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| Bid/Ask | 1947.90 / 1948.90 | |
| Low/High | 1936.50 / 1955.20 | |
| Change | +1.30 | +0.07% |
| 30daychg | +34.00 | +1.78% |
| 1yearchg | +451.00 | +30.13% |
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Silver Price & PGMs
Sep 11, 2020 12:30 NY TimeKitco 10AM Silver Fix
| Silver | 26.89 | +0.04 |
| Platinum | 930.00 | +8.00 |
| Palladium | 2212.00 | +31.00 |
| Rhodium | 11000.00 | +400.00 |
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(401 G.C. Fri. Sep.11th, 2020) – BestGoldMines.com has put forth a review of the current bullish reasons to own gold and gold mining co.’s, we at 401 G.C. believe our customers should be informed and present the following for 401 G.C.’s Friday F.Y.I.
There are several reasons why we believe gold will rise to $5,000. Take your time to review the following arguments:
1. Bull market pattern
The bull market pattern is one of the reasons why I invest in gold mines. Currently, we are in a bull market in gold again as there is an upwards trend. I expect this to continue like we’ve never seen before. The last major bull market in gold lasted from the late 1990s until 2011. The one before that ran between the late 1960s and 1980. The image below shows the usual pattern of a bull market.
The usual pattern starts with a bear market, with the gold price going down (red line). After the lowest point is reached, there is a period where the gold price moves slightly upward (orange line). Once this period is over, the gold price starts to lift off. In 2020, we are around 1.5 years into a bull market, which I believe will last for another 4–5 years. What is important to note is that once the peak has been reached, I believe we will see the gold price bouncing up and down by around 15%, followed by a steep decline. Therefore, once the gold price is testing its limits and everybody is talking about it like Bitcoin at the end of 2017, it’s time to sell your gold mine stocks.
$3,000? That’s even possible?
If I mention to people that I expect the price of gold to reach $3,000 in a few years, I sometimes receive the response that they believe it’s too high a figure. I believe it’s not such an extreme outlook, though. Let’s take a look at the past…
If we were to scale up the ratio of the gold price to world GDP to the peak of 1980, it would result in an ultimate peak for gold of $5,300 an ounce nowadays. In the bull market of the 1970s, the gold price increased from $35 to $850, which is a multiplier of around 24 times. If the bull market we are now in grows by the same multiplier, we will see the price of gold rise to above $6,000. If we compare the money that is currently in circulation and add all checkable and long-term deposits in banks, and we compare that with the previous bull market, gold will move this bull run to $5,700.
There are more ways to estimate the gold price. If we look at the two most recent peaks, we see in 1980 a peak of $843 and in 2011 a peak of $1,896. The second peak is a factor of 2.3 times higher than the first peak. That implies we should see a peak of $4,300 an ounce during the next peak. If we zoom into the stock prices of goldmines during the peak in 2011 with a gold price of $1,896, we can conclude that in 2011 the stocks were a multiple higher than the current stock price – and we should take into account that those gold mine stocks can easily grow tenfold.
I understand this is not an analysis that can predict the apex of the next peak. All I want to point out is that a peak of between $3,000 and $5,000 is not unthinkable. Please note that you’re reading this article in the future from the moment I’m writing it now. I started to make these comparisons when the price was just over $1,500. That’s why I believe it is still a perfect time to buy stocks in gold mines. 2. Central banks and federal stimulation initiatives
The central banks and the fed are another reason why I invest in gold mines. Central banks are among the leading investors in physical gold. In the past few years, central banks have been buying a lot of gold, which contributes to the rising gold price. They added a record of 656 tons in 2018 and 650 tons in 2019. The past ten years have seen the highest shifts in 50 years.
Some experts claim that due to the COVID-19 pandemic, central banks will want to sell parts of their gold reserves. I see the opposite happening, though. For example, since the start of the global COVID-19 pandemic in 2020, the International Monetary Fund’s gold holdings have increased in value by over $19 billion. The value of the Russian central bank’s gold reserves also grew by over $6 billion in just one month. I expect that as long as the price of gold is rising, the central banks will find other ways to access money. How about printing it?
Inflation
Imagine you live in a country with just ten people. Altogether, you have ten coins. In this country, one gold bar costs around 10% of the value of the overall amount of coins. People usually pay one coin per gold bar. Now imagine the inhabitants all receive another ten coins from the central bank, so they now hold twenty coins altogether. The coins are now less rare and less exclusive. The gold still represents 10% of the value, which means that people now have to pay two coins to receive a gold bar. Due to the addition of ten coins, they became 50% less valuable, as in the new situation there are twice as many of them. Or, to put it differently, gold became twice as expensive because twice the number of coins is needed to provide the same value to buy a gold bar. That’s exactly what is now happening in the world on a large scale in response to the federal stimulation initiatives. As a result, the printing of money by many central banks around the world will increase the price of gold.
The central banks are printing a staggering amount of money in response to the COVID-19 pandemic. In several countries, such as the US, people even receive free payments. Especially in the past few years, the credibility of the U.S. motto about a strong dollar is eroding. In the past, central banks would raise the interest rates if inflation was above 2%, but with the enormous amount of debts nowadays, many countries would not be able to pay back what they owed. As a result, everything else, like gold (which is not money), becomes more valuable, and currencies become less valuable. We call that inflation.
