Dear Reader,

What a week it has been for Gold and Silver.  Gold and Silver continue their steady rise this week. Gold moved above the previous high bar for 2016 of £1050, with which it first flirted back in the summer.  Silver added another 1.29% to its already 40% price move upwards from the beginning of the year.  These are excellent figures for our private investors in Gold and Silver bars and coins.

Back in January I wrote a piece entitled, ‘2016 Deflation, Stocks & Pensions: Get Into Gold Soon!‘ I concluded by quoting from a financial seminar given by Mike Maloney in December 2015: “Right now is your greatest opportunity. Anybody who claims that this precious metals bull market is over with isn’t looking at the evidence.” [Re: trend lines] I think we’re going to see spectacular performance because, this time, [as opposed to 2008] Gold will be rising against a stock market, a real estate and a bond market crash, probably accompanied by a change in world monetary systems.”

For our readers who missed it, where are we now and is this a good time to invest in Gold and Silver bars and coins? We can never advise you but we can present a variety of opinions, while looking squarely at the geo-political and economic reality around us.

So, this week I researched an article by Money Morning discussing whether Gold can continue this price rise. After all, we like to encourage our investors to buy low and sell high and to always consider holding Gold and Silver long.  So, what are the experts saying in relation to Gold and Silver? 

Money Morning Resource Specialist Peter Krauth has made “a major gold price prediction for Q4 2016 you can’t afford to miss. Investors who have watched the price of gold climb during 2016 may be wondering if the price can climb any higher. The answer is an emphatic yes. Krauth forecasts a huge increase in gold prices by the end of the year, all the way up to $1,500 per ounce. That’s a rise of 18.5% from current levels. Think that’s a lofty prediction? Well, Krauth’s gold price prediction for 2020 is stunning.”

As discussed throughout this year in Bleyer’s blogs, Gold has seen one of its best years ever in 2016: “The first quarter, in fact, saw the yellow metal’s best performance in 30 years as it rocketed up more than 19% since the start of the year. The S&P 500, by contrast, fell over 5% in the first two months of the year.”

So, one what do Money Morning base their future predictions of further large upward price moves? Interestingly, they look firmly at the physical demand, not the paper contracts. I have written for a long time that the paper price and the physical demand are often two separate worlds and Money Morning give some insightful figures regarding this. Apparently, in the second quarter of this year, “sales of American Buffalo gold coins climbed 72% from the previous year. This is a sign of strong demand.”

The American Buffalo is an extremely popular coin around the world but particularly in U.S. domestic sales. It is a 1oz Gold coin, much like our 1oz Gold Britannia in its domestic appeal.  

Krauth actually predicts a 279% price rise in Gold by 2020. Now, I’m not one for spot-on predictions like that. I prefer broad trends. However, is this realistic? Well, Gold has risen 231% over the last ten years, so it’s possible. But a rise that steep in four years?  However, if we base the price rise on the past pattern, it would be a repeatable 92% price rise.

But are we on repeatable ground? To be honest, I believe the underlying factors in our global economy are so over-extended, our debt so large, our  money so debased through quantitative easing that it – in fact – isn’t impossible to imagine the next financial crash to be much, much worse than the last ten years has presented. In which case, is Money Morning’s prediction of how Gold will react as a safe haven really that out of reach?

The price prediction becomes even more tenable when examining the three main factors upon which this leading research publication bases its outlook. They are: 

1) Global economic uncertainty

2) Low or negative bond yields

3) The steep discount of Gold right now (based on the Dow/Gold ratio)

Let’s look at these three in turn.  I have been writing for a number of years on the weakness of our fiat currency system. But I believe that never before in my life time has so much economic weakness imbued our fiat system with so much fragility.

This month a leading founder of the euro project himself admitted that; “The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form. One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist and a towering figure in the construction of the single currency. “Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly,” he told the journal Central Banking in a remarkable deconstruction of the project.” (The Telegraph, October 2016)

These are stunning words from an individual who is qualified to know their facts. My concern is that I wonder how many are listening to warnings such as these and of those who are listening, who is taking action?  

In every other area of life, if the designer of a thing warned me of its inherent failure I would base my actions upon the warning; whether a chair lift in the Austrian mountains or a fault in an air bag.  Yet is there any area of my life that doesn’t depend on money?  Yes, love and health and money definitely can’t buy the most important things in life but it does provide precisely for those loved ones and give the opportunity for many of the life-defining adventures we walk.

“The European Central Bank is on a “slippery slope” Professor Otmar Issing concludes and has “in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties. “The Stability and Growth Pact has more or less failed. Market discipline is done away with by ECB interventions. So there is no fiscal control mechanism from markets or politics. This has all the elements to bring disaster for monetary union. “The no bailout clause is violated every day,” he said, dismissing the European Court’s approval for bailout measures as simple-minded and ideological. The ECB has “crossed the Rubicon” and is now in an untenable position, trying to reconcile conflicting roles as banking regulator, Troika enforcer in rescue missions and agent of monetary policy. Its own financial integrity is increasingly in jeopardy.”

‘Rubicon’ is a word with which I first became familiar, initially in terms of America’s global situation, a few years ago. It means to cross a point of no return. Historically, it comes with a much deeper connotation, as the metaphorical name actually derives from a river in Italy which was; 

“the boundary between Italy and Cisalpine Gaul. By leading his army across it and marching on Rome in 49 B.C, Julius Caesar broke the law that a general might not lead an army out of the province to which he was posted and so committed himself to civil war with the senatorial party.” What a perfectly chosen word – no doubt intentional – on the part of a founder of the euro project. 

