Gold Silver Desk

Authored by James Rickards via The Daily Reckonig,

Is gold a commodity, an investment, or money?

The answer is…

Gold is a chameleon. It changes in response to the environment. At times, gold behaves like a commodity. The gold price tracks the ups and downs of commodity indices. At other times, gold is viewed as a safe haven investment. It competes with stocks and bonds for investor attention. And on occasion, gold assumes its role as the most stable long-term form of money the world has ever known.

A real chameleon changes color based on the background on which it rests. When sitting on a dark green leaf, the chameleon appears dark green to hide from predators. When the chameleon hops from the leaf to a tree trunk, it will change from green to brown to maintain its defenses.

Gold also changes its nature depending on the background.

Let’s first look at gold a commodity…

Gold does trade on commodity exchanges, and it tends to be included in commodity industries. The common understanding here is that gold is a commodity. But I don’t think that’s correct.

The reason is that because a commodity is a generic substance. It could be agricultural or a mineral or come from various sources, but it’s a substance that’s input into something else. Copper is a commodity, we use it for pipes. Lumber is a commodity, we use it for construction. Iron ore is a commodity, we use it for making steel.

Gold actually isn’t good for anything except money. People don’t dig up gold because they want to coat space helmets on astronauts or make ultra-thin wires. Gold is used for those purposes, but that’s a very small portion of its application.

So I don’t really think of gold as a commodity. But nevertheless we have to understand that it does sometimes trade like a commodity.

As far as being an investment, that’s probably gold’s most common usage.

People say, “I’m investing in gold,” or, “I’m putting part of my investment toward bullion gold.”

But I don’t really think of gold as an investment either. I understand that it’s priced in dollars, and its dollar value can go up. That will give you some return, but to me that’s more a function of the dollar than it is a function of gold.

In other words, if the dollar gets weaker, sure the dollar price of gold is going to go up. If the dollar gets stronger, then the dollar price of gold may go down.

So if you’re using the dollar as the measure of all things, then it looks like gold is going up or down. But I think of gold by weight. An ounce of gold is an ounce of gold. If I have an ounce of gold today, and I put it in a drawer, and I come back a year from now and take it out, I still have an ounce of gold. In other words, it didn’t go up or down.

The dollar price may have changed, but to me that’s the function of the dollar, not a function of gold. So again, I don’t really think of it as an investment.

One of the criticisms of gold is that it has no yield. You hear it from Warren Buffet, you hear it from others, and that’s true. But gold is not supposed to have a yield because it’s money. Just reach into your wallet or your purse and pull out a dollar bill and hold it up in front of you, and ask yourself what’s the yield? There is no yield. The dollar bill doesn’t have any yield. It’s just a dollar bill, the way a gold coin is a gold coin.

If you want yield, you have to take some risks. You can put that dollar in the bank, and the bank might pay you a little bit of interest, but now it’s not money anymore. People think of their money in a bank deposit as money, but it really isn’t money. It’s an unsecured liability of an occasionally insolvent financial institution. The risk may be low, but there’s some risk, and that’s why you get a return.

Of course, you can take more risk in the stock market or the bonds market and get higher returns (or losses, as the stock market is currently proving). The point is, to get a return you have to take risk. Gold doesn’t have any risk. It’s just gold, and it doesn’t have any return. But again, it’s not supposed to.

Gold’s role as money is difficult for investors to grasp because gold hasn’t been used as money for decades. But gold in recent years has been behaving more like money than a commodity or investment. It is competing with central bank fiat money for asset allocations by global investors.

That’s a big deal because it shows that citizens around the world are starting to lose confidence in other forms of money such as dollars, yuan, yen, euros and sterling.

When you understand that gold is money and competes with other forms of money in a jumble of cross-rates with no anchor, you’ll know why the monetary system is going wobbly.

