Gold, copper and silver are must-own metals

As a general rule, the most successful man in life is the man who has the best information

 

2020.06.23

Gold surged on Monday after a spike in coronavirus cases worldwide dashed hopes of a quick economic recovery. Within 24-hours the number of infections globally rose 183,020, a new record, the World Health Organization reported, Reuters said the US saw a 25% increase in new COVID-19 cases over the week ending June 21st. 

Spot prices traded sharply higher, reaching a five-week high, before closing at $1,756.10/oz in New York. Gold futures for August delivery were last up $13.20 at $1,766.60/oz, while July silver futures traded flat at $17.86/oz.

Economic Times of India reported two US Federal Reserve officials sounding increasingly pessimistic of a fast return to growth, in the country worst hit by covid-19. The officials warned that unemployment could rise again if the disease is not brought under control. In April the jobless rate hit 14.7%, the highest since the Great Depression, and while it dropped in May, to 13.3%, more than 45 million Americans have filed for benefits since covid-19 shutdowns began in mid-March.

Kitco’s technical analyst Jim Wyckoff wrote that gold prices are probably pricing in the likelihood of inflation, given the trillions of stimulus being pumped into economies by central banks and governments worldwide to deal with covid fallout:  

Importantly, the sense of the marketplace is that major central banks of the world will continue to print money if global economies show further signs of sputtering. This influx of cash into the global financial system is also supporting stock market gains despite the still seriously hobbled major economies. Many are wondering how long it will take for the negative consequences of all that easy money to show up in economies. Very likely, this notion is also prompting some new buying in the gold market.

The US government and policymakers around the world have no choice but to unleash massive stimulus programs to help their citizenries to deal with the worst recession since World War II. 

The $2.2 trillion relief package Trump signed into law on March 27 is just the beginning, with the Treasury Department now seeking $250 billion more for small business loans. If House Democrats and the president can agree on a Phase 4 spending deal, targeting infrastructure, that would mean another $2 trillion.   

According to Bank of America, via Zero Hedge, the amount of global fiscal and monetary stimulus has already reached an astronomical US$18.4 trillion in 2020, consisting of $10.4 trillion in government spending and $7.9 trillion in central bank asset purchases, “for a grand total of 20.8% of global GDP, injected mostly in just the past 3 months!” 

As an example of explosive monetary stimulus via money printing, consider: at the end of 2019, the Fed’s balance sheet as a percentage of GDP was 19%; six months into 2020, it has already doubled, to 39%. 

 

Inflation-hedge gold buying 

We have written previously about the effects of deflation and inflation on gold prices. We predicted that due to a significant fall in consumer spending, which makes up about two-thirds of the US economy, owing to covid-19 lockdowns, we would see a period of deflation ie., falling prices, before witnessing inflation when the economy recovers and prices start rising again. 

This is exactly what is happening. US inflation is now the lowest since September 2015, falling from 2.5% in January to 0.1% in May. 

With global growth expected to slip 8% this year, it is obviously too early to be worried about inflation. But it is interesting to see investors are already pouring money into assets such as gold, property stocks and inflation-linked bonds, “on the view that the recent explosion of government spending and central bank stimulus may finally rouse inflation from its decade-long slumber,” Reuters said on Sunday. 

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. Also known as linkers, the face value and interest payments on these securities rise with inflation, as measured by the Consumer Price Index. 

Even though inflation may be some years away, banks are advising clients to pick up cheap hedges, such as US 10-year inflation-linked bonds, that show an inflation rate of just 1.2% in a decade.

“These hedges in many cases look extraordinarily cheap, so why not buy them now?” Reuters quotes Colin Harte, multi-asset portfolio manager at BNP Paribas Asset Management. He notes the S&P 10-year U.S. TIPS Index is already up 12% from March levels. 