But these warnings have been a long time coming within our banking system and it is this underlying gravitas that – I believe – is instinctively leading many members of the British public to invest in the historical safe havens of Physical Gold and Silver. Way back in 2013 an economist said the following about Deutsche Bank: “In late 2013, Paul Gambles, a managing partner at advisory firm MBMG International, said that Deutsche Bank was over-leveraged and believed Germany’s banking system was one of the worst in the world.

These fears reached the wider investment community this year.” I like listening to voices with a proven track record. 

“After witnessing Deutsche’s dramatic fall in the share price, Gambles now feels like it would take a miracle for Germany’s biggest bank by assets to absorb any potential settlement, losses on derivatives, a loss in depositors or any deterioration on its asset book.

“It looks like the only savior would be the state,” he told via email on Friday, despite German lawmakers – including the finance ministry – continuing to refute speculation that it is preparing a backup plan. “If that can only come from the state, then that might be a real barrier to external capital thereafter, creating a vicious downward spiral which is why the finance ministry is so keen to downplay rescue stories when in reality it must know that this is extremely possible.” If any risks get out of control, Gambles warns that it could easily spiral and the total exposure could conceivably be beyond Germany’s resources. In which case Deutsche Bank goes, it would take the German economy, the euro zone banking system, the euro zone economy, the Chinese banking system and the global economy with it, he added.

Additionally, if the finance ministry act too late then it could quickly become such an impossible task, that either Germany exits the euro or the euro exits Germany, Gambles warned. “(In this situation) Germany prints like crazy and before you know it, the German fears of hyperinflation are revisited – Germany is the major global economy that faces the risk of a currency and debt event big enough to cause hyperinflation which may be the most ironic aspect of the whole affair,” he added.”

I have long since warned that we are currently in the part of the historical economic cycle called Deflation. After Deflation always follows high or hyper inflation. So, sadly, it is of absolutely no surprise that four days ago one of the leading International Business Editors would write a lightning flash of a piece across the rumbling storm clouds entitled “Inflation: next year’s ticking time bomb.” To look at his biography, Ambrose Evans-Pritchard is International Business Editor of The Daily Telegraph. He has covered world politics and economics for 30 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. So, this is a voice I to which I would do well to listen.

He expounds that, “in the midst of global financial crisis from 2007 to 2008. The currency shock sent inflation shooting up to 5.2pc, abruptly squeezing on real living standards. The smoking gun is the current account deficit, which has been running near 6pc of GDP, the worst in peace-time since records began in the late 18th century.It is the sort of deficit we ran during world wars, except that this time we have been frittering the money away in shopping malls. It was corrosive. It had to stop, Brexit or no Brexit.” (22nd October 2016

Gold and Silver perform well in both deflation and inflation, a true example of “real” money. So, in conclusion to Money Mornings first point of three, the global financial uncertainty, can tragically be relied upon to ensure that fiat currencies are heading for a very unpleasant ride in the near future.

The second factor giving buoyancy to Gold (and Silver) prices is the current low to negative bond yields. I actually explored this coming sign in depth only in August in the piece entitled, ‘The name’s Bond, Government Bond‘ so I won’t repeat such recent material but simply leave the link here for those of you interested in exploring this shining warning sign to an inflated market.  My son is taking A-Level Economics, among other subjects and is currently on half term. The lightest part of his assigned homework for his two week break includes being asked to watch “The Big Short.”  I recommended this film several months ago; the Jenga scene in the film so simply illustrates the accumulative weakness of the markets – first in sub prime mortgages (2007) but now in a massive bond bubble (2016). But the “take-away” message for me was the utter predictability of crashes, if only we look.

And the third factor to give weight to much higher Gold (and Silver) prices is the current “for sale” price of the precious metal based on the Dow to Gold ratio; “The Dow/gold ratio is simply the Dow Jones Industrial Average divided by the price of gold per ounce. The result is the number of ounces of gold needed to buy a share of the Dow.

The Dow/gold ratio peaked in August 1999, at 42. The current Dow/gold ratio is a mere 13.8, which means gold can be bought for a major discount right now.” (Money Morning, 21st October 2016)

In conclusion, the uncertainty and weakness within the European banking sector is going to continue for some months, as it was announced yesterday that the American Department of Justice (DoJ) “may delay the settlement of fines for mis-selling mortgage backed securities until after the Presidential election next month. In quick response, Deutsche Bank and other European lenders fell on Tuesday following this announcement. 

“DoJ hopes of finalizing an omnibus settlement against Barclays (BCS), Credit Suisse (CS) and Deutsche Bank (DB) before the Presidential election have been lowered, Sky News reported, citing a senior banker. It is now becoming more likely that an announcement from the DoJ could slip beyond November.” (The Street, 25th October 2016) This is an additional pressure point of bad news for the fiat banking system very close to our shores, which increases the likelihood of further safe haven buyer of Gold and Silver.

In such simplicity, Jeremy Warner states that “it’s virtually impossible to make money out of banking in a zero interest rate environment, frustrating attempts to rebuild capital buffers after the bad debt write-downs of recent years.” (1st October 2016)

While we read and entertain ourselves with daily headlines, there continues a deep scion between the real and the illusion of the world in which we are living. We are living – just like a plant graft – yet detached from the root of the problem. In its early English definition scion meant the part that was withering. Fiat currencies wither and fail, precisely because they are fiat currencies. It seems so simple, after it happens.  Get back in touch with the root of the monetary world and that has always been physical Gold and Silver. 

Bleyer stock a wide variety of Gold and Silver bars and coins.  To discuss your investment please call one of the team on 01769 618618 or email sales@bleyer.co.uk 

 

Infographic showing 6 various facts about Gold