Why invest in Gold and Silver(Not Platinum/Palladium)

PM1 – WHY INVEST IN GOLD & SILVER? (NOT PLATINUM/PALLADIUM!)

Gold has been sought after as a store of value for more than 5000 years, through wars, depressions and recessions.  Silver a.k.a. poor man’s Gold, it is far more volatile.  Volatility means that when Gold goes up 10%, Silver goes up 20%-40%, but when Gold goes down 10%, Silver goes down 20%-40%.  Throughout this document, I will refer to Gold, but what holds for one, mostly holds for the other.  Platinum and Palladium (P&P) are far more contentious/complicated, because at least 50% of P&P is used in the automotive industry and a far lower percentage is used in coins, bars and jewellery.  However, in the next two decades, the demand for P&P is likely to fall by as much as 50%, as most cars will become electric. If you want to grasp this P&P aspect better, read my Futurism2 article “Just how disruptive will Technological Change be” at https://eelcogold.com/.

The demand/supply dynamics for Gold are very different from Silver. Almost all the Gold ever mined is still above ground, as more than 80% of it is stored in bank vaults or in jewellery, which means there is a nearly unlimited supply provided the price is right.  On the contrary, most Silver is used up in various industrial applications and less than 40% of silver is stored in bank vaults and jewellery.  This means that Silver supply shortfalls could arise if new sources are not found continuously, which could bias Silver to the upside.  Regardless, when the price of Gold rises materially, the demand for Silver bullion escalates rapidly.

The price/popularity of Gold broadly fluctuates inversely with equity markets.  i.e. Typically, when markets are rising, Gold goes down because “Gold does not pay dividends or interest”.  Contrarily, when markets correct significantly, there is often a flight to the safety of Gold, which pushes the price up.  However, these are mostly insignificant short term 1-2-year market corrections and Gold price up-runs.  The Big Question?  When and why does Gold have a huge “generational” bull market run?  This only happens during periods of Negative Real Rates and Negative Real Returns (NRR), i.e. When interest rates and stock market returns are less than inflation, which happens when “Real” interest rates/investor returns are negative.  During the 1970-80 Generational Gold Bull Market, it happened because inflation was rising very rapidly, and interest rates were playing “catch up” (see the period leading into the peak on chart below).  Contrarily, the current Generational Gold Bull Market started when stock markets fell in 2000 and interest rates declined until they became extremely low – i.e. Less than inflation.  Look how US 10-year yields fell for 35 years from 1981 into global “historic” lows towards the end of 2016 as shown below.  NB! They went negative in the EU and Japan.

Gold is currently in a really huge “generational” bull market run that started in 2001 and should end with Gold around $8 000 to $10 000 about 2025.  It is worth noting that Gold has offered far better returns than both the equity and bond markets during the period from 2000 to 2018.  The dynamic of the moves in the price of Gold so far, can be explained as follows:

  1. 2001 – 2011: Flight to the safety of Gold due to stock market crashes and NRR.  The 2000/2003 tech crash, interest rates falling globally, a moderate stock market rally, and then the 2007–2009 sub-prime crash followed by QE with further declines in rates to historic lows – negative rates in most of EU and Japan;
  2. 2011 – 2015: NRR as interest rates continued to decline, but Gold was not attractive since Global Equities offered better returns than Gold, which was good for Gold, because Gold was overbought and needed to correct.  The uncertainty following the 2009 crash faded by 2011 as Equities had recovered enough and continued to rise rapidly, so they offered better returns than Gold.  Gold corrected into Dec 2015;
  3. 2016 – present: Flight to the safety of Gold because investors anticipate a big correction/crash and NRR in 2018 or 2019, as this stock market recovery is now the longest on record and overvalued on almost every metric.  In addition, we have the first signs of inflation, which are being fuelled by Trump’s trade wars.  When stock markets crash, there is always a flight to the safety of Bonds, which will drive interest rates down again – and so we will be back into NRR territory.  This recession could be long as the attendant consumption collapse is likely to be huge due to record levels of Government, Corporate and Private debt.  To understand this statement, one must understand the Debt is future consumption brought forward and that this starts to unwind as interest rates/inflation rise.  See my Econ3 article and other economic articles that explain these concepts at https://eelcogold.com/;
  4. Near future: Following the multi-decade period of falling rates, which should end after the pending stock market correction/crash in the next 2-3 years (2020?), we are likely to see an extended period of rising inflation and trailing interest rates, like that of the 1970’s, both of which would be good for Gold.

