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​A Golden Decade

29 May 2020

Precious Metals Commentary A volatile week for precious metals this week, with gold moving south of USD $1,700, ever so briefly, before rebounding to $1,720 on the back of US GDP Q1 data showing a 5% contraction on an annual basis. Silver also pulled back early in the week before rebounding back above $17.40. The psychological $1,700 level is the battle at the moment and likely to dictate overall bullish/bearish sentiment throughout next week.

Last week we highlighted the possibility of a pullback this week on profit taking and AUD strength, and we saw the AUD/USD remain above 66c with the pullback in gold for local investors hitting a low of around AUD $2,550 mid-week before climbing back above $2,600.


Silver looks strong and resilient at present with any dips being met with buying, the ratio has dropped back below 100:1 for the first time since March 2020. Lows for the week were $25.50 in AUD but they didn’t last long with silver back above $26.40 currently. With the ratio falling back to reality the trend is now for silver to outperform gold, so any weakness should be seen as an opportunity in our opinion. 

1 Year Gold/Silver Chart

Platinum was flat this week at USD $835 and Palladium fell back to $1,926, with both metals seeing a profound impact from COVID on both supply and demand.

A Golden Decade

This week fund manager Incrementum released their 14th In Gold We Trust report. Titled “The Dawning of a Golden Decade”, the 356 page monster involved roughly 20,000 hours of research, writing, editing, translating and number crunching by a team of twenty people.

As we do each year, below we will look at some charts and topics that grabbed our attention.

In Debt we Trust

We have commented frequently on government debt levels but the chart below demonstrates how extraordinary the situation we find ourselves in today.

Federal debt as % of GDP, 1790-2030 Chart

At a projected level of 108, US Federal debt as a percentage of GDP is at war-time levels yet we aren’t in any (conventional) war.

We’d say that the war the US government is fighting is spending within one’s means, with the US government budget in deficit almost all the time since Nixon “temporarily” went off the gold standard in 1971 and expected to exceed $1 trillion this year.

No surprise then, as Incrementum say, that quantitative easing and indirect financing of the state budget via the central bank’s electronic printing press is the new permanent state of affairs.

As the US works to devalue its currency, de-dollarization – countries shifting away from use of US dollars in trade and as a reserve asset – gathers pace with the report having a whole section on this “Endgame”, noting that the US dollar’s share of foreign reserves fell from a high of 73% in 2001 to 62% at the end of last year at the same time that key countries like Russia and China bought gold.

The US is not the only, nor the most profligate, country with many others also running large debt levels.

General government gross debt in % of GDP, 2019 Chart

Relative to its peers Australia appears quite conservative, although the COVID-19 related stimulus measures will help it catch up. But that is only part of the picture. When you look at household debt levels, Australia doesn’t look so good.

Household debt as % of net disposable income, OECD countries, 2018 of latest available Chart

On top of this we also have problems with corporate debt, the volume of which has vastly increased while the average rating of the issuers has deteriorated, with Incrementum noting the increase in BBB-rated debt, just one notch above ‘junk’ level.

Incrementum see the surge in private indebtedness as the weakest point in the whole economic system.

Report contributor Hans Fredrik Hansen argues that while conventional inflation has been modest, asset price inflation (particularly in housing) as resulted in a reduction in household purchasing power. With Western households spending an increasing share of their income on necessities and being forced to take on 30- year mortgages to afford a place to live, Hansen says the result is a society of debt serfs.

He says that society becomes susceptible to radical political changes when those debt serfs cannot find any way out of their trap while observing the new “feudal lords” who are their lenders not having to worry about cost of living expenses.

We agree with Hansen that a debt jubilee is simply not an option as those debts are the assets of banks, superfunds, and insurance companies and would lead to unforeseen consequences.

The solution? A combination of the government having to bail out banks and lenders and quantitative easing for the people via expanded unemployment/JobKeeper programs or a universal basic income, all given (pseudo) intellectual justification by Modern Monetary Theory.

