Ultimate Resource On Gold As An Investment (#GotBitcoin?)
Gold’s Record High Gives New Life To Dollar Doomsayers. Ultimate Resource On Gold As An Investment (#GotBitcoin?)
67 Million Ounces: World’s Biggest Gold Reserves Discovered Deep In Siberia
So much for the argument that gold is scarce like Bitcoin!
Last week the world’s largest stockpile of gold was revealed when Russia’s largest gold producer, Polyus PJSC, said its untapped Sukhoi Log deposit in Siberia holds the world’s biggest reserves.
A company audit showed Sukhoi Log has 40 million ounces of proven reserves as measured by international JORC standards, with an average gold content of 2.3 grams per ton, according to Chief Executive Officer Pavel Grachev. Additionally, the estimated Mineral Resources for Sukhoi Log stand at 1,110 million tonnes, with an average grade of 1.9 g/t Au and containing 67 million ounces of gold as at 31 May 2020. This means that the monetary value of the estimated gold holdings is just over $127 billion at today’s prices.
That means the field – accounting for more than a quarter of Russian gold reserves – is bigger than Seabridge Gold Inc.’s KSM Project in Canada and Donlin Gold in Alaska.
“The estimate of the reserves is an important milestone in development of the field,” Grachev said in interview in Moscow.
Sukhoi Log, located in the isolated Irkutsk region deep in the heart of Siberia, was discovered by Soviet geologists in 1961 and studied in the 1970s. The government had long considered offloading the deposit, and in 2017 sold the field in an auction to Polyus and a state partner, which the mining company later bought out.
Some More Details On Sukhoi Log:
The audit shows that as well as economically mineable reserves, the deposit has 67 million ounces of total resources, up from 63 million ounces previously estimated.
That figure may rise after more drilling and studies.
Main investment is due to start in 2023. Polyus has already started spending on infrastructure for the project, including co-investing with the government on the reconstruction of a local airport.
The world’s biggest gold deposits will likely remain untouched for the foreseeable future. According to Bloomberg, Polyus said earlier this year that it would focus on smaller projects and reducing its debt ratio in the coming years before developing the giant field.
The company plans to announce details on expected production and investment at Sukhoi Log once a pre-feasibility study is ready by year-end. It previously said that costs could reach $2.5 billion, with annual output totaling about 1.6 million ounces, or just over $3 billion at current gold prices.
While developing giant deposits is typically a lengthy and costly process, the field may allow Polyus to boost annual output by at least 70%. Gold prices have rallied about 60% since the company purchased it, and reached a record in August as vast amounts of stimulus were pumped into economies to curb the damage from the coronavirus pandemic.
“We want to show that a project of this quality and scale can and should be carried out, taking into account the best environmental standards, despite the hard-to-reach location,” Grachev said.
This year ranks as one of the best on record for investors in the precious metal, with futures prices up almost 24% for 2020 after hitting an all-time high in August.
Though gold’s detractors through the ages are numerous and prominent, including the likes of Warren Buffett and John Bogle, the events of this year are giving new life to those who insist the arc of financial history points toward the inevitable debasement of currencies like the dollar. Bullish investors contend that trend means new highs for gold are in store.
Gold has been a prime beneficiary of the Federal Reserve’s determination to leave borrowing costs at historically low levels to spur the economy after the shock of Covid-19. Chairman Jerome Powell formalized that stance in August, saying the central bank had dropped its longstanding practice of pre-emptively raising rates to head off higher inflation.
The prospect of the Fed pinning interest rates near zero for years to come and allowing inflation to run hot helped pull so-called real yields into negative territory. This means investors expect to lose money, after accounting for inflation, if they buy 10-year U.S. Treasurys and hold them until maturity.
In such an environment, money managers say the precious metal has lived up to its status as a haven, shielding investors in a year when stocks have been racked by volatility.
“[Gold] has thousands of years of a track record of offering some form of protection against the unexpected,” said George Milling-Stanley, chief gold strategist at State Street Global Advisors. “That’s worth having.”
For decades after Paul Volcker’s Fed raised interest rates to tame inflation in the early 1980s, boosting real yields, the fact that gold paid no dividend or coupon counted against it. Now, with real yields on government bonds back below zero, gold’s lack of income isn’t such a drawback.
The metal’s price surpassed $2,000 a troy ounce for the first time ever this quarter, a milestone in a bull market that some say began in 2015 and climbed to giddy heights after Covid-19 kneecapped the world economy this spring. Gold has room to keep rising, some say.
The price would have to climb another 43% from its late-August level, crossing $2,800 an ounce, to top its peak from early 1980, after adjusting for rising consumer prices in the four decades since then. Fueled by runaway inflation, the Iranian hostage crisis and the Soviet Union’s invasion of Afghanistan, prices crested at $850 in the London market on Jan. 21, 1980. That remains their all-time high in inflation-adjusted terms.
Moves in real yields explain 72% of swings in the gold price over the past 12 months, according to analysis by Michael Sneyd, head of macro quantitative and derivative strategy at BNP Paribas. Changes in inflation expectations accounted for another 21%.
Sliding yields have given bullion, which is denominated in dollars, an additional boost by denting the U.S. currency. The WSJ Dollar Index, which tracks the greenback against several other currencies, fell for five straight months through August. Though the dollar has since strengthened, gold bulls say pressure is bound to intensify.
The greenback’s role as the world’s reserve currency is being called into question by some gold bulls, including analysts at Goldman Sachs Group. Gold is the currency of last resort, especially when governments are debasing fiat currencies and pushing real interest rates to record lows, the analysts wrote in July.
Bond yields have burnished gold in another way. Since yields move inversely to prices, the fact they are so low means Treasurys are unusually expensive. Many money managers worry government bonds, traditionally owned as a buffer, won’t have much headroom to rise if stocks take another tumble.
Investors like Michael Kelly, global head of multiasset at PineBridge Investments, are on the hunt for other assets that zig when stocks zag. “This is crystal clear: Financial repression is coming even to the U.S. and the U.K. and there will be negative real rates as far as the eye can see,” Mr. Kelly said. “That supercharges gold.”
Gold has done a good job at smoothing out returns in recent decades, according to Hilary Till, principal at Premia Research LLC, who thinks money managers should consider investing in bullion as a counterweight to stocks.
Take a hypothetical fund that invested 30% in a basket of stocks tracking the S&P 500 index, 30% in gold futures and 40% in 10-year Treasurys at the end of 1999. This portfolio earned compound total returns of 7.2% a year through 2019, Ms. Till calculates. Its worst result was to lose 2.3% in 2015. In contrast, a portfolio with 60% stocks and 40% bonds earned 6.6% a year and shed 14% in 2008.
For others, however, many of the arguments made in favor of investing in gold don’t stand up to scrutiny.
This year’s surge in prices of the precious metal coincided with a rush of speculative trading in derivatives and shares of companies with little or no record of making profits. Gold’s advance is another symptom of risk-taking encouraged by lavish economic stimulus and enabled by easy access to financial markets for inexperienced traders, skeptics suggest.