CONCLUSION

For centuries, Gold has been a store of value and historically it was always included in every investment portfolio as a hedge against uncertainty.  We are now again facing such a time of uncertainty, where every portfolio should have 10%-25% in Gold or Gold shares.  Gold Shares are less attractive in South Africa due to threats of nationalisation, etc.

From the point of view of Technical Analysis of the charts, the point at which one should buy Gold is when it again rises above $1375 – $1400 (true as at Mid-September 2018).


Note!  All these reports are educational, free and published weekly.

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Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult a qualified investment advisor.

Resumption of the current generational gold bull market

PM2 – RESUMPTION OF CURRENT “GENERATIONAL” GOLD/SILVER BULL MARKET

Before we go further, we have to question this word “Resumption” as it implies that the Sept 2011 peak was not the final peak of this gold bull market.  First, one needs to know that true bull markets usually end in an exponential “irrational exuberance” peak and the best way to evaluate if the action “was/is” irrational, is by way of Year on Year price change.  If one looks at the chart below from a great article by Steve Saville, posted in Jan 2014, we see that the peak in Sept 2011 on the right, in no way resembled the peak in 1974 and the final peak in 1980 on the left, which implies that this Generational Gold Bull Market has not yet peaked.

Furthermore, the use of the word “Resumption” pre-supposes that the bottom is in and I will try to substantiate this, by way of fractal analysis and the charts below.  NOTE! A Fractal is a pattern that repeats.  However, while Fractal patterns repeat, as they are usually fairly similar in “shape”, the price targets and time frames would not be exact.

Using fractal analysis, I see the current Generational Gold Bull Market (GGBM) playing out much like the 1970-1980 GGBM, which played out as shown below.  Let us track Gold’s price action by way of the matching numbers below, which show that it moved as follows:

  1. Gold rose for 4 years from $20/1970 to a peak $196 at in Dec 1974 at the red line. It then
  2. Dipped $90 into mid 1976 to $104 (retracing +/-50% of the rise from $20 to $196). It then
  3. Rose back to the red line at $196 early 1978, where it zig-zagged as it dipped a bit, broke through $196 and retested the red line at about $196 by end 1978. Finally,
  4. Gold rose rapidly, within a year to over $850 by January 1980. Note that the price then dropped significantly, rose and then dropped further to about 34% of the peak price.

1970-1980 market pictured below

Now let us compare the above chart with the current “Generational” Gold Bull Market that started in 2000/2001, with the following “matching” stages as shown below:

  1. Gold took 10.7 years, rising from $255 in the year 2000, to reach its first peak at $1,920 in Sept 2011. It then
  2. Dropped $885 over the next 4.3 years to reach the bottom of the dip in December 2015 at about $1,035 (retracing +/-50% of the rise from $255 to $1920), and Gold then
  3. Reached the previous peak above the “black” line at +/1 $1,920 around Sept 2020, 4.7 years later. The price action from 2 up to 3 clearly shows that the bottom is in and that Gold rose strongly from Jan 2016 into 2020.  When Gold again got to $1,920, it broke above $1,920 and dropped back to retest the black line from above, as it did in 1978.  This consolidation will take 1-2 years to play out as per the “pro-rata” table below.
  4. Projection: The future equivalent peak Gold target at 4 cannot be shown here but is inferred by the “pro-rata” table further below, which suggest Gold will get over $8,300 or closer to $10,000. After that final peak, Gold will probably drop back to about $3,000.

2000-2020 (So far, foundation for 2025/2026) market pictured below

ASIDE FYI.  To illustrate how fractal patterns work on smaller time scales, I show the two extremely similar fractals of the dips from Dec 1974 into Aug 1976 (1.5yrs on left) and from Sep 2011 into Dec 2015 (4.3 yrs on right).  Note the red parallel range just after the peak on the left, the red declining wedge, and the break above the blue resistance line.

Final 2025/2026 Gold/Silver market peak

Next, we want to look at “How high” and “When”.  In the table below I try to do a pro–rata comparison of the fractals, using the time and price targets of the 1970 – 1980 Generational Gold Bull Market, to predict the future action in the current GGBM.  The figures in red are projected.  In the 2nd box from the right, I show that the current GGBM is taking about 2.8 times longer to play out and in the box on the far right, I show that the price targets are about 10 times higher.  All this indicates that Gold is likely to get to at least $8,300.