For those with modest savings who are hardly in the feudal lord category, these solutions are nothing more than financial repression - the objective of which is, as report contributor Russell Napier says, to steal money from savers slowly.

Incrementum see these solutions being implemented globally, quickly creating soaring inflation in most countries and “believe it is quite possible that we at some point be facing a pronounced phase of stagflation in the decade ahead”.

In Gold We Trust

We have noted over the past few months that the smart money is aware of the above issues and is moving to protect themselves with hard assets, like gold and silver.

Incrementum say that it isn’t just the (usually older) wealthy or goldbugs that are aware of the current system’s failings, but that “an increasing number of fiat-money critics can also be found within the younger generation, most of whom reach this insight by studying cryptocurrencies”.

The shift to precious metals has contributed to their outperformance. Incrementum have a table of gold’s performance in various currencies and it is a sea of green, with an average return in 2019 of 18.3%.

In the case of Australia, gold has booked some impressive gains in the past few years as show below (the full table going back to 1992 can be found here).

Gold/Silver Ending in May/2020 Chart

However we are still in a stealth bull market as the majority of investors are not aware of gold’s performance (or the problems we face). The chart below demonstrates this using the value of money invested in gold ETFs as a proxy for general interest in the metals. At 0.6% of the value of equities, it is still only half of what it was in 2011-2012.

Gold held in ETFs as % of US equities, 1/2008-04/2020 Chart

This shows that there is considerable upside should investors begin to worry about debt levels and money printing.

In Silver We Trust

Incrementum devote a chapter in their report to silver, which they say is at bargain levels. An average gold:silver ratio of 86 for 2019 is the seventh highest ever recorded as shown in the chart below.

300 years of gold/silver ratio, 1718-2020 Chart

They say that the fundamental and financial outlook for silver with respect to supply, demand, and price might be better than that for gold.

On the supply side they note that it will not necessarily increase as prices rise given that around 75% of silver mining is as a by-product. In addition, those non-silver mines have been reducing capital expenditures for almost a decade. Finally, industrial scrap and recycled photographic film will be capped by a depressed economy.

On the demand side, Incrementum expect silver investment demand to pick up significantly and once we get out of COVID-19 restrictions, there will be improvement in silver consumption by manufacturing, construction, and power generation sectors.

In Australia we Trust

This year Incrementum had a feature on offshore storage that included Australia, saying that we are an excellent place to store physical gold securely.

Living here many don’t consider how safe Australia appears to outsiders. The appeal of Australia stems from our:
  • geographical isolation - island countries are a lot harder to invade either in war or in terms of unwanted migration
  • political stability – we have never had a civil war
  • rule of law - based on British legal systems
From a gold market point of view, Australia is also blessed with:
  • world’s largest economic demonstrated gold reserves at 10,070 tonnes
  • number two 2 global gold producer (possibly overtaking China in 2021)
  • two internationally accredited refineries
The last point is often not appreciated but is crucial to ensure liquidity (that is, the ability to buy and sell) which underpins competitive buying and selling prices.

With our associated business, ABC Refinery, having around 43% of the gold & silver refining market from miners as a source of supply, this is why ABC Bullion was able to continue to offer clients the ability to buy on pre-order and lock in current prices when other dealers had to shut up shop.

On the buyback side, should we ever see a situation where the price rises so high that Australia experiences net selling, the fact that ABC Bullion’s brand is internationally accepted means we will be able to sell that metal into London and New York. Brands from non-LBMA or non-SGE manufacturers will, in those circumstances, likely trade at a significant discount as they will require re-refining.

Australia is indeed the lucky country for bullion buyers and is why it competes favourably against well-established offshore wealth jurisdictions like Switzerland and Singapore.

Until next time,
John Feeney and Bron Suchecki
ABC Bullion
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

This article has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this article or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it.

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