“It’s still mostly speculation,” said Simon Mikhailovich, co-founder of the Bullion Reserve. “To me, that’s not the point of owning gold.”
Investors are seeking exposure to gold prices through financial products such as exchange-traded funds rather than direct ownership of gold, which is the ultimate haven because it sits outside the financial system, Mr. Mikhailovich added.
Exchange-traded funds backed by gold, which allow investors to bet on bullion prices with the ease of buying a stock, have become wildly popular. Investors poured money into the funds for the ninth straight month in August, according to the World Gold Council. ETFs now sit on a hoard of gold weighing 3,824.05 metric tons, more than any central bank other than the Fed.
There is no evidence that gold acts as a reliable hedge against inflation over time periods other than those spanning centuries, said Campbell Harvey, a finance professor at Duke University, citing a 2013 paper that he co-wrote. Nor has the idea of owning bullion in case the U.S. government defaults made sense since President Nixon ended the convertibility of dollars into gold in 1971, according to Prof. Harvey.
“This is basically a speculative situation,” he said. “Gold is no different from equities or cryptocurrencies.”
Central Banks Sell Gold For First Time In A Decade
Central banks became gold sellers for the first time since 2010 as some producing nations exploited near-record prices to soften the blow from the coronavirus pandemic.
Net sales totaled 12.1 tons of bullion in the third quarter, compared with purchases of 141.9 tons a year earlier, according to a report by the World Gold Council. Selling was driven by Uzbekistan and Turkey, while Russia’s central bank posted its first quarterly sale in 13 years, the WGC said.
While inflows into exchange-traded funds have driven gold’s advance in 2020, buying by central banks has helped underpin bullion in recent years. Citigroup Inc. last month predicted that central bank demand would rebound in 2021, after slowing this year from near-record purchases in both 2018 and 2019.
“It’s not surprising that in the circumstances banks might look to their gold reserves,” said Louise Street, lead analyst at the WGC. “Virtually all of the selling is from banks who buy from domestic sources taking advantage of the high gold price at a time when they are fiscally stretched.”
The central banks of Turkey and Uzbekistan sold 22.3 tons and 34.9 tons of gold, respectively, in the third quarter, the WGC said. Uzbekistan has been diversifying international reserves away from gold as the central Asian nation unwinds decades of isolation.
Gold rallied to a record above $2,075 an ounce in August, before declining to trade around $1,900 in recent weeks. Overall bullion demand fell 19% year-on-year to the lowest since 2009 in the latest quarter, the WGC said, largely thanks to continued weakness in jewelry buying. Indian jewelry demand fell by half, while Chinese jewelry consumption was also down.
The fall off in jewelry was partially offset by 21% jump in demand from investors, according to the WGC, which draws data from both the International Monetary Fund and Metals Focus. Gold bars and coins made up most of the increase, as flows into exchange-traded funds slowed from preceding quarters.
Total supply of gold declined 3% year-on-year as mine production remained depressed, even after Covid-19 restrictions were lifted in producers like South Africa. A quarterly uptick in recycling softened the decline, with consumers cashing in on high prices.
Deutsche Bank Says Investors Increasingly Prefer Bitcoin Over Gold As Inflation Hedge
Bitcoin’s appeal as an alternative store of value asset is strengthening, according to analysts at Germany-based investment bank Deutsche Bank.
“There seems to be an increasing demand to use bitcoin where gold used to be used to hedge dollar risk, inflation, and other things,” Jim Reid, managing director, head of global fundamental credit strategy, said, according to ZeroHedge.
Bitcoin has long been considered by supporters as digital gold due to its limited, predictable supply and use case as a store of value outside banking influence.
While bitcoin has gained 144% this year, gold is up 22%. Both assets seem to have benefitted from the inflation-boosting monetary and fiscal policies launched by central banks and governments across the globe to contain the economic fallout from the coronavirus pandemic.
The cryptocurrency has rallied over 25% this month alone despite hopes for a swift global economic recovery on potential coronavirus vaccines and improved risk appetite in stock markets. Gold, however, has lived up to its reputation as a haven asset by falling 1% so far this month.
The divergence between gold and silver on the one hand, and bitcoin on the other, is one of the oddities of this month, according to Reid. U.S.-based drug makers Pfizer (PFE) and Moderna (MRNA) announced encouraging results for their experimental coronavirus vaccines earlier this month, triggering a rotation of money out of gold and other haven assets and into risk assets.
Reid told Bloomberg earlier this month that coronavirus vaccines are equivalent to global fiscal stimulus. Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management, said inflation could rise moderately in 2021 and 2022, boding well for stocks and gold.
At press time, bitcoin is trading near $17,550, while gold is changing hands at $1,860 per ounce.
Does Gold Protect Your Investment Portfolio? Think Again
After falling alongside stocks amid March’s market panic and again last month, the metal might continue to move with shares for some time.
There is no asset that prompts more emotional reactions than gold, so I really shouldn’t have dismissed its role in a modern investment portfolio with a mere throwaway line in a recent column.
I pointed out that gold had been a hopeless hedge last month and warned that it was likely to continue moving in the same direction as stocks, making it ineffective as a way to protect against share-price losses.
As several readers said, the full story needs more than just a line. Gold’s role as a hedge depends on the risk you are trying to protect against, and it has its uses. The metal has been the last word in insurance against the collapse of the state for millennia, being near-universally exchangeable and easy to hide away or carry across borders.
A rich family can reasonably hold a small portion of their portfolio in physical gold abroad and know they will be able to flee and restart their lives elsewhere, albeit much reduced, if society falls apart.
But gold isn’t a good replacement for Treasurys in a standard 60% stock, 40% bond portfolio. When stocks fall, investors want a diversifier that rises in value to cushion the loss. But gold fell alongside stocks during the market panic in March and again last month, and might continue to move with stocks for some time.
That doesn’t make it a bad investment on its own, and the scale of the loss (and gain) will be different to stocks, but it is of little extra use for investors looking for an alternative to bonds in their portfolios.
We’re in an environment where stocks like inflation, and gold likes inflation. The outlook for inflation is closely tied to the economy, with a stronger economy (perhaps due to an agreement on stimulus) meaning more inflation and vice versa. An improving economy should help stock prices, so stocks rise with gold. A worsening economy would mean less inflation, so stocks fall and so does gold.
In the past, gold has sometimes been a better hedge against stocks. To understand why it works sometimes, and doesn’t others, we need to consider gold’s main price drivers.
Prime among these are real rates, best shown by Treasury inflation-protected securities, or TIPS, whose yields already account for inflation. Like TIPS, gold tends to rise when real yields fall and fall when real yields rise—and gold peaked this year on Aug. 6, when 10-year TIPS yields reached a new low.
With the Federal Reserve committed to keeping interest rates at zero for the foreseeable future, higher inflation would mean lower real rates and lower TIPS yields, helping gold. But higher inflation also suggests a stronger economy, helping stocks.
This is different to the summer of 2011. Back then, stocks suffered as Congress fought over the debt ceiling. But inflation was roaring ahead and investors thought commodity demand from a fast-growing China would keep prices rising. Gold soared as 10-year TIPS yields turned negative for the first time, reaching a high that wasn’t surpassed until this summer when TIPS yields again plunged.
