA-rated sovereign bonds for sale as the European Central Bank mops up the debt market under its quantitative easing programme, leaving pension funds and insurers desperately short of assets needed to match liabilities. Two thirds of the entire stock of German government debt is now trading at negative rates.” (Ambrose Evans-Pritchard, Business Telegraph, 14 June 2016)
What does a negative yield on a German government bond actually mean? Sky News expressed this well this morning when they wrote that this “effectively means investors are actually paying the German government to lend it money on a decade-long basis.” (Sky News, 15 June 2016)
Let’s remind ourselves that Great Britain currently has to pay over 12% of the entire E.U. Budget all on our own (the same figure as 18 other member states combined!) As it looks more and more hopeful that Great Britain might leave the E.U., it is not surprising that international investors are becoming nervous about the EU’s health when the world’s 5th largest economy becomes unshackled from the sinking euro-project, currently headed by Germany. All the other E.U. member states will have to pick up the bill for what we had to pay for and the German government will be hit the hardest.
German government bonds are looking weaker than they’ve ever been because the world knows Great Britain’s stronger economy is propping up the E.U. This knowledge is coming through in the most effective voice that world investors know how to express – investment money is already leaving the E.U. central banks because confidence in those banks is waning.
So, it is not unreasonable to assume that some of the money that was invested in euro-zone central bank bonds will now move into the safe haven of Gold (and Silver), thus driving up the price per ounce further. And it’s not just Germany in trouble. Italy, Spain, Ireland and Portugal all have government debt well over 100% of their GDP!
“Portugal’s 10-year yields have jumped by 36 basis points in three trading days, pushing the risk spread over German Bunds to 336 points. The country’s ratio of public and private debt is 360pc of GDP – the highest in Europe – and a Socialist-led government relying on far-Left support is in a bitter fight with Brussels over budget violations. “Portugal is treading on very thin ice,” said Mr Ostwald. Deutsche Bank’s share price fell 3pc to a modern-era low of €13.16. Italy’s Intesa Sanpaolo slid 3.5pc to a fresh low for the year, while Banco Popolare (BP) dropped 6.5pc and has now shed 85pc of its value since August. “Non-performing loans in the banking sector are still a huge problem and Italy is vulnerable. The negative feedback loop between banks and sovereign states is still very much alive.” (Pritchard, 14th June 2016)
And it’s not just in the Eurozone. As we have regularly written, the global economy is in trouble, as fiat currency cycles historically repeat themselves:
“A key gauge of inflation expectations in the eurozone – the 5-year/5-year forwards – has collapsed to an all-time low of 136 points, down from 180 at the start of the year. It is a warning sign that markets are pricing in deeper deflation despite the frantic efforts of the ECB to break out of the trap. The pattern is all too familiar to economists in Japan, where bond yields have been sliding for a quarter of a century and are still falling, reaching -0.19pc on ten-year maturities this week. The proverbial graveyard is full of traders that tried to bet against this trend, misjudging the deeper forces at work.” (Pritchard, 14 June 2016)
If the euro collapses, I won’t believe that the Brexit was to blame. This is because the European Central Bank is overloaded on buying up sovereign debt and has been since 2008. That’s what a “bail out” means, when the papers announce such things as; “The ECB unlocks extra money to bail out Greece” etc. The figures are mind-blowing:
“The ECB has bought €717bn of sovereign debt since it began QE but cannot continue at this pace unless the rules are changed since it is restricted to 33pc of each debt issue. “They can only keep going for another three months. Brexit or no Brexit, they will have to increase the proportion to 50pc,” said David Owen from Jefferies.” (Pritchard, 14 June 2016)
Sky News concurs; “Banking stocks have been among those bearing the brunt of the losses in recent days – with shareholders fretting about the possibility of a longer period of low or negative interest rates, given the weaknesses in the global economy.”
So, it is absolutely no surprise that the price of Gold and Silver continue to rise. Bleyer believes that buying on the dips makes sense.
Mike Maloney hits the nail on the head when he quotes Clark’s conclusion that, “Bloomberg reported that Ken Hoffman, senior metals analyst at Bloomberg Intelligence, said that an increasing number of hedge fund managers “are seeing gold as a currency.” He said that those worried about central bank consequences “think of gold as the alternative” and then show us what this means:
“That is when everything shifts; when people start treating Gold as currency. And I said that this will happen, many years ago. I put that in my book [A Guide to Investing in Gold and Silver: protect your financial future] that there will come a day when people are rushing back to Gold and Silver because GOLD AND SILVER ARE MONEY. And that is when everything changes and the really, really big gains come.”
“Investec Wealthsaidtheyfavour gold over bonds, mainly to hedge against US political risk. Even John Thornton, the former president of Goldman Sachs (who can speak more freely now that he’s no longer with the company), says he feels uneasy about the global economy…
“After the events of 2008, really since then, central banks either collectively or individually have tried to implement policies which would, in effect, buy time for individual governments to take the actions they should take to put their houses in order. By and large, governments have not done that. So I feel as though we’re sitting in 2016 with many of the same problems that we’ve had for the last eight or ten years. They haven’t been addressed very forcefully; we’re living on borrowed time. Sooner or later, that ends in tears… I think by and large, if things don’t make common sense, sooner or later, they come home to roost.”
