Shutdown Fears

Analysts often look to gold as a broad gauge of anxiety and in these times anxiety runs high. Case in point: a U.S. government shutdown has been a repeated concern for many Americans. Gold is reacting accordingly.

Gold futures have been on the rise as indecision on capitol hill lingers. One senior market strategist at RJO Futures remarked that “Gold is shaking off an upside bounce to the dollar and looking at the possibility of a government shutdown.” That is, the dollar has fallen recently against a basket of currencies amid the same shutdown fears. That drop makes gold (priced in dollars) particularly attractive to buyers. There is often an inverse relationship between the value of the dollar and the price of gold. Even as politicians work through a deal to keep the government operating, many lack confidence in the long-term prognosis. In this first year of a new presidency staff turnover is at an all-time record high.

Global Synchronicity

U.S. and European economies are in growth mode. Meanwhile, other major world economies are also on the the upswing. For example, China is witnessing the continued growth of the middle class. This primes their economy for expansion. Why does this impact gold investors? China is the world’s largest gold market. Many of these middle class consumers are setting their sights on luxury goods, namely jewelry. Meanwhile, expectations for India are also on the rise. As the world’s second largest gold market, a revitalized economy will be important for gold’s long-term potential. Analysts at The World Gold Council project that “policies such as the demonetisation initiative and the new Goods and Service Tax (GST) will start to have a positive effect on the economy.” Rising demand for gold, however, is about more than jewelry. Citizens graduating to the middle class want access to technology (e.g. tablets, smartphones, computers, etc.) all of which use gold components including bonding wire and connector plates.

Russian Roulette

Today, tax regulations in Russia are particularly unfavorable to gold investment. The country presents a strong disincentive for institutional or individual gold purchases in the form of an 18% value added tax. However, pending amendments may change this burdensome rule. A proposal on the table may remove this tax. The result would unlock enormous purchasing potential in Russia thereby bolstering the price of gold. Additionally, in the last quarter of 2017 Reuters reported that Russia’s central bank “may start buying gold for its official reserves on the Moscow Exchange.” This would be another significant driver of future gold prices as the country’s central bank is among the largest stores of bullion. Meanwhile, the precious metals market on the Moscow exchange is relatively new having launched only five years ago. This all adds up to a picture of high potential in the country.

As the world continues to become more interconnected the complexity behind gold’s rise grows. More players and influencers are entering the market every year. Savvy investors, however, can put the pieces together and discern the long-term upside potential that can offer significant growth. In fact, in U.S. dollars the price of gold ascended 13.5% earning its largest gain since 2010.

Is The World Running Out of Gold?

Gold. It’s getting harder and harder to find. The world’s richest gold deposits are being depleted. New discoveries are rare – few and far between.

Some industry analysts suspect we are getting close to “peak gold,” which refers to the time when the world will hit its maximum rate of gold production and then start to move lower.

Three years ago – in 2015 – a Goldman Sachs report warned that there are only two decades of “mineable” gold left. “The combination of very low concentrations of metals in the Earth’s crust, and very few high-quality deposits, means some things are truly scarce,” said Eugene King, a mining analyst at Goldman Sachs.

How much gold has been mined?

In recent years, yearly gold production has averaged between 2700 and 3200 tonnes.

“The best estimates currently available suggest that around 187,200 tonnes of gold has been mined throughout history, of which around two-thirds has been mined since 1950,” according to the World Gold Council.  “And since gold is virtually indestructible, this means that almost all of this metal is still around in one form or another.”

How big is that?

If every single ounce of this gold were placed next to each other, the resulting cube of pure gold would only measure around 21 meters on each side.

Where does gold come from?

China was the biggest gold producer in 2016, mining about 14% of the total annual supply. Check out the The World Gold Council’s handy interactive gold mining map to see how much different countries produce.

The Case for Owning Gold

There are lots of reasons to own gold. It’s a safe-haven assets, a hard currency and a portfolio diversifier. Governments around the globe recognize the value in gold. The concept of “peak gold” only adds to the allure.

One of the biggest detractors of paper or so-called “fiat” money is that governments can devalue it at any time by flipping on the printing presses. The United States and other advanced economies did exactly that in the years after the 2008 global financial crisis. They called it “quantitative easing,” but that’s just a fancy term for adding more dollars into circulation. That can’t ever happen with gold. There is only so much gold that can ever be mined from the earth.

Gold has been used as a measure of wealth for 4000 years, in part because of its rarity. If we do reach peak gold in the years ahead that would be broadly supportive to future price gains.