The pattern has been repeated many times in the past. Gold shines when inflation fears are rising in a weak economy. Inflation then makes Treasurys unattractive, while a weak economy both makes stocks unappealing and encourages the Fed to cut rates or keep them low. The 1970s stagflation illustrated this perfectly, with gold reaching a high in January 1980 that still hasn’t been passed when adjusted for inflation.
Speculation also has a big influence on gold. Because so much gold is held by speculators, often bought using debt, the metal suffers as well when markets seize up and speculators dump everything.
This makes gold a particularly bad hedge when the finance industry is in trouble, which is exactly the moment when many expect it to shine. From its early-March high this year gold fell 12% before bottoming, while it lost more than a quarter of its value at its worst point in the chaos of 2008’s financial crisis.
There isn’t a neat formula for converting the TIPS yield and expected inflation into a gold price. What is clear, however, is that the best time to use gold to hedge stocks (societal collapse aside) is when we are worrying about the wrong sort of inflation, driven by supply issues such as commodity and labor costs, while the Fed is trying to help the economy.
Gold is a good way to protect against such stagflationary problems. That’s not the case when, as now, inflation is more the virtuous type, driven by underlying demand. Unless you think that’s about to change, expect gold and stocks to move in tandem.
Wuhan Company Now At The Center Of One Of The Biggest Fake Gold Scandals
More than 4 per cent of China`s official gold reserves may be fake. And this assume that no other Chinese gold producers and jewelry makers are engaging in similar fraud, the report said.
In early June, Minsheng Trust, Dongguan Trust and a smaller creditor Chang`An Trust filed lawsuits against Kingold and demanded that PICC P&C cover their losses.
A Wuhan-based company is accused of using fake gold to obtain more than $4 billion in loans.
According to multiple industry reports published this week, the Wuhan-based, NASDAQ-listed Kingold Jewelry issued 83 tonnes of alleged gold — valued at $4.2 billion and the equivalent to 22 percent of the country’s gold — as collateral to obtain loans from at least 14 Chinese money lenders and trust banks.
Except the “gold” in the bars is suspected of being gilded copper.
“This is hardly surprising; most of the fakes we see in our business are coming out of China,” Michael Wittmeyer, a gold expert for JMBullion.com. “There are replica products of what we sell online, and while people pay good money, they are essentially worthless.”
Over the years, we have periodically reported of the occasional gold bar discovered as counterfeit in Manhattan’s Diamond District which instead of containing the yellow precious metal would be filled with gold-plated tungsten or in some cases copper.
Some more background: Kingold – whose name was probably stolen from Kinross Gold, one of the world’s largest gold miners – is the largest privately owned gold processor in central China’s Hubei province. Its shares are listed on the Nasdaq stock exchange in New York (although its current market cap of just $10MM is a far cry from its all time highs hit when the company IPOed on the Nasdaq around 2010) . The company is led by Chairman Jia Zhihong, an intimidating ex-military man who is the controlling shareholder.
Well, apparently everything as at least some of 83 tons of gold bars used as loan collateral turned out to be nothing but gilded copper. That has left lenders holding the bag for the remaining 16 billion yuan of loans outstanding against the bogus bars. And as Caixin adds, the loans were covered by 30 billion yuan of property insurance policies issued by state insurer PICC Property and Casualty and various other smaller insurers.
The fake gold came to light in February when Dongguan Trust (one of those infamous Chinese shadow banks) set out to liquidate Kingold collateral to cover defaulted debts. As the report continues, in late 2019 Kingold failed to repay investors in several trust products. To its shock, Dongguan Trust said it discovered that the gleaming gold bars were actually gilded copper alloy.
The news sent shockwaves through Kingold’s creditors. China Minsheng Trust – another shadow banking company and one of Kingold’s largest creditors – obtained a court order to test collateral before Kingold’s debts came due. On May 22, the test result returned saying the bars sealed in Minsheng Trust’s coffers are also copper alloy.
And with authorities investigating how this happened, Kingold chief Jia flatly denies that anything is wrong with the collateral his company put up. Well, what else could he say…
As Caxin notes, the Kingold counterfeiting case echoes China’s largest gold-loan fraud case, unfolding since 2016 in the northwest Shaanxi province and neighboring Hunan, where regulators found adulterated gold bars in 19 lenders’ coffers backing 19 billion yuan of loans, or about USD $2.5 billion. In that case, a lender seeking to melt gold collateral found black tungsten plate in the middle of the bars.
In the case of Kingold, the company said it took out loans against gold to supplement its cash holdings, support business operations and expand gold reserves, according to public records. It then appears to have decided to apply a gold-layer to tons of copper and pretend it was money-good gold collateral. And even more shocking, for years nobody checked the authenticity of the pledged collateral!
In 2018, the company beat a number of competitors in bidding to buy a controlling stake in state-owned auto parts maker Tri-Ring Group. Kingold offered 7 billion yuan in cash for 99.97% of Tri-Ring. The Hubei government cited the deal as a model of so-called mixed-ownership reform, which seeks to invite private shareholders into state-owned enterprises. But Kingold has faced problems taking over Tri-Ring’s assets amid a series of corruption probes and disputes involving Tri-Ring.
After obtaining the test results, Minsheng Trust executive said the company asked Jia whether the company fabricated the gold bars: “He flatly denied it and said it was because some of the gold the company acquired in early days had low purity,” the executive said. In a telephone interview with Caixin in early June, Jia denied that the gold pledged by his company was faked.
“How could it be fake if insurance companies agreed to cover it?” he said and refused to comment further. Well, the answer is simple: the insurance companies were in on the scam, but that’s a story for another day.
In early June, Minsheng Trust, Dongguan Trust and a smaller creditor Chang’An Trust filed lawsuits against Kingold and demanded that PICC P&C cover their losses. PICC P&C declined to comment to Caixin on the matter but said the case is in judicial procedure. A source from PICC P&C told Caixin that the claim procedure should be initiated by Kingold as the insured party rather than financial institutions as beneficiaries. Kingold hasn’t made a claim, the Caixin source said.
In total, Kingold pledge tens of thousands of kilograms of gold to no less than 14 creditors amounting to just under 20 billion yuan.
Caixin learned that the Hubei provincial government set up a special task force to oversee the matter and that the public security department launched an investigation. The Shanghai Gold Exchange, a gold industry self-regulatory organization, disqualified Kingold as a member as of last week.
Following Dongguan Trust and Minsheng Trust, two other Kingold creditors also tested pledged gold bars and found they were fake, Caixin learned. A Dongguan Trust employee said his company reported the case to police Feb. 27, the day after the testing result was delivered, and demanded 1.3 billion yuan of compensation from PICC P&C’s Hubei branch.
Meanwhile, Kingold defaulted on 1.8 billion yuan of loans from Dongguan Trust with an additional 1.6 billion yuan due in July.
The 83 tons of purportedly pure gold stored in creditors’ coffers by Kingold as of June, backing the 16 billion yuan of loans, would be equivalent to 22% of China’s annual gold production and 4.2% of the state gold reserve as of 2019.
