Amid the once-in-a-century COVID-19 pandemic, gold price surged to an 8-year high. The last time gold price reached such euphoria level was in 2012. Is it a bubble in the making for gold price or the start of an explosive bull run? Today, SG Wealth Builder is pleased to share an email interview with BullionStar’s Precious Metals analyst – Mr Ronan Manly.
1) Year-to-date, the gold price has soared from USD1,520 per ounce to USD1,730 per ounce. The gain is about 14%. Yet the rise has not been linear. At the peak of the COVID-19 pandemic in March 2020, the gold price dropped to a low of USD1,460 per ounce. What could be the reason?
The US dollar spot gold price, or ‘international’ gold price, is overwhelmingly established based on trading in two specific venues, the London gold market and the COMEX New York gold futures market. Both of these markets trade not real physical gold, but paper gold whose supply can be expanded at will out of thin air. That’s the first thing to remember.
Turning to March, when the wider financial markets saw unprecedented volatility triggered by fears of the pandemic, and when bond yields and equity prices plunged and the Fed and other central banks bailed out the system and expanded QE, the US dollar gold price, as you said, also dropped sharply from USD1,700 to as low as USD1,460.
During this time, mainstream media outlets, without providing evidence but based on regurgitated trader hearsay, parroted the explanation that the drop in the gold price was due to “investors liquidating gold for margin calls” or “selling their gold to raise cash”, in other words, hedge funds and institutions selling their gold to pay for losses on other leveraged position losses from other asset classes.
Notwithstanding that institutional investors predominantly don’t hold physical gold – they hold exposures to the gold price through synthetic and derivative positions – the margin selling explanation may have had a downward impact on the US dollar gold price because some multi-asset funds may have closed their unallocated gold positions in London or their gold futures exposures on COMEX.
However, this has nothing to do with physical gold. Physical gold is the preeminent safe-haven asset and financial insurance in times of financial market crisis. And we can all agree that March there occurred a financial crisis, one more vicious than any time in generations. It was during this time that BullionStar and other bullion dealers around the world experienced unprecedented demand for gold and other precious metals, and during when the premiums on physical gold over the spot price rose considerably.
So it was paradoxical and surprising that as demand for physical bullion rocketed, the US dollar gold price fell, because traditionally and historically, the gold price acts as a warning bell in financial crises, the proverbial canary in the coalmine. Surprising that is, until you realise that the contemporary US dollar gold price is based, not on the trading of physical gold, but on the trading of unlimited amounts of synthetic gold and derivatives that are created out of thin air by a handful of bullion banks.
But what the mainstream financial media also never discusses or mentions, is that the sharp plunge in the ‘international’ US dollar gold price during March may have been due to interventions and price manipulations by central banks and their bullion bank agents as part of their market rescue package. After all during March and since then, the central banks of the world have been intervening in every asset class across the board to prop up and prolong the current system. So it would be an embarrassment to these financial planners if the US dollar gold price shot up, as this would upset the illusion that all know well on Wall Street and other financial centres. So that is something worth thinking about, even if it is a topic that is not broached by the mainstream media.
2) COVID-19 pandemic has caused major disruptions to the supply chain across most industries. In March, the early days of the outbreak had caused plenty of chaos and people stockpiling food. Now, we are looking at the reopening of economies in many countries, can you share with us what are the impacts to gold mines’ production and is BullionStar affected?
The emergence of COVID-19 as a pandemic since March has seen major dislocations across the entire bullion sector, from supply obstacles and shortages through to huge physical demand and widening physical metal premiums. From our own experience, the gold demand witnessed by BullionStar was unprecedented, with record customers and record orders in March and April.
On the supply side, gold refineries, mints and wholesalers were running out of stock which unfortunately meant long delays on replenishing inventory. However we were, more than most, prepared for such a scenario and our deep and extensive bullion inventory strategy reflected this, as we had anticipated and planned for such developments. After all that’s what savers and investors in precious metals do during a financial panic and market collapse – they buy investment precious metals as a form of wealth preservation and insurance, so it was not exactly a shock that demand behaved the way it did. For bullion dealers that were prepared, it was not a shock.
While some of our bullion products sold out, we were one of the few bullion dealers globally that still could offer a wide and deep choice of investment precious metals during March and April.
The question of mining production is an interesting one. You have to remember that gold mining is a global diversified activity across many continents and countries, and while there will have been some mine closures due to COVID-19 there were not across the board closures around the world. Furthermore, the impact of mining output volumes into the gold supply pipeline will be on a lagged basis, and gold refineries have other sources of supply from recycling and gold stockpiles. But the impact, if any, on gold mining volumes due to refinery closures is something that data from such bodies as the World Gold Council and US Geographical Surveys, will in time answer.