How to Get Started

Investing in physical gold is very easy, and any investor can do it and should do it. There are different weights of gold available, so investors can buy coins that are as little as 1/10 of an ounce up to the more standard one ounce coins, in addition to larger bars for investors making a more sizeable investment.

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Blanchard continues to lead the industry we helped launch in the 1970s. We develop innovative ways to help investors enhance and protect wealth through the strategic acquisition of tangible assets. Through our consultative approach to service, we aim to develop long term relationships that help investors achieve sustained financial success. A dedicated advisor is assigned to each client to advocate in his or her best interest. Call us today at 1-800-880-4653 to get acquainted.

As the old saying goes, “water, water, everywhere, but not a drop to drink.” This sentiment perfectly summarizes the question of scarcity in gold mining. Many have asked, “how much gold is there left to be mined.” The short answer: much more than you think. The long answer, however, is more complicated. Let’s look at why the Earth’s untold riches may stay locked away forever.

If melted into a single cube, all the mined gold would fit into an Olympic-sized swimming pool. Business Insider cites Goldman Sachs analyst Eugene King as calculating that there are “20 years of known mineable reserves of gold.” It stands to reason, however, that each successive year of theses 20 will present increasing difficulty to those seeking to extract the reserves. It’s likely that much more than 20 years worth of gold exists on Earth. However, much is impossible to ever capture. Millions of tiny gold particles are in the ocean and sitting on the floor of the sea.

Today, it’s unclear how much longer production can continue. While technology continues to offer solutions of growing sophistication, the cost of implementation can quickly offset the value of the find. Simply put: diminishing gold production is about more than scarcity.

Here’s why: the time between deposit discovery and production is growing. The average time needed to yield gold from a source is now 20 years. By comparison, this figure in the year 2000 was approximately ten years. With a longer time to production comes greater costs which diminish the prospects of many finds. In recent years new mines have yielded less. New mines are making less of a contribution to total, global production.

In fact, as recently as 2014 Chuck Jeannes, chief executive of Goldcorp, remarked, “whether it is this year or next year, I don’t think we will ever see the gold production reach these levels again,” as reported by The Wall Street Journal. “There are just not that many new mines being found and developed,” he concluded. Statements like this have prompted some to claim that we’ve hit “peak gold,” a new phase where all remaining gold production will require significantly greater labor than previously.

If true, this prediction bodes well for gold investors. A look at history suggests those claiming that we’ve hit peak gold might be right. Consider that in 1995 we sourced 22 gold deposits each containing at least two million ounces of gold. In 2010, only six discoveries occurred, and in 2011 there was just one. The trend is clear.

This diminishing story has altered the strategies of key players in the industry. That is, some miners are focusing their efforts and finances on acquiring other firms that already have ownership of newer mines. It’s become easier to buy a deposit rather than source it yourself.

In the meantime, many geologists are divided on the issue. Some believe we have, in fact, reached peak gold. Others claim it’s too difficult to adequately predict the remaining deposits and their accessibility. However, one fact is clear; we’re finding less gold each year.

This truth may be the reason countries like China have aggressively built up their reserves in recent years. As a global currency with diminishing availability, many are poised to win big in the long-term.

Like all investments, the price of gold is dictated by the markets. However, there are a few key influencers who wield significant influence over the price of gold. Their actions, in aggregate, do not directly alter the price per ounce. Rather, their broad directives serve to rally or squelch interest in the commodity thereby increasing or decreasing the price appreciation over the long-run. Here, we look at three people who may exert their influence over gold throughout 2018.

Jerome Powell

Set to take over in his new role as the Chairman of the Federal Reserve next month, Powell will be the key player in the interest rate changes expected in 2018. Today, it’s still unclear to what extent he’ll raise rates. Some have predicted a dovish approach characterized by just one increase this year. Others expect at least two or three. These rate changes will undoubtedly serve as a key driver of gold prices. In many periods, though not all, there has been a negative correlation between interest rate changes and the price of gold. A more aggressive rate increase policy from Powell may put downward pressure on prices. For the moment, Powell appears ready to make at least his first increase soon. “I think the case for raising interest rates at our next meeting is coming together,” he remarked in late November of 2017.

Kim Jong Un

Verbal tirades between the North Korean leader and President Trump show no signs of slowing and have, in recent months, escalated at a frightening pace. “I would attribute some of the rise in the price of gold to the feeling of uncertainty surrounding that [North Korean-U.S.] dialogue,” explained the Director of Financial Services Policy at the American Action Forum as reported by The Washington Post. Other experts have noted at least a mild correlation between the recent spate of missile launches and the rising price of gold. In fact, CNBC reported that gold jumped more than one percent in one day in November of 2017 reacting to heightened geopolitical fears. The risk of a nuclear threat emanating from an unstable government has reinvigorated interest in the “safe haven” appeal of gold. As Kim Jong Un’s intentions come into focus this year we’ll know more about how renewed interest in gold will unfold.   

