The Dawn of Gold


by Marin Katusa, Katusa Research:

Many believe July 2020 was one for the gold history books, but it wasn’t even a top 10 move in gains for gold historically.

In fact, last month’s big move in gold to all-time U.S. Dollar highs was the 23rd best spot monthly return.

Let that sink in.

A new all-time high was hit, and yet the “big” monthly move that’s drawn a generation of new investors and captured the imagination of a whole new set of investors… isn’t even a top 20 monthly gain percentage wise for gold historically.

We are far from the top in gold.

Top Gold Spot Monthly ReturnGold and silver stocks have responded, catching a tailwind not seen in a decade.

As I showed in my premium newsletter to subscribers this week, institutional money hasn’t even entered the sector in a big way.

We published very detailed analysis of the flow of funds from institutions (for paid subscribers only) and we shared our unique conclusions based on the proprietary data.

A Path to Profit – The Fed Can’t Print Gold

In the 12 years since the Great Financial Crisis (GFC), the U.S. Fed, European Central Bank, Bank of England and Bank of Japan have invented new ways of printing money and keeping the financial markets afloat.

Below is a chart showing how much the total assets (balance sheets) of central banks have ballooned during the Crisis.

Central Banks Ballooning Balancing SheetsExpansionary monetary policy is beneficial to gold.

Now, there are two primary schools of thought on this:

  1. Inflationary
  2. Deflationary

Regardless of which scenario plays out, gold will benefit because that is its primary draw as an investment: a hedge against fluctuations in the real value of money.

The pandemic and lockdown produced record inflows into:

  • Safe-haven investments like AAA-rated government bonds (often with negative real and nominal yields),
  • Large Tech stocks with solid balance sheets (Think paying for financial safety in the FANG stocks)
  • Currencies like the USD and JPY, and
  • Gold and silver.

Gold Goes Mainstream

The once “pet rock” and “barbarous relic” is now on the lips of every talking head.

Flip on the financial news nowadays and every trader and portfolio manager seems to be extolling the virtues of gold and silver.

Now you’ll hear guys like Jim Cramer talk about how gold miners like Barrick, Newmont and Agnico Eagle are some of the better buys right now.

Looking at the YTD returns below, it’s hard to argue that gold and silver aren’t the clear winners in this bull market rally.

Comparative Investment ReturnsEconomists like Nouriel Roubini and Mohamed El-Arian are talking more about gold and the benefits of the safe haven metal in these uncertain times.

Even Goldman Sachs is changing their tune. They once mocked gold as an investment that’s nearly always beaten by the market.

They’ve since joined the chorus of major financial institutions like Bank of America and Citigroup ringing the alarm on currency-debasement.

In the next chart, you can look at how gold prices have surged, with a Relative Strength Index (RSI) showing how prices are reaching an overbought level not seen since mid-2011.

Gold Price AnalysisBut that is one indicator.

Things have changed so much over the last decade and we are just starting to see the impacts of MMT on the price of gold.

Is There Enough Gold to Meet Demand?

This year, as many as 119 producing gold mines in 18 different countries have either been offline at some point. Or operating at reduced capacity due to COVID-19.

Estimates vary as to how much of 2020 production was lost as a result of the pandemic. The last COVID-19 impact report published by S&P Global Intelligence estimated a 10% decline in their forecasted gold output for 2020 (approximately 11 million ounces).

The 10% estimate was also affirmed by the World Gold Council, despite sourcing their data elsewhere.

So, let’s go with the 10% figure. As I have respect for both outfits who have come to the same conclusion.

Previously, 2020 gold mining output was projected to increase by 3.7% YoY. Instead it’s fallen by at least 6.7%, barring any unforeseen shutdowns.

The most important statistic from the data was an estimated US$2.5B in revenue from forecasted gold production lost. For lost silver production, this amount was US$502 Million.

Gold ProductionGold Investor Beware

Gold projects that weren’t economic at $1,750 per ounce suddenly look like no-brainer investments.

  • Land packages that were once barren moose pasture are now labelled as “greenfield” mining projects.

For new investors and speculators in the gold space don’t forget “buyer beware”.

Not all gold projects are equal.

There has always been 3 types of management teams in the precious metals sector: The Innovators, Imitators and Hot Dog Vendors.

It’s just the latter two (the imitators and hot dog vendors) aren’t around during a bear market, but pop up during a bull market like a plague.

  • Make sure you know which management team you are backing. Everything starts with great people.

Flavor-of-the-day companies will chase any bull market.

In the late ‘90s, there were thousands of dot-com companies. In 2007, there were literally over 500 hundred uranium companies on the Stock Exchange, where there were only 15 five years earlier.

In 2017, the cryptocurrency market exploded, with over 850 coins and new celebrity initial coin offerings announced daily.

There will be an explosion of new precious metals companies and financings looking for your money.

Or worse, to leave you with nothing better than an old hot dog.

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