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The main reason to buy gold and silver any time is as insurance against
extreme negative events. I have always recommended having approximately 5-10%
of one’s portfolio in physical gold outside the financial system. Gold is
money in extremis. It has been passed down in my family from generation to
generation to have 5-10% in gold and pray God it will never be needed.
Diversification of financial assets when the financial system collapses is
meaningless. Ask those who were “statistically” well diversified with a CDS
basket in the 2008 financial crisis. With a looming systemic crisis you can
even allocate higher than 10% of gold.
The main reason for buying gold in 2016 remains the risk of an
international monetary system collapse. It hasn’t happened yet but events in
2015 make my case of a collapse not weaker, but stronger. When you hear
people like the past chairman of the U.S. Fed (Ben Bernanke) saying, “the
system is incoherent”, and the former governor of the Bank of Canada and
present governor of the Bank of England (Mark Carney) who remarked, in a
December 2011 speech that, “the global Minsky moment has arrived”, you have
to be prudent at least. Those are not your typical fear mongering people but
those in charge of the financial system. Several U.S. Fed governors have also
admitted that we are in “unchartered territory”, that central bank policies
are “experimental” and that they learn as they go along. Journalists even
found that one U.S. Fed governor was holding gold for himself in his
investment portfolio.
In 2015 we have seen currency wars accelerating, not diminishing, and now
we see signs of trade wars appearing. At the end of 2015 the U.S. has
announced it will impose a 256 percent tariff on Chinese steel imports. I
became bullish on gold in 2004 based on research on global debt and, more
specifically, U.S. debt. The 2008 financial crisis has confirmed my
hypothesis of a major secular reset of the international monetary system. The
balance sheet expansion of global central banks is clearly seen in the chart
below and its close correlation, even if not perfect, with the price of gold.
 
In the chart below we can see the close correlation of gold also with U.S.
debt. The U.S. Congress approved at the end of the year legislation to
increase the debt limit even more, again to allow more debt.
The recent divergence between U.S. debt and global central banks balance
sheet vs gold is, in my view, mostly due to the manipulation of the gold
price by central banks starting in the ‘60s with the London Gold Pool and
that continued since then. Observe in the two charts below the close
correlation between the sales of gold by the Bank for International
Settlements (BIS) and the price of gold. As you can see, the gold bear market
coincides with the sale of gold reserves by the International Monetary Fund
(IMF), which was done through BIS in Basel, Switzerland, right after the 2008
financial crisis. At the same time, the IMF has increased its SDR holdings
ten-fold.
According to the IMF,
the first phase in the IMF’s gold sales was exclusively off-market
transactions to interested central banks and other official holders, at
market prices. In October and November 2009, the Fund sold 212 metric tons of
gold in separate off-market transactions to three central banks: 200 metric
tonnes were sold to the Reserve Bank of India, 2 metric tonnes to the Bank of
Mauritius, and 10 metric tonnes to the Central Bank of Sri Lanka.
The IMF
also states that, “In February 2010, the IMF announced the beginning of sales
of gold on the market. At that time, a total of 191.3 tonnes of gold remained
to be sold. In order to avoid disrupting the gold market, sales were phased
over several months.”It seems from the charts above that the IMF/BIS sales
have ended or are close to the end.
At the same time, we see continued gold buying by China and Russia for
their foreign exchange reserves, counteracting Western gold selling. My
hypothesis is that China, Russia and also India intend to increase their
official gold reserves up to approximately 9,000 tonnes, which is in between
U.S. and EU holdings. India is attempting to achieve it by monetizing part of
the enormous private and temple gold already in India, estimated to be
between 18,000 and 30,000 tonnes. They also bought from the IMF, as mentioned
above, 200 tonnes in 2009.
Gold coin buying also has increased all over the world, including North America,
since the 2008 crisis, and that despite the recent drop in price. Most of the
gold coin demand comes from private individuals and not institutional or
official central bank demand.
There is a hypothesis that this sideways gold price move we have seen
since 2013 is just a correction within a major bear market that will take the
price of gold all the way down to the start of the bull market. The bull
market started in 2000 at around $250 and ended in 2011 just above $1,900.
The target in this scenario, if similar to the ‘70s, would be at least $500.
It is a possibility but I give it a very low probability, based on last
year’s events. Negative geopolitical and economic developments in 2015 have
strengthened my conviction that this scenario is most improbable, but not
excluded. Technical indicators also show a very large oversold market not
typical of a correction, but more of a bottom.
I still believe gold is at the end of a correction within a secular bull
market that will take gold to around $5,000 and maybe more. It will end with
a reset of the international monetary system. The recent divergence in the
price of gold in US dollars versus an index of the top 20 countries’
currencies (based on GDP) will solve itself by the price of gold in dollars
converging towards the currency index price, not the other way.
In the chart below you can see that if we look at the price of gold in SDR
(basket/index of US dollars, EU euro, British pound and Japanese yen) and
compare the recent move since 2000 to the 1970s, the recent move is more a
correction within a bull market than a bear market correction.
I haven been through the gold mania in the ‘70s and I can definitely tell
you the $1,900 was not the top of a bubble by any means. Just compare the
gold price acceleration (Price Rate of Change) in the ‘70s with the recent
one.
All the charts above could easily be visualised also applying to silver.
Since the financial crisis in 2008, both gold and silver have been acting
like hard currencies with silver following gold as the “poor man’s gold”, but
with more volatility. The currency wars have amplified in 2015 and I think
they will end into a collapse of the present international monetary system
and a reset. Until then gold and silver will be a good place to park your
money. Gold and silver are hard cash and once the international monetary
system is reset you will be able to exchange them in income producing assets
or spend them, contrary to fiat currencies, which will be worthless.
The chart below is the scenario I prefer both for gold and silver. If we
have a repeat of the ‘70s it would mean an increase in gold price of
approximately 2,000% from the present level of $1070. That could take gold
even over $10,000. This scenario would happen in a hyperinflationary
environment. In a deflationary environment the banking and financial system
would collapse and hard cash would hold its exchange value, even at $500
gold.
So the reason for me to buy gold, but also silver, in 2016 remains the
same as last year, and that is as money in extremis. It even gets reinforced
by the correction and an extreme oversold sentiment. Every new information in
2015 has strengthened, not weakened my hypothesis of a collapse and reset of
the international monetary system. Nothing has changed since I came to this
conclusion in 2004. My time projection (better said speculation) was about 15
years, so at the latest by 2020. Whatever the outcome of the reset I am sure
gold will be part of the new international monetary system in some form. Both
China and Russia have indicated they intend to use gold in pushing for a
system reset. Their massive buying also supports their public statements. The
European Union made comments on a regular basis in recent years in favour of
gold. Also recent gold buying by the Federal Reserve Bank of India from the
IMF and initiatives to monetize India’s gold make the U.S. the only major
opposition to gold coming back into the official international monetary
system.
Chart Annex:
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