Another fund manager, PineBridge Investments’ head of multi-asset Mike Kelly, has been buying gold on the view that the covid situation will be different from what happened after the financial crisis, when prices failed to respond to all the money-printing during rounds of quantitative easing: 

“We will be pushing, pushing, pushing on the string and dropping our guard, then 3-5 years from now...that’s when the (inflation) dog will start barking,” he says. “Gold worries about such things long in advance. It has risen through this coronavirus with that down-the-road-risk top of mind.”

Private banks that cater to the world’s ultra-wealthy are also counseling clients to invest more of their portfolios in gold, as bond yields plummet amid central bank stimulus programs. 

“Our view is that the weight of monetary supply, expansion, is going to ultimately be debasing to the dollar, and the Fed commitments, which (are) anchoring real rates, make the case for gold pretty sturdy,” said Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley.

Dollar’s ‘exorbitant privilege’ at risk 

Speaking of the dollar, it has sunk steeply in recent weeks. In fact Donald Trump may finally get his wish of a low dollar to support US exports - a rallying cry during the trade war with China - except that the dollar is falling for reasons that are entirely the fault of the president.

Gold and the dollar move in opposite directions, so as the US convulses amid continued coronavirus chaos/ economic fallout, White House divisions, and soaring racial tensions partly stoked by Trump (“when the looting starts the shooting starts”), gold has benefited. 

 

In the 1960s French politician Valéry d’Estaing complained that the United States and its exporters enjoyed an “exorbitant privilege” due to the dollar’s status as the world’s reserve currency. He had a point.

The dollar is still the reserve currency, but how important is it right now, with all that is going on in the world? 

Renowned Yale economist Stephen Roach believes that due to the decoupling of trade with its partners, and the rise of China, the dollar’s reign as the king of currencies looks shaky.

Appearing on CNBC’s Trading Nation a week ago, the university lecturer forecasts a 35% decline in the US currency against its major rivals, due to the nation’s rising deficit (it recently tripled) and dwindling savings. 

“The dollar is going to fall very, very sharply,” he told the business network.

In a Bloomberg op-ed, Roach said the US economy is already stressed by the recession caused by covid-19, and that the public health crisis will only amplify the dollar’s woes. 

Goldman Sachs believes a weaker dollar will boost the purchasing power of major gold consumers in emerging-market (EM) economies like China and India. In its latest Commodities Research note, the investment bank upgraded the precious metal on “debasement fears”, noting the two main drivers sending gold prices higher will be lower real rates (interest rates minus inflation) and higher EM demand: 

Our economists expect inflation over the next 5 years to average 1.73% vs current market pricing of 1.02%. Therefore, real rates in the US are expected to continue to fall, increasing debasement concerns and putting upward pressure on gold (see Exhibit 9).

US burns, gold climbs

It does not require much digging to find reasons to question US leadership domestically and internationally. Every day new headlines emerge indicating how unfit Trump is for the highest office in the land, and how four years of his administration has culminated in deep divisions not only in the American economy but in the American psyche. 

Recent losses for Trump include two Supreme Court decisions that went against him - one that blocked the termination of the Deferred Action for Childhood Arrivals (DACA) program, the other delivering a landmark opinion in favor of LGBTQ workers - along with withering criticism of both his handling of the George Floyd protests and the pandemic, and the release of John Bolton’s book in which the former Trump national security advisor makes a number of allegations including that Trump engaged in “obstruction of justice as a way of life.” 

The Atlantic notes Trump’s string of Supreme Court defeats, including a challenge last year to his addition of a citizenship question to the census, all stem from an abuse of the executive branch of government: 

Much of his administration’s approach to governance rests on attempting executive actions that lack any meaningful justification rooted in expertise, or even rational thought.

The Supreme Court as early as this week could decide on whether Trump’s accountants must turn over his financial records and tax returns to House Democrats and New York prosecutors, who are investigating “hush money” payments. 

Only 42% of Americans approve, and 55% disapprove, of the Trump presidency, according to the latest polls. 

