Five Years Of Nothing

I was reading a recent article the other day about how central banks are buying gold at a record pace. Infact the amount of gold purchased in 2018 by central banks over the most recent four quarters was higher than any calendar year since 1971. That was when Richard Nixon pulled the U.S. off the gold standard monetary system at a time when gold was worth $35 a troy ounce. Over the 12 months through March 31, these banks purchased 715 metric tons of gold bullion worth around $30 billion, according to a recently published report from the World Gold Council. This is 640 tons more than the 79 tons banks purchased in 2010, according to the WGC report.

Countries such as Russia are leading the way to buy more gold and get away from holding U.S. dollars. Russia started buying up more of the metal in just after the financial crisis of 2008-2009, reversing a trend of ditching the metal. Other countries like India and of course China have been big buyers of gold also. India is also a huge buyer of silver as the Indian currency has been in a slump and people there find gold prices a tad to high so they are now seen buying silver in large quantities.

So with all these countries buying gold, why hasn't the price of gold gone up? One would think that there would be the old supply vs. demand issue come into play but that just hasn't happened. A lot of people, myself included, like to think that bullion banks and large funds run by the major world banks are manipulating prices down with paper gold to keep the fiat currencies going. In a recent report I read that there is now over 200 ounces of paper gold traded to every one ounce of actual physical gold. Some say the difference is even higher than that.

Looking at a five year chart we see that gold has done basically nothing for the past years. Silver on the other hand has been torture for those holding. If you used US dollars to buy this metal and are going to sell in US dollars, silver has not been a good investment at all. However for those who are selling silver in currencies other than US dollars the drop in silver price hasn't quite as painful. Most metal bugs have bought into the scenario that when times get tough the metals are the place to be because of their safe haven appeal. This time around however that has not been the case and there seem to be no end in sight to these low prices. There is an old saying that says, "the cure for low prices is low prices" but it seems low prices are here to stay at least for the forseeable future. Talking to another fellow about this we came to the conclusion that gold prices could very well stay right where they are at indefinitely. After all, just a week or so ago one of the largest mines in the world or at least in Mexico, the Penasquito Mine owned by Newmont-Goldcorp shut down due to water supply concerns and no one really knows for how long. The Penasquito Mine, which produced more than a 500,000 ounces of gold and 25 million ounces of silver in a single year and this distruption didn't seem to effect the silver price one bit.

One of the old ways of measurement of gold was the gold oil ratio. As the price of oil rose, gold would rise also and vise versa. This scenrio held quite true throughout the years until five years ago when oil prices started to fall but gold remained steady in comparison. In the chart below we see gold relatively stable but oil being down around 40%.

Aside from the manipulation theory of metals, what has really caused this disortion in prices. One of the theories is the abundance of cheap money and low interest rates. Low interest rates allows for almost wasteful spending of money meaning the end product can be bought and sold cheaper because there is little to no borrowing costs. Negative interest rates could possibly even push this scenario further.

So whats the answer? Is gold still a hold? Or does one sell and buy equities in pot or tech stocks? Or maybe cryptos like Bitcoin? The one thing I can say is that there is still optimism out there for gold. Not only with central banks buying huge at what I like to think of as discounted prices but in the miners themselves both private and public. Mining claims on this site continue to sell. Some almost as soon as they are listed. There are still those willing to do private placements to finance another round of drilling, another property aquistion, another sampling program. Regardless of what happens to the gold price, the game will go on as it has for hundreds of years.

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