Gold and other precious metals are out of favour as asset bubbles mushroom everywhere on huge stimulus, and prospects of much more very soon. Is this the time to buy up now ahead of the 'inevitable' crash?

Gold and other precious metals are out of favour as asset bubbles mushroom everywhere on huge stimulus, and prospects of much more very soon. Is this the time to buy up now ahead of the 'inevitable' crash?

Gold fell out of favour in a major way today.

It is getting crushed on markets. In London it ended at US$1863/oz and down -US$57, while it fell in New York as well to end the week at US$1850 or -US$64 lower in a day. It is its worst week since November.

Moves by the yellow metal this large are unusual.

Other precious metals took a bath as well. Silver fell an eye-watering -6%.

Worse, the World Gold Council is reporting that central banks have now turned sellers. And this January news comes after the December news that ETF's had turned into net sellers as well.

Jewelry demand is relatively weak in both India and China, technology use remains very low, so that leaves individual investors in coins and bars as the main demand drivers. But there are questions about how committed they are too.

Gold isn't doing its traditional job as a countercyclical hedge. And that is hurting its reputation.

Why?

It is probably too soon to judge, but answers may lie in some or all the following points.

US Treasury yields are surging, up to 1.12% today or up +20 bps this week alone.

This comes after decisive election results in the US, with an incoming President elected by the largest margin in twelve years and a flipped Senate. The expectation is that American federal authorities will be active in getting problems sorted. Political risks are fading fast, as far as financial markets are concerned.

Oddly however, the new Administration is expected to be more active with a stimulus program, flooding markets with liquidity. That will pump up asset prices even further. But gold never seems to be an asset class that benefits. It requires pessimism and failure to thrive, whereas optimism is currently being assumed.

This rising Treasury yields are despite the expected flood of new stimulus. Investors seem to be concluding that finally all this extra cash will find its way into consumer prices and inflation will re-emerge. Perhaps the falling US dollar will aid as well encouraging higher import costs. The point is, more businesses see rising costs and rising prices ahead, and that means inflation.

Certainly a reflating economy is one way to 'afford' the extra debt, paying it back in the future with devalued currencies. This may even be a US Fed and US Treasury Department plan.

This works against gold and other precious metals is a crisis is avoided.

Demand for gold coin and bullion is struggling as well. The problem here is that this demand is underpinned by old investors. Younger investors are opting for "millennial gold" - or bitcoin and other cryptos, which have developed price momentum, and sucking demand from traditional gold. These investors seem happy they aren't actually holding any 'thing', just an electronic entry in an electronic 'wallet'. They don't see any risk in that, and there are millions of them, certain there will always be someone else ready to buy their imagined asset if they want to sell it.

The big issue for bitcoin is, is it durable? Millennial investors don't care about that when they are gambling/speculation mode, but gold investors know this is an important question. It is unresolved.

On the supply side, gold is facing a medium term surplus as the World Gold Council data clearly shows with miners delivering more than current markets can absorb. That may not be the case in the long term of course, but for 2021 and 2022 it will be. That oversupply won't help gold's price either.

One note of caution in all this: gold is priced in US dollars. But US dollars are devaluing in terms on New Zealand dollars. That makes the NZD situation more risky for local investors. We may not face higher inflation here to the same extent, but we won't be able to avoid rising benchmark interest rates. 

And we have our own bubble underway with house prices, another situation juiced up by cheap regulator money (the low OCR), financial repression, and the promise of low borrowing rates for some time (FLP). Holding gold when other key [wealth conserving] asset prices are rising fast will test investor's commitment.

However, if you think it will all come crashing down at some point, maybe gold is for you. Consider now a cheap time to buy. But you will need a long memory - the last time a huge financial crash happened where gold worked as an effective store of value was 90 years ago. You have to be a diehard history buff if you expect those circumstances to recur.


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44 Comments

Gold fell out of favour in a major way today.
It is getting crushed on markets. In London it ended at US$1863/oz and down -US$57, while it fell in New York as well to end the week at US$1850 or -US$64 lower in a day. It is its worst week since November.

Dating back more than two years now, gold prices have been pushed higher by deflationary expectations like those embedded within lower and lower risk-free rates represented in the longer UST’s. Gross financial distress of the global dollar shortage kind, totally the opposite of the inflationary flood we keep hearing about.

Gold is actually rising instead on concerns that central banks and governments around the world will fail in their collective efforts to support already deflationary economies…As always, money-less monetary policy comes down to ridiculous, easily disproved deception. Other than that, there’s nothing else in the official central banker toolkit. Realizing this, you might then understand exactly why gold and bonds are being bid concurrently in this way.