It’s important to take off your dollar blinders to see that the dollar is just one form of money. And not necessarily the best for all investors in all circumstances. Gold is a strong competitor in the horse race among various forms of money.

Despite the recent price action, which is far more a function of the stock market rather than gold itself, this is great news for those with price exposure to gold. The price of gold in many currencies has been going up as confidence in those other currencies goes down. Confidence in currencies is dropping because investors are losing confidence in the central banks that print them.

For the first time since 2008, it looks like central banks are losing control of the global financial system. Gold does not have a central bank. Gold always inspires confidence because it is scarce, tested by time and has no credit risk.

Lost confidence in fiat money starts slowly then builds rapidly to a crescendo. The end result is panic buying of gold and a price super-spike.

We saw this behavior in the late 1970s. Gold moved from $35 per ounce in August 1971 to $800 per ounce in January 1980.

That’s a 2,200% gain in less than nine years.
We’re in the early stages of a similar super-spike that could take gold to $10,000 per ounce or higher. When that happens there will be one important difference between the new super-spike and what happened in 1980.

Back then, you could buy gold at $100, $200, or $500 per ounce and enjoy the ride. In the new super-spike, you may not be able to get any gold at all. You’ll be watching the price go up on TV, but unable to buy any for yourself.

Gold will be in such short supply that only the central banks, giant hedge funds and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super-spike even more extreme than in 1980.

The time to buy gold is now, before the price spikes and before supplies dry up. The current price decline gives you an ideal opportunity to buy gold at a bargain basement price. It won’t last long.

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Business

Gold Bars Fight Covid Kits for Space on the Plane

Before the health crisis, gold typically traveled around the world on commercial flights.

By Elena Mazneva, Justina Vasquez,
and Ranjeetha Pakiam May 2, 2020

Swiss refiner Valcambi SA tried for five straight days last month to move a shipment of gold out of Hong Kong. Twice the metal was packed carefully onto a plane, only to be offloaded again.

After daily attempts and numerous arguments, the gold suddenly arrived in Switzerland without warning, said Chief Executive Officer Michael Mesaric. “We had not even asked for a slot.”

The coronavirus crisis has shone a light on a corner of precious metals markets that usually draws little attention: the logistics of transporting gold, silver and other metals across the world. The business is dominated by companies including Brink’s Co., G4S Plc, Loomis AB and Malca-Amit, which link miners and refiners with gold trading and consumption hubs around the world.

In normal times, gold bars worth millions of dollars travel the world in the cargo holds of commercial planes, just a few meters from the feet of passengers, before being whisked in armored trucks to refineries and vaults. But the grounding of flights has had a chaotic effect on an industry that’s used to relying on instantaneous delivery: prices in key markets have diverged dramatically, and the London gold market has even started talking about allowing delivery in other cities around the world.

Now, with global travel at a standstill, the precious metals industry is scrambling for alternative ways to keep the market moving. It’s a world of logistical headaches: even when space can be found on a plane, packages are often turned away if essentials like medical supplies need to travel instead.

“The limited commercial flights, charters or freighters we are using must prioritize personal protection equipment, medical, food and other essential products over our requirements to move bullion,” said Baskaran Narayanan, vice president at Brink’s Asia Pacific Ltd.

Another big name in the business, Malca-Amit could deliver within 24 hours before the health crisis, said managing director of Malta-Amit Singapore Pte. Ariel Kohelet. Now it’s more like 48 to 72 hours, and costs have risen.

“We’ve widened our use of cargo-only aircraft that are not dependent on passengers to fly and we’ve also chartered aircraft,” he said.

Some in the market say they’re managing to keep operating without delays. However, it’s been particularly difficult to get metal in and out of Asia, said Robert Mish, president of precious-metals dealer Mish International Monetary Inc.

“Some customers understand it and some don’t,” said Mish. “Some customers will pay more now, and others will say, ‘I understand,’ and take delivery in two weeks.”

It’s even getting more expensive to move gold that doesn’t typically travel by airplane.

