Yellow metal versus four decades of demonetisation

  • The unique gold window
  • The ‘Great Gold Hoax’
  • Penny gold stocks — you’ve got to know where to look
  • The paper gold pyramid is about to topple
  • Swiss gold explains supply and demand
  • The implications of global gold flows

A rare window in the gold markets has opened up. This gold window has opened up at least four times in the past four decades. Once from 1976 — 1980, once again from 1992–1996, once again from 2000- 2007 and it’s opened again right now.

Jim Rickards

Jim sent me a video last night, direct from Brazil, where he was attending a conference for an exclusive group of investors. If you think they were discussing gold…move to the front of the class!

But before I explain more about this gold window Jim is talking about in the above quote, let’s look at the markets.


Overnight, the Dow Jones Industrial Average gained 9.79 points, or 0.05%.

The S&P 500 was up by 0.64 points, to 2,139.12.

In Europe, the Euro Stoxx 50 index was down 3.45 points, to 2,964.86. Meanwhile, the FTSE 100 was up by 17.24 points, or 0.25%. It’s similar story with Germany’s DAX index, up 19.99 points for a total gain of 0.19%.

At time of writing, Japan’s Nikkei 225 index is up 1.11%, or 183.02 points. China’s CSI 300 index is up 0.07 points, to 3,257.47.

Back home, the S&P/ASX 200 is up by 36.80 points today, currently trading at 5,340.40.

On the commodities markets, West Texas Intermediate crude oil is trading for US$44.79 per barrel. Brent crude is US$47.82 per barrel.

Gold is US$1,310 (AU$1,738.38) per troy ounce. Silver is US$19.11 (AU$25.34) per troy ounce.

The Aussie dollar is marginally lower than this time yesterday at 75.37 US cents.

The unique gold window

Gold is money. And money people forget that. And while central banks have dabbled in and out of owning physical gold, there’s the famous ‘Gordon Brown’s Bottom’, where the UK’s Chancellor of the Exchequer — fancy talk for a country’s Treasurer — famously sold 395 tonnes of gold over 17 auctions between July 1999 and March 2002, receiving an average price of US$276 per ounce.

Sure, the UK raised 2.2 billion pounds.

However, this gold selloff really enabled the UK to ‘invest’ in the euro. Arguably, you couldn’t call it investing in the euro…more like financially supporting the fiat currency experiment of our time.

Australia had its own Gordon Brown bottom moment.

In the first six months of 1997, the Reserve Bank of Australia sold 167 tonnes of the shiny metal. The central bank netted $2.4 billion along the way. But rather than selling the gold at auction, it was a one-off transaction through a broker. Leaving Aussies with a paltry 79 tonnes sitting somewhere in a vault.

In a paper obtained by the Australian Freedom of Information laws, The Australian claims that the RBA felt the ‘commodity’ — note that they call gold a commodity, and not a currency — wouldn’t play a role in a future financial crisis.


However, there’s new data to suggest that some central banks are buying physical bullion at a rate not seen since the late 1970s.

A report from the Official Monetary and Financial Institutions Forum (OMFIF) shows central banks have been buying up gold at an average rate of 350 tonnes per year.

To quote David March from OMFIF, ‘this has restored the yellow metal as a central element of money management after four decades of attempted demonetisation.’

So if central banks are buying physical gold, should you?

Subscribers of Strategic Intelligence would know that I always advocate a 10% allocation of your investable wealth into physical gold.

But atop that physical allocation, there’s another opportunity ahead of you. A potentially much bigger opportunity and that’s what Jim Rickards means when he says ‘a rare window’ for the gold market has opened up.

I’m going to borrow some very simple analysis from our company’s founder, Bill Bonner, today: ‘When the Dow is worth less than 5 ounces of gold, buy stocks and sell gold. When the Dow is worth more than 10 ounces of gold, sell stocks and buy gold.

In the chart below, Bill reasons that there have been five times in which this Dow and gold correlation has come into play:  

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Source: Bonner and Partners
Click to enlarge

Not only that, if you have followed this history of gold, you could have doubled the value of your wealth with each swing by using this simple formula.

Right now, five ounces of gold would set you back US$6,570 (AU$8,710). 10 ounces of gold is US$13,140 (AU$17,400), well below the Dow’s current trading level of 18,129.96.

Based on over 30 years of experience, Bill is pointing out that now is the time to buy stocks. But which ones? I’ll get to that, but first…

The ‘Great Gold Hoax’

Over the past two days, we’ve shown you two exciting videos from Jim that explains how the greatest gold panic is coming. No one understands the intricacies of the gold market like Jim.

To prove how deep Jim’s connections run, he had a secret meeting with a man he will only refer to as ‘Goldfinger’. And he flew in to Switzerland to meet with this Goldfinger.

But it wasn’t any ordinary meeting. No. Jim was picked up from his hotel in a car with blacked out windows and taken to an unknown location. To this day, Jim still doesn’t know exactly where in Switzerland he was.

After passing through heavy steel doors, biometric security, and a thorough security screening, Jim finally gained access to a vault that contained millions of dollars of physical bullion.

