Something big is happening in the gold market right now, and nowhere is that more apparent than in central banks of emerging economies…
Something big is happening in the gold market right now, and nowhere is that more apparent than in central banks of emerging economies. Last year was a watershed in the size of official gold purchases, as banks added an incredible 651.5 tonnes (worth some $27.7 billion) to their holdings, according to the World Gold Council (WGC). Not only is this a remarkable 74 percent change from 2017, but it’s also the most on record going back to 1971, when President Richard Nixon brought a formal end to the gold standard. In the final quarter of 2018 alone, central banks purchased as much as 195 tonnes, the most for any quarter on record, according to leading precious metal research firm GFMS.
As I’ve shared with you before, central banks have been net buyers of the yellow metal since 2010 in an effort to diversify their reserves away from the U.S. dollar. Last week, I had the opportunity to discuss the issue with SmallCapPower’s Vasudha Sharma. You can watch the conversation by clicking here.
Most Western nations already have a comfortable weighting in gold relative to their total reserves, so the demand is almost strictly from emerging markets. Among the biggest purchasers last year were Russia, Turkey and Kazakhstan, and we also saw China add to its holdings for the first time since 2016. Meanwhile, Hungary, Poland, India and a number of other countries took deliveries for the first time this century.
Central Banks Recognize Gold as an Effective Diversifier and Store of Value
With gold representing a whopping 74 percent of U.S. reserves, the Federal Reserve has historically had the largest position among global central banks. (Venezuela’s weighting, at 76 percent, has lately roared past the U.S., but that’s thanks solely to hyperinflation and its rapidly deteriorating economy. I’ll have more to say on Venezuela later.)
Other countries have a lot of catching up to do—i.e., gold buying—to get to the same level of diversification. Russia, for instance, has the fifth most gold in the world at 2,066.2 tonnes, but this amount represents only 17.6 percent of its total reserves. In sixth place is China, whose holdings (a reported 1,842.6 tonnes) represent a very small 2.3 percent of reserves.
Below you can see Russia’s ongoing strategy of “de-dollarization.” To date, the Eastern European country has liquidated nearly its entire position in U.S. Treasuries to fund its rotation into gold. According to the WGC, Russia bought 274.3 tonnes in 2018, its greatest amount on record, and the fourth consecutive year of purchases above 200 tonnes.
Gold Is the Only Thing Left of Value in Venezuela
Gold made even more headlines last week as it relates to Venezuela. The beleaguered South American country, as you probably know, is in the midst of a potential transfer of power, from current president and dictator Nicolas Maduro to the more centrist Juan Guaido, whom the U.S., European Union and other world governments have recognized as the de facto head of state.
Since the U.S. and other countries have imposed heavy sanctions on Venezuela and its oil industry, the cash-strapped country has had to rely on its gold holdings to make international bond payments, mostly to Russia and China. But the days of Maduro’s plundering of Venezuela’s hard currency might be numbered, and not just because he could be removed from power soon.
Last week Guaido sent a letter to U.K. Prime Minister Theresa May and the Bank of England (BoE), urging them not to send $1.2 billion from any sale of Venezuela’s gold reserves—held in the BoE’s vaults—to Maduro’s “illegitimate and kleptocratic regime,” according to the Financial Times. “Maduro has stolen a huge quantity of state assets,” including Venezuelan gold, a part of the letter reads. “There is no doubt that he will, if allowed, also steal the assets held by the Bank of England, which rightly ought to be saved to support the recovery of Venezuela.” The bank has honored Guaido’s request and is blocking Maduro’s efforts to sell the metal.
Later in the week, a Russian Boeing 777 allegedly landed in the capital city of Caracas and was loaded up with as much as 20 tonnes of Venezuelan gold, according to Bloomberg. It was later reported that the jet, for reasons unknown, left Caracas without the gold payment. There were additional reports, however, also by Bloomberg, that another aircraft, this one from the United Arab Emirates (UAE), had landed in the country and was awaiting delivery of the gold instead.
These incidents are certainly dramatic, and I’m eager to see how they play out, but I think the key takeaway is that gold is an exceptional store of value. It’s the only asset of any value to which a socialist autocrat like Maduro still has access. The bolivar is worthless, and the country’s once powerful and influential oil industry is fading fast. Without gold, Maduro is powerless.
Four Straight Months of Gains. What’s Gold’s Next Move?
The gold rally that began late last year, when equities turned rocky, continued into the new year as the historic U.S. government shutdown gripped investors, and signs that Fed Chair Jerome Powell was set to pause monetary tightening intensified. For the fourth straight month in January, both the price of gold and gold mining stocks posted strong gains. Before then, the price of gold was down for six straight months, a losing streak we hadn’t seen in 40 years, when the yellow metal fell each month from December 1988 to May 1989.
The yellow metal ended last month at a nine-month high, and with the U.S. dollar expected to lose momentum on higher deficit spending, we could see prices surge to as high as $1,400 or even $1,500 an ounce this year.
I’m not alone in my bullishness. Billionaire Sam Zell, creator of the real estate investment trust (REIT), bought gold for the first time in his life, citing the fact that supply is shrinking.
And Mad Money’s Jim Cramer also came out strongly in favor of the yellow metal last week.
“We are big gold believers here,” Cramer commented. “Now gold is at $1,300, we think gold is going to $1,400, $1,500. We suggest that everybody have a little bit of gold in their portfolio.”
I second Cramer’s suggestion. My recommendation has always been a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks and well managed gold mutual funds and ETFs.
Did you miss our updated Periodic Table of Emerging Markets? Read all about it by clicking here!
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
Diversification does not protect an investor from market risks and does not assure a profit.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands.
