Gold - did you know?
A "perfect storm" is an expression that describes an event where a rare combination of circumstances will drastically aggravate a situation. The term is also used to describe a hypothetical hurricane that happens to hit at a region’s most vulnerable area resulting in the worst possible damage by a hurricane of its magnitude.
Perfect storms are described to be the confluence of three different weather-related phenomena. These combine to create what is referred to as the "perfect situation" to generate such storms:
1. Warm air from a low-pressure system coming from one direction.
2. A flow of cool and dry air generated by a high-pressure from another direction.
3. Tropical moisture provided by the hurricane itself.
The phrase has grown to mean any event in which a situation is aggravated drastically by an exceptionally rare combination of circumstances.
OUT OF SIGHT - OUT OF MIND
In past writings I have described how economies and economics are directly linked to cycles or what has been coined by many an economist as seasons. Each full season can be correlated to four parts, the same as in nature being autumn, summer, spring and winter. Just like a perfect storm, there are events under the surface bubbling away out of sight and out of people’s minds when it comes to financial matters. These events normally happen when the economy is not in good shape.
For a number of decades there have been a series of financial fronts culminating under the surface. These are now starting to become unavoidably easy to see on the financial horizon specifically when it comes to higher Gold prices for the future.
1. SUPPLY AND DEMAND
2. UNSOLVABLE GEOPOLITICAL EVENTS
3. CURRENCY INFLATION
What causes a shortage? When there is more consumption than production, this then obviously leads to a shortage. The greater the shortage, the higher prices will eventually reach. Demand in Gold at 3600 tonnes is outstripping supply over the last decade, with supply currently running approximately 2300 tonnes per annum.
Not only that, because of a lack of investment within the mining industry prior to the beginning of this current bull market beginning in 2001, mine production is actually declining.Mining is responsible for the majority of Gold supply; about 60% over the last several years. And the prevailing trend of this component is one of the major fundamental reasons for Gold’s current bull market.
As you can see in the chart above, the Gold mining industry is in the midst of some serious structural problems.
For a long time the Central Bank (CB) bogeymen sales had a major influence on the overall balance of the Gold markets. And though by volume what the CBs delivered to the markets had been smaller than what was generated by recycled Gold, CB sales were material. But a unique attribute to CB activity is that it is not fixed to one side of the economic spectrum. CBs have the ability to supply or demand Gold, to be net sellers, or net buyers. Hence, throughout the bear market of the 1980s and 90s, they were able to suppress the price at will.
In 2009 we saw a strategic shift in CB activity, a change that is starting to have a resounding effect on the Gold trade. In the last three quarters of 2009 CBs actually shifted to becoming net buyers of Gold. For the year, CBs were marginal net sellers, but as of this year, a break of a 20+ year net-selling streak as a group has now been broken.
This CB buying activity is very refreshing to see and was eventually inevitable. Fortunately, banks don’t have an unlimited supply of Gold to keep flooding into the markets to maintain suppressive activity. Back in the 1980s and 90s we know that the CBs held approximately 33,000 tonnes. Much of this hoard has been off-loaded into the free markets at, I might add, very suppressed prices. Possibly as much as two-thirds has been sold, and the only way for them to retrieve it back is to re-enter the markets and pay un-suppressed free market prices!
Gold has been and will always be the ultimate form of money. Its timeless value transcends the life of any fiat currency, because Gold cannot go to zero in value. It is steady in its role as an inflation combatant. Perhaps it is a stretch to think that the financial leaders of the world’s nations understand this concept. But a step in the right direction tells us they are at least willing to work towards better diversifying their large fiat reserves.
Central Banks can’t be ignored on the supply side of the Gold trade and shouldn’t be on the demand side either. CBs have a lot of buying power. Now that they are slowly one by one deciding to start stockpiling Gold again, it will have a material impact on the balance of these markets with increased prices.
The world is full of Perplexing Problems meaning unsolvable problems. Just recently I listed a handful of issues which repetitively seem to keep cropping up in one form or another. Throughout all of recorded history there has only been one time where there were no wars recorded anywhere on the globe.
If there were any, history didn’t record them. That time I am referring to lasted for approximately 40 years and was during the reign of King Solomon approximately 3,000 years ago. However, with the issues facing our nations today, they are all intertwined because of technology and globalization. So if there is an issue in one part of the world, it tends to domino effect into other parts of the global economy.
Here is the list repeated:
Tech bubble burst / War on terrorism / Attempts to stabilize Iraq / Ongoing attempts to stabilize the Middle East / Ongoing conflict in the Balkans / Nuclear power struggle between India & Pakistan / Possible future conflict with North Korea / China, Tai-wan & United States political disagreements / Iran, Israel and USA nuclear weapons issues / Housing market decline / Massive government bailouts / Portugal, Ireland, Italy, Greece and Spain debt / Massive USA debt total unfunded liabilities over US$109Trillion / Consumption of six barrels of oil per day and dis-covery of 1 barrel daily to replace it / Massive multiple inflation injections of currency
There’s one thing Governments and Banks around the world love to do and that is print money. So long as this goes on, Gold will always be a valuable commodity in relation to a store of one’s wealth.
The simplest and easiest way to explain this phenomena is to compare the dollar price of Gold over an extended period of time. In 1971 Gold was priced at US$35 per ounce; therefore, one US Dollar would purchase you one thirty-fifth of an ounce of Gold. Today the Gold price is approximately US$1200 per ounce; therefore, one US Dollar will purchase you one twelve-hundredth of an ounce of Gold.
All fiat currencies around the world are being inflated. Over the last ten years inflation has been, without success, evidently exponential in trying to solve the systemic credit risks. As money supply is poured into the system, the main resulting problem in the end is massive debt alongside an increased cost of living.
The economic vehicle used is to pump this supply to the borrowing masses. The seduction takes place with lower interest rates to make the borrowing look more attractive. Lower interest rates will work for an extended period of time but not indefinitely as we are seeing show up in the economies of western nations since 2008.
Current US unfunded liabilities stand at US$109 Trillion and are set to increase. On top of this there are what Warren Buffet coined ‘financial weapons of mass destruction’ - an estimated total US$600 Trillion ‘over the counter’ (OTC) derivatives paper IOUs.
History dictates that these debts will not be paid back. As stated earlier, the economic system is global, and the US Dollar is the global reserve currency; therefore, this massive unfunded liability is a global problem. It will take decades to purge from the system what is owed and transferred onto future generations. It will show up in more economic consolidations, bankruptcies, fraud, and unfortunately more damage to innocent people.
The economic environment has definitely changed in the current season of events we find ourselves in today. In stepping back, it most certainly looks different from ten years ago let alone just as little as two years ago. There are so many potential economic systemic risks that are building on the horizon in the current financial systems. Only a fool would deny them. These events could bring about the perfect financial storm.
The prudent are prepared and take steps to be on the advantaged side of such potential risks by reallocation of wealth as well as by changing business activities. When correctly repositioned, you are in an advantaged state for a wealth transfer. If it’s with assets, their value increases dramatically; if it’s with business, an increased flow of activity will filter through your business.
I thank God that these storm fronts do not blanket all areas. There are other safe havens if you recognize them, and Gold is the king out of them all.
Until next time,
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