The lies keep coming from the Tweeter-in Chief. Despite boasting of a million people seeking tickets for his rally on Saturday in Tulsa, Oklahoma, only about 6,500 showed up - what can only be described as a fizzle for Trump’s 2020 campaign kick-off. TV coverage showed large sections of empty seats in the 19,000-seat BOK Center arena. An extra venue rented for over-flow crowds went un-used. 

His long-winded speech made no attempt to unite a nation divided on race and economic prospects. He disparagingly, and wrongly (coronavirus is not influenza) referred to covid-19 as “Kung Flu”, and said he told officials in his administration to slow down coronavirus testing because of the rising number of cases. CNN reports

“You know testing is a double-edged sword,” Trump said while complaining about press coverage of his handling of the virus. Claiming the US has now tested some 25 million people, he added: "Here's the bad part ... when you do testing to that extent, you're going to find more people; you're going to find more cases. So I said to my people, slow the testing down please."

Widespread testing and contact tracing worked well to contain the virus in Singapore, and dramatically limited covid-19 deaths in South Korea. Testing is necessary to identify who has the virus, so that the infected can be quarantined and their contacts can be traced, something that has not been done effectively in the United States and other countries, including Canada. 

The president keeps acting in ways that attempt to censor bad publicity or remove impediments to his bid for re-election. First there was his administration’s attempt to block the publication of John Bolton’s book, which contains a number of stinging allegations including that Trump once asked Chinese President Xi Jinping for help getting re-elected. Trump then fired Geoffrey Berman, the federal prosecutor whose office put his former personal lawyer in prison and is investigating his current one, heightening criticism that the president was carrying out an extraordinary purge to rid his administration of officials whose independence could be a threat to his re-election campaign, states the New York Times

Of course, Trump last year was impeached by the House of Representatives but acquitted by the Senate over allegations of obstruction of justice. The Times notes that Since the beginning of the year, the president has fired or forced out inspectors general with independent oversight over executive branch agencies and other key figures from the trial.

Meanwhile a wave of social unrest, which began with the death of George Floyd, who was black, while in the custody of a white Minneapolis police officer, continues to wash over the country. 

Violence revisited the MidWest city early Sunday morning. A shooting in a popular nightlife and shopping district left one man dead and 11 people wounded. 

Also on the weekend, in Seattle a 19-year-old man was killed and another person was in critical condition, following a 3 am shooting in the city’s police-free ‘autonomous zone’ set aside for protesters. When police officers responded to reports of gunshots inside the protest zone, they “were met by a violent crowd that prevented officers safe access to the victims,” according to a police department press release

Despite states being in various stages of reopening their economies, the United States is nowhere near recovering from covid-19. 

Last week 10 states saw a record number of coronavirus cases, including Florida, which had the largest one-day count since the pandemic began. 

White House officials ignored warnings from members of Trump’s coronavirus task force, about the health risks of holding large-scale indoor campaign rallies. The Tulsa rally took place despite six Trump campaign staffers testing positive for covid-19 and the virus surging in Oklahoma. 

And while the federal government has attempted to cushion the economic blow for hard-hit Americans by doling out $1,200 checks and bumping up unemployment insurance payments, many are in financial trouble. 

On June 1, a three-month moratorium on evictions expired, exposing millions of Americans to the threat of being tossed from their homes. While some of the 43 moratoriums, like in New York, have been extended, more than a third of those moratoriums have since been lifted and more are set to expire, leaving renters to come up with months of back pay or face losing their homes, CNN Business said

Homeowners aren’t any better off. Fully 30% of Americans didn’t make their housing payments for June, with one-third of the 30% making a partial payment and two-thirds unable to afford any payment at all. 

This is what chaos looks like in the land of the free and the home of the brave.

China rising 

Gold is a store of value and a hedge against inflation. It is also the logical response to fear.

Heightened global tensions such as terrorist attacks, border skirmishes, coups, protests and pandemics, scare investors into shifting their funds to precious metals.

