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LAWRIE WILLIAMS: Own gold to protect your wealth

With global Covid-19 cases now at over 1 million, and deaths approaching 50,000, equities at last seem to be taking the threat to the world economy seriously.  Rising U.S. virus infections are likely to pass the quarter million mark today. However there are always those out there who will continue to try and talk the markets up and occasionally they are taken seriously – hence temporary market rallies like yesterday in the U.S.  Students of history will be aware though that this was the pattern during the equities crash of 1929 and beyond, which in turn led to the Great Depression which then lasted for around 10 years.  The notes below are excerpted and edited from Wikipedia and the parallels with the current situation with regards to the pre-crash equities boom are remarkable.  Let’s hope the current market meltdown does not generate similar dire consequences to those that so dominated the 1930s.

Wikipedia notes: 'The Wall Street Crash of 1929 was the greatest stock market crash in the history of the USA.   Bank failures followed, resulting in businesses closing. The crash signalled the beginning of the 10-year Great Depression that affected all Western industrialised countries. Countries imposed high tariffs and otherwise restricted imports. International trade declined.  The Depression ended in the U.S. with the start of American mobilisation for World War II at the end of 1941.

Stock-exchange speculation had led hundreds of thousands of Americans to invest heavily in the stock market, creating an economic bubble. Many were borrowing money to buy more stocks.'

In many ways the recent equities market drop could be even more serious as there is more to it than just a financial breakdown.  The coronavirus incidence may have provided the trigger and an additional hit to the economies of the U.S. and Europe.  Unemployment claims in the U.S. rose to over 6 million this week and are predicted to go higher. Yet despite these figures, which serve to demonstrate the huge downturn in the U.S. economy. the oil price recovered a few dollars nd thus to the investment market apparently all was well! With the U.S.  However, the now by far the world leader in the number of recorded coronavirus cases, rising at around 30,000 a day and deaths are approaching 1,000 a day, so the apparent complacency in the equities market is mind-boggling.  Investors are too used to the American indexes recording record after record pre-coronavirus and are finding this seeming ever continuing market growth difficult to shake off.  Things have changed!

Governments, though, are throwing much more money into the system to try and prevent a total industrial and societal collapse, but have not been wholly successful in this aim so far.  The huge debt positions which correspondingly are being run up by governments and central banks are likely to have consequences which will continue well into the future.

So far the key precious metals, gold and silver, seem to have been reluctant to move upwards as safe haven counters to the extent many analysts have been predicting.  As we have noted in the past, precious metals prices seem to be being set largely by activity in the futures markets, but these are open to manipulation, both up and down, by big money players and at the moment those that seem determined to keep precious metals well controlled for both financial and political reasons have been able to dominate the markets. 

The financial incentive is possessed by those bankers, funds and traders holding big short positions in gold and silver and which would be hit heavily should precious metal prices rise significantly and continue onwards and upwards and stay there.  If this were to happen it is likely there would be bankruptcies in the sector, or at the very least huge downturns in profitability. 

The political motivation is that a rising gold price in particular tends to be seen as an indicator that governments’ handling of the economy is somewhat lacking and a gold price rise effectively represents a de facto devaluation of the mighty dollar, and most other currencies along with it.  Central banks have many allies in the financial centres of the world – most central bank managers have come out of the sector – and they can be successful in persuading ex-colleagues to toe the line here.

The build-up being seen in the big gold ETFs around the world is the contrary indicator to what has been happening in the precious metals futures markets. These ETFs have seen some strong inflows of late, suggesting that there is momentum building for gold and silver in particular.  The biggest gold ETF of all, SPDR Gold Shares (GLD) in the U.S., is a good example.  Since the beginning of the current year it has seen 73.45 tonnes of gold added bringing its total gold holding to 968.75 tonnes, the biggest amount of gold held in the ETF since August 2016 and worth nearly $50 billion at the current gold price.

Indeed it could be said that the gold price is holding up very well under the circumstances.  We have noted before its reluctance to fall much below the $1,600 level.  It is continually being brought down below this level by activity in the futures markets, but so far has always bounced back and this pattern will likely continue – maybe until the bottom truly drops out of the equities markets which we feel is likely to happen once Q1, and particularly Q2, GDP figures are released.  They are likely to be sufficiently low to really spook the markets.  Goldman Sachs, for example, is predicting U.S. GDP to fall by around 9% in Q1 and 34% in Q2 – both unprecedented drops – and unemployment to reach 15%.  It then looks for the steepest ever recovery as well – but we think all these horrendously dire figures could be conservative and that the U.S. economy will take much longer to recover.  Some major contributors to the economy have been absolutely decimated by the coronavirus lockdowns and it could take years for these to regain the confidence of employees, purchasers and investors.

That the gold price keeps on being brought down flies in the face of reported shortages of gold bullion availability – and silver too – although it is also said that there is plenty available and it just in the wrong place and in the  wrong sizes for would-be investors.  We think that this latter reasoning is somewhat faulty and delivered to the media to try and arrest panic buying.  Several of the world’s principal gold refineries are on shutdown – particularly those in Switzerland which handle a huge proportion of the world’s newly mined gold, re-refining it and selling it on at the purities and sizes most in demand in global markets.  True, many of these global markets have also effectively hugely diminished but global gold output will likely also fall as an increasing number of gold producers are also now running on care and maintenance only due to coronavirus-related shutdowns.

Yes the virus spread will indeed come to an end - or diminish significantly, but not before more huge numbers of people are infected and deaths will continue to rise dramatically.  Some of the worst affected countries say the infection curve is slowing. But what happens when self-isolation and social distancing measures are eased – and talk of the infection curve flattening may also be propaganda exercises by governments to try and reduce anxiety among their populations.

Much of the so-called third world has so far not been quite so strongly affected by the virus – yet,  But many of these countries do not have the means, or health facilities, to control the infection when it does arrive – and arrive it will. Several of these are significant gold producers too, which could affect global gold flow as well.

So what do we make of all this?  Global virus infection numbers, and deaths, will continue to rise.  The world’s most dominant economy, the U.S., is probably still at a relatively early stage in virus spread given its late start in recognising the problem and perhaps has another month or so of rising virus infection and death figures ahead of it, with an even more devastating effect on the country’s economy than even the most pessimistic current forecasts suggest.  That likelihood will filter through to the equities markets which could well have a much larger downturn in prospect than has happened so far, and the continuing effects are likely to extend well beyond Q2 – perhaps well into 2021 and possibly beyond.  The dollar’s purchasing power will be eroded, although its parity against other currencies, which will see a similar drop in purchasing power, may well be maintained.  But a decline in the value of the dollar will see a consequential rise in the gold price, which will only really serve to protect wealth. 

Gold remains the ultimate currency of choice in these circumstances and could pull silver up along with it, but the short term future for the pgm sector remains bleak as these are very much industrial metals nowadays and their principal market has been decimated by measures taken to control the spread of Covid-19.

In short – if you want to protect your wealth, such as it may be, own some gold.  In the past many investment advisers had recommended holding around 10% of one’s investments in gold.  In the current situation, with the likelihood of a further decline in equity valuations, it might be woth upping this gold proportion of your investments to 50% or higher.  Even if gold does not perform as we expect it is highly unlikely to decline in value as far as equities could.

03 Apr 2020 | Categories: Gold

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