27/3/2020: What is Gold’s true value today?

Gold/USD	LT-M	MT-W	ST-D
1625 (1498)
Trend	↓ (↓)	↓ (↓)	↑ (↓)
% Risk Weight	85 (78)	43 (62)	67 (18)
Allocation	100% (100%)

Conclusion: The massive sovereign intervention in all financial markets and QE to infinity has now become a risk that requires more than applying a few technical tools. Price discovery is off the table as of last week.

The last time a French president initiated a major monetary event was in 1965 when General Charles de Gaulle decided to exchange all French dollar reserves for Gold at the standard rate of $35. It took until 1971 and an expensive Vietnam war(1955-1975) to see the result of that decision and the Gold standard became a huge hurdle for modern monetary finance.
Today’s situation with the Corona virus is bringing 80% of economies to a near halt and must inevitably lead to corrective measures never seen or tested before and no individual of above average intelligence can even begin to imagine what the effects will be. For sure any countries still holding Gold bars in US vaults will no longer be able to repatriate and whatever Foreign countries still technically hold in US vaults has become a negotiable asset as any asset on US soil belongs legally to the USA. Whether the USA still holds 8134 tons of gold is also a big question and many influencers say this no longer exists as a monetary asset. QE to infinity is now fact and this will lead to a reset of the financial system which will be much more complex than the 1944 Bretton Woods agreement. The underlying imbalance and more polarised political interests appear so much greater than at the end of WWII.

What is Gold’s true value today?

As most nations issued their own fiat paper money in order to faciltate a means of exchange for goods and services the public would trust this barter paper without much further consideration. The system worked in spite of various individual nation’s currency crises during much of the 20th century. For the past 100 years the USA has been the leading economy in the ‘financial’ world, hence the US$’s status as World Reserve Currency.
We’ve done a simple analysis of what ratio of gold reserves in the USA represents a level that embody’s trust.
Because ‘economics’ is not math and because ‘trust’ is as much emotion as anything else just look at these numbers;
The Average value of total USA Gold reserves, at the prevailing standard rate, as a percentage of Public debt from:
1900 till 1933 = 28.77%
1900 till 1944 = 28.91%

In comparison, the 1930’s data would really represent ‘trust’ today, yet President Roosevelt acted to halt all buying and trading of physical gold in 1933 in order to prevent a bank run. With 30% of Gold reserves? Apparently not sufficient in the minds of political leaders. During the following years the USA continued to accumulate gold starting in 1900 at 602 tonnes to 7800 metric tonnes in 1933 to a grand total of 18,000 metric tonnes in 1944 and a nominal peak in 1952 with 20,663 MT. The amount of gold subject to seizure in 1933 is not documented but is limited and could be somewhere between 500 and 800 metric tonnes. We just don’t know. Based on the fact that gold reserves between 1932 and 1934 rose by 1100 MT whilst the average annual accumulation prior to 1932 amounted to about 100MT per annum, the 1932 and 1933 increase in gold reserves was over 400MT and possibly the result of cashing in by investors suffering from losses in other asset classes. The idea to seize gold may have been tabled in 1932. Essentially Order 6102 meant the Gold standard ended right there for ordinary people. Sovereigns could still swap dollars for Gold of course until 1971. That risk was small because countries around the world held relatively little physical gold until the awareness of owning real money surfaced in the 1960’s and 70’s. Especially European countries started to accumulate more physical gold around the $35 level.

So, what should or could be the price gold?

Let’s keep it simple and not follow the 100 or so parameters of pro’s and con’s and attempt to weigh them to get to the answer of where trust in fiat money should be priced in terms of Gold.
Look at the long term price chart of PHYSICAL Gold (1900-2020)

Maybe the USA has missed an opportunity to devalue the dollar against gold after each of the major drawdown events. First Bretton Woods in 1944 after a very costly World war and then in 1966 or 67 when Charles de Gaulle had hinted Gold was too cheap. The Vietnam war and the Space programme over a period of 20 years increased US public debt by 100% from 280B in 1956 to 560B in 1975. During this period this debt was partially financed by selling Gold. Bad timing and very similar or worse to what European nations did between 1995 and 2005. Gold reserves declined from 20,000 tonnes in 1957 to 8,500 tonnes in 1975. Gold has only been revalued once against the world reserve currency and that was in Jan 1934. This is surprising because the US Treasury continued to accumulate physical gold until 1957 as is shown on the below chart:

The chart below visualizes the progression of US Public debt to date since 1900:

Old school requires debt to be balanced with sufficient assets in order to retain trust. Bank won’t lend money to Joe bloggs unless there is proof of plenty collateral.
USA Public debt increased from 1.6 Billion dollars in 1900 to an estimated 25,000 Billion or (much) more dollars in 2020 as shown on the above chart.
Now compare Gold reserves with Public Debt:

Is ‘Old school’ mistaken? Can this ‘debt for anything’ continue without some serious consequence? Is Covid-19 not telling us that ‘WE’ have taken this beyond bounderies ourselves? We are all to blame for this correction that nature has put upon us.
Central Banks around the world have sold Gold since the 80’s till about 2005 and have started accumulating again in recent years following the correction of Gold and Silver that ended in June 2013 and finally bottomed in Dec 2015. The USA has not sold gold ‘officially’, although Shadow stats suggests it has. According to their research the USA has less than half the reserves as officially reported. We don’t know because there hasn’t been an audit for 60 years. But if that is so the entire world has been very naive, and even if the USA still holds its 8,133.5 metric tonnes of gold in Federal vaults, plus a fair amount of storage on their territory on behalf of other nations, we prefer to put our trust in real money until this thing blows over.