Due to the stimulation initiatives, the growing debts of governments around the world will increase (for example, the USA). In many countries, the debt raised to solve the pandemic crisis could be seen as war debt, which will most probably be spread over many generations. If a country is not able to pay its debts, it will go bankrupt, which will hurt its currency. All these risks have a positive effect on the price of gold. And that’s why I invest in gold. Would you like to know the third reason?
3. Economic uncertainty
The economic uncertainty is the third reason why I invest in gold . Safe havens are sought by investors to limit their exposure to losses in the event of market downturns. Gold is one of the favorite safe havens of investors. When uncertainty starts to dictate the market, inflation heads upward, and investors expect gold to become more expensive. The price of gold usually moves in the opposite direction of the dollar, meaning a weaker U.S. economy favors a higher gold price. When the stock market took a deep dive in March 2020 during the coronavirus crisis, gold went down by only around 10% and recovered within 14 days.
Apart from COVID-19 and possibly other viruses or mutations of the virus, I foresee an increase in tensions between China and the USA as another severe driver of economic uncertainty. China was still a developing country in the ’70s but is now becoming the number one economy in the world. We’re seeing a shift in power happening on a financial, economic (trade war) and, eventually, military level. We’re also seeing a shift in power concerning natural resources and technology. History tells us that these shifts in power do not happen smoothly, and the resulting tensions will cause the gold price to rise.
Apart from these significant trends, there are a lot of other issues that could become the spark in the powder keg of worldwide unrest. The situation in Hong Kong, the tension in the South Chinese Sea, the sovereignty of Taiwan, the situation in Tibet, and the re-education camps of the Uyghurs are just a few examples, all of which are controversial topics. Several countries are skeptical about the silk road and the purchase of harbors in other countries by China. Despite the realities, I hope that all countries will sort out their difficulties in the most peaceful manner, as I believe many of these tensions will, one way or another, have a negative impact on the world economy, and consequently a positive impact on the price of gold.
4. Low yields
Low yields are the fourth reason why I invest in gold . The world is currently facing low yields. Low yields have pushed the opportunity cost of bypassing bonds way down, making precious metals more attractive. Gold is one of these. If you were getting 8% interest on your deposits, would you still have visited my website to invest in mining companies? That’s why as long as we see low yields, or even negative yields, saving accounts are not a competitor for gold, as low yields have a positive effect on the price of gold.
5. Shortages
Shortages are the fifth reason why I invest in gold. There is an increasing shortage of gold. Let’s take a look at China: In 2020, the industry in China alone requires 50,000 tonnes of gold, but there are only 27,000 tonnes of raw gold available. We can see this happening around the world, and nowadays, we are finding even more ways in which we can benefit from the use of gold for the production of goods. With a growing world population, I believe the shortage can only increase in the future.
Gold mining companies scale up their business when the price of gold is rising. While the gold price is rising, the gold mining companies are usually not able to keep up with the demand as it takes many years before a mine is operational. On top of that, it can cost over a billion dollars to start up a mine. An open-pit mine is less expensive, but if the mine has to go underground, several hundred meters deep, the cost of starting up the mine and hence the cost per ounce of gold (AISC) goes up. If the gold price ever drops, these mines will operate at a loss. In view of this, mining companies don’t immediately scale up if gold prices are rising, which results in additional shortages. A shortage of gold has a positive effect on the price of gold.
Update, 21-7-2020: In Q1 and Q2 of 2020, several mines had to close due to the COVID-19 crisis. The closure of mines obviously results in less output, and it’s not rocket science that this will affect the gold price in Q3 and Q4.
6. The Robinhood generation
The Robin Hood generation are the sixth reason why I invest in gold . At the moment of writing (July 2020), many people still wonder exactly why the stock market is booming and why (mainly tech) companies are extremely overvalued, and tech stocks are rising rapidly. Well, meet the Robinhood generation! The Robinhood generation are individuals, many of whom are millennials, who use the in 2015-introduced Robinhood app to buy and sell stocks without commission.
Many users of Robinhood are not into the old-fashioned stocks such as Unilever, Shell, BP and Walmart, but seized the opportunity during the COVID-19 crisis to buy stocks from tech companies. Tesla, Facebook, Amazon, NIO, and Datadog are some of these. Some of these stocks do profit from the COVID-19 crisis, but the increase in value is extraordinary. These buyers believe in these tech stocks like no others and tend to hold them. They also have FOMO – the fear of missing out. Stepping out and finding that the next day the stock has risen another 10% hurts!
When the Trump administration started to distribute the corona relief money directly to the people, many of them used this money to buy stocks. Where institutional investors stopped buying stocks due to the high valuation, the Robinhood users kept on buying. Most of the users just couldn’t stand to witness the rising stock prices and do nothing, while others were simply caught up in the hype. In one period of just 24 hours, almost 40,000 users added Tesla to their portfolios.
