September 10, 2019
Gold prices, which are up approximately 40% since their 2015 lows, have boosted investor interest. That’s particularly true in Canada, where they recently hit an all-time high in Canadian dollars. Silver prices are up as of this week by more than 25% from their 2019 low.
The surge has been good for the entire gold industry, which is benefitting from demand from “smart money” and high net worth clients, who are often the first to jump on such trends.
While I am happy to see gold regain its lustre, I have never regarded it as a trading vehicle. I regard gold primarily as a safety holding.
For me, it boils down to trust.
I am not alone. According to this year’s edition of the In Gold We Trust report published by Incrementum, breakdown in trust in almost all public and private sector institutions is a key driver of gold demand. I am not surprised.
I learned early to ask questions about gold.
Like many little girls, I was surprised when I found out that the costume jewelry me and my friends were buying from bubble gum machines and sidewalk peddlers was nothing but fool’s gold.
Today, investors face dilemma
Many gold ETFs, including almost all of the biggest names, contain little or no physical gold but back up their obligations with swaps or derivatives.
That’s why many investors are increasingly turning to physical gold, which they own personally, as opposed to “pieces of paper.”
Indeed the writers of In Gold We Trust, Ronald-Peter Stoeferle and Mark Valek, say trust—“the basic value of all interpersonal cooperation and the cement of our social order”—is eroding in politics, science, media, even religion. They have a point.
Consider the following:
Governments increasingly don’t trust each other
This breakdown in trust starts with the governments of the world’s two greatest powers.
As U.S. vice-president Mike Pence noted in a key, but underreported speech at the Hudson Institute, the U.S. Administration increasingly regards China as an adversary, rather than as a partner.
The breakdown can be further seen in America’s roller coaster trade negotiations with Canada and Mexico (NAFTA II is still not ratified) and Europe.
Lack of trust extends to the U.S. dollar, which the American government has been “weaponizing” by restricting Iran’s, Russia’s and other countries’ access to the global payments system.
Even the United Kingdom, once a lynchpin in the rules-based global economic order, is raising suspicion by refusing to return gold that the Venezuelan government stored in its London vaults.
This echoes Germany’s recent trouble repatriating its own gold from the United States, which reminds us of America’s gold debt defaults in 1933 (when FDR announced the confiscation of Americans’ physical gold) and 1971 (when President Richard Nixon refused to return gold held by the Federal Reserve in return for dollars held by foreign governments).
Thus it’s hardly surprising world governments are buying “insurance” of their own by stocking their gold reserves.
According to the World Gold Council , central banks purchased a record 374 tonnes of gold during the first half of 2019.
Negative interest rates: de facto government debt defaults
Growing suspicion regarding the Bank of England’s intentions extends to all of the world’s major central banks and large financial institutions.
These include the ECB and the Bank of Japan and many others, which are de facto leading defaults on their respective country’s national debts by driving interest rates below zero.
U.S. Federal Reserve officials have hinted they will move in that direction as well.
Right now only large institutions are forced to hold bonds and other paper that carry negative interest rates.
But as we have written in the past , proposals by former IMF chief economist Ken Rogoff and many others, which call for a ban on cash, would enable governments to take the money right out of your bank account.
Breakdown in trust in the Big Banks
The Big Banks are hardly much better.
True, many financial institutions (with the notable exception of Deutsche Bank, Commerzbank AG, Caribe, and several other European banks) have made legitimate progress since the last financial crisis in beefing up their balance sheets.
However, as Jim Rickards notes in his latest book, Aftermath (which Sprott Money News reviewed this week), much of this improvement is illusory.
Indeed, derivative trading by banks—which skyrockets their potential liabilities far above totals recorded in their financial statements—has actually increased, says Rickards.
This has been masked by the fact that the trading has been moved off balance sheets to clearing houses. The upshot is that while the individual banks appear safer, the system as a whole is far more fragile.
Equities: if you own a broad market ETF, you own one stock
Even the U.S. stock market, the bastion of capitalism, is riddled with questions following admissions by key officials, including then-Chairman Ben Bernanke, that the Federal Reserve has been driving up stock prices.
There are now numerous signs (Buffet indicator, gold-Dow ratio, long-term charts…) that equity markets have become highly overvalued.
While high stock prices are great, investors simply can’t be sure that governments can and will be able to continue to prop them up.
Public suspicion increasingly extends to investment advisors whose latest strategy has been to push clients to buy ETFs to diversify and save on fees.
This was a great idea decades ago. But now everyone is doing it. And if everyone is doing it, that means you are no longer diversified.
Today, skeptics say that if you own an ETF that tracks a major index such as the S&P 500, “you own one stock”.
That means there is a good chance that during the next market downturn, you’ll be fighting hedge funds, your parents, and your local taxi driver to be the first to dump those ETFs.
History suggests that not everyone will get out in time.
Trust but verify
Former U.S. President Ronald Reagan once famously said “Trust, but Verify” when dealing with the Soviet Union, whose intentions he questioned.
That always made sense to me, and since then, I have learned to ask harder questions, not just about governments but about all major institutions.
And the more questions I ask, the more I hedge my bets.
For me, that means gold or silver.
If you store precious metals in a safe place and they are insured, they are really the only asset for which you don’t have to trust the promises of “a guy in a suit” to get them back.
Today, in gold (and silver) I trust. Everything else I verify.