The price of gold took off in the 2000s. As I wrote about in The Unchained Man, I greatly benefited from this and never forgot how much I profited from gold back then even though all the mainstream economists and financial “experts” denigrated it.
During the 2010s it mostly hung around at its new highs and didn’t do much. Lots of guys I follow are “gold bugs” meaning they worship gold and always seem to think it’s just about to take off in price, yet it seemingly never does.
There are many reasons for this, mainly because, like with silver, the price of gold is heavily manipulated and suppressed for various reasons. I’ve always thought the price of gold will shoot upwards, but I wasn’t quite sure when it would happen.
It could happen in 2020. Maybe. I’ll give you some quotes from Doug Casey’s newsletter with my comments and I’ll let you make up your own mind.
The Bank for International Settlements (BIS) is located in Basel, Switzerland. It’s often referred to as “the bank of central banks.” Its members consist of 60 central banks from the world’s largest economies.
It facilitates transactions – notably gold transactions – between central banks, the biggest players in the gold market.
The BIS also issues Basel Accords, or a set of recommendations for regulations that set the standards for the global banking industry.
On April 1, 2019, Basel III went into effect around the world.
Buried among what was mostly confusing jargon was something of huge significance for gold:
A 0% risk weight will apply to (i) cash owned and held at the bank or in transit; and (ii) gold bullion held at the bank or held in another bank on an allocated basis, to the extent the gold bullion assets are backed by gold bullion liabilities.
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.
Banks can now consider physical gold they hold, in certain circumstances, as a 0% risk asset. Previously, gold was considered riskier and most of the time could not be classified in this way. Basel III rules are making gold more attractive.
If accurate, this does indeed represent a significant paradigm shift in regard to central bankers, the men who control most of the world’s economy. Historically, central bankers, Keynesians, and monetarists have hated gold with a passion and get upset whenever anyone brings it up. Just like with cryptocurrency, any form of currency or medium of exchange that can’t be easily regulated, inflated, or taxed by big government deeply offends these people. If they are now publicly admitting that it’s a 0% risk asset, that’s a big change, and one that could signal good things for gold.
In 2010, something remarkable happened. Central banks changed from being net sellers of gold to net buyers of gold. Remember, central banks are by far the biggest actors in the global gold market.
This trend has only accelerated since…
The World Gold Council reports that in 2018, central banks bought a record 651 tonnes of gold. This is the highest level of net purchases since 1971 when Nixon closed the gold window. And it’s a 75% increase from 2017.
Central bank purchases in 2019 are on pace to be even bigger than 2018’s record year.
I can confirm this is correct. I’ve mentioned before how China, Russia, India, and other governments are buying up gold in record amounts. I’ve been watching these countries very carefully. The fact they’re buying up all this damn gold is the biggest reason why I too have been quietly buying up gold over the past few years while its price has been more or less stagnant (though it did have a nice bump in 2019; my gold made a 15% return).
Just look at this page here. Notice the insane amount of gold all of these countries have been buying up over the years. That means A) less gold on the open market; B) an incentive for these countries for gold to go up instead of staying the same; C) countries opting out of the U.S. Dollar which will drive gold upwards.
In 2017, when tensions with North Korea were rising, Trump’s Treasury secretary threatened to kick China out of the U.S. dollar system if it didn’t crack down on North Korea.
If the threat had been carried out, it would have been the financial equivalent of dropping a nuclear bomb on Beijing.
Without access to dollars, China would struggle to import oil and engage in international trade. Its economy would come to a grinding halt.
China would rather not depend on an adversary like this.
…
Last year, the Shanghai International Energy Exchange launched a crude oil futures contract denominated in Chinese yuan. For the first time in the post-World War II era, it will allow for large oil transactions outside of the U.S. dollar.
Of course, most oil producers don’t want a large reserve of yuan.
That’s why China has explicitly linked the crude futures contract with the ability to convert yuan into physical gold – without touching the Chinese government’s official reserves – through gold exchanges in Shanghai and Hong Kong. (Shanghai is already the world’s largest physical gold market.)
Bottom line, China’s Golden Alternative will allow oil producers to sell oil for gold and completely bypass any restrictions, regulations, or sanctions of the U.S. financial system.
