Gold — Barbarous Relic No More? Just Ask the Central Banks…

“I believe in the Golden Rule – the man with the gold… rules.”
– Mr. T

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June 6, 2024 – Today’s missive follows up on yesterday’s essay looking at Japan, which is caught in a debt trap.

Here’s how the trap works: As Japan contends with inflation, the rising cost of financing its extreme debt – 260% of GDP – becomes impossible via raising interest rates. That means they have to simply let inflation take its course.

That’s why gold is an attractive asset to own. It holds up against inflation, no matter the currency. It doesn’t have a counterparty risk like debt does.

Those points are likely a big reason why so many central banks are increasing their position in the metal.

Today’s guest essay, from Lau Vegys at Doug Casey’s Private Investing, examines why central banks are buying gold now … and focuses on how the banks may have no other choice.

Enjoy ~~ Addison

CONTINUED BELOW…

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CONTINUED…

Gold — Barbarous Relic No More? Just Ask the Central Banks…

Lau Vegys, Doug Casey’s Crisis Investing

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
~ Warren Buffett

I often wonder about this quote… Would Warren Buffett wish it never came out of his mouth, seeing what’s happening in the world with gold today?

You have China accelerating its de-dollarization efforts by loading up on gold (and dumping U.S. debt).

You’ve also got Russia, who’ve moved about 20% of their reserves into gold since the collective West slapped them with sanctions over the Ukraine war.

And it’s far from just being these two countries.

Buffett may not realize (or care), but central banks as a group have been on a gold-buying spree since 2022. Take a look at the next chart below.

Turn Your Images On

Central bank net gold purchases totaled 1,037 tons in 2023. That fell just 45 tons shy of 2022’s multi-decade record.

According to the Official Monetary and Financial Institutions Forum (OMFIF), central banks’ average gold reserves rose from 9% to 11% in just the last year.

In fact, central bank gold demand has almost tripled, now making up about 25% to 30% of total global demand.

As a result, global central banks now own about 17% of all the gold ever mined, which is roughly 36,699 metric tons or over $2.75 trillion.

All these factors are a big reason why gold is near its all-time high today.

They Are Not Done

Now, here’s the thing to understand: central banks aren’t speculators. They’re not concerned about the price. They buy gold for strategic reasons.

They don’t usually go for such big buys of gold for such a long stretch.

Our takeaway from seeing all these bank gold purchases in recent years is that they’re bracing for a shift in the global financial landscape. And it’s probably tied to de-dollarization.

And if I’m right, this likely means they’ll keep on buying.

A recent survey (just published Tuesday) by OMFIF revealed that about 15% of central bank managers anticipate increasing their exposure to gold over the next 12—24 months.

According to OMFIF’s calculations, this would mean an extra $600 billion of reserves will be in gold in the next few years.

This is pretty astonishing when you think about it, especially with gold trading near a record high. But, like I said, central banks aren’t speculators and they don’t care about price.

If you take a quick look back at the chart above, it looks like it’s already happening, with central bank net demand reaching 290 metric tons in Q1 2024. That’s a few more tons than last year, making it the strongest start to any year on record.

So, yes, gold is near its all-time high. But it’s probably headed much higher since it looks like the buying spree by central banks is far from over.

Not All Gold Is Priced The Same

Now, if you’re thinking about hopping on the gold bandwagon, it’s crucial to know that not all bets on the gold price are created equal.

Doug Casey always recommends holding gold, the commodity, in your long-term investment portfolio. But he also recommends investing in gold stocks for even more profits.

That’s because gold miners tend to do better than gold bullion when the price goes up because the cost of extracting gold becomes cheaper. In other words, they provide leverage to the underlying commodity.

And you know what’s really interesting? Even with gold near its all-time high, shares of solid, profitable, dividend-paying gold miners are still cheap. Just take a look at this chart of major gold mining stocks, measured by the NYSE Arca Gold BUGS Index (HUI).

Turn Your Images On

Now, again, I want to stress that we’re not discussing junior explorers here. We’re talking about a list of senior gold stocks, including miners like Newmont (NEM), Barrick Gold (GOLD), and Agnico Eagle (AEM). In fact, juniors are even cheaper.

Now, you’re likely wondering why this is the case, especially (again) with gold sitting near its all-time highs.

It’s quite simple… central banks only buy physical gold bullion. They do not buy gold stocks. So there’s a lag between them getting gold, helping push its price up, and that showing up in gold equities.

That’s why there are still heaps of these businesses selling for crazy bargains right now. And it’s also why a good chunk of our Crisis Investing portfolio is focused on these stocks, which Doug himself owns.

Doug Casey: Mining is a lousy, costly, 19th century business. Companies have to spend millions looking for prospects, and they usually fail. If they do find something, that’s where the trouble really starts. It can take a decade or more just to get a mine up and running, with most of that time spent waiting on permits and red tape.

That said, mining offers many opportunities for investors to profit. And there are moments when you can make spectacular returns if you invest in the right mining stocks.

And now is a great time to do just that.

~~ Lau Vegys, Doug Casey’s Crisis Investing

So it goes,

Turn Your Images On

Addison Wiggin,
The Wiggin Sessions

P.S. Gold’s record run may not be over yet. While the metal has set new record highs in dollar terms this year, it first started making new highs in other currencies. Owning some gold, especially in a mix of physical bullion, stored bullion, and gold mining stocks, should be a small, but essential part of every investor’s portfolio.

(How did we get here? An alternative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on toEmpire of Debt— all three books are available in their third post-pandemic editions.)