However, I project a higher target at over $10,000, because this time around the combined economic circumstances are far worse than they were in 1980, as follows:

  • Sovereign Debt is at unsustainable levels, and rising rapidly, even in developed countries.
  • Deficit spending continues unabated globally, as all central banks print money like crazy.
  • Stock markets are seriously overvalued by most metrics.
  • The global economy was in a mess before Covid, and Covid made it all worse.
  • Interest rates are at historic lows, below inflation, and mostly negative.
  • Artificially low interest rates have caused mispricing of assets.
  • Key economic indicators are manipulated (eg. Understated inflation and unemployment).
  • Things are very tricky geo politically and the US and China trade war is not helping.
  • Due to the “Fiat” money shenanigans comprising QE, TARP, ZIRP, etc. a significantly higher peak, with Gold over $10 000, is a distinct probability. I know this sounds far-fetched, but no more radical than $850 was in 1980 and, remember, it is not Gold that is going up, it is the currencies and confidence in the system that are going down.

How realistic is a target of $10 000 for Gold if the DOW and S&P collapse?  Looking at the DOW:GOLD ratio below, the ratio was at 2.0 in the early 1930’s, when the world was still on the Gold standard.  It then got down to 1.3 in Jan 1980 after the world abandoned the Bretton Woods Dollar Gold standard in 1971.  Will it go to below 1.0 next time following this era of extreme Fiat money printing in the 2000s – see dashed black line?

Remember, these are high probability plays, not guarantees.  If the DOW Gold ratio goes back down to say 1:1, will that be with the DOW down 70% from its current level at $34 000+ (04/21) to $10 000 and Gold at $10 000, or with the DOW down 90% at $3 500 and Gold at $3 500.  The latter seems extreme, but the 1929 crash saw a 90% drop.  Worse still, if the ratio goes down to say 0.5:1.0 as implied by the chart, will that be with the DOW at $5 000 and Gold at $10 000.  While we play these games and convince ourselves that the future looks very promising, only time will tell.  My take is that Gold will bet over $10 000.

SILVER

Sir Isaac Newton set the Gold:Silver ratio at 16:1, as that reflected the ratio of Gold vs Silver in the Earth’s crust, when determining the value of Sterling Silver currencies.  In 1980, with Gold at $850 and Silver at $50, the Gold:Silver ratio was at 17.  Currently, (as at 04/21), the Gold:Silver ratio is at about 68:1.  If this ratio again drops below 20:1 in 2025/2026, when Gold peaks at $8,300, Silver should be over $400.  If Gold gets to $10,000, Silver should get over $500.  This provides about a 15 fold multiple from the current Silver price of $26.00 (at 04/21).

CONCLUSION

There is a very high probability that Gold and Silver will provide better returns than Bonds and Equities in the next 5-6 years.   Therefore, one should put 10-25% of one’s wealth into precious metals, of which say 5%-10% should be in Silver.  Because markets are overvalued, the balance of one’s money should probably be in defensive asset classes like Cash, Money Markets and Bonds.  Below, I provide a list of “where to buy” and my 15 flags that will tell you when Gold is reaching a peak.  You can get an “overbought or not” update from me anytime.

I say that Gold will peak in 2025/2026, but it may continue if inflation really manifests, as that will perpetuate the negative real returns.  See my PM Update report – When Does and Will Gold rise materially, to better understand this.

Where and what to buy – Offshore addresses included

One can buy Gold or Silver Krugerrands from Randburg Coin or Gold Reef City Mint, who are probably the fairest and most honest dealers.  Do not fall for anything other than known bullion coins such as South African Krugerrands, American Gold Eagles, Canadian Maple Leaves, Austrian Philharmonics, Australian Nuggets, to name but a few.  Bullion coins are those where the price is based on the Gold/Silver value alone.  i.e. Stay away from anything that is being “pushed” because it is allegedly/ deemed rare by a coin dealer.

If you choose to invest in Gold/Silver Equities, this can be a very good strategy, as these often tend to rise more than Gold.  Just ensure you only do so in offshore funds, preferably not local South African mines, because these face power blackouts, labour and nationalisation issues.  Odds are they will be fine for the next few years, but why take a risk, when offshore is an equally great Rand Hedge strategy.  Regardless, you should be emigrating financially.