In short, more than 4% of China’s official gold reserves may be fake. And this assume that no other Chinese gold producers and jewelry makers are engaging in similar fraud (spoiler alert: they are.)
* * *
Founded in 2002 by Jia, Kingold was previously a gold factory in Hubei affiliated with the People’s Bank of China that was split off from the central bank during a restructuring. With businesses ranging from gold jewelry design, manufacturing and trading, Kingold is one of China’s largest gold jewelry manufacturers, according to the company website.
The company debuted on Nasdaq in 2010. The stock currently trades around $1 apiece, giving Kingold a market value of $12 million, down 70% from a year ago. A company financial report showed that Kingold had $3.3 billion of total assets as of the end of September 2019, with liabilities of $2.4 billion.
Jia, now 59, served in the military in Wuhan and Guangzhou and spent six years living in Hong Kong. He once managed gold mines owned by the People’s Liberation Army, which means he likely has connections all the way to the very top.
“Jia is tall and strong,” one financial industry source familiar with Jia told Caixin. “He’s an imposing figure and speaks loudly. He is bold, reckless and eloquent, always making you feel he knows better than you.”
Several trust company sources said Jia is well connected in Hubei – the epicenter of the coronavirus pandemic – which may explain Kingold’s surprise victory in the Tri-Ring deal. But a financial industry source in Hubei said Jia’s business is not as solid as it may appear.
“We knew for years that he doesn’t have much gold ― all he has is copper,” said the source, who declined to be named.
Local financial institutions in Hubei have avoided doing business with Kingold, but they don’t want to offend him publicly, the source said. Why? Because of his extnesive connections with the Chinese army.
“Almost none of Hubei’s local trust companies and banks has been involved in (Kingold’s) financing,” he said.
That explains why most of Kingold’s creditors are from outside Hubei. Caixin learned from regulatory sources that Minsheng Trust is the largest creditor of Kingold with nearly 4.1 billion yuan of outstanding loans, followed by Hengfeng Bank’s 3.9 billion yuan, Dongguan Trust’s 3.4 billion yuan, Anxin Trust & Investment Co.’s 1.9 billion yuan and Sichuan Trust Co.’s 1.8 billion yuan.
But wait, counterfeiting gold is just the tip of the company’s fraud iceberg: several industry sources told Caixin that the institutions were willing to offer loans to Kingold because Jia promised to help them dispose of bad loans.
Hengfeng Bank is the only commercial bank involved in the Kingold affair. The bank in 2017 provided an 8 billion yuan loan to Kingold, which in return agreed to help the bank write off 500 million yuan of bad loans, bank sources said. Kingold repaid half of the debts in 2018. But the loan issuance involved many irregularities as access to the pledged gold and testing procedures was controlled by Kingold, one Hengfeng employee said.
The loan was pushed forward by Song Hao, former head of Hengfeng’s Yantai branch. Song was placed under graft investigation in March 2018 in connection with the bank’s disgraced former Chairman Cai Guohua, whose downfall led to a major revamp in the bank’s management. In 2019, Hengfeng’s new management sued Kingold for the unpaid loans and moved to dispose the collateral. But a test of the gold bars found they are “all copper,” the bank source said.
It is still unclear whether the collateral was faked in the first place or replaced afterward. Sources from Minsheng Trust and Dongguan Trust confirmed that the collateral was examined by third-party testing institutions and strictly monitored by representatives from Kingold, lenders and insurers during the process of delivery.
“I still can’t understand which part went wrong,” a Minsheng Trust source said. Bank records showed that the vault where the collateral was stored was never opened, the source told Caixin.
The Falling Dominos
Public records showed that Kingold’s first gold-backed borrowing can be traced back to 2013, when it reached an agreement for 200 million yuan of loans from Chang’An Trust, with 1,000 kilograms of gold pledged. The two-year loan was to fund a property project in Wuhan and was repaid on time. Before this, Kingold’s financing mainly came from bank loans with property and equipment as collateral.
It appears that one way or another, the company realized that it could fabricate gold ownership and receive money in exchange for what were basically worthless copper bricks painted as gold; and thanks to Jia’s military connections nobody would ask any other questions.
As a result, starting in 2015, Kingold rapidly increased its reliance on gold-backed borrowing and started working with PICC P&C to cover the loans. In 2016, Kingold borrowed 11 billion yuan, nearly 16 times higher than the previous year’s figure. Its debt-to asset ratio surged to 87.5% from 43.4%, according to a company financial report. That year, Kingold pledged 54.7 tons of gold for loans, 7.5 times higher than the previous year.
It is now safe to assume that most of that gold never existed.
A person close to Jia said the surge of borrowing was partly due to Kingold’s pursuit of Tri-Ring. In 2016, the Hubei provincial government announced a plan to sell Tri-Ring stakes to private investors as a major revamp of the Hubei government-controlled auto parts manufacturer.
In 2018, Kingold was selected as the investor in a deal worth 7 billion yuan. According to the investment plan, Kingold’s purchase of Tri-Ring was part of a strategy to expand into the hydrogen fuel cell business, which is obviously a “logical” fit for a company involved in gold jewelry. Sources close to the deal said Kingold was attracted by Tri-Ring for its rich holding of industrial land that could be converted for commercial development.
Yes, at the very bottom of the fraud we finally get to the one true and endless Chinese asset bubble: real estate.
A Dongguan Trust investment document showed that Tri-Ring owns land blocks in Wuhan and Shenzhen that are worth nearly 40 billion yuan.
The deal drew immediate controversy as some rival bidders questioned the transparency of the bidding process and Kingold’s qualifications.
And here things get even crazier: according to Kingold’s financial reports, the company had only 100 million yuan of net assets in 2016 and 2 billion yuan in 2017, sparking doubts over its capacity to pay for the deal. Despite the fuss, Kingold paid 2.8 billion yuan for the first installment shortly after the announcement of the deal. The second installment of 2.4 billion yuan was paid several months later with funds raised from Dongguan Trust.
In December, Tri-Ring completed its business registration change, marking completion of Kingold’s takeover. However, the new owner has since faced troubles mobilizing Tri-Ring’s assets because of a series of corruption probes surrounding the auto parts maker since early 2019 that brought down Tri-Ring’s former chairman. As Caixin the notes, a majority of Tri-Ring’s assets were frozen amid the investigation and subsequent debt disputes, limiting Jia’s access to the assets.
The Fraud Is Finally Exposed
Hobbled by the Tri-Ring deal, which cost billions of yuan but has yet to make any return, Jia’s capital chain was eventually broken when Hengfeng Bank pushed for repayment, triggering a series of events that brought the fake gold to light, said a person close to the matter. Insurers’ involvement was key to the success of Kingold’s gold-backed loan deals. The insurance policies provided by leading state-owned insurers like PICC P&C were a major factor defusing lenders’ risk concerns, several trust company sources said.
“Without the insurance coverage from PICC P&C, (we) wouldn’t issue loans to Kingold as the collateral can only be tested through random picked samples,” one person told Caixin.
