Central banks are stocking up on bullion… Will the gold still be there when you go to buy?… How to follow the “Golden Rule”… In the mailbag: “What a sad display of self-delusion”…
In his book A History of Hungary, historian Peter Sugar notes that the eastern European country used to account for about three-quarters of Europe’s gold output.
In the 14th century, Hungarian gold coins – known as florins – spread across the continent, competing with coins from England and Italy.
And it seems Hungary hasn’t forgotten its golden past.
Last week, the central bank of Hungary announced it had increased its gold holdings tenfold – from 3.51 to 31.5 metric tons.
Over the summer, Poland’s central bank bought gold at a pace not seen in 20 years.
These two central banks are taking advantage of the economic mess their old enemies, the Turks, have made for themselves.
Amid rising debt and deficits – and an increasingly authoritarian government regime – the Turkish lira plunged as much as 45% versus the U.S. dollar this year.
To try to stem the bleeding, Turkey’s central bank has been selling gold to buy lira.
As regular readers know, the coming bull market in gold is one of the top profit themes on our radar here at The Daily Cut. It was also one of the highest-conviction calls at our first Legacy Investment Summit in Bermuda last week.
It’s why, yesterday, Legacy Research Investment Director Grant Wasylik and I hopped on a call with Frank Holmes.
If you don’t know him already, Frank is the CEO of U.S. Global Investors, which specializes in gold and emerging market investing. And he’s one of the most sought-after speakers at precious metals conferences.
Frank was on the ground floor of several major gold mining companies – including the world’s premier precious metals royalty and streaming company, Franco-Nevada (FNV).
He writes one of the best free resources for gold investors, Frank Talk. And he was behind the creation of the U.S. Global GO Gold and Precious Metal Miners ETF (GOAU).
And yesterday, Frank opened our eyes to an aspect of the gold market you don’t hear much about in the mainstream media.
Most folks (your editor included) think of gold primarily as a disaster hedge.
Gold carries no “counterparty risk.” In plain English, it doesn’t depend on somebody else honoring a promise to pay. The metal has intrinsic value. This makes it invaluable in the kind of credit meltdown we saw in 2008.
But as Frank pointed out, about two-thirds of global gold buying comes not from the “fear trade”… but from what he calls the “love trade.” As Frank explained it to us…
The fear trade has two key factors. It’s fiscal policy – the gap between government taxation and spending. And it’s “real” interest rates – how much you can make on your money in bonds and bank deposits above the rate of inflation.
But about two-thirds of all gold buying is down to the “love trade” – mainly jewelry buying out of China and India. About 40% of the world’s population lives in these two emerging nations. What’s important there is GDP per capita. Rising GDP per capita has led to continuous consumption, or a rising consumption out of China and India.
If you believe that people in China and India will continue to get richer over time, a great way to capture that rising tide of wealth is through the gold price.
In India and China, far more so than in the West, people still see gold as the ultimate store of wealth. The more wealth they have to store… the more gold they will buy.
Central banks and consumers in China and India are buying a lot of physical gold. There’s a real risk there’ll be no more bars left to buy… or to back an ETF… when investors in the West want to tap the gold market as a hedge for the next crisis.
It’s a point Dave Forest made at our Summit last week. Dave heads up our elite commodities investing advisory, International Speculator.
And he noted that, although it’s the world’s biggest producer of gold, China doesn’t export a single ounce.
Gold has gone East… and it may not be coming back West. Here’s Frank again…
I’m a big believer in the theory of “Peak Gold.” There was “Peak Oil,” until American ingenuity came along with the frackers and disrupted the whole oil market.
But there’s been nothing comparable to that in the gold market – no big breakthrough for how we look for, develop, and produce gold. It’s still very, very costly to look for. And despite the billions of dollars that have been spent in exploration over the past decade, there’s been no major discovery of high-quality gold in a safe jurisdiction.
Meanwhile, as they debase the fiat currencies they oversee, central banks are going to continue to buy gold as a way to diversify their reserves.
And India and China have some of the fastest per capita GDP growth rates in the world. That bodes well for the single biggest driver of the gold price – jewelry buying. As Frank put it…
I think we are in a Peak Gold scenario. Any peak in supply will put a floor under the gold price.
It’s a simple formula for figuring out how much gold you should own that even a fifth-grader could follow.
Always have 10% of your wealth in gold.
Split that evenly between physical gold – bars and coins – and gold stocks. And rebalance at least once a year.
In other words, if gold has a good year… and your gold allocation creeps up to 12% of your portfolio… you sell until you bring it back to 10% of your overall mix. If gold has a bad year… and drops to 7% or 8%… you buy until you bring that gold allocation back up to 10%.
Tomorrow, we’ll be exploding one of the biggest myths about gold – that it’s either gold or bitcoin if you want to protect your wealth against the race to the bottom for fiat currencies.
As Frank told us, you can own both as a way of diversifying out of fiat money.
Gold’s still a hot topic in the mailbag…
But first, one of your fellow readers isn’t convinced by the Digital Bill of Rights proposed by Bill Bonner Letter coauthor Dan Denning…
Libertarians like Mr. Denning are working to secure our privacy. I don’t like their chances since they don’t vote for any party that could do anything about it.
Libertarians are too daft to recognize that President Trump is waging war on the Deep State. Instead of working alongside him and supporting him, libertarians play this little infantile game of trying to influence the political system by yelling from the bleachers. What a sad display of self-delusion. Both comical and sad.
– Ken V.
Back to gold…
Jeff Clark seems to have a sort of sixth sense for gold stocks, so I wouldn’t bet against him on that. But I’ve also seen some of what Dave Forest is referring to recently – a long dormant gold stock I’ve been holding at like an 80% loss for years get up off the turf and bounce back all the way to where I once bought it, and then a bit more.
Why? It was a buyout. Obviously not everyone thinks gold is a dead asset, but the COT clearly shows that the “dumb money” has never been more convinced than it is now. That is a key signal to me.
I think it was Bill Bonner who once made a prediction he called the “The Trade of the Decade.” This was nearly 20 years ago now, as he was talking about the first decade of the new millennium. He said to buy gold and sell the dollar.
When I took his advice, gold was $320 an ounce. That has been the best investing decision I ever made in my life, although I will admit that I am attempting to repeat that kind of success in cannabis stocks with Nick Giambruno, and in cryptocurrencies with Teeka Tiwari and Marco Wutzer.
– Shawn S.
I believe the trigger for the next bull run will be any pause in the Fed’s planned rate increases – a perfect storm – geopolitics, midterm elections, softening world markets, trade tariffs, excessively high USD, and now the Saudi issue. Safe-haven buying is ready to break out. I would expect gold to be well over $1,300 before year end.
– Mayer N.
Look at the inverse chart again. It will rise about $2 then the real takedown will begin. The new bull market could then start or there could be a long period of flat prices, many years maybe.
– Malcolm R.
Are you buying gold or gold stocks as a chaos hedge? Let us know how it’s going at [email protected].
October 24, 2018
P.S. We have no financial relationship with Frank or U.S. Global Investors. Our mission is to bring you the best investment ideas every day. Most often, it will be from the Legacy Research team. But it means reaching out to the experts in our Rolodex from time to time, too.
As we told you when we launched The Daily Cut, we accept no dollars from the companies we put on your radar. And we receive no kickbacks. Unlike the mainstream press and mainstream finance, we’re 100% independent. For more on our promise to you as a reader, catch up here.