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Gold Confiscation – Feasible or Fantasy?

22 May 2020

Precious Metals Commentary

Continuing on from last week’s breakout, gold topped out at a fresh high of $1,763 this week before giving back some gains to settle just above $1,725 for now. Silver is holding just above the USD $17.00 per ounce level but looking at risk of a short-term pullback on profit taking after the sharp move from $15.00 to $17.00 in just two weeks. 

The pullback in gold last night was mainly due to the ‘flattening of the curve’ of US jobs losses. As markets are always forward looking, the 2.5 million additional Americans filing for unemployment last week was seen as bad, but not as bad as before, therefore positive. This combining with some USD strength was enough to see gold drop just over 1% in USD terms. The total jobs losses from COVID-19 rose to 39 million in the US.

The short-term positive trend is intact, unless we see gold fail to hold $1,700, which could lead to new longs having patience and waiting for a more sustained pull back. 

We talked in recent updates about Australia’s stellar performance at managing the Covid pandemic thus far, as we seem to have dodged a bullet for now. Compared to the US, which is the most affected country, it doesn’t surprise us to see some AUD/USD strength in the near term. Again, the AUD strengthened this week to 65.6 US cents, seeing gold in AUD $50 lower than this time last week. Silver pulled back to $26.20 from recent highs above $27.

COVID Deaths AUS V US Chart

There is a possibility that gold could have a rest in the short-term and give back some recent gains, the charts below show the recent trading range in AUD terms stuck in a consolidation pattern.

XAUAUD Chart

The longer-term daily chart below this sees the 20 day moving average moving south of the 50 day, with gold in AUD elevated well above the 100 day moving average, so cheaper prices a possibility next week if no news upsets the party.

XAUAUD (Bid) Chart

With most analysts forecasting USD$1,800 -$2,000 gold this year we think sentiment will remain strong and pullbacks will be met with buying, but nothing moves in a straight line.


Gold Confiscation

Hedge fund manager Crispin Odey got a lot of headline coverage this week when he said that gold ownership could become illegal if inflation spikes.

Gold confiscation - or to be accurate, gold expropriation as the gold owner is paid for their gold – is a perennial favourite of gold bloggers, particularly in America. The banning of gold ownership in the US in 1933 provides American bullion dealers with a dramatic story to encourage buying physical gold.

Our view is that gold confiscation is unlikely these days as gold no longer constrains central bank or government monetary or fiscal policy.

For a fund manager we were surprised to see confused thinking by Odey in his case for gold to become illegal again.

He was quoted as saying that “the authorities may attempt at some point to de-monetise gold … only do this if they feel the need to create a stable unit of account for world trade”. We are not sure how you de-monetise something that is no longer officially money – gold was de-monetised when the world went off the gold standard in the early 1970s.

With money no longer being defined as gold, there is no limit on commercial or central bank money creation so, as Keith Weiner of Monetary Metals says, “if the government tried to confiscate gold, it would have no effect on bank solvency, interest rates, or consumer prices”.

With mainstream financial market commentators disdainful of gold as a legitimate part of an investor’s portfolio, any move by governments against gold would be counterproductive as it would send a strong signal that things must be really bad if the government needs to hoover up something it has previously ignored and said is unimportant.

So it is a high risk strategy with little benefit and it would just result in investors moving into other hard assets to protect their wealth – like silver.

Odey’s views on gold haven’t stopped him from holding it, although we should put that in inverted commas as he is reported to have roughly 40% of his European’s asset value in June gold futures – so he isn’t a long-term physical holder.

While Odey is short-term in focus, he is very aggressive about inflation, seeing it reaching between 5% and 15% within 15 months.
 

We Print It Digitally

US Federal Reserve Chairman Jerome Powell and his fellow central bankers are doing their best to create inflation in partnership with governments, with over $20 trillion in stimulus pledged since February to address COVID-19.

Global Monetary & Fiscal Stimulus to Fight COVID-19 Chart

To put that figure in context, it is nearly double the value of all the gold ever mined in history, which at an estimated 197,576 tonnes is worth $11 trillion.

In a US 60 Minutes interview, Powell agreed with the interviewer’s statement that “you simply flooded the system with money” and gave a refreshingly direct answer to “Where does it come from?” by saying “We print it digitally”.

Powell’s only mention of gold in the interview was to say that “the government response in the '30s, the central banks were trying to raise interest rates to keep us on the gold standard all around the world. Exactly the opposite of what needed to be done”.

We found it a bizarre interview as half of it has Powell trying to reassure people with motherhood statements about how the Fed is providing support to the banking system and companies, who only need temporary liquidity but at the same time including alarming comments about 40% of people making less than $40,000 per year losing their jobs; flooding the system with digitally printed money; and that “the U.S. has been spending more than it's been taking in for some time. And that's something we're going to have to deal with … when we're through this recovery”.

It is like Powell knows his job is to be calming but he just can’t bring himself to completely lie about the reality we are in. For us the most striking exchange was this, which followed Powell saying that banks were “so much stronger” now compared to the 2008 Global Financial Crisis:

PELLEY: And for people who wonder whether they should take their money out of the bank and put it in a mattress, you tell them what?
POWELL: There's no need to do that. No need at all. The banks have been strong, they've been fine. There's absolutely no need to do that.
PELLEY: There's no worry there?
POWELL: No.

It is hard to read that and not think of this meme (actually from a comic by KC Green).

KC Green Comic

Banks got through the Global Financial Crisis and the government and RBA will make sure they get through this COVID crisis but we still think having some gold and silver financial “fire insurance” would be prudent.

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 comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.

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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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