German refiner C. Hafner GmbH + Co. KG used to send gold bars to neighboring Poland in security trucks. After road borders closed and its contractor stopped operating, the company has started flying the metal with FedEx Corp., said Torsten Schlindwein, deputy head of precious metals trading. Transportation costs have surged about 60% as a result.

Lockdown regulations and red tape have contributed to the delays, said Peter Thomas, a senior vice president at Chicago-based broker Zaner Group. When he tried to fly some silver out of Peru in early April, authorities initially refused to approve loading documents or allow union workers to load the plane. The metal was eventually moved on private aircraft, he said.

“It was expensive but it got done,” he said. “I think that as the virus subsides and as we get rolling again, we’re going to see a lot of product that has been sitting around, especially in smaller refineries, hit the market.”

— With assistance by Jack Farchy

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Friday May 01, 2020 

As every new day passes, with the world economy at a virtual standstill because of the COVID-19 pandemic, investors are starting to realize that they need to hold some gold and that in turn will be positive for the mining sector, according to one mining executive.

In a recent interview with Kitco News, Hugh Agro, president and CEO of Revival Gold, said that it is difficult to be negative on the precious metals space as governments and central banks flood financial markets with capital.

“Gold is not just for the difficult times. It’s for every time,” he said. “You’re in gold for the long run, not because you want to see a crisis or you expect a crisis, but because governments can’t manage their currencies.”

In an environment of higher gold prices, Agro said that he expects the mining sector to continue to attract capital as retail investors look for exposure and leverage to the yellow metal. He added that the mining sector, and especially junior explorers, remain an attractive option to the physical metal.

“Not everyone can be a Ray Dalio or Jeffrey Gundlach and buy millions of dollars’ worth of gold and have exposure to the gold price going up,” Argo said. “But you might have the money to invest in undervalued mining companies.”

Agro added that right now, all the attention is focused on major producers, as companies are expected to report significant increases in cash flow in their first-quarter earnings. Senior benefited in the first quarter from a substantial rise in the gold prices, coupled with lower input costs.

However, improved margins among senior miners will benefit junior explorers. “Senior gold companies are making, 50%-60% margins on what they’re producing, and now they’re looking for ounces of gold to replace that production. I expect capital will trickle down to the juniors and the explorers very quickly.”

As to what companies investors should be looking at, Agro said that it’s not just about weathering the current economic crisis but what is the growth potential when the global economy is back on the road to recovery.

He added that investors should also look at the major players backing junior explorers. Companies with big players in the mining sector, supporting them, will have easier access to capital if the global shutdown lasts longer than expected.

Agro said that he is confident Revival gold has a big enough war chest to wait out the economic crisis. He added that the company is also in a good position to grow and leverage its Beartrack gold project in Idaho. He said that the property has an updated resource of 3 million ounces.

Amid the COVID-19 pandemic, Agro said that the company is currently working on a preliminary economic assessment to evaluate the costs of starting a heap leach project and have some production on the property.

Agro added that they should have that study done by the end of the year.

As to what investors should do in the current environment, Agro said that now is the time to build a diversified mining portfolio with a mix of senior producers, and juniors. He added that the key is to have a healthy pipeline for future growth.

“It’s not a matter of if, but a matter of when senior producers start buying junior projects to support their production,” he said.

By Neils Christensen

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By Pam Martens and Russ Martens: March 24, 2020 ~

The chart that tells you how all of today’s economic troubles are going to end is not the bar graph of new deaths from coronavirus in Italy versus deaths in the U.S. It’s the chart that shows the number of potential deaths among the banks and insurance companies that have gorged themselves on risky derivatives and serve as counterparties to each other in a daisy chain of financial contagion.

The chart above is why the Federal Reserve is throwing unprecedented sums of money in all directions on Wall Street. Because despite being a primary regulator to these massive bank holding companies, the Fed has no idea who is actually in trouble on derivative trades, other than looking at a chart like the one above.