(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at AmazonandBarnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)

Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com

“I believe in the Golden Rule – the man with the gold… rules.”
– Mr. T

June 6, 2024 – Today’s missive follows up on yesterday’s essay looking at Japan, which is caught in a debt trap.

That’s why gold is an attractive asset to own. It holds up against inflation, no matter the currency. It doesn’t have a counterparty risk like debt does.

Those points are likely a big reason why so many central banks are increasing their position in the metal.

Today’s guest essay, from Lau Vegys at Doug Casey’s Private Investing, examines why central banks are buying gold now … and focuses on how the banks may have no other choice.

Enjoy ~~ Addison

CONTINUED BELOW…

>>>>>ADVERTISEMENT<<<<<

Get Your Money Out of U.S. Banks Immediately

CONTINUED…

Gold — Barbarous Relic No More? Just Ask the Central Banks…

Lau Vegys, Doug Casey’s Crisis Investing

I often wonder about this quote… Would Warren Buffett wish it never came out of his mouth, seeing what’s happening in the world with gold today?

You have China accelerating its de-dollarization efforts by loading up on gold (and dumping U.S. debt).

You’ve also got Russia, who’ve moved about 20% of their reserves into gold since the collective West slapped them with sanctions over the Ukraine war.

And it’s far from just being these two countries.

Buffett may not realize (or care), but central banks as a group have been on a gold-buying spree since 2022. Take a look at the next chart below.

Turn Your Images On

Central bank net gold purchases totaled 1,037 tons in 2023. That fell just 45 tons shy of 2022’s multi-decade record.

According to the Official Monetary and Financial Institutions Forum (OMFIF), central banks’ average gold reserves rose from 9% to 11% in just the last year.

In fact, central bank gold demand has almost tripled, now making up about 25% to 30% of total global demand.

As a result, global central banks now own about 17% of all the gold ever mined, which is roughly 36,699 metric tons or over $2.75 trillion.

All these factors are a big reason why gold is near its all-time high today.

They Are Not Done

Now, here’s the thing to understand: central banks aren’t speculators. They’re not concerned about the price. They buy gold for strategic reasons.

They don’t usually go for such big buys of gold for such a long stretch.

Our takeaway from seeing all these bank gold purchases in recent years is that they’re bracing for a shift in the global financial landscape. And it’s probably tied to de-dollarization.

And if I’m right, this likely means they’ll keep on buying.

A recent survey (just published Tuesday) by OMFIF revealed that about 15% of central bank managers anticipate increasing their exposure to gold over the next 12—24 months.

According to OMFIF’s calculations, this would mean an extra $600 billion of reserves will be in gold in the next few years.

This is pretty astonishing when you think about it, especially with gold trading near a record high. But, like I said, central banks aren’t speculators and they don’t care about price.

So, yes, gold is near its all-time high. But it’s probably headed much higher since it looks like the buying spree by central banks is far from over.

Not All Gold Is Priced The Same

Now, if you’re thinking about hopping on the gold bandwagon, it’s crucial to know that not all bets on the gold price are created equal.

Doug Casey always recommends holding gold, the commodity, in your long-term investment portfolio. But he also recommends investing in gold stocks for even more profits.

Turn Your Images On

Now, you’re likely wondering why this is the case, especially (again) with gold sitting near its all-time highs.

Doug Casey: Mining is a lousy, costly, 19th century business. Companies have to spend millions looking for prospects, and they usually fail. If they do find something, that’s where the trouble really starts. It can take a decade or more just to get a mine up and running, with most of that time spent waiting on permits and red tape.

That said, mining offers many opportunities for investors to profit. And there are moments when you can make spectacular returns if you invest in the right mining stocks.

And now is a great time to do just that.

~~ Lau Vegys, Doug Casey’s Crisis Investing

So it goes,

Turn Your Images On

Addison Wiggin,
The Wiggin Sessions

Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com

Relative to GDP, the net international investment claim on the U.S. economy was 20% in 2003. It had swollen to 65% by 2023. Practically every type of American company, bond, or real estate asset now has some degree of foreign ownership.

But it’s even worse than that. As the federal deficit has pumped up the GDP figures, and made a larger share of the economy dependent on government spending, the quality and sustainability of GDP have deteriorated. So, foreigners, to the extent they are paying attention, are accumulating claims on an economy that has been eroded by inefficient, government-directed spending and “investments.” Why should foreign creditors maintain confidence in the integrity of these paper claims? Only to the extent that their economies are even worse off. And in the case of China, that’s probably true.

As global government interest expense climbed, gold quietly followed it higher. The IIF estimates that interest costs on government debt now run at nearly $4.9 trillion annually. Over the same span, gold prices have tracked that burden almost one-for-one.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

Over that same period, gold prices have surged about 135%, while silver is up roughly 175%. Zoom out two years, and the divergence becomes starker still: gold up 114%, silver up 178%, while the S&P 500 gained 44%.

According to the American Association of Individual Investors, the average retail investor has about a 70% allocation to stocks. That’s well over the traditional 60/40 split between stocks and bonds. Even a 60/40 allocation ignores real estate, gold, collectibles, and private assets.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.

In a healthy economy, production and consumption communicate constantly. If a company builds something useful, customers respond by buying it. If they overbuild, inventories pile up and prices fall, sending a signal to slow down.

AI infrastructure, by contrast, is being built largely on faith. Companies are scaling up compute power without clear signs of sustainable demand. Unlike oil and gas, where prices adjust second-by-second, AI companies operate in a fog. They release tools, collect usage stats, and hope that paid conversions will follow.

But hope is not a business model.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.

But hope is not a business model.