To catch up on my introduction to the first monthly round up blog in February please click here. In retrospect, it reads very poignantly, in light of the tragic attack in London last week. I was in London the weekend before, waltzing around Parliament Square from Horse Guards across Westminster bridge in a pink taxi, not a care in the world, chatting in total agreement with my cabbie about our magnificent capital and country. It was one of those chats that resulted in such camaraderie that the full fare was foregone for a cheery “Don’t worry about the rest.” “Are you sure?”, “Nope, have a great rest of your day.” The Spring sunshine was out, Trafalgar Square was packed with tourists, the last minute RSC cheap seats have been scooped up at the Haymarket with much glee and all was well with friends and the world in our often beautiful capital.
So, it is with much heartfelt thoughts towards those whose lives have been forever changed by last week’s events that I write this month’s update.
March: Key Events in Regard to Gold and Silver
This month, underneath not only the noise but the occasional tears of the headlines, what is the background hum – in relation to Gold, Silver and the economy in this instance – and how best we can position ourselves to protect our wealth in light of it?
It is worth repeating that “The constant hum is the market and geo-political fundamentals, they are the constant base notes and they are worth listening to. The price of Gold and Silver may make some jolt moves, either up or down, but what’s the trend? What’s the base note? These monthly updates will be about doing my best to acknowledge the headlines – the fleeting noises – to spot any to which it would actually be astute to react, but then to look beneath at the hum to the overall trend.”
Today we’ll look at two recent developments to keep our eye on that may help us hear the base notes:
1) The Chinese Economy
China is a massive economy. What they do affects us. Quietly behind the scenes this quarter China has been selling U.S. Treasuries. This is another way of saying that China has been selling U.S. debt and reducing its past investment in the U.S.
In January of this year, ever so quietly, China sold so much of its U.S. debt that it now holds less than Japan! Japan’s economy is in ruins with a debt to GDP ratio is 250% and rising. That’s not an economy that can prop up America.
Since 2014 there has been some commentary on China overtaking the U.S. as arguably the largest economy in the world. This is another background hum that looks set to raise the price of Gold and Silver over the coming years.
Vanity Fair wrote that “When the history of 2014 is written, it will take note of a large fact that has received little attention: 2014 was the last year in which the United States could claim to be the world’s largest economic power. China enters 2015 in the top position, where it will likely remain for a very long time, if not forever. In doing so, it returns to the position it held through most of human history.”
In addition, Casey Research wrote that “China think differently about Gold. They view Gold in the context of its role throughout history and dismiss the Western economist who arrogantly declares it an outdated relic.”
Combine gold’s historical role with current events, and we would all do well to view our holdings in a slightly more “Chinese” light, one that will give us a more accurate indication of whether we have enough, of what purpose it will actually serve in our portfolio, and maybe even when we should sell (or not).
The horizon is full of flashing indicators that signal the Chinese view of gold is more prudent for what lies ahead. Gold will be less about “making money” and more about preparing for a new international monetary system that will come with historic consequences to our way of life.” (Casey Research)
How Will This Affect the Price of Gold and Silver?
So, if China is continuing to quietly sell holdings of U.S. Treasuries, are they buying the opposite asset, physical Gold? And if they are, will that push up the price of Gold on the global market?
“Don’t forget that China is already the largest gold producer in the world. It is now reported to have the second largest in-ground gold resource in the world. China does not export gold in any meaningful amount. So even if it were true that recorded imports are falling, it would not necessarily mean that Chinese demand has fallen, nor that China has stopped accumulating gold.” (Casey Research)
The fact that China doesn’t export their Gold became even more pertinent within the last 24 hours, as it was very quietly announced (in fact I can find the news hardly anywhere) that China has discovered its largest ever gold mine yesterday! (28th) Because that gold won’t be leaving the country, this gives China the ability to acquire Gold without having to buy it from overseas.
It is very hard to tell what this will do to the price of physical Gold over the next two years, which is the time-span given to excavate that newly discovered Gold.
On the one hand, China want the price to remain contained, so it can continue to accumulate Gold from overseas in tandem to digging out its own newly found Gold. On the other hand, will the fact that China can now massively increase their Gold holdings without having to purchase from overseas start a Gold race between other central governments to increase their own Gold holdings by comparison? This would push up the price.