The chart above also justifies the Democrats refusing to sign off on the fiscal stimulus legislation that would have given U.S. Treasury Secretary Steve Mnuchin a $500 billion slush fund where the names of the recipients of bailouts could be withheld from the public.

In January 2007, prior to the last financial crisis, Citigroup’s stock was trading at the split-adjusted level of $550 a share. At yesterday’s stock market close, Citigroup’s stock price was $35.39. If you are a long-term shareholder in Citigroup, you’re still down 94 percent on your principal, not including dividends. After receiving the largest taxpayer and Federal Reserve bailout in banking history during the Wall Street financial crash of 2007 to 2010, Citigroup did a 1-for-10 reverse stock split to dress up its share price. In other words, if you owned 100 shares of Citigroup previously, you now owned just 10 shares at the adjusted price. If Citigroup had not done that, you would have seen a closing price yesterday of $3.54 cents instead of $35.39.

Citigroup is the poster child for everything that is wrong with the banking structure in the United States today. After blowing itself up with derivatives in 2008, in December 2014 it got the repeal of a key component of the Dodd-Frank financial reform legislation that would have forced derivatives out of federally-insured banks. Then in 2016, it went full speed into the very derivatives that were at the heart of the financial crisis in 2008, Credit Default Swaps. (See Bailed Out Citigroup Is Going Full Throttle into Derivatives that Blew Up AIG.)

Citigroup is not alone in loading up on derivatives again. Together with JPMorgan Chase, Morgan Stanley, Goldman Sachs and Bank of America, these five bank holding companies now control a notional (face amount) of derivatives amounting to $230 trillion, representing 85 percent of all derivatives held by U.S. banks.

And their counterparties are just as questionable as they were at the peak of the crisis in 2008, which led to the biggest Wall Street bailout in U.S. history.

The 2017 Financial Stability Report from the Office of Financial Research (whose budget and staff have now been gutted by the Trump administration) included this cautionary text:

“…some of the largest insurance companies have extensive financial connections to U.S. G-SIBs [Global Systemically Important Banks] through derivatives. For some insurers, evaluating these connections using public filings is difficult. Insurance holding companies report their total derivatives contracts in consolidated Generally Accepted Accounting Principles (GAAP) filings. Insurers are required to report more extensive details on the derivatives contracts of their insurance company subsidiaries in statutory filings, including data on individual counterparties and derivative contract type. But derivatives can also be held in other affiliates not subject to these statutory disclosures, resulting in substantially less information about some affiliates’ derivatives than required in insurers’ statutory filings.”

Insurance counterparties named in the report were Lincoln National Corp., Ameriprise Financial, Prudential Financial, Voya Financial and (wait for it), AIG, the insurance company that blew itself up with Wall Street derivatives in September 2008 and required a $185 billion bailout – with more than half of that sum going out its backdoor to pay off Wall Street and foreign global banks that had saddled it with derivatives that were structured bets that things would blow up. (Some of those funds were also used to settle securities lending programs with Wall Street banks and hedge funds.)

The 2016 Financial Stability Report from the Office of Financial Research provided more granular detail, noting the following:

“At the end of 2015, U.S. life insurers’ derivatives exposure, as reported in statutory filings, totaled $2 trillion in notional value. This $2 trillion does not include derivative contracts held in affiliated reinsurers, non-insurance affiliates, and parent companies that do not have to file statutory statements. Details on these entities’ derivatives positions are not publicly available.”

The report further indicates that a dangerous interconnectedness with a high potential for contagion has grown between U.S. life insurers and Wall Street banks:

“According to statutory data on insurance company legal entities, nine large U.S. and European banks are counterparties to about 60 percent of U.S. life insurers’ $2 trillion in notional derivatives. These data show that despite central clearing, derivatives interconnectedness between the U.S. life insurance industry and banks remains substantial.”

