– Sean Brodrick: Gold investors, forget Europe. Yeah, yeah, gold prices went down on the idea that France might vote for someone boring. Panic leaked out of the market like an old balloon.
So, gold prices went down. That’s nice. I told you why this is actually good. Meanwhile, there is a tidal wave of demand building in Asia.
I’m going to tell you some big news on China. Big for gold. But first …
First, let’s deal with India.
Earlier this month, I told you how gold imports into India jumped sevenfold in March. India’s physical gold imports rose to 120.8 metric tons in March from a year earlier.
Demand from jewelers in anticipation of India’s wedding season was off the charts. That’s partly due to the fact that demand was suppressed last year.
Last year, India’s gold consumption fell 37% to hit the lowest level in seven years. That was due to all sorts of chaos caused by a hike in taxes on imported gold, a resulting jeweler’s strike, and general government shenanigans.
This year, India is getting back in its golden groove. And yeah, that’s bullish.
Also in that same story, I reminded you that “India is the world’s No. 2 consumer of physical gold, after China.”
So we’ve all been waiting to see what’s happening with China.
Hoo, doggies! Something’s happening all right.
Here is a chart of gold imports into China through Hong Kong.
Whee! In fact, Reuters reports that physical gold bullion arriving into China via Hong Kong — its main vein for gold imports — more than doubled month-on-month in March.
Well, that’s pretty bullish. But part of the frustrating thing about China is they’re so danged secretive about their gold markets, gold holdings, you name it.
However, there is another measure of Chinese demand for imported gold: its flows through Switzerland.
And sure enough, somebody has been buying A LOT of physical gold from Britain and shipping it into Switzerland.
What happens to the physical gold there? Well, big bars of gold, the kind stored in London, are melted down and recast into smaller bars for sale in Asia.
“Gold exports to China from the refining hub of Switzerland almost doubled to 46.4 metric tons in March,” according to Bloomberg. That’s up from 23.6 tons in February.
Another 30.29 tons went to China. You get one guess where that gold ended up.
And let’s not forget India. India’s physical gold imports from Switzerland soared to 72.5 metric tons at the same time.
Singapore is a big buyer, too. Singapore is often a “back-door” channel into China. Singapore also exports physical gold all across Asia.
So, you get a Swiss gold export chart that looks like this.
The four big bars I’ve circled are Swiss gold exports in March to China, Hong Kong, India and Singapore.
So yeah, you might say that Asian demand for physical gold is rising. Heck, I’d say we’re seeing a tidal wave forming. It’s all part of the surge in demand by Asia’s the ballooning middle class that I warned you about.
So now we can add renewed Chinese demand to that long list of bullish forces for gold.
So now gold is selling off. This is due to panic leaking out of the market as France chooses the middle road. And the market seems to be hanging a lot of hope on President Trump’s tax cuts.You know what I’m talking about: declining physical gold reserves, a lack of spending on new exploration, a top in the U.S. dollar, declining gold grades, peak gold, rising inflation, the cyclical nature of gold. And more.
To be sure, these tax cuts are not paid for. Which means, even if President Trump is successful in getting his tax cuts, the federal deficit and America’s national debt will balloon.
The debt used to matter to the markets. It might matter again. And when it does, you’ll know what you want to know.
So go on. Give me a big pullback in gold prices. We’ll get the best buying opportunities we’ve had in a long time. And then on the next turn of the wheel, the profit opportunities won’t just be good. They’ll be glorious.
– Sean Brodrick: Boy, gold is having a tough slog in April — and that comes on the heels of rough March.
This is no surprise for calendar traders, though. They know that the best time of the year for physical gold is yet to come.
And by that, I mean it’s well-known that gold performs better in the second half of the year.
This is due to seasonal buying. In August, jewelers around the world traditionally stock up for various cultural holidays. These include Muslim Ramadan, Hindu Diwali, Christmas, and the New Year in China.
This doesn’t mean gold demand and price must rise in the third quarter — it didn’t last year — but it’s more likely to.
However, the worst bear market in precious metals in living memory has taken its toll. Let me show you a chart and you’ll see what I mean.
|Data source: Stockcharts|
This is gold performance by month from 2006 to 2016. The chart separates the performance of gold by individual months. So all the January performances are averaged together, and so on.
Heck, looking at that, you can’t be blamed for thinking you don’t want to stick around for May.
But this is the bear-market effect. It has warped the regular market trend. Take a look at gold performance over the longer term — from 1975 to 2016.
|Data source: LBMA|
You can see that March and April are traditionally months when gold goes down. Gold historically pops higher in May … but the real blast-off comes in the third quarter.
This doesn’t mean physical gold demand and price must rise in the third quarter — it didn’t last year — but it’s more likely to.
We just exited a 4½-year long bear market in gold. That dragged down the metal’s seasonal performance. And because miners are leveraged to the metal, it hammered mining shares lower.
Now, we’re back in a new bull market. So I would look for a return to the normal trend. That means strong periods of outperformance in the metals and the companies producing them, especially in the second half of the year.
Heck, we may even see better-than-average performance. That’s what bull markets are all about.
– Stephen McBride: In a 1998 speech at Harvard, legendary investor Warren Buffett shared his thoughts on physical gold:
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility.”
Buffett is correct—gold doesn’t produce earnings or pay dividends. There are, however, some good reasons physical gold should be an essential part of every investor’s portfolio.
#1: Real Interest Rates Are Still Negative
Even with the Fed raising nominal interest rates, real rates—that is, the nominal interest rate minus inflation—are still in negative territory. And real rates are what really matters to your portfolio.
In the first quarter of 2017, inflation averaged 2.57%.