In this third instalment, Jim highlights the coming market panic. He points out the dangers government officials are oblivious to. If you missed the first two videos, don’t worry. Just click the link above. You’ll find all three videos there.

I highly recommend you watch all the videos. Jim is exposing the paper gold market in a way that no other analyst has before.

Penny gold stocks — you’ve got to know where to look

Not all gold stocks are the same. And even though we’re confident the gold price is set for a super-spike, any old gold miner won’t cut it. The big boys in town — Newcrest Mining [ASX:NCM] or Evolution Mining [ASX:EVN] — sure, they’ll go up a little bit. But they aren’t the ones I’m talking about.

I’m talking about the small, more speculative mining stocks no one’s heard of.

The sort of companies most people don’t bother with.

For example a tiny unheard of gold miner, Middle Island Resources [ASX:MDI], is a up a massive 981% this year. What about Alicanto Minerals [ASX:AQI]? Up an incredible 775% for the year to date. Then there’s Primary Gold [ASX:PGO], returning 377% this year.

Not one of these companies has a market cap larger than $50 million.

Jim and I are working hard on bringing a new project to Australia. In fact, I’ll bet there’s nothing else like it in the market. We are looking for speculative gold mining stocks for the brave investors that are chasing massive returns. There are hundreds of opportunities in the Aussie market. And we are going to bring them to a select group of Aussie investors.

Stay tuned. 


Shae Russell


The Paper Gold Pyramid Is About to Topple

Investors who understand physical gold flows stand to make fortunes in the months and years ahead.

Last June I visited Zurich and was able to meet with some of the most knowledgeable experts and insiders in the physical gold industry. Last March I visited Lugano, where I met with the top executive of the world’s largest gold refinery. As a result of these visits to Switzerland, and other points of contact, I have been able to gather extensive information on the major buyers and sellers of gold bullion in the world, as well as the exact flows of physical gold.

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Inside a secure vault near Zurich, Switzerland with an array of 400-ounce gold bars. Each bar is individually stamped with the name of the refinery, a serial number, purity, name of the assayer, and the date it was refined. These bars are worth about US$535,000 each at current market prices.

This information about gold flows is critical to understanding what will happen next to the price of gold. The reason is that the price of gold is largely determined in ‘paper gold’ markets such as COMEX gold futures and gold ETFs. These paper gold contracts represent 100 times or more the amount of physical gold available to settle those contracts.

As long as paper gold contracts are rolled over or settled for paper money, the system works fine. But, as soon as paper gold contract holders demand physical gold in settlement, they will be shocked to discover there’s not nearly enough physical gold to go around.

At that point, there will be panic buying of gold, the price of gold will skyrocket thousands of dollars per ounce, gold mining stocks will increase in value by 10 times or more, and paper gold sellers will move to shut down the futures exchange and terminate paper gold contracts because they cannot possibly honour their promises to deliver gold.

The key to seeing this gold buying panic in advance is to follow the flows of physical gold. Once the price of physical gold starts to move up on basic supply and demand fundamentals, the stage is set for corresponding increases in paper gold prices and the beginning of a price super-spike as more and more paper gold-holders turn from the paper market to obtain physical gold that is already in short supply in the physical market.

As long as supply and demand for physical gold is in rough equilibrium, there is no catalyst for a sudden spike in gold prices apart from the usual geopolitical flight to quality demand. But, as soon as demand begins to overwhelm supply, then it’s ‘game on’ for significantly higher physical gold prices, followed by the toppling of the inverted pyramid of paper gold contracts.

Swiss gold explains supply and demand

What information do we have about the flows of physical gold that will help us to understand the supply/demand situation? That’s a mixed bag. Some physical gold players are completely opaque and do not report their purchases or holdings transparently. The Chinese and Saudi Arabians are the least transparent when it comes to reporting their gold market activities.

On the other hand, the Swiss are highly transparent. The Swiss report gold imports and exports by source and destination on a monthly basis.

The Swiss information gives us a window into the world. That’s because Swiss imports and exports are mostly about the Swiss refining business, which is the largest in the world. There are no major gold mines in Switzerland, and Swiss citizens are not known as major buyers of gold — unlike, say, Chinese or Indian citizens. The Swiss watch-making industry does use a lot of gold, but imports are balanced out by exports; Switzerland itself is not a major destination for Swiss watches.

In effect, Switzerland is a conduit for much of the gold in the world. Gold arrives in Switzerland as 400-ounce good delivery bars — the kind I’m holding in the photo above — doré bars (those are 80% pure ingots from gold miners), and ‘scrap’, that’s the term for jewellery and other recycled gold objects.

This gold is then melted down and refined mostly into 99.99% pure one-kilo gold bars, worth about $45,000 each at current market prices. These one-kilo ‘four nines’ quality bars are the new global standard bar, and most favoured by the Chinese.

By examining Swiss imports and exports, we can see where the supply and demand for physical gold is coming from and how close to balance — or imbalance — that supply and demand is. This information can help us to forecast the coming super-spike in gold prices.

The first chart below shows Swiss gold imports and exports in total. The red bars in the chart below show whether Switzerland is a net importer or exporter by month.