Gold Price Breaks Below $1315…Is Gold About To Break Below $1300?It’s now a real possibility gold loses the psychological level of $1300, so let’s look at how low gold may go, and when we can expect a move higher…
The Technical Traders Ltd. research team has been on top of nearly every move in the metals markets over the past 12+ months. On February 1, we posted this article: Get Ready For The Next Big Upside Leg In Metals/Miners. In this post, we suggested that the recent peak in Gold, near $1330, would likely end and prompt a downside price rotation over the next 45+ days.
Subsequently, on January 28, we posted this article: 45 Days Until A Multi-Year Breakout For Precious Metals. In that post, we highlighted our predictive modeling systems support of a sideways price correction in the precious metals markets that would align with US stock market strength and US Dollar strength.
Today, the price is moving in favor to confirm that our modeling systems and research is correct again. Gold has recently broken lower, below $1315, and appears to be targeting our lower Fibonacci projected target levels. At this point, we believe the Fib level near $1302 will offer minor support and the lower level near $1282 will become major support. We believe the psychological level at $1300 will be tested and broken over the next 30+ days as rotation above $1275 continues to play out. Remember, if our analysis is correct, Gold will provide multiple excellent buying opportunities over the next 30+ days for skilled traders to prepare for the larger upside move.
We believe the downside price breakdown is aligning with general US stock market and US Dollar strength that should last until near the end of March or early April 2019. We believe a moderately deep price rotation in precious metals will allow skilled traders to accumulate positions below $1285~1290 in preparation for the upside breakout move. Read the articles linked above to understand why this is so important for all traders to understand.
The next 2~4 months of trading activity are critical for all investors to understand the dynamics of what is at play across the global markets. Our research suggests we have about 45 days of moderate calm before precious metals begin to breakout to the upside. If you understand the importance of this move, then you’ll understand WHY you need to be prepared for this to happen.
Want to know how we can help you prepare for and profit from these moves? Do yourself a favor and read the free research of our proprietary predictive modeling systems, cycle modeling system, and Fibonacci price modeling systems. These incredible tools we use help our members stay well ahead of these market moves www.TheTechnicalTraders.com/FreeResearch to read all of our public research posts.
Don’t wait till it’s too late for this one. Take a minute to see why you really need to consider having a skilled team of traders and researchers backing you up every day. 2019 is already proving to be a great year for our members as we recently locked in 10.5% with an ETF, and another 8% on stock, and we would love to help you achieve greater success this year as well.
John Rubino: What Blows-Up First? ‘Almost Junk’ BondsHundreds of US companies are about to have their bond ratings cut to junk. Here’s why that’s a major problem for the markets and the economy…
by John Rubino of Dollar Collapse
The key insight of the Austrian School of Economics (maybe the key insight of ALL economics) is that the amount you borrow matters, but so does the use to which you put the money.
A case in point is US corporate debt, which has changed structurally lately in very scary ways. The short version of the story is that after the US cut interest rates to historically low levels to keep the Great Recession from swapping it’s capital R for a capital D, public companies figured out that they could borrow money for less than their stocks’ dividend yield, use the proceeds to buy back their outstanding shares, and generate free cash flow in the process. And – a nice added perk – the increased demand pushed their share price up and landed their CEOs even bigger year-end bonuses.
So that’s what they did, on an epic scale.
But – recall the Austrian School insight – the result was soaring debt without any new productive assets to offset the cost.
Generally speaking, debt rising faster than operating income equals diminished creditworthiness. So all that borrowing has produced several trillion dollars of debt that’s just one step above junk. Here’s an excerpt from money manager Louis Gave’s take on the subject.
Louis Gave at Gavekal Research says the greatest source of potential instability in the years ahead lies with the massive growth of the U.S. corporate debt market, particularly at the BBB-rated (near junk) level.
Gave recently told FS Insider that it has far outpaced the economy and could be due for a reset during the next downturn, which is increasingly becoming a concern by other strategists.
When it comes to potential trouble spots brewing in the financial markets or global economy, Gave said “if you ask a French client, they tend to point a finger at Italy. If you ask Italian clients, they point a finger at Deutsche Bank; and if you ask German clients, they point a finger at France. When I talk to my U.S. clients, most of them point a finger at China, which they see as having unsustainable high levels of debt and is an accident waiting to happen.”
However, Gave sees an even source of potential problems since, as he points out, the “size of corporate debt one rung above junk has never been greater” (see below).
The challenge today, Gave said, “is that part of the massive growth we’ve seen in the U.S. corporate bond market has really taken place in the BBB space. And so, if you start seeing an economic downturn (and the usual type of downgrades that occur in a downturn), then all of a sudden you have investment grade that becomes non-investment grade.”
Gave worries this could send shock waves through the financial markets since U.S. corporate debt is widely held by pension funds, investment banks, and large institutions all around the globe.
“There are real questions about all the energy debt that’s being issued by a lot of negative cash flow companies in the energy space,” he said, which also leads to questions about industrial, auto and real estate debt.
Gave asked listeners whether all this growth in debt has “funded the purchase of assets that allow the servicing of the debt and then the reimbursement of the debt or has this growth really funded a massive rise in share buybacks and financial engineering?” Gave said if the answer is the latter it would signify that our balance sheets are far more stretched out than they have been in previous cycles.
To sum up, hundreds of US companies are about to find their bond ratings cut to junk. They’ll then have to pay way up to refinance their debts (or in some cases to make payroll), setting off a death spiral that, if the history of past debt binges is any indication, will end with mass bankruptcies.
And as Gave notes, a ton of these bonds reside in the very same pension funds that are already due to implode in the next recession.
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