A flurry of safe-haven demand in recent weeks has pushed gold even further into the spotlight. We see a number of events happening that are both destabilizing, and move China and the United States closer to blows. 

On June 15, there was a disagreement over two Chinese tents and observation towers that Indian officials said had been built on its side of a demarcation line in the disputed Galwan Valley. 

The seemingly minor scuffle escalated into the first deadly border clash in nearly 40 years. Al Jazeera reports

A large group of Chinese soldiers arrived and confronted the Indian troops. It was not clear what happened next, but the two sides soon clashed, the Chinese soldiers reportedly using iron rods and batons with spikes, killing 20 Indian soldiers and wounding dozens of others.

On Saturday the Times of India reported India has moved its fighter jets to  forward bases facing China, and warships were deployed to the Bay of Bengal. China reportedly lined up more jets and bombers to its air-based offensive platforms along the Line of Actual Control in Ladakh. 

Things are also heating up regarding the constant friction between China and Taiwan, which Beijing considers a renegade province that must eventually unite with the Motherland. 

As a seventh Chinese fighter in less than two weeks approached Taiwan’s airspace on Sunday, Harvard political science professor Graham Allison warned that Taiwan's tireless pursuit of its independence may result in Beijing's military retaliation, Taiwan News reported

Allison emphasized that Taiwan is in a dangerous position and that the only reason it has not been attacked by Beijing is because of the CCP's uncertainty regarding the global community's response.

China has been planning, for the past 25 years, to defeat the US with an electromagnetic pulse (EMP) attack on US aircraft carrier fleets (currently 3) stationed in East Asia. As reported by The Hill

A nuclear EMP attack against U.S. aircraft carriers is the key to victory in China’s military doctrine, as noted in a Feb. 12, 2000, article in the official newspaper of the Shanghai Communist Party Central Committee:

“The weak points of a modern aircraft carrier are: 1) As a big target, the fleet is easy for a satellite to reconnoiter and locate. … 2) A high degree of electronization is like an Achilles’ heel for an aircraft carrier fleet, which relies heavily on electronic equipment as its central nervous system. These two characteristics determine one tactic.” Therefore, military strategist Ye Jian said in the article in Jiefang Ribao: “The possession of electromagnetic pulse bombs (missiles) will provide the conditions to completely destroy an aircraft carrier fleet, and the way to complete victory in dealing with aircraft carrier fleets.” 

In March 2020, a panel of China’s military experts threatened to punish U.S. Navy ships for challenging China’s illegal annexation of the South China Sea by making an EMP attack — one of the options they considered least provocative because the crew would be unharmed, but most effective because the ship would be disabled. Now three U.S. aircraft carriers are in the Pacific to challenge China’s aggression in the South China Sea.

Less threatening but germane to our discussion on gold, Chinese companies have been particularly active in acquiring gold producers and gold juniors. In March Zijin Mining completed the takeover of Colombia-focused Continental Gold for CAD$1.3 billion, and on May 8, another large Chinese gold miner, Shandong Gold Mining, agreed to acquire TMAC Resources for around CAD$230 million. Shandong also snapped up Australia’s Cardinal Resources, which operates in Ghana, for AUD$300 million. 

Conclusion

As smart resource investors, we want to be investing in metals, and companies, that are at the leading edge of a trend. 

Gold and silver offer stability during periods of extreme stock market volatility and low bond yields, and while they do not pay interest or dividends, they are not subject to inflation like paper currencies. 

Precious metals can be used as a “fail-safe” currency in the event of a total financial collapse. Until we can say, in a broad sense, that re-openings have succeeded and the coronavirus is beaten, gold is going to continue to do well, and I would therefore strongly suggest holding some physical bullion or investing in one or two quality gold juniors - which historically present the best leverage against a rising gold price.