Now that gold prices are falling, you hear very little about them – in favor of the increasingly ridiculous BOND ROUT!!!! resurrected by this Inflation Hysteria #2 which suddenly can’t include rising gold prices.Link

US Treasury yields are surging, up to 1.12% today or up +20 bps this week alone.

Both the 5-year and 10-year real rates have fallen dramatically, staying down despite all these recent “positive” developments which are said to be economic game-changers. In fact, the real 10s yield is equal today to its lowest on record while the 5s are mere bps from their own.
What does that mean? No recovery, no inflation.Link

by Audaxes | 9th Jan 21, 1:26pm

Check out US real (Treasury Inflation Protected Securities - TIPS) yields here.

Investigate the 10 year TIPS (linker) yield history here.
Click the 1Y tab at the top right hand corner of the page and chose to VIEW FULL CHART. The trend of increasingly negative real yields is on display for all to see. The 5Y tab serves to highlight reality.

Still a 30% gain over 2 years. Not stellar but still a gain that beats BDs and almost no risk

Buying gold makes a lot of sense at this point; just a pity is so hard to do so in New Zealand, and expensive.

I wish a NZ firm ran a gold fund.

Anyway: David, out of curiosity, do you have an opinion on Bitcoin, given at least some US institutions are placing big bets - and gambling it is - that BT can be substituted as an easy buying, no-cost for storage gold replacement.

Why don't you just go buy gold at the various bullion exchanges in NZ? BTW gold is tipped to fall further. If you have to ask Chaston about whether BTC is worth looking at - it's obviously something you don't understand, it's definitely not for you.
With gold - you're missing the point.. it's a wealth preservation play, not an in investment accretion play. You buy gold when things look grim, not when they look positive

You can buy PAX Gold through EasyCrypto; Perth Mint tokens and ETFs through any broker; U.S. gold miners through Sharesies.

It's not hard to buy in NZ. Just buy straight from the refiner. Look see https://morrisandwatson.com/live-price-lists/

The price of 1 kg is about spot + 3% at the moment. That is cheap! Try buying gold in Europe and you'll be paying spot +5%, that is if you can get it at all.

Then you have to store it so storage and security costs. Gold is such a clumsy investment. Okay I buy from this crowd, who is offering secure storage and for how much annually?

Well if you buy from the abovementioned refiner they store at zero cost in a gold account. Of course then you have counterparty risk. Wasn't there a infamous case in NZ years ago with a bullion dealer that went bust. I forget what it was called though. There seems to be no substitute for real estate.

Really? I'll have to go read better as I saw no offer of storage on a quick look. But logic would question how a firm can offer to store a bulky, heavy item like gold that needs big security at no cost for the customer? There's never a free lunch from a legit operator I would have thought.

I had a look Mark and it specifically says after payment you can come and pick it up or they'll ship it - no mention of storage. Not much of a markup though - 20oz bar was only $1100 up on 8 Jan spot price so barely 2%. You'd need to check purity of course

Yes that's what I thought. That's no use to me.

I'm just gonna go without gold. It's only insurance and if needed, the system is gone anyway, coz the correction from this monetary stimulunacy is most likely terminal, so who are you going to sell your gold to?

It's not advertised - you have to call them. Ask them about their allocated gold accounts

Pretty certain he makes his opinion clear on btc when he calls it "imaginary"

The gold price is largely manipulated by JP Morgan through its derivatives and last night's drama will be attributed to this awful organization. If you own and follow gold, you're likely to be aware of this (if you don't know or understand this, the following link is a recent example https://www.kitco.com/news/2020-10-02/Gold-price-manipulation-proven-rea...).

I think the gold community puts too much faith on all this actually unwinding at some point and the price to escalate meaning that the owners of physical gold with the beneficiaries while the paper markets get smashed (and JPM). To be honest, I think there's too much collusion between the ruling elite and JPM. It's a murky world where the little guy's self interest is low priority.

Now, there are many 1%ers who own gold as a store of value and this is at odds with all the chicanery. Ultimately, theses are JPM's peers to some degree. Why is this important? Well these 1%ers can actually cause damage to JPM's reputation and even their bottom line. Of course, these people make money as the price increases and decreases, but ultimately it's in their interests for the gold price to represent store of value properties.

It's very hard to ascertain the extent to which people are fleeing gold for BTC. However, there are some high-profile people (Raoul Pal) who sold all their gold holdings to switch into BTC. Considering he made this call in Dec, the timing was almost perfect.