If you have emigrated financially, or are in the process of doing so, you can invest in Physical Gold or Silver Coins / Bullion OFFSHORE?  SEE SUMMARY BELOW:

  • Singapore/Hong Kong!!! – at silverbullion.com.sg. I like Singapore because they do not cow-tow to the US so much.  They hold coins specifically allocated to you and it is easier for them to deliver Gold/Silver to you. They also assay all the PM’s that go in and out.  Singapore banks provide bonds for properties around the world;
  • Global Gold globalgold.ch Registered in Switzerland and I am more inclined to trust Swiss Government. They hold coins specifically allocated to you and it is easier for them to deliver Gold/Silver to you. This may be the best. They assay all the PM’s that go in and out;
  • Austria bullioninternational.com and store gold at Das Safe in Vienna www.DasSafe.com;
  • Bullion Vault bullionvault.com Registered in the UK and I do not trust UK Government. You own a share of a 400 oz (12Kg) bar, so it is difficult to get them to deliver your Gold to you.
  • PLUS! I know many more, in Switzerland, the US, Puerto-Rico, etc. However, you have to do your own homework.  Just make sure they are holding the physical metal and not futures contracts, as that re-introduces 3rd party risk, which is exactly what you are trying to avoid with Bullion.
  • Ex John Mauldin’s report really comprehensive http://www.hardassetsalliance.com/landing/lifestyle-insurance
  • Considerations https://www.youtube.com/watch?v=Mz99lObewSg&feature=youtu.be

PLUS – “15 Final peak approaching FLAGS”.

NB! Most will flag at about the same time, but not necessarily “all”.  NB! I see these coming into play when Gold is over $8,000.

  1. Everyone is an expert on Gold and Gold Equities. Time to become wary when the people at book club, hairdressers and waitresses are telling you which shares to buy and how their friends are making a killing.  We saw this in 1980 with Gold and again in 2000 with the IT Boom.  We are starting to see this today in Technology Equities (in July 2020, it was not a factor in Feb 2020).
  2. There will be queues outside coin shops. We saw this in 1980.
  3. Billboards will be reporting Gold at record highs “daily”. We saw this in 1980.
  4. The Gold:Silver ratio will be at, near, or less than 20x, probably at or less than. Very reliable signal.  Keep your finger on the sell key.
  5. Silver and Silver Equities will peak days/weeks/months before Gold. In 1980, Silver peaked 3 days before Gold.  When both drop steeply for say 2+ days, while Gold is rising, get out of Silver, and soon thereafter, get out of Gold.  Very reliable signal.  NB! Gold equities will also roll over before the final peak in the Gold price, whereas Gold bullion could jump say 10% higher in those last days.
  6. The Gold price will double in less than 12 months (not calendar year). More than a year does not count.  Very reliable signal.  Keep your finger on the “sell” key.
  7. The Gold price will jump 5%-10% in a day (Silver even more) a number of times in a week, maybe two. Sell most of your holdings, as the peak is less than a month away.  Very reliable signal.  Keep your finger on the “sell” key.
  8. The DOW:GOLD ratio will be at 1x, or less than 1x. Very reliable signal.  Keep your finger on the “sell” key.
  9. The Parabolic SAR will have gone up for at least 24 consecutive months. Very reliable signal.  Keep your finger on the “sell” key.
  10. Gold will account for closer to 25% of investments in global financial assets (it is currently less than 1.5% – see graphic at end). Start thinking about selling as this milestone is approached. See chart below.
  11. Global and S&P equities average PE valuations will be 5-8x (Currently 20+x) and dividend yields will be closer to 8%-10% (Currently about 1.5%) thanks to passive investment and momentum trading vs value investing. e. The markets will once again be offering great value. We have not seen these levels in the past 2 decades.
  12. Gold will be going parabolic/vertical on the charts – hard to pick up as the horizontal scale can always make any rise look vertical. Best to look at a 20-30 year chart.
  13. Gold price will be 100% higher than the 40 week Exponential Moving Average – which is similar to the 200 day EMA. AND, Gold will be 150% higher than its 100 week EMA.
  14. Central banks will, almost certainly, be buying Gold big time – tapering near end?
  15. Almost certainly, we will have rising inflation and interest rates. e. Both Bonds and Equities will be offering Negative Real Returns.
  16. There will be major discussions between G7/G8/G20 about Fiscal Austerity and Fiscal monetary discipline.
  17. Talk of a Gold Standard is unlikely but there will probably be talk of a Global Currency Peg to a basket of commodities that includes Gold. The future can no longer be one where selected currencies can print at will, which inevitably gives rise to competitive devaluations (currency wars).