With China’s Golden Alternative, a lot of oil money is going to flow into yuan and gold instead of dollars and Treasuries.
As I’ve already analyzed several times at this blog (particularly here), rightly or wrongly, countries like China and Russia have had quite enough of the USA bullying everyone else by controlling the world’s currency. These big nations are doing everything in their power to opt out of the U.S. Dollar as fast as they can so they can conduct commerce on the world stage without having to go through the corporatists at the U.S. Federal Reserve.
While it won’t happen tomorrow, it will happen in the next few years. This will be a serious problem for the USA (what else is new?) but it will be great for China and for anyone who owns a decent amount of gold. Why not join that club?
The Fed announced it would not raise interest rates in 2019.
The Fed also began increasing its balance sheet in the fall.
Previously, the Fed was slowly winding down its balance sheet by about $30 billion a month. At such a snail’s pace, it would have taken the Fed over 10 years to drain its balance sheet back to its pre-crisis normal level.
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.
The next move is a return to massive amounts of QE and 0%, and perhaps negative, interest rates. These moves would, of course, weaken the dollar and be good for gold.
The argument is that when the next economic crash comes (and it’s definitely coming), the only option for our big corporatist government is to print up even more money and/or drive interest rates even lower than they are, which would be pretty difficult considering they’re almost at 0% now. This would likely do well for gold.
I don’t disagree with the logic. The problem I have with that argument is that A) gold didn’t go up much the last time they did that; B) there might be some other international options government has to artificially prop up the economy a little longer that doesn’t directly involve direct manipulation of our currency or interest rates.
Don’t get me wrong: the U.S. Dollar is completely screwed in the long-term and will eventually collapse. I just don’t think you’ll see any radical problems with it in the very next economic downturn. (Though I could be wrong. As I’ve said many times, it’s impossible to tell the future with any pinpoint accuracy.)
Regardless, the other pro-gold arguments are very sound. I have a decent amount invested in gold. It wouldn’t hurt for you to do the same.
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Is it too late to get in this market ? I’m considering it after reading your article. Silver as well.
I’m wondering which way I should invest. Is buying physical gold/silver coins (and storing them at home) a good idea, knowing that it’s more risky than paying some company to keep it ?
No. At a minimum gold will go way beyond where it currently is over the next 10-20 years. Silver too. You may have to be very patient though.
Best way to invest in gold for beginners is to purchase nonnumesmatic coins (American Gold Eagles are the safest but they aren’t the cheapest) and keep them in safe that you own but is not necessarily located at your house.
Easiest and safest way to invest in silver for beginners is to purchase “junk silver” which means buying American change minted in 1964 or prior.
The pieces of the puzzle start to fall into place.
Goes along with the audio book I’ve been listening to:
The Future is Asian by Parag Khanna.
He redefines what Asia is and talks about how China is investing in future generations while the U.S. is investing in its very small percentage of wealthy (corporatism).
Also, China unhinging from that petro-dollar.
Sovereign gold coins are a great investment.
If other people could just say that.
They are called Black Swans for a reason.
Agree.
I’m not certain about this. I mean Silver is a bigger dip right now and is more easily divisible in “end times” situations.
Also, again, I’m trying to ascertain the purpose.
If you want to hedge against the US dollar, can’t you invest in foreign currency of some kind?
There’s also real estate, and stocks (US or international) which should also not be terribly affected in real value vs. a crazy runaway Fed.
If we’re talking massive societal collapse (not sure if you are) — well then —
There are other commodities that are probably more valuable. Guns, ammo, water purification tablets, batteries, etc.
And then there’s also — your own survival and general skills.
If you own even say $40,000 worth of Gold — keeping in mind, the average American doesn’t even have $40,000 in any liquid assets sadly — that’s like 0.25 – 1 year’s income at best. Developing recession-proof (or societal colllapse) SKILLS would be more prudent.
Just my own thoughts.
Correct. Silver is a much better investment than gold right now.
Haha. “Just?” Okay, “just” tell me which foreign currency is near-guaranteed to skyrocket when the US dollar collapses, and why.
You really think that’s easier than just buying some gold coins?