Regardless of how each of us voted, Great Britain’s exit from the E.U. is an economic situation worth looking at without bias. It would be remiss of me not to include it in this month’s key events, and on today of all days (Article 50 Day) simply for worry of offending one or two, which I would never want to do. It would be remiss because the U.K. leaving the E.U. gives all of us insight into what the price of Gold and Silver may do. In this regard, examining the future affect on Gold and Silver can be seen as a unifying exercise, as everyone of whatever political leaning enjoys wise investing.
Both fear and fact affect the price of Gold and Silver, as was seen immediately after the Referendum Result nine months ago. If the Referendum was conception, then nine months later today is the birth and we all know that can be an intense occasion.
And just as we can predict that a birth may include mixed emotions for some, any one could have also predicted that the invoking of Article 50 today would cause a rise in the price of Gold and Silver, as already happened starting from late last night. The markets not only do not like both the perception and reality of uncertainty but it is also no secret that many London-based companies were vocal in their dislike of Brexit.
Looking at this dispassionately however, from an economic perspective, the negotiations and landscape ahead of us now give this country’s economy and individual investors a unique opportunity. To highlight this I will quote from both one right leaning and two left leaning papers:
“The Prime Minister should exploit the current turmoil in the EU to get the best deal for Britain in the upcoming Brexit negotiations, Telegraph columnist Allister Heath argues. In a new video ‘Article 50: Theresa May’s Winning Hand’, Heath shows just how powerful her negotiating position could actually be. And he urges Mrs May as she triggers Article 50 to recognise that she could have the upper hand and go ‘all in’ when the chance to strike arises. “The EU is on the verge of the abyss,” he says. “We need to leave quickly. But it is clear that Theresa May has a winning hand.” The video discusses five key areas in which Britain has the stronger hand; it’s worth a quick watch if you have five minutes.
Just as many of us remember the replacement of the old £1 note that preceded the now “old” £1 coin, so too do many of us remember the exact same trajectory of opinion on the importance of joining the Euro back in 2001 and how it played out in the opposite direction:
“The continent’s single currency, needless to say, has been an economic disaster. Yet had the pro-EU crowd had their way, Britain too would have been part of this union of monetary mess.” And that’s The Independent speaking.
Yet, “In 2001, the Financial Times predicted that “Membership of the Eurozone offers the prospect of long-term economic stability,” which also time and economics proved as false.
Great Britain will exit the E.U. by March 2019. This is now just in time to continue to retain our vastly more flexible currency, the GBP. It is no secret that by 2020 all E.U. member states will have to use the euro.
With the financial health of the countries using the euro now at a growing and fragile large internal disparity, our flexibility from that currency will be, and always has been, a certain economic advantage for Britain.
How Will This Affect the Price of Gold and Silver?
Even so, just because we won’t ever be trading in euros, doesn’t mean the euro’s ill health won’t affect the price of Gold and Silver. It definitely will. As the economic strain on the euro as a currency increases watch and expect to see the price of Gold (and Silver) climb upwards.
First, as with any uncertainty, I suspect that during the early rough stages of negotiations with the E.U. where points of disagreement will become obvious, the price of Silver and Gold will rise fairly firmly and possibly sharply. As certainty prevails, it is logical to suspect that the price of Gold and Silver will later climb with a calmer trajectory, as it has been doing if one observes the 200 day moving average over the last five years, for example, instead of the occasional monthly or weekly jolts.
As Great Britain leaves the E.U. it may feel a little like watching a toddler trying to walk – occasionally nerve racking. For all of us who have lovingly watched our own toddlers through these stages of gaining balance, we know that we seem to be in a constant background state of awareness. But then they learn to walk; confident, tall and independent. And we begin to relax. It takes time, like any change.
Watching the price of Gold and Silver through the next few years may reflect that hit and miss attempt at economic certainty and balance, with peaks of alarm and knee-jerk reactions, followed by sighs of relief and then a clumsy repeat alongside an optimistic learning curve. And then I am hoping that – if we all work together – the U.K. will run.
Gold and Silver have always been a hedge against economic uncertainty. It is not unusual to expect there to be a fair deal of that over the coming months and to prepare wisely. To invest in your own Physical Gold and Silver please click here.