NB!  Gold has not increased; it is the currencies that have lost their value.

i.e. Bank notes no longer constitute wealth since their value is continually eroded by inflation.  It is a proven fact that most currencies have lost 99% of their buying power in the past century, because it now takes almost 100x more money to buy the same item today than it did in the 1920’s.  Similarly, it was not Gold that went up by a factor or 100x from $20 in the early 1900’s, to $1920 in 2011, but the currencies that went down. This is the ultimate proof that Gold, the ultimate tangible, is the perfect inflation hedge.

See two charts below:

Point 5 above:                    Chart from 321 Gold website.

In 1980, Silver peaked on Jan 18th, 3 days before Gold peaked on Jan 21st.  I suspect we will again see a divergence 2-3 days before the final peak in 2025/2026.  In 2011, Silver peaked months before Gold peaked early September 2011 (red divergence), and again just before the final peak (blue divergence).  Divergence means Silver price dropped while Gold rose.  Note, the blue divergence was surely 10 days before peak.

Point 10 above:

Currently it is below 1.5% – as at mid 2020.

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Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult with a qualified investment advisor.

When “does” gold rise and when “will” gold rise again.

PM3 – When “does” gold rise and when “will” gold rise again – last updated Aug 2020.

NB! Gold is a “defensive” haven asset, much like government Bonds, in that it is tends to do well when Equities do not.

THE ONLY TIME GOLD RISES IN A SUSTAINED GENERATIONAL GOLD BULL MARKET:

Gold only “really” rises “materially” when the “after tax” returns of “both” the bond and equity markets are, or are expected to be, less than inflation for “a considerable time”.  Such periods of “Negative Real Returns” (NRR) give rise to “generational” Gold bull markets, which only happen when the following two conditions are met simultaneously:

  1. Equities are not offering positive inflation beating “Real” returns, which typically happens during major stock market crashes and/or significant, protracted corrections. During such crashes or corrections, there is usually a flight to the safety of Bonds and Gold, the so called “haven” assets.  However, more recently, Bond yields have been extremely and artificially low, which makes Gold far more attractive – more about this later; and
  2. Interest rates are not offering positive inflation beating “Real” returns, because either:
    • Interest rates are nominally negative as they currently are in the EU and Japan, or negative nett of inflation and tax, as we currently see in the USA and UK; or
    • Inflation is rising rapidly, and interest rates are lagging / playing catch up, as we saw during the 1970-1980 Gold boom.

Therefore, we only need to determine when these two conditions “will be” met if we wish to know when to invest in Gold.  NB! Any spikes in the price of Gold arising from sporadic events such as political conflict, acts of terror, trade wars or regional wars, tend to be short lived.  However, currently rabid money printing, trade wars, currency wars, socio-political unrest and economic uncertainty arising from Covid 19 have probably made Gold more attractive.

The above is the key message.  In the remainder of this report, I will review and evaluate the future prospects for Gold in relation to the above two scenarios namely 1) NRR’s in “Equities” and 2) NRRs in “Interest rates”.  I will then also comment on the prospects for Gold into 2025.

Before I start, let me just clarify something.  Economists and Investment Brokers are quick to say: “Gold does not pay dividends, or interest, so it is not attractive, because it does not provide any income”.  Keynes said, “Gold is a barbarous relic of a forgotten era”.  Contrarily, I contend that gold does hold its real value over time, which is more than can be said for most investment funds.  Regardless, when markets tank, interest and dividends are irrelevant.

It is a proven fact that most currencies have lost 99% of their buying power in the past century, because it now takes almost 100x more Dollars, Euros or Pounds to buy the same item today than it did in the 1920’s.  Similarly, it was not Gold that went up by a factor or 100x from $20 in the early 1930’s, to over $2 000 in 2020, but the currencies that went down.  This is the ultimate proof that Gold is the ultimate tangible asset, and the perfect inflation hedge.  The recent rampant money printing, post Covid-19, is likely to further devalue global currencies, which will provide even greater impetus for Gold.

