Gold in the Time of Corona

Ah—the quest for El Dorado! There’s a story by scholar Zecharia Sitchin circulating since the 1970s claiming that ancient Babylonian gods known as the Anunnaki came to Earth 450,000 years ago and mixed with prehistoric humans to create Adam and Eve. The new species—referred to in the Bible as the Nephilim—was bred to work as slaves mining gold in Africa for their own planet Niburu, which passes through our inner solar system every 3600 years. Another story from 1528 —a bit better documented—tells of a slave from Morocco, Mustafa Azemmouri, who endured shipwreck, disease and hostile natives to find the lost gold of the Incas/Aztecs, only to land by mistake in St. Petersburg, Florida. But that was a Caribbean cruise compared to the tales that emanated from the Yukon in the gold rush days. From time immemorial, gold has come to represent the sun and immortality, wisdom and truth, wealth and permanent value—not to mention good taste—and humans have gone to great lengths to get their hands on some.

All the gold that has ever been mined (about 200,000 tons—two thirds of it in the past 75 years) is still out there somewhere in its original condition. Over 150 million ounces or 4500 tons of gold are mined in a year, 185 tons of it in Canada, the world’s 5th largest producer, but production is dropping and will fail some day to meet the insatiable appetite of users, bettors and collectors. Worldwide production was already expected to drop in 2020, and now with Covid-19, availability of bullion and especially coins has been constrained due to corona-related temporary shuttering of mines and delivery bottlenecks. Some miners are high grading to lower short-term costs. Where does all the gold go?  About 50% is used to make jewelry and collectibles, 40% is purchased as an investment or held by centrals banks (15% or 35000 tons so far), and 10% goes to industry (dentistry, electronics, aerospace). As an investment, gold serves as a hedge against currency devaluation, market volatility and political instability.

With the turmoil caused by Covid-19, will the price of gold and silver rise this year? Factors that could drive up the price are a high US dollar, ESG issues, negative yields on long-term treasuries and, of course, Corona-induced debt and recession. The World Bank calls for the world economy to contract 5% in 2020 and for the pandemic to push more than 70,000,000 people (1) into extreme poverty. At its trough, a Q2 GDP contraction of 40-45% is seen in India and the United States, along with Depression-level unemployment of over 20%. Will our post-corona world see hyperinflation as governments print money and supply chains move away from China, or deflation and an asset price collapse? Nobody knows. What happens when the Corona tab for second- and third-world countries with no swap lines falls due? Do they nationalize Western-built precious metals mines for the greater good, as Canada did to create CN, CBC, Potash Corporation and Hydro Quebec, or do they default on their IMF loans from the same Western sources?

Our national debt has reached $1.5 trillion, costing nearly $60 billion in interest payments in an economy that is expected to shrink only 12% this year thanks to massive government spending on CERB and other benefits. According to the Fraser Institute, “The provinces and federal government are expected to spend $54.8 billion on interest payments in 2019-20.” The official unemployment rate rose from 5.9% at the end of February to 13.7% in May—an understatement. Global News reminds us that (4), “The interest rate increases from 2004 to 2006 were followed by a 54 per cent jump in annual insolvency filings between 2006 and 2009.” Marin Katusa (7) is bearish on Canada due to a collapse in oil and real estate prices, and a refocus of investor interest in the safe haven U.S dollar and gold. He sees our buck dropping to as low as 50 cents.

Want to invest in gold but don’t know which product to buy—gold futures on the commodity exchanges, shares in gold companies listed on the Toronto Stock Exchange, a mutual fund heavy on gold stocks, an Exchange Traded Fund, gold coins or bullion? What about silver? It is currently priced at a very low ratio of 100:1 against gold versus a historical average closer to 60:1. Gold and silver are both cheap relative to the Dow. What you buy depends on your risk appetite. Futures markets are very risky, mutual funds have high fees, and ETFs and stocks depend on the strength of their components. Coins and bullion will give you the most security. You can pick it up from your vendor or have it delivered to your home or pay a small fee to have it stored in a vault. There will be a markup in the price at your shop of choice, of course, whether the Royal Canadian Mint or the Bullion Mart.

How can I follow the trend in the price of gold and silver? You can follow the daily movements in the commodity markets for free in detailed graphic charts on such sites as www.barchart.com or www.insidefutures.com. The ratio of the Dow Jones Industrial Average to the price of gold tells you how many ounces of gold it would take to buy the Dow on any given month. Previous cycle lows have been 1.94 ounces in February of 1933 and 1.29 ounces in January of 1980. They have a reasonably strong inverse correlation and currently a very strong one. Savvy investors bought gold from 2016 to 2018; now the public is getting on board. This run should last longer than the first and will eventually end up as a selloff or correction in the market, which is normal.

Are Canadians allowed to own gold? Yes, and you will pay no retail sales tax on it. Bullion Mart is a fully legitimate and recognized reseller of coins and bullion and buys directly from the Royal Canadian Mint among other suppliers. Your purchases can even be linked very conveniently to your registered accounts like an RRSP or TFSA. With good credit, Bullion Mart, which sells 99.99% pure Canadian maple bars and coins—the same purity that the Mint sells—may let you buy on margin, meaning you can put up 25% of the total cost, for example, but buy 4 times the amount of gold. And, unlike most retailers, Bullion Mart is rarely out of stock. The Canada Revenue Agency does not require you to report your bullion or coin holdings, unless you resell at a profit, in which case you will be obliged to pay tax. Are bullion and coins liquid assets? In other words, can I easily resell them, even back to Bullion Mart? Yes. If the bars or coins have artistic value, they may have risen in value faster than bullion. Are you in good company as a buyer of precious metals? Judge for yourself: Russia, Kazakhstan, India, China and Poland, to name a few, are currently hoarding gold as a reserve to protect their currencies. India is still one of the largest buyers of gold for personal use such as jewelry, and even hot shot investors Robert Kiyosaki—author of Rich Dad, Poor Dad—and Warren Buffett, have been large buyers of precious metals.

Part of an old poem about the Klondike by Robert W. Service entitled The Cremation of Sam McGee, goes, “Now Sam McGee was from Tennessee, where the cotton blooms and blows. Why he left his home in the South to roam ’round the Pole, God only knows. He was always cold, but the land of gold seemed to hold him like a spell; Though he’d often say in his homely way that “he’d sooner live in hell.” Even Edgar Allan Poe urged his readers to Ride, boldly ride if you seek for Eldorado. The lure of gold!

1) https://blogs.worldbank.org/opendata/updated-estimates-impact-covid-19-global-poverty

(2) https://www.msn.com/en-ca/news/canada/is-your-neighbour-cheating-on-cerb-heres-what-you-need-to-know-about-the-cra-snitch-line/ar-BB155nNa

(3) https://ipolitics.ca/2020/04/24/1-4-million-jobless-canadians-dont-qualify-for-the-cerb-or-ei-analysis-finds/

(4) https://globalnews.ca/news/4665691/canadian-bankruptcy-rates-2019/

(5) The Daily Reckoning reference is paraphrased. https://dailyreckoning.com/

(6) https://blog.pimco.com/en/2020/04/post-pandemic-interest-rates-lower-for-longer

(7) The Katusa Research reference is paraphrased. https://katusaresearch.com/

(8) The Robert Kiyosaki reference is paraphrased.

https://www.richdad.com/how-to-get-started-in-real-estate