PICC P&C’s Hubei branch provided coverage for most of Kingold’s loans, Caixin learned. All the policies will expire by October. As of June 11, 60 policies were still valid or involved in lawsuits.
PICC P&C faces multiple lawsuits filed by Kingold’s creditors demanding compensation. But a PICC P&C spokesperson said the policies cover only collateral losses caused by accident, disasters, robbery and theft. Not fraud, and certainly not losses when the collateral never even existed!
Wang Guangming, a lawyer at Dacheng Law Offices, said the key issue is what happened to the pledged gold and which party was aware of the falsification. If Kingold faked the gold bars and both the insurers and creditors were unaware, the insurers should compensate the lenders and sue Kingold for insurance fraud, Wang said. Insurers are also responsible to compensate if they knew of Kingold’s scam but creditors didn’t, Wang said.
If Kingold and creditors were both aware of the fake collateral, insurers could terminate the policies and sue the parties for fraud. But if insurers were also involved in the scam, then all the contracts are invalid and every party should assume their own legal responsibilities, Wang said.
A financial regulatory official told Caixin that previous investigations of loan fraud cases involving fake gold pledges found there was often collusion between borrowers and financial institutions.
Earlier this year, PICC P&C removed its Hubei branch party head and general manager Liu Fangming. Sources said staff members involved in business with Kingold were also dismissed. PICC P&C said Liu’s removal was due to internal management issues. It didn’t answer Caixin’s question about whether Liu was involved in the Kingold scandal.
The above story is shocking in exposing just how multi-faceted fraud is in China: capitalizing on pre-existing cronyism and connections with China’s powerful army, the founder of Kingold was allowed to basically do anything he wanted, no questions asked, including counterfeiting over 83 tons of gold bars to get billions in funds to participate in China’s housing bubble, only for a series of unexpected events to unwind the frauds one after another and expose the type of sordid scandal that is at the heart of most Chinese “enterprises” and business ventures.
As for the gold, yes – several billion in gold bars never existed and yet resulted in a cascade of subsequent cash flow events allowing tens of billions in funds to be released, “benefiting” not only founder Jia, but China’s broader economy. Which is, needless to say, terrifying: because whereas just after the financial crisis China was engaged in building ghost cities, everyone knew these were a symbol of demand that would never materialize, even if the cities themselves did exist. However, it now appears that a major part of China’s subsequent economic boom has been predicated on tens of billions in hard assets – such as gold – which simply do not exist.
As for what this means for the price of gold… well, Kingold is certainly not the only Chinese company engaging in such blatant fraud, and the consequences are clear: once Chinese creditors or insurance companies start testing the “collateral” they have received in exchange for tens of billions in loans and discover, to their “amazement”, that instead of gold they are proud owners of tungsten or copper, they have two choices: reveal the fraud, risking tremendous adverse consequences and/or prison time, or quietly buy up all the gold needed to literally fill the void from years of gold counterfeiting.
Something tells us option two will be far more palatable to China’s kleptoculture where one domino cold trigger a collapse of the entire financial system. What happens next: a panicked scramble to procure physical gold, one which even our friends at the BIS will be powerless to stop from sending the price of the precious metal to all time highs.
Gold Is Rallying. The Mining Stocks Are The Best Way to Play It
Gold prices have rallied to new highs, helped by renewed weakness in the dollar, and the metal could soon be poised to hit $2,000 an ounce.
Gold gained $33.70, to $1,91.00 an ounce Monday. The old peak set in August 2011 was around $1,900 an ounce. Gold is now up about 27% this year, making it one of the better asset classes.
Investment demand continues to be strong. The amount of gold in exchange-traded funds rose to a new high of 106.7 million ounces on Friday, up more than three million ounces so far in July and up 30% so far this year according to Bloomberg data. The largest ETF, the SPDR Gold Shares (ticker: GLD), had a record 39.5 million ounces on Friday.
Mining stocks were higher. The Van Eck Vectors Gold Miners exchange-traded (GDX) fund was up 4.8%, to $43.84, Newmont (NEM) was up $2.29, or 3.4%, at $69.04, and Barrick Gold (GOLD) was 5.2% higher, at $29.91. Barrick and Newmont are the two leading gold mining stocks.
There could be more room for the mining stocks to rally since their profits are leveraged to gold prices. Newmont’s free cash flow increases $400 million annually for each $100 move in gold prices with a base of $1 billion of free cash flow at $1,200 an ounce, according to a company presentation.
At current gold prices, Newmont’s annual free cash would be more than $3.8 billion annually, based on that analysis. The company’s market value is about $55 billion.
Barron’s has been bullish on gold and mining stocks including a cover story in 2018 and an article in March. Our Up and Down Wall Street Columnist Randall Forsyth was also bullish on gold earlier this month.
Gold’s move is helping silver, which was up $1.67 an ounce, or 7.3%, to $24.48 an ounce. Silver, which usually is more volatile than gold, has rallied by more than a third this month. The gold/silver ratio continues to contract and is now around 80, down from a peak of around 125 in March.
Silver equities are relatively scarce with one of the leaders, Pan American Silver (PAAS) up over 5% Monday to $38.77. Pan American Silver got more than half of its revenues from gold last year. The Global X Silver Miners ETF (SIL) has gained 6.6% to $49.99. Silver normally is found in mines with other metals such as gold.
Gold tends to move inversely with the dollar and the dollar has continued to weaken with the U.S. Dollar Index off 0.78 to 93.66, its lowest level since 2018. The dollar index is down nearly 10% from its March peak.
Gold is also being supported by ultralow nominal U.S. interest rates and negative real rates in the U.S. The yield on the 10-year Treasury inflation-protected securities is about minus 1%.
Mark Haefele, the chief investment officer at UBS Global Wealth Management, wrote Friday that he sees gold heading toward $2,000 an ounce and that the metal offers diversification benefits and protection from market volatility
“While we think gold will continue to be supported by rising geopolitical tensions, in our view the primary drivers of the gold price are its negative correlation to real interest rates and the dollar. We think these three factors, in combination with limited supply growth as miners continue to restrain cap ex spending, will drive gold prices higher,” Haefele wrote.
New mined supply of gold adds less than 2% annual to aboveground stocks. There is an estimated 6 billion ounces of gold in the world. Compare that with the sharp expansion in the Federal Reserve’s balance sheet.
Gold, Stimulus And A Futures Gap: 5 Things To Eye In Bitcoin This Week
Gold builds on all-time highs as markets wait for news from the U.S. Federal Reserve and Bitcoin price volatility returns — where will it go?
Bitcoin (BTC) begins a new week above $10,000 and teasing investors with more gains — will it last or is a correction already guaranteed?
Cointelegraph takes a look at the coming week and what it might have in store for the Bitcoin price — five factors that could take BTC/USD to the moon or back down to four figures.
Gold Vs. Bitcoin: “Strong Gains Are Inevitable”
While stocks futures were inching higher on Monday, the focus for macro was more on geopolitical tensions. The United States and China continued to ratchet up the hostile mood, while coronavirus woes likewise stayed in the headlines.