Gold is currently in the second phase of its Generational Gold Bull Market (GGBM).  From 2000 to 2020, Gold outperformed every other asset class, so, even though it provided no income for income dependent pensioners, it did provide handsome capital gains for investors.  Therefore, it is wrong to cast it away as being of no value in a portfolio.  Yes, there is a time to own Gold and a time not to own Gold, there is a time to buy and a time to sell, but to discard it with the above flippant statements is irresponsible and even stupid.

  • Gold’s action these past 20 years interpreted from the above “Equity NRR” perspective

In this section, we will show that Gold outperforms Equities when Equities are, or are expected to be toppish, or are yielding Negative Real Returns.  NOTE! Global Analysts tend to use the S&P 500 as a proxy for global markets, because if the US sneezes, the world gets the flu.

The slightly dated chart below (late 2019), by Jesse Felder who puts out amazing commentary and charts weekly, confirms that there are times when Gold outperforms Equites and times when Equities outperform Gold.  Jesse Felder: “One chart I’ve been watching for the past few years is the ratio of Gold to the S&P 500. Over the last half-century there have been good times to own gold and good times to own stocks and the two have rarely coincided (making gold a better portfolio diversifier than many alternatives). The trend in the ratio of the two (at the bottom of the chart below) has been a decent guide to understanding when to own each”.

  • The left lower box shows Gold outperforming the S&P from 1970 to 1980 (10 years), while the S&P traded down and sideways (i.e. Not offering positive returns).
  • The next upper box shows the S&P outperforming Gold from 1981 to 1999 (18 years), while the S&P offered good and then stellar returns.
  • The third lower box shows Gold outperforming the S&P from 2000 to 2012 (12 years), while the S&P traded down and sideways (i.e. Not offering positive returns).
  • The right upper box shows the S&P outperforming Gold from 2012 to 2019 (7 years), while the S&P offered relatively good returns, albeit in the face of rising gold from 2016.
  • As at mid 2021, it is clear we are entering the next phase where Gold is likely to outperform the S&P/Equity markets for the foreseeable future.  Furthermore, future prospects for Equities are not bullish.  In fact, experts suggest that projected future earnings for the next 10 years will be about -4.6% per annum.  This time around, I contend that Gold will outperform Equities from say 2021/2022 until at least 2025/2026.  If inflation manifests at that time, it could last a further 5-10 years beyond that date (combined total of 15+ years).  However, stock market crashes are mostly deflationary.

The chart below from Daniel R Amerman tells the same story using a very different and useful visual graphic. It too confirms that there are times when Equities outperform Gold (green bars) and times when Gold outperforms Equities (yellow bars).  The years correspond to those outlined above.  The second set of yellow years from 2000 to 2012 reflect the first phase of this Generational Gold Bull market.  The second phase arguably started in January 2016, when Gold started to rise, but was confirmed early 2020 when Gold broke out of its 6 year consolidation.  Because Gold has been performing relatively well since January 2016, the S&P’s “relative” performance these last few years has not been stellar.  Because Equities are now overvalued, indications are that Gold will outperform equities for the foreseeable future.

Gold’s prospects in the face of future Equity performance (underperformance more likely).

It is critical to understand that if you buy into Equity markets when they are overvalued by most metrics, as they are now, projected future 10-year returns are usually negative.  This makes investors skittish and haven assets like Bonds and Gold attractive.  Currently, as at April 2021, the S&P is once again performing strongly following the Covid scare, despite a record 12 year bull run from March 2009.  However, this time it is mostly on the back of about 10 technology stocks, as many companies are struggling, and the number of S&P “Zombie” companies that cannot meet their interest payments is over 20%.  The market elevation through 2020 (Covid) can largely be ascribed to the fact that Government support has kept companies from folding, which support will not continue indefinitely.  This act of levitation is counterintuitive, since it is as if Covid never happened, despite that fact that it brought almost 20% of global GDP to a grinding halt because it decimated industries like the global Travel, Hotel, Restaurant, Leisure, Entertainment & Gym niches.  Regardless, this 12-year old boom is now the longest on record, so a doozy of a correction/recession is imminent when the full effects of Covid on small, medium and large businesses manifests.  This again underscores the attractiveness of Gold.

