“It’s rather short-sighted to completely lose confidence in an asset that has a 5,000 year track record because of a few down years.” (Tyler Durden, 4th August 2015.
This week, we’re going back to basics. Every week, we cover the intricacies of geo-political changes and signs, which may affect the Gold and Silver price. But sometimes, it’s good to go back to the beginning. What is the history of Gold and why is it good to own Gold?
While chatting with friends from outside the precious metals market this last week, I was again interested to hear their perceptions on gold. It was the usual, “Gold has fallen” focus, gleaned from passing headlines in mainstream media. We tend as humans to knee-jerk to momentary anomalies, rather than look calmly at the entire picture, which often involves history that came before us. These friends are lovely sweet people but I suspect none of them would follow up a headline by pulling up historical charts of Gold (and Silver’s) price history over 10 or even 100 years. The Gold Price has corrected over the last three years, no doubt. So in their mind, “Gold has fallen.”
Two facts are important to point out here:
A) The “price” which has fallen is the paper trading price and in no way reflects the ounces of actual physical gold sold and the demand for Physical Gold and Silver.
We at Bleyer have regularly highlighted the fact that the paper price and the physical price are tagged together under one spot price. Yet at any one time, the proportion of paper certificates held is vastly more than the physical ounces available. This disconnect between the price vs. the actual movement of gold ounces is not just seen in private investing but, much more alarmingly, in the purchasing of major government players. The following 4 minute video explores this disconnect factually. Here is a summary, although we recommend a quick watch for your own research:
- The demand for physical Gold through Central Banks was 119 tonnes in the first quarter (Q1) of 2015. That is the 17th consecutive quarter that Central Banks have purchased Gold.
- Russia in June bought 25 tones of Gold.
- India bought 15% more physical Gold in Q1 of 2015 than in Q1 of 2014.
- China’s Q1 purchases of Gold have risen 15% over the last 5 years, if that figure is to be believed. China are well known for under-declaring their Gold holdings, which we will explore more later.
- The U.S. Mint sold 76,000 ounces of American Eagles in June 2015. That is a staggering 250% increase on sales from May 2015, just one month prior.
- Yet, at the same time, U.S. Gold mines have produced 11% less Gold in Q1 of 2015 than in Q1 of 2014. Mining of Gold has also contracted in Canada and South Africa, two other major Gold mining countries.
*all figures taken from the video: “Gold Price Forecast – Are Gold Prices about to hit $9,900? (published 3rd AUGUST 2015)
In addition, here is a chart showing the paper fix price vs. the ounces of Gold purchased by Russia over the last few years:
Look at the how Russia buys Physical ounces when the paper price falls. So, to reiterate point A. The paper price bears no correlation to the actual global demand for Physical ounces of Gold and Silver. Therefore the “price fall” does not mean Physical Gold and Silver have become less in demand. The figures show the complete opposite. It is worth asking ourselves why?
B) The second point worth pointed out is that it is unwise to judge anything by one tiny moment, rather than look at the whole of its lifetime.
So, let’s look at that, at a brief History of Gold. We’ve come across a great graphic from The Visual Capitalist, that sums up the history of gold neatly and succinctly from the Egyptians through to today. Take a quick look. It concludes that, “Gold is an extremely unique, useful and versatile metal. It has proved irreplaceable throughout the ages… and it’s story is far from over.”
Now let’s hone in on the last 12 years or so. “On April 2, 2001, the price of gold closed the market trading session at $255.30. And that was the lowest price that gold has seen ever since. In US dollar terms, gold closed the 2001 calendar year higher than it did in 2000. Then it did the same thing again in 2002. And again in 2003. In fact, after reaching its low in April 2001, gold closed higher for twelve consecutive years– something that had never happened before in ANY financial market with ANY asset. Then came a correction; the price started falling, and gold is now on track for 2015 to be its third down year in a row. What’s incredible is that, despite its history of gains, and 5,000 years of tradition behind it, gold is rapidly becoming one of the most widely despised assets. But before we pronounce it dead and write the final gold eulogy, however, let’s consider the following:
1) Nothing goes up (or down) in a straight line. After 12 straight years of unprecedented gains with any asset class, it’s not unusual to have a meaningful correction. (Just imagine how severe the correction in stocks will be. . .) And like all frantic booms which go way past sustainable levels, corrections also overshoot fair value. This correction in the gold market could easily last for several more years, with prices potentially well below $1,000. But then we could just as easily see another massive surge all the way past $2,000 and beyond. That’s the nature of these markets– to be extremely fickle (and highly manipulated). Even over a period of a few years, the market can show about as much maturity as a middle school lunchroom, complete with pubescent gossip and inane popularity contests. But it’s rather short-sighted to completely lose confidence in an asset that has a 5,000 year track record because of a few down years.