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What is revealing about this chart is that Switzerland has been a net exporter of gold for the past four months. More gold is going out than is coming in. This means demand remains strong, but supplies are tight.

Switzerland does not produce its own gold. Some refiners may have inventories, and there are gold vaults in Switzerland that are a potential source of supply. But the high-net worth individuals who keep their gold in Switzerland are long term buy-and-hold investors, and tend not to sell. On balance, these net outflows are not sustainable. If the outflows persist, the price of gold is likely to go up because that’s the market’s solution to excess demand.

Now let’s take a look at Swiss exports alone, broken down by country. That’s shown in the next chart. The ‘big five’ destinations are China, Hong Kong, India, the UK and the US.

Those five destinations account for 91% of total Swiss gold exports.

chart image

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Hong Kong demand is mostly for re-export to China. This is revealed through separate Hong Kong import/export figures, which are also considered reliable by international standards. Using Hong Kong as a conduit for Chinese gold is just another way China tries to hide its true activities in the physical gold market.

Chinese and Indian demand — about 70 tons in total, including Hong Kong — is mostly for individual consumption, either as gold bars or jewellery. I consider jewellery ‘wearable wealth’, and not materially different from bullion demand. Bear in mind that China is the largest gold producer in the world, so there is an additional 450 tons per year of indigenous mining output available to satisfy China’s voracious demand for official gold held by its central bank and sovereign wealth funds.

The Chinese and Indian demand is strong, but down somewhat from prior periods when it ran over 100 tons per month. Historically, Indian demand is cyclical, and tends to pick up in the fourth quarter.

Chinese demand has been tempered by the recent strong dollar, which makes gold more expensive when purchased for yuan. That headwind may be about to dissipate if the Fed engineers a weaker dollar — which I expect — to deal with a slowing US economy.

The 102 tons exported to the UK and US is almost all to satisfy demand from ETF investors. Will this strong demand persist? ETF demand runs in a feedback loop relative to gold prices. When gold is going up, ETF demand goes up also, which puts more upward pressure on the price. This also works in reverse, as we saw in 2013. When gold is going down, ETFs tend to disgorge gold, which puts further downward pressure on the gold price.

Either way, ETF demand tends to be pro-cyclical, amplifying whatever gold is doing based on other factors. If we have reason to believe that gold prices are going up on their own, ETF demand will tend to drive the price even higher — and faster.

The final piece of the puzzle is the matter of Swiss gold imports. Where is the gold, that Switzerland itself refines and re-exports, coming from? This information is shown in the last chart below.

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The major sources of gold shipped to Switzerland are Burkina Faso, Germany, Ghana, Italy, Hong Kong, the UK, Peru, Russia, South Africa, Thailand, Turkey, UAE, and the US. Those 13 sources account for 73% of Swiss gold imports.

Burkina Faso, Ghana, Peru, Russia, the US and South Africa represent mining output. This has been fairly constant in recent years, and is unlikely to expand or contract significantly month-to-month.

Gold from Germany, Italy, Hong Kong, the UK, and Thailand is mostly scrap (Thailand is a conduit for scrap gold from Southeast Asia, including Vietnam, Indonesia and Malaysia, among others). Some of the UK gold consists of old 400-ounce bars acquired directly from bullion banks.

The interesting cases are Turkey and the UAE, which alone account for almost 30% of Swiss gold imports. The UAE is a major vault operator for Middle Eastern and Russian gold bullion. Turkey is a conduit for gold from the Persian Gulf and Iran. Until recently, Switzerland imported almost no gold from the UAE, as it was unavailable. The Turkey and UAE figures reveal major dishoarding by Middle Eastern and Russian investors, probably in response to persistently low oil prices and the need for cash to meet dollar-denominated debt obligations.

The implications of global gold flows

I consider gold a form of money, and we analyse it the same way we would examine US dollars, euros, yen or yuan for potential instability and sharp price breaks that provide the opportunity for huge profits.

The most powerful indications and warnings right now are the rising price of oil and the prospect of a weaker US dollar as the US economy heads for recession. The rising price of oil will alleviate some pressure on US dollar debtors in the Middle East and Russia, reducing gold outflows from the UAE. A weaker dollar will make the dollar price of gold more attractive to Chinese buyers.

Look at the import and export charts above. Imagine increased exports to China, and reduced imports from the UAE and Turkey. The result will be larger net exports from Switzerland, a kind of ‘trade deficit’ in gold.

Supplies of gold in Switzerland are already tight. I heard this firsthand from my refinery and vault contacts there. If that shortage gets worse, as we expect it will, there’s only one way to adjust the Swiss gold trade imbalance — higher prices. Once the higher prices kick in, the ETF demand will send it into overdrive. Then it’s just a matter of time before the whole paper gold pyramid comes crashing down.

Gold prices are set to skyrocket based on a combination of supply and demand fundamentals and the ETF pro-cyclical feedback loop.

If gold goes up, the prices of gold mining stocks go up even faster. In effect, buying gold mining stocks is a leveraged bet on the price of gold itself.

All the best,

Jim Rickards