The way we see it, gold/ silver have it made, whether economic growth picks up or it continues to muddle along, still pinned down by the coronavirus. In the current deflationary environment, gold is doing well because of all the other drivers that make it such an attractive investment - a high global debt to GDP ratio from the combination of falling economic growth and rising national debts, owing to massive virus-related stimulus; growth of the M2 money supply lighting a fire under gold prices; continued low interest rates until at least 2022; a steady flow of safe-haven demand, due to the numerous above-mentioned global hot spots particularly with regard to a more belligerent China; and social/ economic chaos gripping the United States as it enters a presidential election.

Gold is also poised to gain in the likely event that all of this stimulus - at last count $18.4 trillion!- leads to inflation. 

If inflation goes, say, above 3%, yet interest rates remain near zero, that would create another bullish condition for gold - negative real rates (interest rates minus inflation). When US Treasury bond yields turn negative, investors typically rotate their funds out of bonds, into gold. 

And we haven’t even mentioned all the bullish supply drivers for the precious metal, outlined in a previous article, including peak gold, a lack of new discoveries due in part to pared-down exploration budgets; the large gold-producing countries like China and South Africa outputting less; coronavirus-related gold mine shutdowns; falling gold grades; and producers high-grading their deposits. 

As for silver, we have recently seen the gold-to-silver ratio decline, from over 100:1, to the current 99:1, meaning it takes 99 ounces of silver to buy one ounce of gold. Historically, the ratio is closer to 60:1, so silver is really quite undervalued compared to gold. 

We have the same bullish indicators for silver as for gold, in terms of safe-haven demand inciting investors to park their money in silver bullion, silver ETFs or silver mining stocks, and the fact that silver is not subject to inflation like paper currencies. 

Now, supposing the coronavirus retreats and economic growth begins to take off. As mentioned this would be inflationary, but silver wouldn’t react to inflation as much as gold, because it functions less as an investment metal than an industrial metal.  

Over 50% of silver demand comes from industrial uses like solar panels, electronics, and the automotive industry. 5G is set to become another major new driver of silver demand.

In an earlier article we said what the global economy really needs, in this low-growth, spending-stalled environment brought about by the pandemic, is a push - something big that will attract huge amounts of investment, and workers. As we have suggested, this could be a massive infrastructure spending program, on the scale of President Roosevelt’s “New Deal”.  

The Trump administration is said to be preparing a nearly $1 trillion infrastructure proposal – some of the dollars are geared toward 5G/ broadband - as a way of spurring the world’s largest economy back to life. 

According to the Silver Institute, The electronic components that enable 5G technology will rely strongly on silver to make the global 5G platform perform seamlessly. In a future 5G connected world, silver will be a necessary component in almost all aspects of this technology, resulting in yet another end-use for silver in an already vast and versatile demand portfolio. 

The group expects silver demanded by 5G to more than double, from its current ~7.5 million ounces, to around 16Moz by 2025 and as much as 23Moz by 2030, which would represent a 206% increase from current levels.  

Copper’s widespread use in construction wiring & piping, and electrical transmission lines, make it a key metal for civil infrastructure renewal.

A report by Roskill forecasts total copper consumption will exceed 43 million tonnes by 2035, driven by population and GDP growth, urbanization and electricity demand. Total world mine production in 2019 was only 20Mt. 

Many copper watchers were expecting the essential industrial metal to take a big hit from the coronavirus, but if current market fundamentals continue, we might even see copper posting a 2020 gain on economic recovery momentum. 

The same goes for silver. Its hundreds of industrial applications make silver very responsive to the condition of the global economy. Improved economic conditions resulting from countries successfully reopening from coronavirus lockdowns, would be great for copper and silver explorers, and their investors, who know the best leverage against rising metals prices is to own an early-stage junior with a sizeable and scalable deposit in a mining-friendly jurisdiction.

As smart resource investors, we want to be invested in metals, and companies, that are at the leading edge of a trend. At AOTH we see gold, silver and copper as THE best metals to own right now, offering investors both safety and opportunity for price appreciation in a pandemic and post-pandemic world.

Richard (Rick) Mills
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