This investment smashed the Dow’s 20-year return

Wednesday, 11 September 2019
Adelaide, Australia
By Bernd Struben

Over 20 years — 1999 to 2019 — and despite more stimulus than the world had ever seen, the Dow rose only 143%. If you held gold, on the other hand, you multiplied your money more than five times. It was not US industry that triumphed in the 21st Century. It was gold…old, dumb, immobile gold.’

Agora Founder, Bill Bonner

We pick up today where we left off.

With gold. Or in the words of Bill Bonner, ‘old, dumb, immobile gold’.

Specifically, I want to highlight the critical role central bank actions are playing in driving bullion’s surging price…up 16.7% since 21 May.

First, central banks are on a gold buying spree, led by China, Russia, Poland, and Kazakhstan. Yes, Kazakhstan.

Now, you and I can’t influence the gold price. Even if we leveraged up and poured every cent we had into bullion — not recommended! — it wouldn’t have a measurable impact on the supply and demand dynamics.

But when a collection of central banks begins accumulating gold it’s a different story. Any time demand for a commodity with a fixed supply ramps up, you can expect the price to go up. That’s page one of any introductory economics textbook.

Yesterday we noted that China has added almost 100 tonnes of gold to its reserves since December.

Today we turn to Russia.

Russia’s central bank remains the world’s top bullion buyer, a position it’s held for several years now. It edges out China, purchasing some 106 tons of gold so far in 2019.

Bloomberg tells me Russia’s gold reserves now exceed 2,200 tonnes. Only four other nations have a larger stockpile.

Now not all of that gold was bought on the open market. There’s gold in them thar Russian hills as well, after all. But 2018 marked the first year Russia bought more gold than it mined.

And the strategy is paying off.

With the gold price rallying alongside Russia’s rapid accumulation, the value of the nation’s gold reserves is up a remarkable 42% over the past year, to US$109.5 billion (AU$159.8 billion).

See for yourself:



chart image
Sources: IMF / Bloomberg
Click to enlarge

The US increasingly flexing its muscles via tariffs and economic sanctions that depend on the dominance of the US dollar in global trade. Meaning this trend is likely to continue as Russia — like China — seeks to diversify away from the all mighty greenback.

From Bloomberg:

“Russia prefers to cushion its macroeconomic stability through politically neutral tools,” said Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki. “There is a massive substitution of U.S. dollar assets by gold — a strategy which has earned billions of dollars for the Bank of Russia just within several months.”

Central bank purchases are one of the factors that international gold experts Jim Rickards and Shae Russell say will send gold to over US$1,600 per ounce by the end of the year.

Here’s Jim:

In terms of supply and demand, supply has been flat for about five years at around 4,500 tons, but demand is rising. Central banks have gone from being net sellers to net buyers. That’s a very big deal, and now institutional interest is picking up as well because of the recent price action.’

So that’s one way central bank actions are helping to drive gold’s bull run.

We’ll look at a second way they’re likely to make an even larger and more immediate impact right after a peak at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 73.92 points, or 0.28%.

The S&P 500 closed up 0.96 points, or 0.03%.

In Europe the Euro Stoxx 50 index closed up 3.97 points, or 0.11%. Meanwhile, the FTSE 100 gained 0.44% and Germany’s DAX closed up 42.61 points, or 0.35%.

In Asian markets Japan’s Nikkei 225 is up 173.35 points, or 0.81%. China’s CSI 300 is down 0.42%.

In Australia, the S&P/ASX 200 is up 5.44 points, or 0.08%.

West Texas Intermediate crude oil is US$57.87 per barrel. Brent crude is US$62.81 per barrel.

Turning to gold, the yellow metal is trading for US$1,491.60 (AU$2,176.88) per troy ounce. Silver is US$18.14 (AU$26.47) per troy ounce.

One bitcoin is worth US$10,130.77.

The Aussie dollar is worth 68.52 US cents.

There’s only one winner in this scenario…

Getting back to central banks…and gold…we have a huge week ahead.

The European Central Bank (ECB) leads the charge when they meet tomorrow (tomorrow night Aussie time) for their next rate decision.

The ECB is already in negative territory, ‘paying’ -0.40% on interest on reserves. This is intended to prod banks into lending and spurring the laggard EU economy.

But signs are pointing to continued sluggish growth. And with Germany’s GDP going backwards last quarter, outgoing ECB president ‘super’ Mario Draghi is looking to take rates even further into the negative. Along with restarting the bank’s QE (bond buying), which was optimistically suspended nine months ago.

Now there’s some resistance within the bank itself. But I expect Draghi will get his wish. And that will heap more pressure on the US Federal Reserve when they meet for their rate call next Wednesday.

The Fed will almost certainly cut by another 0.25%, its second rate cut this year. But Trump, of course, will be demanding more. Whether he gets it next week or not remains to be seen. But the trend for rates in the world’s leading economies remains decidedly down. Enough so that America’s biggest bank is preparing for the worst.

From The Australian:

The biggest bank in the US is starting to prepare for how to make money if interest rates in the US drop to zero.

James Dimon, chief executive of JPMorgan Chase & Co, said at an industry conference the bank has begun discussing what fees and charges it could introduce if interest rates go to zero or lower.

While Mr Dimon stressed he wasn’t expecting zero rates at this point, the fact that he would entertain such a conversation is a sign of how sharply the environment has changed.

Now, lower interest rates alone tend to drive gold higher. But the real kicker will be when negative real interest rates become the norm.

That’s real interest rates — which take inflation into account — not nominal rates, mind you. While nominal interest rates are plumbing the depths, today’s exceptionally low inflation has kept most real rates positive.

But Jim Rickards has the insider’s scoop that’s going to change:

I’ve met with central bankers recently and they said they have to get to negative real rates. They’ve got to bring those nominal rates down, a little bit like a cat chasing its tail.

In other words, if inflation’s still getting lower, you have to cut rates even more to get to negative real rates.

That’s the major drive of the gold price. I’ve heard it straight from some top central bankers and it’s going to continue. We’re probably heading to zero in the US, not all at once, it might take a year or so to get there, but that’s just very bullish for gold.

So, all the vectors, sometimes they point different directions, but right now they’re all pointing to higher gold prices.

Jim’s unique geopolitical insights and his outlook for the gold market are all on the agenda for this Friday’s ‘2019 Gold Mania Summit’.

As are Aussie gold expert Shae Russell’s investment methods that could see you potentially make $37 for every $1 move up in the gold price.

That’s courtesy of our sister company, Agora Financial Australia (AFAU).

Publisher James Woodburn recently got Jim and Shae together for a comprehensive interview in Sydney. It’s all in the final stages of production now to be broadcast at 2pm this Friday.

As a subscriber to one of our paid services, you can tune in for free. We’ll send you the link on Friday.

Keep an eye on your inbox.

Cheers,
Bernd