Both issues have had a conspicuous impact on demand for safe havens, and notably gold. As Cointelegraph reported, last week witnessed major appreciation in both gold and silver, while the weekend saw bullion hit record intraday highs.
In line with previous sentiment gauges, plenty of faith lies in Bitcoin following the precious metal’s lead.
Speaking to Bloomberg, one analyst predicted that gold’s run was far from over.
“Strong gains are inevitable as we enter a period much like the post-GFC environment, where gold prices soared to record levels as a result of copious amounts of Fed money being pumped into the financial system,” Gavin Wendt, senior resource analyst at Australia’s MineLife Pty said.
At the same time, Citigroup placed the odds of XAU/USD topping $2,000 by the end of 2020 at 30%.
“The U.S. dollar just hit an all-time record low. You now need over $1,920 to buy a single ounce of #gold,” gold bug Peter Schiff summarized.
“But this record won’t last long as the dollar’s decline is only just getting started. It’s about to plunge to new depths taking the American standard of living down with it.”
Exchanges Inflows Spike Hard
Against a backdrop of a flight to havens, Bitcoin’s rise to $10,300 is hardly surprising. Weeks of price compression were long anticipated to resolve in a break up or down — analysts were just split over which direction the market would go.
The speed of the weekend’s breakout nonetheless was troubling for some. Specifically, trader behavior suggests that the mood is increasingly turning to short-term profit-taking.
“BTC price went up too fast. Seems like other whales think so too,” Ki Young Ju, founder of on-chain analytics resource CryptoQuant, summarized.
Ki uploaded a chart showing exchange inflows for the past three days, which revealed a noticeable spike in the number of coins moving to exchange wallets.
At the start of the surge, a lack of selling from long-term hodlers gave the impression that this time, $10,000 would not disappear in a sell-off as with the two previous spikes.
Government-Backed Tokenized Gold With ‘Killer Features’
A crypto consortium including Bittrex Global, Ledger, CertiK, and Uphold, has launched a gold token backed by the world’s largest refiner of newly minted gold.
The Universal Protocol Alliance — a consortium of crypto firms comprising Bittrex Global, Ledger, CertiK, and Uphold — has launched a token backed by the Western Australian government-owned Perth Mint.
The tokens, dubbed ‘Universal Gold’ or UPXAU, can be purchased on Uphold and spent using the firm’s debit card. Investors can purchase UPXAU from $1 with no investment limits. Unlike mainstream gold products which often have 0.4% monthly custody fees, the token is free to hold.
In A July 30 Announcement, Jp Thieriot, Uphold’s Chief Executive, Said The Token Had “Three Killer Features”:
“Spendability, zero holding costs, and government guarantee.”
Perth Mint Backs ‘Universal Gold’
Speaking to Cointelegraph, Thieriot stated that “the Universal Gold project has been in the making for quite some time,” noting that one of the Alliance’s largest investors is “a prominent goldbug” who brought the Perth Mint to its attention several months ago:
“The Perth Mint is the largest refiner of new gold in the world, and is owned by the Government of Western Australia, which guarantees all the gold it holds in the same way the FDIC guarantees US dollars held in American banks.”
He said the Perth Mint didn’t charge custody fees and was technologically savvy. “We’ve been working with another prominent gold provider for the better part of six years, and they can’t match what The Perth Mint offers,” he added.
Gold Tokens Proliferate
Gold Has ‘No Role’ In Portfolio Of Wealthy Clients, Says Goldman Manager
‘Our view is that gold is only appropriate if you have a very strong view that the U.S. dollar is going to be debased. We don’t have that view,’ says Mossavar-Rahmani.
Don’t believe the hype.
That’s the message from Sharmin Mossavar-Rahmani, chief investment officer of private wealth management at Goldman Sachs, who thinks that gold is overpriced and has no clear role in the portfolios of her private clients.
Our view is that gold is only appropriate if you have a very strong view that the U.S. dollar is going to be debased. We don’t have that view. We think the dollar maintains its status as the reserve currency. The dollar can cheapen a little bit because it’s moderately overvalued but that doesn’t mean that it’s going to be debased, that we are going to have huge inflation and that gold is a good substitute.
During an interview on CNBC Thursday morning, Mossavar-Rahmani explained that her wealth management group has two factors that it focuses on when thinking about gold: strategically and tactically.
She said that gold isn’t a great deflation hedge, doesn’t generate any income, and isn’t tied to economic growth and corporate earnings, so it fails the strategic hurdle as Goldman’s wealth management crew assesses its relevance in a balanced portfolio.
Secondly, she explained that tactically, gold is a hard case to make unless investors hold the perception that the current bout of weakness in the U.S. dollar is the start of a more severe downturn for dollars and a possible change in leadership of the monetary unit that is viewed as the No. 1 reserve currency in the world.
“So all this excitement and brouhaha about gold is not something that we buy into,” Mossavar-Rahmani said.
“In fact, at one point, we think people should look at the reverse and think there’s more downside to gold,” she said.
Mossavar-Rahmani’s comments run in contrast with Goldman’s commodity crew, which earlier this week raised its 12-month forecast for gold to $2,300 from $2,000 .
That shift was precipitated by “a potential shift in the U.S. Fed toward an inflationary bias against a backdrop of rising geopolitical tensions, elevated U.S. domestic political and social uncertainty, and a growing second wave of COVID-19 related infections,” said a team of analysts including Jeffrey Currie.
On Thursday, August gold GOLD, +2.33% fell by $11.10, or 0.6%, to settle at $1,942.30 an ounce, after settling at a record on Wednesday, marking its ninth straight advance, which is its longest win streak since a 10-session climb ended in January.
Gold’s ascent has come amid the backdrop of rising cases of COVID-19 in the U.S. and around the world. However, gold’s climb has also coincided with a weakening of the dollar against its major rivals, which can give gold buoyancy because bullion and other precious metals are priced in the currency and its softening can make metals more attractive to buyers using alternative currencies.
One measure of the buck, the ICE U.S. Dollar Index DXY, +0.46% was down around its lowest level since 2018 and has dropped 4.5% so far in July, according to FactSet data, while gold has climbed 8.1%, based on the most-active contract.
The Universal Gold project is not Perth Mint’s first gold backed token. In February it teamed up with Infinigold to launch the Perth Mint Gold Token (PGMT). Other gold backed tokens appearing recently include Tether Gold which launched in January, Paxos’ PAX Gold which commenced trade in September 2019, and DigitalX’s token which launched in April 2019.
When Real US Treasury Yields Are Negative, Gold’s Lack Of Yield Becomes It’s Strength (#GotBitcoin?)
Why Gold Prices Are Hitting All-Time Highs
A guide to the surge in the precious metal’s prices during the current recession.
Gold prices hit a record at the end of last week, notching a new milestone in a bull run that began in late 2018 and has gathered momentum during the coronavirus pandemic. The precious metal has soared roughly 30% in 2020 to stop just short of closing at $2,000 a troy ounce—which would be an all-time high in New York trading—as it outstrips the Nasdaq Composite Index of highflying technology stocks.
Here is how the gold market works, and why prices are on the rise now.
What Is The Gold Market?