Xi Jinping

Chinese President Xi Jinping is putting the full weight of his country’s resources behind what he calls “The Belt and Road Initiative.” Essentially, the development plan is designed to boost trade and economic growth across Asia. The largest projects within the plan will be infrastructure related with some estimates that Jinping will “pump $150bn into such projects each year,” according to the Guardian. How does this tie to gold? Miners are expected to use this investing to ramp up exploration and production. The CEO of China National Gold Group Corp, explained last year that he would “intensify exploration and capital allocation in Belt and Road countries.” This move has serious implications given that China is the leading gold producer in the world yielding 455 metric tonnes in 2016 alone.

Gold investors should keep a close eye on these three key players. Their actions, in total, can make significant impacts on gold pricing.

The price of an ounce of gold surged over $125 an ounce since the start of 2017, for a roughly 9% gain.  That’s an impressive move. If you bought an ounce of gold at the beginning of the year you’ve baked in a nice return.

What are a few factors that moved the price of gold this year? Let’s take a look.

1. Threat of War with North Korea

Tensions have never been higher with the rogue nuclear-armed nation of North Korea.

The country fired 23 missile tests since February. 

“Most Americans don’t realize how close we are to war,” said Illinois Senator Tammy Duckworth.

Gold is a traditional safe-haven and investors turned to the metal as various Twitter exchanges between President Trump and North Korean Supreme leader Kim Jong-un ratcheted higher throughout the year. The leaders of the two countries exchanged threats and taunts, including “dotard” and “Little Rocket Man.”

“The key problem for the United States is the likely possibility that North Korea has the missiles to deliver nuclear bombs to South Korea and Japan. If one of these weapons were to reach its target, an entire city would be annihilated,” noted a New York Times article December 6.

2. Weakness in the U.S. Dollar

The U.S. dollar index fell 12% in 2017. A weak dollar is good for gold, but a signal of underlying weakness in the U.S. economic, political and perhaps even military might.

A weaker dollar makes gold cheaper for foreign buyers, who used the lower prices to snap up the precious metal at bargain prices.

However, the weaker U.S. dollar trend is a negative sign regarding international views of our country’s economic, political and fiscal policies. The level of a nation’s currency is a type of “grade” on how the country is viewed versus other countries around the globe to international money managers. Gold is a currency with a nation and without any of the fiscal obligations (or debt) that come with various governments around the globe.

3. Stock Market Hit New All-Time Highs

The aging bull cycle in U.S. stocks hit its eighth anniversary in 2017. By traditional valuations, the stock market is overpriced and overvalued.  Just how overvalued is the U.S. stock market right now?

“Shiller’s cyclically-adjusted price/earnings (CAPE) ratio for the S&P 500 has climbed to around 32. The last time it rose to such a high level was in the late 1990s, shortly before equity prices in the US plunged,” wrote economists at Capital Economics on December 18.

The gold market climbed over 9% this year, alongside an exuberant stock market. Investors turned to gold this year, as a way to take some risk off the table, with equity prices at sky-high levels.

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping: I admit to not understanding it.” — Richard Thaler, winner of the 2017 Nobel Prize in Economics

4. Federal Reserve Rate Hikes

The Federal Reserve hiked interest rates three times in 2017, in March, June and December. Yet gold prices continued to climb despite the Fed’s move. Why? Because official interest rates remain at historically and abnormally low levels, with the Fed funds rate at 1.50% to end the year. Interest bearing accounts offer little return and risk levels in the stock market are at the highest level in over a decade. Investors continue to turn to gold as a hedge against a depreciating U.S. dollar and a hedge against stock market declines.

5. Major Tax Package Overhaul

In late December President Trump signed into law a $1.5 trillion tax overhaul package. The stock market climbed as corporations receive a massive tax break, which could help the Price/Earnings ratio of publicly traded companies. Gold also climbed higher in in the second half of December. Many economists believe that this tax package will ultimately spike the U.S. deficit – already at $20 trillion even higher. That’s gold bullish.

The New Year is just around the corner. If you are making resolutions for 2018, purchasing gold right now could be one of the best ways to kick off the New Year right. Protect your assets. Hedge your risk against an aging, overvalued stock market. Make 2018 your best financial year ever.