Why gold’s run has plenty more steam in it

Written by Ciaran Ryan. Posted in Journalism

If you believe the world’s financial system is robust, gold is probably not for you. From Moneyweb.

Flows into gold ETFs have been outpacing flows into S&P 500 stocks this year. Image: Waldo Swiegers, Bloomberg
Flows into gold ETFs have been outpacing flows into S&P 500 stocks this year. Image: Waldo Swiegers, Bloomberg

The case for buying gold has always been to hedge against risk, and those risks have become radioactive.

Look at the following chart from Crescat Capital, a hedge fund manager leading the Bloomberg US performance rankings for three months in a row to August this year. Crescat is bullish on precious metals, and believes the best is yet to come for gold.

The graph shows a correlation between the ‘twin US deficits’ (budget and current account) and the gold-to-the-S&P 500 ratio. The higher the deficit, the higher gold ratio seems to move.

Given the meteoric rise in the twin deficits, gold could be poised for another major move up.

Another factor in favour of precious metals producers is the relative health of their balance sheets. They have spent the last few years paying down debt, leaving them strongly positioned to benefit from any further rise in the metal price.Read: Gold may hit record before year-end

Crescat points out that miners have been reluctant to spend capital even though gold prices have been moving higher. The result is a constrained supply pipeline that provides further underpinning to the metal price, and a huge increase in free cash flow that will either go into expansion or to shareholders.

At the start of 2020, the rate of inflows to gold exchange-traded funds (ETFs) started to outpace flows into S&P 500 stocks.

Gold and silver junior stock prices have outperformed the broader stock market since 2019.

Despite all these positives, precious metals stocks are still near record lows when compared with global stocks.

Krishan Gopaul of the World Gold Council points to another development that could put further fire under the gold price: with so many UK property companies putting a freeze on withdrawals by investors, liquidity risk is now rising – and not just in the UK.

“Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. In these instances, when liquidity may fall for other investments, gold can act as a genuine diversifier over the long term,” says Gopaul in a recent commentary.

Gold suffers none of the liquidity constraints imposed by property managers on their investments. Physical holdings of gold by investors and central banks total £2.7 trillion (R58.1 trillion), with an additional £700 billion (R15 trillion) in financial market instruments such as derivatives.

“In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of acute financial stress,” says Gopaul.

Source: ShareMagic

Another development highlighted by Crescat is the renewed interest in junior miners, which are now starting to outperform the seniors.

The bottom line is that central bank money printing, such as we are now seeing around the world, will only support financial asset bubbles for so long.

“Ultimately, quantitative easing drives flows out of overvalued stocks and credit and into undervalued precious metals,” says Crescat.

“Fiat currencies around the world are in a race to the bottom. The price of gold has been rising across all of them.”

Legendary investor Warren Buffett once remarked that Martians would marvel at earthlings who dig up gold and then rebury it in vaults. Buffett was never a fan of gold, but appears to have changed his tune, loading up recently on 21 million shares in Barrick Gold. He appears to be betting against the US, and has been selling US banks JP Morgan and Wells Fargo (though he is also loading up on Bank of America).

The easiest way buy gold is through Krugerrands, ETFs, and – and a more recent development – digital gold in the form of Paxgold. This is digital investment fully backed by physical gold and is available through Revix.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.