It is useful to remember that recessions typically eliminate the excesses that build up during booms.  However, by indulging in untested monetary policies, such as QE, TARP and ZIRP, both the US and Global central bank interventions have repeatedly prevented such healthy corrections from happening.   As at the end of 2019, about 40% of Eurozone bonds and 16% of corporate bonds had negative yields, and any future correction or crash will push the US into negative territory.  The fact that deficit spending continued unabated and sovereign debt continues to spiral out of control, even before the recent massive bailouts, suggests that QE to infinity is the only logical future outcome.  This would initially be accompanied by the renewed repression of rates, but eventually excessive Fiat money could feed future inflation, both of which would be great for Gold.

Add to all this the fact that countless disruptive technologies are going to change the way we do business and the way our world works in the next 5-10 years. The resulting painful transition will cause many corporations and industries to be transformed, shrink or fail.  This suggests that a global reset will be good, as it will rid us of those industries that are no longer relevant.

Fundamentally, all this lays the foundation for a long-awaited major correction/crash/reset.  When that happens, there will be a flight to the safety of bonds, which will drive rates down.  I expect a correction/crash will start in Sept/Oct 2021, with the rise of the increasingly socialist democrats, who want to tax the rich and give to the poor.  However, it could come a year later.

Of course, if an equity collapse causes US interest rates to fall, the Dollar could lose its appeal as money flows away from the current relatively higher US interest rates.  Remember, Gold usually rises when the Dollar falls as these are mostly contra-cyclical.  Furthermore, a collapsing Dollar will cause commodity prices to rise, which will, almost certainly, bring with it cost push inflation.

  • Gold’s action these part 20 years in relation to falling “Negative Real Interest Rates”

Interest rates have been falling for the past 40 years, as reflected by US 10 Year Bond yields below, but since 2010 they increasingly tended to be lower than inflation.  The reason for this is that governments have been artificially suppressing interest rates to keep their debt service costs low.  In fact, in the latter years, rates have been Negative in “Real” terms, worldwide.

The resulting artificially low and negative bond yields have resulted in significant market distortions as cheap money lowers the threshold for risky investments that would otherwise not be considered. Amongst others, super low interest rates caused serious mispricing of assets and compelled pension funds and investment companies to adopt unusually risky strategies in a search for higher yields.  This may partly explain the current interest in technology stocks, which are performing ridiculously well.  Unfortunately, this will translate into greater pain in the event of a market crash.  Consequently, the excesses and distortions continue to grow unabated, which suggests that the next market crash will, in fact, be an unusually big economic reset.

Consequently, one of the strongest bull markets in history has not been matched by the traditional “strong” 4%-6% GDP growth, but has instead been accompanied by a very weak economic recovery.  In fact, much of this seemingly “impressive boom” was driven by speculative growth expectations, not by value.  This is because the latter part of this equity boom was mostly on the back of a handful of tech stocks, share buybacks and, more recently, IPO’s of loss-making Unicorn tech companies whose shares soar despite continued losses.

All this lays a foundation for Gold, as the Negative Real interest rates, the weak economy and the probability of negative nominal returns in equities over the next few years will make Gold, the ultimate haven asset, irresistible.

Current and future prospects for Interest Rates

It should be noted that in the past, interest rates were the market’s “risk pricing mechanism”, with higher rates suggesting higher risk and lower interest rates suggesting lower risk.  Accordingly, investment funds used to move between equity markets (risk on) and bond markets (risk off), which meant that the Stock and Bond markets were mostly not correlated.  However, in this era where interest rates are no longer “freely” set by the markets but are instead kept artificially low by central banks, who are trying to suppress their debt service costs, that risk pricing mechanism is broken.  For this reason, it is expected that Interest rates will remain low and mostly below inflation, because Central Banks will do everything in their power to prevent them from rising.  Consequently, Bond Yields are at historic lows, which makes Bonds less attractive as a haven asset.  This has made Gold increasingly attractive, particularly at this moment in time, when Equities are “deemed” overvalued.

However, in view of the recent dramatic Covid driven increase in printed money, it is possible/likely that inflation could manifest, and rates could play catch up at some point in the future.  Therefore, despite the fact that Bonds are traditionally a safe haven asset, they may not be so for long, due to the increasingly inevitable risk of rising rates.  This would make Gold a better “haven” bet.  Both the above Negative Real Rates and the prospect of rising inflation are exactly the time when Gold comes into its own as the ultimate “flight to safety” destination.  Now add a post Equity crash scenario where Equities are slow to recover and Bonds are not attractive because rising interest rates are putting an end to the 40 year Bond market boom.  Where will investors put their money.  Many will go for Gold until the situation normalises.

