A MUST READ today. Casey Research just penned two articles listing 8 reasons why they think we are on the verge of “an epic gold bull market”. They believe we are about to see a remonetisation of gold, a paradigm shift in the international monetary system, of an order not seen since 1971. Gold went up 2300% from 1971 to just 1980. We summarise the reasoning as follows:
No. 1: Basel III Moves Gold Closer to Officially Being Money Again
As we reported
at the time, on 1 April the new Basel III rules for global banking issued by BIS came into effect. Those rules made gold bullion a 0% risk weight asset. From Casey:
“What this means in plain English is that gold’s official role in the international monetary system has been upgraded for the first time in decades….. Basel III is giving gold more official recognition in the international financial system. It represents a step towards the re-monetization of gold… and the recognition of this powerful trend in motion.”
No. 2: Central Banks Are Buying Record Amounts of Gold
A topic regularly covered in our daily’s, 2018 was a record year for central bank purchases of gold. Ever. The following chart speaks volumes for the point made above. Central banks are easily the biggest participants in the global gold market. Since leaving the gold standard in 1971 they were, in nearly every year since, sellers of gold. They didn’t need it anymore as it didn’t back their currency and this new credit based system was clearly awesome. Then a little thing called the GFC happened that highlighted the limitations of a system based purely on credit (debt). Since then, they have been rampant buyers.
But it’s not just the historic monetary safety element at play here. It’s also the fact that the world’s reserve currency, the USD, is being mistreated by its creator (printer) and governments are rebelling by dumping USD / Treasuries for gold. That mistreatment is both through rampant stimulus-lead printing and also as a financial weapon against enemies of the US state.
No. 3: Oil for Gold – China’s Golden Alternative
As we reported
at the time, when the US threatened such financial warfare on China over its ties with North Korea, China moved to create a crude oil futures contract denominated in the Yuan but convertible to gold (given the limited international liquidity of Yuan). From Casey:
“Right now, oil is hovering around $60 per barrel. That means China is spending around $588 million per day to import oil.
Gold is currently priced around $1,330 an ounce.
That means every day, China is importing oil worth over 442,105 ounces of gold.
If we’re conservative and assume that just half of Chinese imports will be purchased in gold soon, it translates into increased demand of more than 80 million ounces per year – or more than 70% of gold’s annual production.
This shift hasn’t been priced into the gold price. When it happens, the increased demand for gold from China’s Golden Alternative is going to shock the gold market.”
No. 4: The Fed’s Dramatic Capitulation
The capitulation of the Fed from trying to raise rates to now almost certain to drop them and even bring back QE (and hence another sharemarket rally AND gold rally last night) has been the key theme since last year. We’ve written repeatedly on this but Casey summarise nicely below:
“This whole charade is indicative of how utterly dependent the U.S. economy has become on artificially low interest rates and easy money.
If the Fed couldn’t normalize interest rates when the debt was $22 trillion, how is it ever going to raise rates when the debt is $30 trillion or higher?
The Fed couldn’t shrink a $4.5 trillion balance sheet. How is it going to shrink, say, a $10 trillion balance sheet or higher?
The answer is it can’t and won’t. It’s impossible for the U.S. government to normalize interest rates with an abnormal amount of debt. The Fed is trapped.
After nearly six years of 0% interest rates, the U.S. economy is hooked on the heroin of easy money. It can’t even tolerate a modest reduction in the Fed’s balance sheet and 2.5% interest rates, still far below historical averages.
In other words, this monetary tightening cycle is over. The next move is a return to QE and 0%, and perhaps negative, interest rates. These moves would, of course, weaken the dollar and be good for gold.
By flipping from tightening to signaling future easing, the Fed has turned a major headwind for the gold market into a tailwind.”
No. 5: Takeover Frenzy in the Gold Mining Industry
As we reported
in February, 2019 is on track to be a record breaking year for gold mergers and acquisitions. Newmont’s $10b buy of Goldcorp, Barrick’s $6b buy of Randgold, and the JV of Barrick and Newmont to create the largest gold mine in the world in Nevada are the main headlines. As Casey say, this means these big players both think mining shares are cheap and are resorting to M&A over new discoveries and mines as the latter get harder and harder to find.
No. 6: President Trump Is Pro-Gold
Here’s 2 quotes from the man himself:
“The legacy of gold as a precious commodity has transcended to become a viable currency and an accepted universal monetary standard. Central Banks around the world are holding gold as a reserve asset.”
And from his election campaign:
“Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.”
So what? From Casey:
“Trump has been able to wield more influence over the Federal Reserve than any other president since the Fed was created in 1913.
He’s had the chance to fill five out of the seven seats on the Board of Governors of the Federal Reserve.
In other words, Trump gets to stack over 70% of the whole Fed board with people of his choosing.
And so far, he’s nominated several pro-gold candidates, including Herman Cain and Stephen Moore. They’re both on record as supporting a gold standard.”
When Cain himself was running for President in 2012 he said: “Gold is kryptonite to big-spending politicians. It is to the moochers and looters in government what sunlight and garlic are to vampires.”
No. 7: Socialism Is on the Rise
We wrote of this phenomenon
back in March and it appears to have real traction in the US. Prominent politicians and presidential candidates the likes of Bernie Sanders, Elizabeth Warren, Kamala Harris, and Alexandria Ocasio-Cortez (AOC) are driving a hard agenda of socialism. When starting with a debt of $22 trillion and record deficits, where does all the money come from for all that free stuff? Introducing Modern Monetary Theory or MMT (explained here
). As we wrote in that link and as Casey concur, this can only be positive for gold:
“In short, America’s embrace of socialism will lead to more money-printing and currency debasement, just as it has everywhere else it’s been tried.
But this time, it won’t be the Argentine peso or the Venezuelan bolívar that is debased. It will be the U.S. dollar… the world’s premier reserve currency.
Gold is the primary competitor for the U.S. dollar’s top role. And as the American socialists inflate the value of the dollar away, it will make gold all that more attractive.”
No. 8: Gold-Backed Cryptos – A Monetary Revolution
Peter Grosskopf, the CEO of Sprott, recently called gold-backed cryptocurrencies “the most important thing to happen to the gold market in the last several decades.”
“Gold-backed cryptos combine the best attributes of gold and cryptos. I can’t think of two other asset classes that have as many synergies. In other words, the whole is worth much more than the sum of the parts.
With cryptos redeemable for gold, we can now instantly send anyone anywhere in the world small or large amounts of gold – reliably and without interference. It’s nothing short of a monetary revolution.
Gold-backed cryptos are going to make using gold as money even more convenient for the average person and business. Anyone with a cell phone now can use gold in a way that was not possible before.”
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