Deutsche Bank, whose share price has been regularly setting historic lows, is one of the European banks that is heavily intertwined with Wall Street’s derivatives. (See related article below.)

As Treasury Secretary Steve Mnuchin repeats ad nauseum that this is a health crisis not a financial crisis, just remember when the financial crisis actually started: September 17, 2019 – five months before the first death from coronavirus in the U.S. (See our more than five dozen articles on this latest financial crisis here.)

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Jim Wyckoff – Friday February 21, 2020 07:55

Precious Metals News

Gold and silver prices are solidly up in early U.S. futures trading Friday. Gold notched another seven-year high, while silver hit a six-week high, on safe-haven demand as the negative effects of the coronavirus outbreak on the global economy remain highly uncertain but appear to be increasing. April gold futures hit a new contract high overnight and were last up $17.10 an ounce at $1,637.60. March Comex silver prices were last up $0.161 at $18.48 an ounce.

Asian and European shares were mostly down overnight. U.S. stock indexes are pointed toward weaker openings when the New York day session begins. Risk-off trading attitudes are keen as the trading week winds down, as the coronavirus continues to spread in Asia, and its impact on the global economy is perceived to be getting much more serious.

Reports overnight said China’s auto sales fell over 90% in February as coronavirus restrictions prevented buyers from visiting car dealerships. Over 21 million autos were sold in China in 2019, making China the world’s largest auto market. The Hubei province is still in lock-down and officials there have pushed back the date for businesses to reopen to 10 March. That date could be further delayed if covid-19 is not contained by then.

China recorded over 800 new cases Thursday (up from around 400 Wednesday), with the total number of afflicted now at over 75,000 and over 2,200 dead. South Korea has reported over 200 confirmed covid-19 cases. The capital has banned all rallies in major downtown areas.

Options may be cash settled or physically delivered. ETF options, like SPY, expire into a position in the ETF. Index options, like the comparable Mini-SPX, are cash settled. This key difference is particularly important when we talk about “gap risk.”

From a marketplace perspective the covid-10, or coronavirus, situation is still very fluid regarding the economic impact on major world economies. Traders and investors are vacillating daily on whether the outbreak’s rate of spread is accelerating or declining. This uncertainty will continue to support buying interest in safe-haven assets like gold, U.S. Treasuries and the U.S. dollar, and the movement of money out of riskier assets like stocks. Gold prices hit another seven-year high of around $1,640 overnight.

Manufacturing indexes from the major world economies are starting to show the negative effects of the covid-19 outbreak. U.S. companies are also mentioning the illness as impacting their bottom lines when earnings reports are released.

The key outside markets today see crude oil prices lower and trading around $53.00 a barrel. Meantime, the U.S. dollar index is weaker on a corrective pullback after hitting a multi-month high Thursday.  

U.S. economic data due for release Friday includes the US flash manufacturing PMI, the services PMI, and existing home sales.

Technically, the gold bulls have the strong overall near-term technical advantage to suggest still more upside in the near term. A three-month-old price uptrend is in place on the daily chart. Bulls’ next upside price objective is to produce a close in April futures above solid resistance at $1,650.00. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at this week’s low of $1,581.80. First resistance is seen at the overnight high of $1,639.40 and then at $1,650.00. First support is seen at the overnight low of $1,621.60 and then at $1,619.60. Wyckoff’s Market Rating: 8.5

March silver futures bulls have the overall near-term technical advantage with this week’s strong gains. Silver bulls’ next upside price breakout objective is closing prices above solid technical resistance at the January high of $18.895 an ounce. The next downside price breakout objective for the bears is closing prices below solid support at this week’s low of $17.67. First resistance is seen at today’s high of $18.57 and then at $18.75. Next support is seen at the overnight low of $18.335 and then at Wednesday’s low of $18.135. Wyckoff’s Market Rating: 6.5.

By Jim Wyckoff

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