What goes up must come down … at least a bit. The Robinhood users will eventually see that they can also lose the value that they’ve accumulated. At the time of writing, we suspect an economic crisis is coming. Furthermore, the relief money paid to the people will eventually stop. Many people will by then still be unemployed. They will simply need the money to pay the bills and take their profits. If more people sell than buy, the price of a stock usually goes down. I estimate that this is the beginning of the sell-off, which will be accelerated by the Robinhood users. The largest Goldmine is not even 1/4oth of Amazon. If just a fraction of that money will go to gold, it’ll lift off!
‘What does that have to do with gold?’ you might ask. Cashing out might be an option, but I believe many of these millennials are addicted to trading and will look for alternatives once the tech stocks drop. They want to experience that addictive feeling of winning again, like when the tech stocks were rallying. That’s the moment when I believe many of these users will turn to gold, as this Robinhood generation will not put their money in slow gainers such as bonds. In times of uncertainty, gold is often considered to be a safe haven. It’s the same for Robinhood. The demand for gold will have a positive effect on the price of gold, and I assume there will be a peak before the final rally upwards to the $5,000 target. T
7. Global warming and environmental restrictions
Global warming is the seventh reason why I invest in gold. Some people believe in global warming due to the influence of humans, and some don’t. I’m not going to debate whether humans are a contributing factor, but what is crystal clear is that the climate is changing, and these developments have a more substantial effect on the price of gold than you might think.
Green mines
It is an increasing trend in the mining industry to report activities concerning corporate responsibility and the environment. A company such as Kinross dedicates a significant part of their website to explaining how they use less energy and how they have lower greenhouse gas emissions. They report about tailings and waste management, cyanide management, how they protect biodiversity, and the use of water. Despite all the good intentions, though, open-pit mines in no way contribute positively to the environment. They cause erosion, and animals are chased away as they can’t stay in their natural habitat if it’s turned into an open-pit mine. To mine gold, a lot of ore is mined and processed. Consequently, the production of gold uses a lot of energy. All the shovels, trucks, and plant cause a tremendous amount of pollution, and the compounds that cyanide breaks down into can be harmful. Cyanide spills into groundwater can persist for long periods and contaminate drinking water aquifers. The ore from the mines also results in a lot of waste. That’s why some countries have banned the operation of mines. President Duterte of the Philippines recently closed 23 large operating mines due to environmental disasters and violations of environmental rules such as using the sea as a waste pool. The overall opinion on mines could also change. Once environmental activists gain the upper hand, they could pressure governments to shut down mines. Some claim that we cause a lot of harm to the planet for the sake of a bit of precious metal. Who knows? What I do know is that fewer operating mines, and hiccups in mining activities, will cause the price of gold to rise.
Harder to mine gold
Due to global warming, mining companies are facing more challenging circumstances these days. Especially in Canada, we see several mines having issues with production due to global warming. Warm winters restrict access to the goldfields. We see bitterly cold winters producing record snowfall, which makes mining harder; but we’ve also witnessed the ice not forming in time due to the warmth of the winter. Because of the lack of ice, several mines are underwater. Mining companies have to fly in their equipment and spend millions on aviation fuel because the temperatures haven’t dropped far enough to create ice bridges across rivers and lakes to allow access to the mines. The increased cost of mining gold, especially along with lower outputs, results in a higher price of gold.
Regulations
I previously mentioned that countries such as the Philippines have started to prevent mines from mining until they comply with specific environmental standards. In several countries and continents such as Europe, there are strict regulations to improve the environment. For example, the European Union has all kinds of rules. Vacuum cleaners are not allowed to use more than a certain amount of energy, light bulbs need to be energy-friendly, and items such as plastic plates and straws will soon be history. In several countries, such as the Netherlands, construction companies are only allowed to build new houses if they are 100% powered by electricity generated by solar panels.
I believe that gold mines will face more of such environmental regulations, and they will have to make significant investments in emission reduction, electric shovels, waste reduction, etc. An increase in the costs and the obligation to stick to the regulations will increase the AISC. Several operating mines and development projects will no longer be profitable. Not all mines are doing well, and there are still many that don’t make that much profit. For several mines, these regulations will result in more debts and lower available budgets to explore and develop new opportunities. Less exploration and development or even bankruptcy will result in a lower amount of mined gold. It is obvious that these are not the stocks I want to have in my portfolio as I believe these developments will eventually contribute to slightly fewer mines and less gold output. If there is less gold on the market, it will have a price-boosting effect.
In Conclusion
Sovereign debt defaults, the general weakness in the fundamentals of the global economy, economic uncertainty, currency inflation, and devaluations have all increased worries about the solidity of U.S. public finances. Insufficient physical supply, the need for a safe haven, global warming, the stimulus initiatives, electronic money printing, the trade war with China, the shift in power, a bull market, low yields, the Robinhood generation, stock market apps, and the tendency of central banks to buy gold make me believe that the gold bubble that takes prices to all-time record levels will inflate in three distinct stages: currency devaluations, growing investment, and then a stratospheric ascent. I believe the $5,000 price point will most likely be reached in this third and final phase.
Posted by :
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com