Huh? Where did I say to not buy real estate? Go ahead if you’re going to hold it for a long time. (Stocks, no. That’s a horrible bubble.)
I’m not talking about that.
Again… where did I say to not develop recession proof skills?
Your comment is putting all kinds of words in my mouth. I just said you might want to buy some gold. It sounds like you’re responding to an entirely different article written by someone else.
Caleb do you think Usa and Europe economy will recover from next crash like 2008 or collapse permanently? Or at least long time
Last recession there was really different situations all over Europe. Seems like latino countries are in worst shape and eastern europe in best. Or least bad. Scandinavia is something between those. And why countries like Norway and Switzerland even collapse. Theyre not in the corporatist Europian union.
Cash is trash! They are digitally creating Fiat dollars at an insane rate. Just turn your cash into hard assets. Gold, silver and brass. Real estate, artwork, firearms. Simple economics more money chasing fewer goods equals higher prices.
The USA will likely “recover” from the next crash in that the economy will slowly return to its state of slow collapse. I do not think the USA will collapse from the very next crash.
Europe is a different story, as you indicated. My wild guess is that some countries in Europe may not survive the next crash and but most will. As to which countries will survive or not, that’s really hard to say, but I agree that the Southern European countries are going to be in bigger trouble (though I really worry about Germany).
Gold is gold, but is Caleb going to address an economic collapse which is coming in a couple months ? #coronavirus
It already took off a bit over the past year or two, about 10%, not bad.
I really wonder about silver though. There are contrasting arguments and divided opinions on this. I do agree that silver is ridiculously undervalued but I wonder if it will ever go up to anything meaningful. I am also not sure it is easy to make big money on physical silver since you’d need ridiculous amounts considering how cheap it is. I think a 1 ozt coin should cost around 50 bucks and that is what it might get too. Indeed that is the price most people will tell you they guess such an amount of silver should cost not knowing anything about current prices. I doubt we will ever see it go into the hundreds, so unless you have many many kilograms of silver you wont make more than a few hundred bucks on it. I think silver coins are more the conductibility than serious investment. As a serious investment I would say some ETF or something.
Not many people talk about platinum and palladium and I think this is very promising because of the shortage, the fact it mostly comes from a few places and the applications, but it is mostly used in a few select industries so I guess it is tied to how well those industries perform.
Lithium was a big deal a few years back, I wonder if it is still a thing for people now.
No. Because it’s not going to happen. 2% Rule.
10% isn’t “taking off” in my view.
There are contrasting arguments and divided opinions on literally everything when it comes to investing and speculating. That’s part of the game. Your job, if you want to speculate, is to make educated guesses on what you think will do well while hedging your bets in a major way in case you’re wrong, which you might be.
Haha, I don’t understand why you “wonder” about silver then. It’s at $17 right now. If you think it would go to $50 that would be fucking huge. Based on what you just said you should buy as much as you can afford right now (provided you have plenty of emergency cash / safe investments first of course).
It’s still a thing. Just because people stop talking about an investment doesn’t mean it’s suddenly no longer a good investment. People tend to be stupid and irrational.
Caleb , Are you familar with Peter Schiff ?
He’s been a huge goldbug but overall he’s been wrong on a lot of things.
Btw i was very bullish on gold back in 2008 ( i was only 18 at the time ).
Secondly.
Also, my family does extensive business with China but we only buy certain capital goods from them.
If i wanted to sell something to the Chinese market , what would you suggest ?
Thanks,
Hi Caleb,
Are you familar with Peter Schiff ?
Yes. I’ve spoken with him personally several times and have talked about him at this blog many times. Click this.
Far too general a question to answer. And off-topic again. You have a lot of questions on lots of different topics: join the SMIC Program so I can answer all of them.
Hi Caleb, im interested in SMIC however for that particular forum I am hoping for a much more detailed response than the one you typically give to people in the comment section of your blogs.
I suppose i’ll have to give it a try to see if its a good fit for me or not.
Ho boy … this is super misleading. First of all, the “certain circumstances” are for gold assets held against gold liabilities. That is very much an edge case. Second, Basel III actually makes it more expensive for banks to hold gold, and therefore less attractive. This is due to the imposition of an 85% “Required Stable Funding” (RSF) requirement on gold assets.