You don’t need a crystal ball to know if you should buy gold; you only need to recognize that current government machinations don’t make sense right now, that there is no free lunch to all this financial engineering, manipulation, and experimentation. This is what’s led the many institutional investors to buy gold.
So, the #1 reason the gold bull market is here to stay is because institutional investors—the “big money”—is back. A major shift is underway.” (The Number One Reason this Gold Uptrend is Here to Stay, June 2016)
But, having said all of this, Maloney sells Gold and Silver, as do we. So, are there other voices calling a possible rise in the Gold and Silver price on the horizon, that are commentators?
Plenty. One of the most readable is from an organisation called Profit Confidential which give Market Forecasts and has been giving “Financial and Economical Analysis since 1986.” I found one of the most clearly written, simple to assess pieces of recent days, when facts have been hard to untangle from rhetoric in a report entitled, “3 Reasons Gold Prices Could Be About to Skyrocket.” (14th June 2016)
“The Brexit:On June 23, Britain will be voting on whether the country should leave the European Union (EU) or stay. As it stands, it looks like the “Leave the EU” movement is surging. According to the Opinion Poll, commissioned by the Brexit-backing think tank Bruges Group, 52% of the respondents said they would prefer to leave the EU. Only 33% said they would want to stay. (Source: “End of EU rule FINALLY in sight: Leave camp take 19-POINT lead as Britons flock to Brexit,” Express, June 13, 2016.) If Britain does vote to revoke its EU membership, this could cause a significant amount of uncertainty. Britain is a major financial and economic hub in Europe. All of a sudden, a lot of factors will become questionable. However, this could all be great for gold prices. Investors may end up running toward the yellow shiny metal to secure their wealth.”
We at Bleyer would be remiss not to acknowledge that even good change maybe a little bumpy for a short period. Physical Gold and Silver therefore position themselves as attractive investments over the post-Brexit excitement.
Federal Reserve’s Interest Rate Decision: “Not too long ago, the Federal Reserve was adamant that it would continue to raise its federal funds rate after having raised it for the first time in nearly a decade in December 2015. Now, the situation looks completely different. A rate hike doesn’t look like a very viable option. At the time of this writing, odds of a rate hike in June sit at just two percent. The odds of a hike in February of 2017, however, are sitting at 60%. (Source: “Countdown to the FOMC,” CME Group, last accessed June 13, 2016.) And if you a Fed watcher, you will know these odds could decline further. With this, know that one of the only reasons investors were selling gold was because the Federal Reserve was going to raise rates. Now, when it can’t, won’t investors jump to buy gold again? As I see it, yes, and they could send gold prices soaring.”
Once again, we are back looking at negative or zero interest rates as one of the key drivers of a upward movement in the Gold price. The last and third reason commentators give for a rise in Gold prices is exactly as we have concluded in this piece:
“Negative Yields on Bonds: If you follow the bond market, you may know this already: a significant portion of global government debt is selling at a negative yield. Japanese government bonds with maturities of two years, five years, and 10 years have negative yields. German government bonds with maturities of two years and five years have negative yields, and the 10-year German Bund is very close to yielding a negative return, too! This means that if you buy these bonds and keep them until maturity, you are guaranteed to lose money. Don’t be shocked if investors ditch bonds and turn to assets that store value. Gold does a great job at it.”
Profit Confidential concludes with a Gold Prices Outlook for 2016: “Here’s something that usually is forgotten; despite gold being an important asset, the gold market is relatively small compared to the stock market or the bond market. So, a relatively small amount of money could cause gold prices to soar significantly. This statement may sound very bold, but if all the events mentioned here come into play, gold prices could easily see the $1,500 level by the end of 2016.”
I’m not one for predicting exact prices, because even if the general direction of price moves doesn’t usually surprise me, the amounts can. However, the above commentary makes such a key point, about the relatively small size of the physical Gold and Silver markets.
I wrote about this back in March of this year, if you’d like to read more please click on the link for “A Storm is Coming: The Real Figures of Gold and Silver Demand” for further insight and research.
Bleyer Bullion offer investors the opportunity to buy a variety of gold and silver bullion coins from around the world. While these collectors coins are highly transportable and easy to store in terms of size, many of our clients also like to use our preferred custodians in terms of value and rarity, for safe, secure, fully insured bullion storage facilities of their gold bars and coins. Whilst coins tend to cost very slightly more than bars they may carry the added advantage of being not only VAT free but also CGT (Capital Gains Tax) free. All coins sold through Bleyer meet the criteria for investment gold and are at least 22 ct or above. All investment gold is exempt from VAT and many gold coins are exempt from Capital Gains Tax. If you are considering buying gold for your SIPP bars are a cheaper alternative. Bleyer are approved for the purchase and storage of SIPP Pension or SSAS Pension Gold.
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