That's the one thing gold and Bitcoin have in common the big guys manipulate the market. As Audaxes found for us a couple of days ago:
https://coinlib.io/coin/BTC/Bitcoin
Take a look at the "Money flow from/to Bitcoin in the last 24 hours" and "BTC price per currency". Tether or USDT (and BUSD) make up >60% of the trade inflows. These are "stable coins" pinned to USD with reserves and where all the demand for Bitcoin is coming from and not people buying with USD.
https://www.forbes.com/sites/robkniaz/2020/12/16/the-problem-with-bitcoi...
In this wild west Tether can print what it likes. It could be the organisation of Tether can print USDT buy BTC and then sell for real USD to top up it's reserves and pocket the remainder but I don't know how to check if they can do this.

This is all a little 'half baked'. Whether people buy BTC with USD or USDT is beside the point. The whole idea of Tether being an elaborate scam is untrue. And even if it were, the crypto world understands that 'bad actors' are inevitable. Furthermore, BTC doesn't have a bank controlling its price. Even the institutions are not buying on exchanges. They're also paying a premium compared to individual buyer on exchanges.

Why would the buyers and seller want to get stung twice with transaction fees? Either they are printing for themselves or there is some reason to buy USDT first and for the sellers to want to hold it. The USDT is printed so it has to come from USD buyers or internally. Is it that the big guys can hide themselves and their activity with the step further removed from fiat? 60 percent of net buying goes trough Tether, it is driving the bitcoin price (see the Frobes link). Is there an article out there explaining why someone might do this?
Pasting the abstract from the research in forbes:

This paper investigates whether Tether, a digital currency pegged to the U.S. dollar, influenced Bitcoin and other cryptocurrency prices during the 2017 boom. Using algorithms to analyze blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month‐ends. Rather than demand from cash investors, these patterns are most consistent with the supply‐based hypothesis of unbacked digital money inflating cryptocurrency prices.
https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.12903

I'm sorry but I have no idea what your thesis is. If you're saying that buying BTC with USDT is like the rehypothecation of the gold market, then you're wrong.

Isn't gold a hedge against inflation, if we get deflation it won't be something you want to hold.

Empirically it's the reverse. My way of thinking about this that there are different kinds of inflation:
The most common way inflation occurs is during private sector credit expansion and when this is happening you may as well own shares because their value will also inflate, and companies will also do well due to debt being eroded, the wealth effect and other things also supporting profits.
When things are not going so well risk increases, the government might decide to fill in the gap and the opportunity cost for holding gold is low. People buy gold here as a currency debasement hedge and a low risk asset.

I think anyone who hasn’t got assets are missing the party. Total criminal behaviour by Central banks. A massive civil lawsuit should be unleashed on those responsible.

Wealth creation: a net worth, equity of assets, tradeable; shares, house, btc, inheritance, won lotto etc.
Wealth stabiliser: Study, work, means of earning for daily then added the above? or pay marginal debt/tax for it.
Wealth protector: Gold or it's equivalent paper bond trading.
BTC try to nudge Gold pedestal position, difficult. It's limited in supply unlike the infinite $ numbers of countries debt creation, which only stop when the debt/bond chaser start knocking at the door, their confidence waning.

This economic crisis and pandemic is far from over and with Central banks printing trillions, interest rates and zero and Governments performing record levels of stimulus and giving out free money, Gold still has a lot of upside potential in this environment. Not to mention all of the other issues going on including the Geo-Political troubles between the US and China. The Central banks currently selling Gold like Turkey are forced to do so due to their current economic situations as they liquidate to pay debt. The monetary system as we know it is coming to the end of the road and with the world economic forum calling for a great reset and 80% of central banks looking to go digital, Gold may very well shine again. Bitcoin is taking the light away for it for now, but when the next major Bitcoin correction happens we could also see a lot of funds flow back towards Gold then as well.

Putting my tin hat on, ' where to go when the SHTF,' I need investments that I can cash up fast, cash that I can use to take advantage of opportunities.
living in a speculative world fuelled by low interest rates, if confidence ever goes I think there will be a rush to cash, not gold
I think falling asset values create opportunities and to take advantage of that you need cash, if the collapse goes too far we are all screwed anyway. I suspect that when it starts to go pear shape everyone will be offloading beach houses, boats and anything else that can generate some cash. All the toys first then the big stuff.

I need to be able to transfer my gold/BTC to something that I can go to the bank with and buy a distressed asset, and I need to do it fast. Hard to do if everyone else has the same idea.

Charles Hugh Smith has an article out this morning
https://mailchi.mp/641be6ef590c/musings-report-2021-2-warning-light-flas...

"I suspect that when it starts to go pear shape everyone will be offloading"
The Trump inner circle will be ahead of the game... I saw they set up a big marquee and were partying and livestreaming themselves watching the 'entertainment'. They are a weird bunch... Melania mia

Trump was always a democrat. Trump got a lot of support because he was anti establishment, lots of Americans think the establishment is rotten to the core.
They now need to shut him up, well thats my take on present behaviour of elites in media and government. Just like Assange had to be shut down, he was embarrassing, the truth dug deep and hurt, the motivation behind decisions was open for all to see.
Problem could be solved by transparency in voting system, which should be easy, but looks not to be, it's what should be done immediately, problems don't mature well. Trump got far too many votes to be ignored, even though he lost, the divisions remain huge.