Current/Future inflation prospects – bearing in mind that Inflation tends to be bullish for Gold

Currently there is little chance of inflation, because Covid has precipitated recessionary and even deflationary expectations, and because the velocity of money is at a historic low.  However, in the longer term the Dollar is likely to weaken and this will cause all commodities to rise, which would, almost certainly, precipitate inflation.  If I had to guess, I would expect inflation to manifest around 2025.  This is a quandary for me, as I am predicting that Gold will rise into 2025/2026, yet there is a considerable likelihood that the prospect of rising inflation could give further impetus to Gold for at least a decade after that.  Obviously, it is hard to predict that far into the future, so I will review the situation closer to the time.

Before he became Chairman of the Fed, Alan Greenspan said:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard”.  He recently confirmed that he stood by every word of that.

Late (2016), Greenspan likened the Fed’s over-blown balance sheet to “a tinder box that has not been lit“, characterized the job of Fed chairman as one “subject to the heavy dictate of the federal government”, and recommended gold ownership as a hedge for private investors. “Gold,” he said, “is a good place to put money these days given its value as a currency outside of the policies conducted by governments“.

Why invest in Gold (and Silver) – provided we get the timing right

The above analysis suggests that we will soon see a correction in Equities, and we will soon see rates going even lower, thereby meeting the two criteria needed for Gold to resume its role as the ultimate “flight to safety” destination.  Effectively, one has to choose capital gains in Gold as opposed to capital gains in equities like Netflix and Tesla which also yield not income or dividends.

Remember, the entire point of buying “physical” Gold or Silver is to:

  1. Own a tangible to ensure the return “of” your capital when the return “on” your capital is at risk and is likely to be considerably negative in the near NRR future;
  2. Get away from owning FIAT currencies, which continually lose value;
  3. Get out of the dishonest “screw you” banking system;
  4. Get away from the increasingly dishonest incentive bonus driven corporate world, and
  5. Eliminate third party risk at a time when incentive bonuses have created a situation where management strategies and equity valuations are no longer rational.

All that said, owning ETF’s like GOAU is probably not a mistake.

Gold’s action and prospects – a future scenario

Below you will see that Gold broke out of the 6 year corrective basing pattern when it broke above the upper red line, and then broke above the previous high represented by the upper blue line.  The latter breakout confirms that this Generational Gold Bull market has resumed.

It is my contention that Gold will reach a minimum target of $8 300 and probably $10 000 by about 2025/2026, which would be 4.0x – 5.0x higher than the current price of say $2 000.  Contrarily, Silver is likely to go to $400 or even $500, which would be 15x to 20x higher than the current price of $28.00.  This is because when Gold gets to its peak, the Gold/Silver ratio should be 20, which suggests the future Silver price will be the Dollar Gold price ÷ 20.

If the above target of $10 000 is realised, Fibonacci analysis suggests we will never again see a price below $4 000, which is double the current price.  Gold has held its “Real” value over the millennia, with fluctuations either side of the mean, particularly during periods when Fiat Currencies prevailed, as they do now.  Therefore, it is never a mistake to hold Gold long term, provided you managed to buy when the price was below the mean, as was the case around 1929, 1967/1970, 1999/2002 and 2016/2020.

However, it must be noted, that if markets crash, Gold could correct with the markets as investors “sell all”, or sell to cover margin calls.  Please note, such a correction would be short lived – at most 1 year.  The same thing happened with the 2007-2009 crash.  Therefore, one has to see it as a long term investment winner, not a speculative short term play.

Last notes

Without Gold and Silver, there is little diversification in your policy.  Diversification within equities is not diversification if the markets crash, as all equities crash together.  Today, diversification into bonds is not as clever as it was in the past, especially if there is an increasing risk of rising rates as the profligate printing will eventually beget inflation.   NB! I consider Platinum and Palladium risky in the medium term as 50% of PGMs are used in cars with internal combustion engines, most of which are likely to be replaced by electric cars in the next decade.

Conclusion

It is a time to adopt a more defensive strategy and have 10% to 25% of your wealth invested in Physical Gold/Silver and/or Gold/Silver equities, preferably offshore.  It is also time to reduce your exposure to Equities and increase your exposure to Cash, Bonds and Treasuries.

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Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult with a qualified investment advisor.

Now it is important to realise that Bonds and Equities are mostly contra-cyclical, because

Eelco Lodewijks

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