So he’s got it completely backwards.
No he didn’t. Nothing close to that. There were proposals/threats to restrict certain types of stock market investments …. that’s about it.
This is jibber jabber. Oil buyers and sellers can already transact in any mutually agreeable currency on the spot market. They don’t need China to do anything special to enable that. Prices are quoted in USD for convenience, and most transactions do occur in that currency, but nothing requires it.
Yeah but wasn’t that like 10 years ago? We’re talking about today.
No, Basel 3 is the regulatory regime that is being phased in now …. the “stable funding” requirements are a brand new feature intended to stop banks from engaging in excessive maturity transformation …. this concept did not exist in previous versions of Basel.
Basel 3 was like around 2009 or 2010. I assume you mean recent updates to that. I wasn’t aware of that; I’ll have to check that out.
Basel 3 process was started as a response to the GFC. It wasn’t finalized until Dec of 2017. By itself it has no teeth …. each country has to enact its own enabling legislation or rulemaking as allowed by existing legislation. As far as I can tell the net/required stable funding rules have not yet been enacted in the United States, although they have been drafted and proposed. I suspect the Trump administration’s hostility to regulation has something to do with that.
Regardless, Casey’s assertion that Basel 3 is somehow bullish for gold is absurd. There may be other reasons to be bullish on gold, but Basel 3 isn’t one of them.
I’m not very knowledgeable about gold but have been interested in buying for some time now. What does this mean for gold long-term? Boom this year than drop or will it hold it’s new high price longer?
Yeah, ok. Makes sense.
There’s no way to know for sure. Gold could boom long-term or just stagnate long-term after any boost. There are credible arguments for either scenario, mostly because of this.
How do you buy silver in EU?
Gold is OK since it is not taxed (no VAT when buying), but silver is taxed with VAT (22% in my country) buying from institutional sellers.
Also buy/sell spread is ~4% for gold, 10+% for silver, so you “loose” 30+% including VAT when buying.
One option is silver stored in vaults in Switzerland – no VAT here, just the ~10% commission. You can pick up your physical silver in Switzerland upon request if you wish (15 kg bars), but transporting it to EU is a different matter…
Late to the party here, but wanted to check in and say Doug Casey is wrong about there being something new to central banking that is bullish for gold. Gold and the US dollar have been central bank reserves since the 1944 breton woods agreement. What that means is gold and US dollars are considered risk free reserves and collateral for lending.
You really have to watch out for these gold-selling web sites. They are using doom/gloom stories to sell you a product. I have a small amount of gold as part of diversification, but it is a terrible investment. It has high transaction costs, hard to trade. You need to find a coin dealer. Even in large cities they are rare.
I agree with this article because you say a boom *may* happen this year. What are the odds? 10 percent? Gold had a boom in the early 70s because the US reneged on the gold standard. Oil producing countries were upset that they were suddenly getting unbacked dollars, and they demanded more for the risk they perceived. There was another boom in 2000 when the euro started circulating. It was supposed to replace the dollar, but obviously than never panned out.
What do we think will happen this year? Please don’t say a crash, because that won’t happen.
Well, the Bretton Woods regime ended when Nixon formally took the US off the gold standard, as you noted further along. As for “central bank reserves”, depends what you mean by that term …. central banks for sure hold foreign exchange reserves, but that can be in a variety of currencies and can depend on which foreign central banks that they have swap lines with. This can be for a variety of reasons, like simply facilitating foreign exchange and commerce or the need to credibly defend a currency peg. Some central banks do own and/or buy gold as part of this portfolio …. notably the US Federal Reserve does not (although they hold gold in a custodial role for the US Treasury).
Gold isn’t considered a “risk free” asset by any modern banking system … it has volatility risk against whatever the reporting currency is for the bank or even central bank in question. Even US dollars are only “risk free” to banking institutions that are based in or report in US dollars. Although most internal investors do consider US dollar denominated Treasury securities as relatively safe assets in times of turmoil.
Na, that’s not why. The reasons were entirely political …. they were miffed at the US backing Israel in the Yom Kippur war.
The whole “euro replacing the dollar thing for oil producers” was never more than a half baked conspiracy theory. That’s why it never panned out 😉