The West is turning, happening here too, National just lost every rural seat, wheres the change at the top? nothing, nada. There has been no attempt by National to try to win those seats back, under MMP they will stay the number two party until Labour does something wrong, not something I can ever support.

Maybe the problem is the child who refuses to accept defeat, we have seen this from him before continuing falsehoods long after the truth is proven. Now claiming his free speech has been removed because he cant use SM.

He got too many votes to ignore, he's done serious damage to the establishment, damage that won't be repaired with the present administration. Biden and the Democrats will limp from one disaster to the next, without the support of the America that used to be the Democrats strength, its base in hard working America.

Just perhaps, he was a lot smarter than anyone gave him credit for, the Trump effect will linger for years. Pelosi etc, made fools and fortunes for themselves and that won't be forgotten or forgiven.

Anyone who has achieved what trump has is obvs not a total fool, he knows how to play on peoples fears while pushing his own barrow... he still lost the majority vote two times. He will also be impeached twice which is a first. I like Biden as a person but how he will do as president is anyone's guess, my guess is that he will be reelected. Saw the last white house correspondents dinner with Obama and reading the recent comments its like night and day between then and the trump admin and people have realized that now.

Until now The Don could have run in 2024 on the Republican ticket or handpicked his successor ... I doubt that will happen now as many have publicly disowned him and blame him for the insurrection. He is much much weaker ... and wounded so I hope they dont underestimate him as an opponent.

if the democrats don't get the economy up and running they will struggle next election, thats a big ask.

Regarding gold (and maybe silver) - yes very disappointed. I abandoned my gold play a while back. I did not expect this to happen. I have heard that the bitcoin demand is stealing money away from gold.

However, there is one play where metals win (sort of). Gold and silver mining stocks. As they are shares with potential dividends no tax on resale (yay!). So I still hold GDX and Pan American Silver Corp stock. Not too much, but a little. And if I want gold exposure, I can instantly convert BTC into Pax Gold via FTX.

investing or guessing?

I've been doing pretty well at this "guessing" thing so far, if I may say so.

My daughter has a friend in the States called 'Shadowpack Lonewolf'. I finding what used to be for sure is turned on its head more often than not.

Remember you're losing 5% of the value of those stocks pa via FIF regime.

my stock play is small so I'm not yet that the FIF level. Its actually 33% (or 39% soon) of 5%. So not quite that bad. And kinda reasonable when you consider the capital gains.

Doesn't it trigger at 50K? As you say I guess the imposition is small but for me it's a principle thing.
I'm in the NZ market so don't get hit at all. (YET!) Hopefully the Greens keep their sticky little sconegrabbers off for another few years... lol
BTW your advice re miners is good - as long as you find the right miner of course.

FIF rules don't apply to ASX listed shares - plenty of good goldies on the ASX

Unlike a lot of other assets that can be purchased with a few clicks, having a tangible supply of bullion in your possession offers that point of difference. Plus, good luck getting it when supply is running short. It is worth looking at recent history of Silver and Gold Eagle demand in the US as an indicator of demand. Personally, I wouldn't place too much faith in favouring coins over rounds but possesess both nonetheless. Keep some for diversification and the "sono cazzi" scenario, where you need it for bartering at short notice.

I bought silver back in Nov/Dec 2014 as there was the combination of low spot price and a strong Kiwi dollar (vs US dollar). Storage is often the biggest concern in holding physical, but it can be done and BTW, do not tell anyone!

Just perhaps, the biggest shortage of all could be CASH. With falling asset values your gold price will collapse. The destruction of the value of money by inflation makes gold a keeper, it's a hedge against the loss of the buying power of a currency. Now there is so much debt and speculation everyone has ended up on one side of the boat, the wrong side sometime soon.

Some how this is linked to the problems in the USA, where the middle classes have been sacrificed so the elites can become super wealthy. Recessions fall hard on middle classes, the watering down of the US$ will come home to roost one day, the bailing out of big banks and businesses at the cost of the masses has to end.

Gold will do its job.... as it has for thousands of years. If there was ever a time to hold, it is now. Gold and oil.

"On the supply side, gold is facing a medium term surplus as the World Gold Council data clearly shows with miners delivering more than current markets can absorb. That may not be the case in the long term of course, but for 2021 and 2022 it will be. That oversupply won't help gold's price either."

No one can find and extract more Bitcoin, 900 new coins a day for the next 4 years, then that gets cut in half every 4 years until 2140. More demand and less supply.....