There are two gold markets, closely linked because investment banks and other big players are active in both.
The first is the physical market, which brings together miners, refiners, jewelers, central banks, electronics manufacturers, banks and investors. London is the focal point, dating back to the first gold rush from Brazil in 1697. Shanghai, Zurich, Dubai and Hong Kong are also hubs.
The second market is the futures market, for swapping financial contracts based on gold. This market is electronic, hosted by New York’s Comex exchange, and sets the prices you read about in The Wall Street Journal. It gives investors an opportunity to speculate on gold prices rising or falling without holding the metal, and miners a way to insulate themselves from unexpected price drops.
How Does The Physical Market Work?
Deals to buy, sell and lend gold in London are struck privately, rather than on an exchange. To reduce the amount of metal that has to be shunted from vault to vault, five banks act as a clearing house, balancing out each other’s sales and purchases.
Some of them provide vaults, offering clients a safe place to stash gold. The Bank of England guards more than 400,000 bars beneath the narrow streets of the City of London, largely on behalf of the U.K. government and other central banks, a hoard second only to that of the Federal Reserve Bank of New York
Prices are quoted by troy ounce (14.6 troy ounces to the pound, instead of the standard 16) of pure gold, and bullion trades in batches of 400-ounce bars. London prices are fixed in twice-daily auctions and act as a benchmark throughout the physical market. When a watchmaker buys gold from a refiner, it usually does so at a premium to the London price.
To avoid paying for tons of gold, tying up millions of dollars in cash, industrial users often borrow metal instead of buying it outright. Banks either lease it to them, charging interest, or lend with more complex forward, swap and repurchase deals.
How Does The Financial Market Work?
Futures are standardized contracts that lock in prices for gold that will change hands at a specified date. Buyers and sellers agree to swap 100 troy ounces (a new Comex contract that allows delivery of 400 ounces has barely traded). Gold futures trading data go back to the final day of 1974, when Comex launched the market to coincide with a law allowing Americans to own bullion for the first time in four decades.
Most traders exit futures trades before they actually exchange gold. Recently, however, more investors have taken delivery of gold on the Comex, a sign demand for physical gold is unusually high.
How Do The Physical And Futures Markets Interact?
In good times, gold costs roughly the same amount in London’s physical market and on New York’s Comex. If prices move out of whack, banks bring them back in line by buying bullion on the cheap in one city, flying it across the Atlantic (normally in the cargo hold of a passenger plane) and selling at a profit where prices are higher. They must factor in the small sum it costs to recast the gold, since Comex requires smaller bars, weighing either 100 troy ounces or a kilo.
The pandemic scrambled this self-correcting mechanism in March. A dearth of flights led to fears of a shortage in New York, sending futures well above spot prices in London.
The concerns proved unfounded, but the violent price moves led to losses at banks including HSBC Holdings PLC. That has prompted banks to trade less actively on the Comex, which could make futures more volatile, said David Govett, head of precious metals at brokerage Marex Spectron.
How Do Investors Buy And Sell Gold?
Professional fund managers bet on gold prices with futures. To avoid taking hold of a large amount of bullion, investors typically sell futures before they expire and buy later-dated contracts, in a process known as rolling. This comes at a cost because longer-dated futures cost more than spot gold. The difference is pocketed by the investor’s counterparty—normally an investment banker—who gets to buy low and sell high.
Mom-and-pop investors buy physical bars and coins, which they can either stow at home or in a vault. One-ounce gold eagles, produced by the U.S. Mint and sold by dealers like Kitco Metals Inc., are among the most popular.
Demand for bars and coins has shot up during the pandemic, said Robert Higgins, chief executive of Argent Asset Group, though clients are also selling to profit on rising prices.
“When things go crazy and the surety of everything is questioned, the two things everyone turns to are gold and silver,” he said. This wasn’t always the case: In 1933, Franklin D. Roosevelt ordered Americans to hand over all gold coins, bars and certificates to banks, seeking to staunch a rush to exchange paper money for bullion during the Great Depression.
Investors who want exposure to gold prices without the hassle of storing bullion or trading futures found an alternate solution in 2003: exchange-traded funds.
These funds, which have surged in popularity, buy gold and issue shares that trade on the stock exchange. ETFs bought a record 734 metric tons of gold in the first half of 2020, according to the World Gold Council, taking overall holdings to 3,621 tons.
This buying offset a 46% slump in sales of jewelry, a common means of investing in gold in Asia. India and China led the decline, which the WGC attributed to shop closures, economic uncertainty and high prices.
Why Are Gold Prices Soaring?
The main reason is this year’s precipitous drop in yields on U.S. Treasurys to levels below the expected pace of inflation. Unlike bonds or bank deposits, gold doesn’t pay any income. As a result, owning gold means missing out on yields from other assets when interest rates are high. When real yields are negative, gold’s lack of yield becomes a strength.
The Federal Reserve’s March decision to slash interest rates to just above zero and buy hundreds of billions of dollars of bonds has pulled down yields in fixed-income markets, prompting investors to buy gold instead. Some money managers expect inflation to pick up once the economic crunch is over, which would act as a further drag on real yields if nominal rates don’t rise.
Investors are also buying gold because they think it will hold its value if stocks take another tumble. Enthusiasts take this argument a step further, contending that gold is the ultimate insurance policy against a scenario in which the U.S. government defaults or kindles inflation to alleviate the burden of debt.
“Gold is a haven,” said Rhona O’Connell, head of market analysis for Europe, the Middle East, Africa and Asia at StoneX Group. “It doesn’t have anyone else’s political or financial risk associated with it.”
Another tailwind for gold right now is the depreciation in the dollar. Buyers outside the U.S. are willing to pay a higher dollar price when the greenback weakens, making gold cheaper in terms of their home currencies.
This relationship doesn’t always hold: Gold and the dollar shot up in tandem in March during a period of turmoil in financial markets.
How Does This Compare With Previous Bull Runs?
Two other run-ups have taken place since President Nixon cut the link between gold and dollars in August 1971. The most dramatic spanned the rest of the 1970s, when inflation exacerbated by twin oil crises led the gold price in London to soar from $43 a troy ounce to a peak of $850 in early 1980.
“We’re in World War Eight, if you believe the market,” a commodities broker named James Sinclair told the New York Times on Jan. 21 of that year, the day prices crested.
Prices jumped again from 2008-2011, when interest rates fell because of aggressive stimulus measures by the Fed and a recession that was, at that point, the worst since the Great Depression. Worries that bond-buying by the Fed would lead to runaway inflation—which didn’t transpire—also contributed to the advance
Will Gold Prices Keep Rising?
It took three years after the start of the previous financial crisis for gold prices to peak, notes Edmund Moy, who was director of the U.S. Mint at the time.
“They kept on going up until it was very clear that the U.S. economy would recover slowly and that there would not be inflation,” he said. “I think we’re at the very beginning of momentum for gold prices going up.”
Gold prices tend to overshoot, according to Fergal O’Connor, an economist at University College Cork who has studied the market’s history. Still, he expects them to fall back to a higher level than they were before the pandemic because institutional investors are adding to their gold holdings, removing a chunk of available supply. The return of jewelry demand in China and India could also boost prices.