2) The gold price shed nearly 5% after the government of China announced recently that they owned 1,658 metric tons of gold. This amount was lower than what many investors and analysts had been expecting, and the price of gold dropped as a result. My question- since when did anyone start believing official reports from the Chinese government? Seriously. The Chinese have a vested interest in understating their gold holdings. They know that doing so will push the price of gold LOWER, which is exactly what they want. China is sitting on trillions of dollars in reserves right now, a portion of which they’re rapidly trying to rotate OUT of US dollars. So it’s clearly beneficial to the Chinese government if they can sell dollars while they’re strong and buy gold while it’s cheap.” (Zerohedge)
This last point, regarding China’s holdings, was exactly the conclusion we also reached, two weeks ago, in a previous blog entitled, “Is a Stock Market Crash coming in late 2015?”
So, how can we logically look at the price of Gold today and not see this disconnect, this lack of financial truth between the supply and demand of Physical Gold? I believe it is impossible not to see this, when one looks through logic, instead of feelings. This navigation tool of logic becomes increasingly valuable when the crowd are moving in the opposite direction because our feelings tend to want to “conform.” The stock market at this current time represents the crowd. We at Bleyer have been researching the signs that point to a massive stock market crash in the near future (Please see our previous blogs). Profit Confidential agrees: “the stock market [is] sorely overvalued and investors are far too optimistic. For example, the CAPE ratio of the S&P 500 is a price-to-earnings (P/E) ratio adjusted for inflation and cycles. The ratio currently stands at 27.85; that means that for every $1.00 of earnings a company makes, investors are willing to pay $27.85. (Source: Yale University, Department of Economics web site, last accessed March 10, 2015.)
The last time the ratio was near this level was in late 1999, the high-flying days before the dot com bubble burst. Comparing the current valuation of the S&P 500 to its historical average of 16.59, the stock market is currently overvalued by 68%. A correction is coming. And it’s not going to be pretty.”
If you haven’t considered owning Physical Gold, now might be the time to consider investing in Physical.
So, now that we have briefly looked at the:
- History of Gold in pictorial form
- figures for physical demand vs. the paper price
- buying patterns of major Eastern Central Governments
- the current overvalue of the stock market
…what steps can we take to protect our wealth? The answer may be obvious. We believe owning some Physical Gold and Silver is a historic safe haven in times of economic turmoil. We also believe it is particularly important to move into this safe haven, well before the turmoil hits.
“Gold is a very long-term store of value. Notwithstanding a few down years, gold has maintained its purchasing power for thousands of years.
Paper currencies come and go. They get devalued, revalued, and extinguished altogether. How much would you be able to buy today:
- With paper money issued by the 7th century Tang Dynasty? Nothing. It no longer exists.
- Or a pound sterling from 1817? Very little. It’s barely pocket change today.
- Yet the gold backing up that same pound sterling from 1817 is worth over $250 today (165 pounds).
- Even in modern history, the gold backing up a single US dollar from 1971 is worth vastly more than the paper currency that was printed 44 years ago.
But even more importantly, aside from being a long-term store of value, gold is a hedge— a form of money that acts as an insurance policy against a dangerously overleveraged financial system. How much will your dollars and euros buy you in the event of real financial calamity? Or if there’s a major government default or central bank failure? No matter what happens in the financial system– whether it collapses under its own weight, or cryptofinance technology revolutionizes how we do business– gold ensures that you’re protected.” (Tyler Durden)
So, where does Gold go from here? No one can predict its exact steps for sure but some believe that, “Gold is about to experience a massive price rally, erasing its recent lackluster performance for investors smart enough to act now. At least, that’s the latest gold price forecast of Albert Edwards, head strategist at Societe Generale. Gold certainly isn’t everyone’s favorite commodity at the moment. And the belief that the Federal Reserve is set to raise interest rates as early as September doesn’t help matters. Because gold doesn’t return interest or pay dividends like some other assets, higher interest rates make them even less desirable. This has put the “safe-bet” into an awkward market position, and convinced a great many analysts and traders that it’s to be avoided. Edwards, however, sees the current market weakness of the yellow metal as only the prelude to a massive price rally. In a report obtained by Newsmax, the economist points out the financial fragility of Western central banks. He alleges that they have set themselves up for a crisis on a far larger scale than the one in 2008. What will follow is plummeting interest rates and massive fiscal deficits, and then finally quantitative easing on a scale which will have investors flocking to gold. It will become the most sought-after commodity on the planet, and those wise enough to invest now will reap the benefits. (Source: SocGen’s Edwards: Buy Gold to Prepare for Massive Rally, July 30, 2015.)
Bleyer offer a large variety of Gold and Silver bars and coins. Take a look at the stunning Austrian Philharmonics or the extremely popular American Eagle and Buffalo. We’ve noticed an increase in interest in Chinese coins, and Bleyer now offer a variety of denominations of the Chinese Panda in 1/10, 1/4 and 1/2 ounces. These make ideal gifts or as an incentive to start accumulating Gold for a family member or grandchild.
Browse Bleyer’s extensive range of additional South African, Canadian and Australian Gold coins, for a bullion investment that – like all our bullion investment coins – are recognisable the world over.