3) Post COVID-19, what is the outlook for gold price? What will be the demand for bullion like? Will it surge like what it did in the aftermath of the Great Financial Crisis in 2008?
During the 2008 financial crisis, the US gold price also fell sharply before it surged again. In that case in 2008, the price retreated $200, falling from USD900 to USD700, and in that case the mainstream media also attributed the price fall to margin calls by investors and traders to cover losses in other asset class positions. Back then in 2008 and early 2009 when the gold price rebounded, it took nearly 3 months to make up lost ground to USD900, but then the price began its ascent to its all-time high of USD1,900 in 2011.
This time around, the gold price only took 3 weeks to recover lost ground, rising from USD1,470 on 20 March 2020 to around USD1,700 by 10 April 2020. So this time around, the surge has been more intense and the rebound has been faster. Fast forwarding to June and we now have witnessed two months of the US dollar gold price is trading in a narrow range around and above USD1,700.
Still, it has to be bourne in mind that this US dollar gold price is, as explained above, derived from the trading of unlimited supply paper gold in London and on the COMEX, so its price fluctuations can, over the short term, be influenced by the dominant bullion banks and their central bank counterparts.
A perhaps question perhaps would be to ask why the international gold price in US dollars has not made a new all time high in an environment of a global pandemic, an ongoing financial crisis, unprecedented central bank QE and a global recession. A confluence of events that in theory would be a perfect storm for a higher gold price. Is it perhaps that the global planners are not ready to allow such a new all-time high gold price in US dollars?
Turning to physical demand for gold bullion, BullionStar is still seeing very strong demand for gold bars, gold coins, silver bars and silver coins. But that is to be expected. Because savers and investors in investment precious metals know that nothing in the global financial system has been fixed, and that the problems and day of reckoning have just been prolonged. Central banks kicking the can down the road can paper over the crisis, but they have, yet again, only made the eventual debt and monetary crisis far larger and the fallout magnitudes worse.
So we expect that demand for investment precious metals will remain strong, principally because nothing has been resolved in the financial system, just delayed, and physical precious metals are some of the few assets that can ultimately protect savings in this unprecedented time of relentless fiat currency destruction and central bank market destruction.
4) As part of the economic rescue package, the US government has pushed out USD2 trillion fiscal stimulus to prevent the economy from collapsing. At the same time, the US Federal Reserve has slashed interest rates to near zero. Against this backdrop, does BullionStar foresee a negative interest rate scenario? And will this lead to investors buying gold to preserve wealth?
There are already negative interest rates across many of the world’s jurisdictions both official central bank rates (e.g. Japan and Switzerland) and within many markets’ bond yields. And these are nominal rates in major economies and major bond markets, not emerging markets or economic backwaters. Factoring in inflation, even more interest rates around the world are in negative territory. And those economies which are near, but not at the zero nominal bound, such as the US, UK and Eurozone, are practically there. So an environment of negative interest rates is not a potential scenario, it’s a current reality.
Gold always does well in periods of negative real rates, since the opportunity cost of holding gold relative to interest bearing securities is low. There is a empirically demonstrated strong correlation between negative real interest rates and a rising gold price, for example in the late 1970s, and the 2000s. So the current situation will not be different. Gold will do well in times of negative interest rates. So yes, negative interest rates are another part of the jigsaw that encourage investors and savers to acquire and hold physical investment precious metals, as a form of wealth preservation and savings.
5) The current health crisis is unprecedented and led to lockdowns in many countries. Arising from this, consumers have been leveraging on technology to work from home and telecommuting. In view of this, does BullionStar foresee a rise in demand for digital gold products? Will the demand for bullion drop going forward?
Lockdowns and telecommuting don’t necessarily relate to the purchase and storage of physical bullion bars and coins or digital gold, or a preference for acquiring digital gold over physical gold or vice-versa. At BullionStar we use technology across the entire firm and have always done so, from BullionStar’s fully transactional website for buying, storing and selling bullion to transacting in cryptocurrencies, and from everything from the BullionStar Savings Program (BSP) to BullionStar’s blogs and web site content.
While there are a plethora of digital gold products and platforms in the marketplace now, with more coming all the time, many of these have not gained traction to any extent, and at the end of the day they are just tokens and securities which proport to represent physical gold ownership. Take away the physical gold and these tokens, coins and placeholders have no value. Digital gold is interesting, but not a game changer.