The biggest deciding factor will be the direction of interest rates, adjusted for inflation, said Suki Cooper, an analyst at Standard Chartered. “It’s real yields that are really driving the flows into gold.”
Where Does Gold Come From?
Gold ores are mined from rocks in underground and open pits all over the world. China has emerged as the biggest miner, digging up 420 metric tons in 2019, according to the U.S. Geological Survey. Other sources include Russia, Australia and the U.S.
Toxic cyanide solutions are used to dissolve gold, extracting it from crushed rocks, before miners partially refine the metal into impure bars known as doré. These are sold to specialist refiners, which transform doré into gold that has close to 100% purity with either gaseous chlorine or electrolysis.
Refiners play another crucial role: recycling.
Since gold is chemically inert and malleable, it lasts for thousands of years and can be endlessly refashioned. Around one-quarter of demand is met with recycled gold, according to the World Gold Council. Of that, 90% comes from jewelry.
Recycling has picked up as people have sold bullion to cash in on rising prices.
Is gold a commodity or a currency?
Both. Gold is a commodity in that it derives its value, in part, from its use in products like jewelry. Banks that are active in the physical market trade gold on their commodities books, and the futures market in the U.S. is regulated by the Commodity Futures Trading Commission. Gold is treated like any other commodity on banks’ balance sheets under the Basel III regulatory guidelines, designed to avoid a repeat of the 2008-9 financial crisis.
Gold is also a currency. For millennia, the metal has functioned as a store of value, unit of account and medium of exchange.
“The Egyptians were casting gold bars as money as early as 4000 B.C., each bar stamped with the name of the Pharaoh Menes,” the financial historian Peter Bernstein writes in “The Power of Gold: The History of an Obsession.”
Bullion played a foundational role in the monetary system from 1717, when Isaac Newton, master of England’s Mint, established a price ratio between gold and silver, to 1971, when President Nixon ended the convertibility of dollars into the precious metal.
Though gold stopped underpinning exchange rates after the “Nixon Shock,” the metal still plays a part in currency markets. Central banks in emerging markets have, for instance, boosted their gold holdings in recent years in an attempt to diversify their reserves away from dollars.
“It is more a currency than a commodity,” said Dr. O’Connor. “Everything else, to one degree or another, gets used up and
doesn’t come back into the market. Gold just stays there.”
Gold Will Need More Bad News To Keep Prospering
If an economic recovery continues, expect the precious metal to suffer.
Questions about gold often get to the heart of what’s going on in finance and economics. Ask why the price is up so much this year, and the most popular answers are ones that might make the heart miss a beat: The Federal Reserve is creating so much money that serious inflation is on the way, or the dollar is heading toward inexorable decline (or both).
Some weird things have been under way with gold since the coronavirus crisis began, however. The metal developed a decent link to the performance of technology stocks:
When the Nasdaq roared ahead, so did gold, reversing the pattern from earlier in the year. Further, gold tended to do well when Covid-19 infection rates rose and the economy suffered, and badly when they fell and the economy recovered faster than expected.
This week, gold’s moves were particularly odd. After reaching a record above $2,000 an ounce last week, gold fell back along with tech stocks. It then barely eked out a gain Wednesday in spite of inflation coming in far ahead of forecasts.
The geeky but reassuring answer to all this is that gold is just driven by after-inflation Treasury yields, as government bonds are the safe alternative to the inert metal. The parallel is to 2011-12, when real bond yields plummeted and gold soared.
When Treasury inflation-protected securities, or TIPS, have negative yields, as now, the zero real yield of gold stops being a burden and becomes a benefit. Something similar applies to Nasdaq stocks, which typically have low dividends.
Yet, this is a fundamentally unsatisfying answer. There is a strong link between TIPS and gold, but not so strong as to explain everything. Now that gold plays no formal role in the monetary system, there is no particular reason to think that gold prices will keep up with inflation and so provide that zero yield in real terms—it might just be the pet rock its detractors claim.
My view is that there’s a bit of truth to all these explanations.
MONEY PRINTER GO BRRR: The Fed and other central banks are underpinning an explosion of bank reserves, while governments are handing out money. The potent mix kept household incomes up even as unemployment jumped, helping the economy avoid a far worse hit.
I don’t think gold is warning that we’re set for another major burst of inflation, though. The bond-market-implied rate of inflation for the five years starting in five years’ time is back up to where it was in January, but at just 1.8% is still below the Fed’s 2% target. Options tied to inflation imply a tiny chance of price rises averaging more than 3% for the next five years, with a far bigger chance of inflation below 1%, according to the Minneapolis Fed.
Sure, investors think there will be more inflation on the way than they thought in March (when the consensus was that inflation was dead). But other, well-traded assets aren’t preparing for significant inflation. It is hard to believe that gold would send such a different signal.
Something else is going on, and for Michael Howell, CEO of Crossborder Capital, it is a broad asset-price jump driven by what he calls “monetary inflation,” or the devaluation of fiat currencies.
“Everyone says the gold price goes up but in fact the dollar paper price is going down, gold is a fixed stock of wealth,” he says. This might not appear in retail price inflation the way it did in the 1970s, depending on what happens with oil, trade, wages and broader production costs.
I don’t share his belief that gold has some immutable value against which everything else is measured, and I think the price of money—the interest rate—matters much more than the quantity. But it is plausible that massive quantitative easing combined with increased savings during the pandemic has led investors to buy anything regarded as reliable. That includes the big tech stocks, where investors think future profits are a sure thing, as well as gold, explaining why the two have become linked.
DOOMED DOLLAR: To be clear, I don’t think the dollar is about to lose its status as the world’s anchor currency. But whatever the (minuscule) probability before the pandemic of the dollar ending its reign, it is clearly much higher now as America withdraws from international engagement and takes on China. That higher probability justifies diversification, and while it would be strange indeed to adopt gold again, the metal has history on its side.
GOOD AS GOLD: Gold offers perhaps the best form of catastrophe insurance short of a bunker full of tinned food and guns, as it is widely negotiable and reasonably easy to smuggle out of a country in case of emergency. At a time when societal collapse is easier to imagine, it makes sense that more people would want a fallback. Again, though, the probabilities remain tiny, and at best this accounts for only a small portion of the price rise.
GOLD RUSH: Sharp asset-price rises generate their own momentum, and gold had begun to attract lots of private-investor buying via exchange-traded funds. At least some of the recent jump—and Tuesday’s big fall—are probably driven by excessive short-term optimism leading to overdone moves that partially corrected.
Put all these factors together and gold really needs more trouble to prosper. Negative real interest rates on TIPS are already the lowest ever, and need either much higher inflation or the prospect of negative rates from the Fed to drop a lot more. If economic recovery continues, expect gold to suffer: There will be less need for insurance, fewer worries about the dollar’s reserve status and lower prospects of more Fed action. Of course, if the Fed lets inflation rip gold might ultimately rise a lot more—but for now, at least, investors see little chance of this.
Your Questions And Comments Are Greatly Appreciated.
Monty H. & Carolyn A.