Today, a one-year bank CD pays about 1.4%. Therefore, to keep all of your money in a bank account means to watch your purchasing power erode.
Of course, there are other options. You can put your money in U.S. Treasuries or dividend-paying stocks. However, with the 10-year Treasury yield hovering around 2.25% and the average dividend yield for a company on the S&P 500 at 2.33%, you would still be in negative territory.
Gold is known as the yellow metal with no yield, but simple math tells us no yield is better than a negative one. In fact, real interest rates are a major determinate of which direction the price of gold moves in.
So, gold will protect your capital from the eroding forces of negative rates… and help it grow at the same time.
#2: The Dollar’s Value Has Collapsed
The U.S. dollar may be rising against other currencies like the euro and yen. Nonetheless, in the last 50 years, its purchasing power has fallen by 86%.
As this chart shows, keeping your savings in cash is a poor wealth-building strategy. On the other hand, gold has more than kept up with inflation. Since 1972—the first year private ownership of physical gold became legal again—the price of gold has increased by 2,400%.
#3: Gold Is Money
Why has gold retained its value while fiat currencies have fallen? It’s because gold is money.
2,000 years ago, Greek philosopher Aristotle theorized that any sound form of money must be: durable, portable, divisible, and have intrinsic value.
Gold has all these characteristics— that’s why it has proven to be a long-term store of value. Fiat currencies like the dollar cannot be considered money as they don’t have intrinsic value.
In other words, gold is payment in and of itself, but the dollar is only a promise to pay.
#4: Negative Correlation to Stocks and Bonds
The world’s largest asset manager, BlackRock, pointed out recently that in the last decade, the correlation between stocks and bonds has been at almost double its long-term average.
Therefore, a portfolio comprised of 60% stocks/40% bonds no longer offers investors adequate diversification. Sure, it’s great when markets are rising—but when the tide turns, that’s going to be a problem.
To keep all your eggs “out of one basket”—buy gold. Recently, the correlation between gold and the S&P 500 stood at its second-lowest level in over 30 years. That’s also the case with gold and bonds.
#5: No Counterparty Risk
Gold is one of the few assets that has no counterparty risk. What does that mean?
No counterparty risk means that once you have physical gold in your possession, you don’t depend on someone else to fulfill a contract or keep a promise for it to retain its value.
Stocks, bonds, ETFs—essentially all paper assets require another party to make good on their end of the deal. Physical gold’s value does not hinge on someone else’s obligation to pay.
Aside from being a long-term store of value and diversification tool, there’s another reason you should buy physical gold.
Bonus Round: A Profitable Portfolio
Since the beginning of 2017, gold is up over 10%, making it one of the best-performing assets of the year. And this is no anomaly.
Since late 2015, gold has outperformed the S&P 500 by 30%. In fact, gold has been the best-performing asset class since the turn of the millennium.
Not only will gold preserve your wealth and insulate your portfolio from market sell-offs, it can earn you a profit at the same time.
Given the negative real rates, a falling dollar, and heightened correlation between stock and bonds, physical gold should be an essential part of every investor’s portfolio today.
– John Persinos: It’s time to give the “gold bugs” their due.
In this newsletter in recent weeks, I’ve been recommending various gold-backed exchange-traded funds (ETFs) and gold miners. In response, I regularly get letters (sometimes heated ones) from the hard-money crowd, who think of paper dollars as worthless “fiat money” and physical gold as “real money.” These yellow-metal zealots don’t even trust gold ETFs or miners; they insist on the tangible asset.
As one reader writes:
“Gold ETFs can be good investments, but they confer many risks. For example, you must rely on a counterparty to make good on your investment. If the fund’s management, structure or chain of custody break down during a crisis, your money is at risk.” — Thomas H.
The chances of those events occurring are scant, but Tom raises an interesting point. The major motivation for owning gold is protection from risk, but a gold ETF or mining stock is part of the financial system you’re trying to hedge against.
While I don’t consider myself a gold bug, today’s worsening dangers make it worth considering the purchase of physical gold. Below, I examine convenient ways to purchase the Midas Metal. As an alternative, I also highlight an under-the-radar gold play that could be poised for outsized potential.
The newspaper sitting in the driveway every morning is starting to resemble a ticking bomb. What explosive headline will confront you today? Face it: the dust will never settle during a Trump administration. And when uncertainty rules the news cycle, investors flee to the safe haven of physical gold.
This issue, I focus on the advantages of owning bullion. Why physical gold? Here are three key reasons:
1) The yellow metal maintains its intrinsic value despite a government’s ability to back its currency. If your country’s currency implodes and becomes worthless, you’ll still be able to spend your physical gold.
2) Physical gold is universally accepted around the world, without the need to convert it into the local currency. It can be bartered anyplace at anytime.
3) If there’s ever an economic crisis and banks freeze individual accounts, a physical gold investment can always be accessed.
The Trump era is undeniably turbulent, with a stock market correction and perhaps economic recession looming in the wings. Gold will be responsive this year to the ubiquitous threat of terrorism, right-wing nationalism and continued disarray in Washington, DC.
The conditions that are favorable for gold, will prove fatal for overvalued stocks that are looking for a trigger to tumble. Gold also is a time-tested hedge against inflation, which is showing signs of new life.
The yellow metal is proven protection against crises. During the Great Recession of 2007-09, the worst economic downturn since the 1930s, gold prices rallied from $840 per ounce at the end of 2007 to over $1,200 by the end of 2008, even though inflation over this period stayed in check.
Remember, diversification is crucial to any investment strategy. As a fraught 2017 unfolds, consider re-balancing your portfolio to accommodate the likely economic, business and market volatility ahead. You can hedge your bets, with physical gold.
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