Will gold be confiscated?

There could be confiscation although this is not very likely given the complexity of administering and real risks for humanity related to realizing such a one sided action against own citizens. This applies to all Sovereigns around the globe and especially the United States of America. A hard reset by officially debasing all currencies of the world against Gold (and Silver) is more likely in our view. Why? Because many nations own a lot of Gold.
The 2014 Gold referendum in Switzerland asked the citizens whether Switzerland should increase it’s Gold percentage of official reserves back to the pre 2000 level of 20%. It has been just over 7% during the past 15 years which represents about 17 percent of total public debt. The Swiss National Bank holds very large currency reserves in different asset classes. This was their argument to convice the Swiss nation that an increase of Gold reserves was not necessary.
The nation finally decided by 78% to 22% against this proposal but it shows the kind of ‘Trust’ that lives in peoples mind as to where a balanced and solid monetary system should be targeted in terms of hard asset collateral against public debt. And there really is only one hard asset in regular but limited supply available to protect our financial stablility; GOLD!

Still the question what Gold’s value should be today all things being equal?

This take us to the final 2 long term Gold charts:
KISS; If 30% Gold reserves to debt in 1933 wasn’t enough (we will never know of course), and 20% is a desired level for a nation like Switzerland, let’s just take the long term average in the USA. We could be reviewing this against many technical tools, including longer periods simple or weighted moving averages, but let’s take the most conservative one, just to keep it simple, based on the whole period. From 25% USA to Debt Gold reserves in 1900 to near 30% in the late 40’s and then a steady decline to date at 1.7% Gold reserves to Debt. The Long term 120 year average now sits at exactly 14%.

We say that 1.7% is clearly not enough, because the market is now decoupling physical gold from paper, whilst any level above that is a guess. It does not matter what causes it. Corona virus clearly plays a role, but it is happening. We don’t know what’s coming in the months ahead or what our individual well being looks like. What we can visualise is that a series of measures to balance the books will be necessary and this probably incorporates an orderly or disorderly leveling of wealth distribution, which is in fact already happening.
This chart shows where the Gold price would have been if the USA had maintained a 14% cover to public debt:

If it is 5% the price would be $4,800 today. at 10% $9,700 and at 20% just under $20,000. Have your pick. Being fully invested in physical gold at this level may no longer be easily achievable because it is important to stay away from paper assets. The Bitpanda exchange is an option because it is relatively easy to setup quickly and as they back Precious metals holdings with 100% physical metal stored in Switzerland and Austria. Maybe some other intermediaries that legally reside and store outside of your home territory. For US citizens this should be a trusted party outside of North America. Anything held within the territory of North America including Canada, which doesn’t own any gold, is a much higher risk.
No Change

Note: All chart data is based on offical Daily, Monthly and Annual publications starting Jan 1900. Gold did trade outside of its official conversion rate during the periods 1929 -1934 and 1965-1971

20 March: If investors around the world have not yet committed to at least 20-25% of their liquid assets to Precious metals it may be a little late now due to the business shutdown of Swiss refiners in Ticino, Switzerland if confirmed on Monday 23, and if one can still get hold of physical Gold and Silver, you should do so up to at least 25% of total liquid assets or even 50%.
All time frames have turned down during the past week but in highly critical times the behavior of technical tools also require a closer observation. Divergences may trigger much quicker than usual and markets can turn around very rapidly and stay overbought or oversold for a long time whilst price discovery continues in one direction, up or down.
This time round the uncertainty about the ultimate effects of the Covid-19 Corona outbreak can drive markets to extremes in a very short period of time. We feel comfortable with the thought that real money will always protect some of our financial wellbeing whilst not be exposed to leverage of any kind.
Owning a traditional hard asset is absolutely critical in times of economic stress, whilst the emphasis should not be on protecting one’s entire portfolio as this is impossible. Many investors would be lucky to protect just 30 to 50% of their original portfolio value adjusted for inflation.
Unfortunately we did not manage to add to our fully allocated Gold position last week and this time we will wait for markets to settle down somewhat or possibly act or extreme movements if they develop.

Silver/USD	LT-M	MT-W	ST-D
14.50 (12.55)
Trend	↓ (↓)	↑ (↓)	↑ (↑)
% Risk Weight	55 (45)	18 (43)	47 (67)
Allocation	100% (100%)

No Change. Hold Silver to maximum level.

Last week: The totally unexpected happened and our position is at a loss in dollar terms, not in Euro terms. Silver tanked to a tick low of 11.63 before settling in a range above the $12 handle. Extraordinary circumstances are making us hold our breath, yet this market is going to become one of the leading insurances for investors and we see zero risk in holding an above average allocation in our portfolio. We did not manage to acquire more physical silver last week at a reasonable price as premiums were extraordinary. The Swiss refiners were working at full capacity and no wealth investor is selling any physical Gold or Silver. The demand however is substantial. With Swiss refiners now rumoured to close for business on Monday 23 March the ripple effect of this overdue measure can be huge. Switzerland serves about 65% of total world refined precious metals and thus satisfies near 90% of the western world demand. That demand can no longer be met. Full stop. Hedge funds long on futures, if they get the chance, may challenge Comex for delivery. Is this the final straw that breaks down the unnatural link between paper and physical. One well known financial market commentator in alternative media is predicting this weekend that Europe will confiscate gold. We’ll see. So, there is no reason to panic in our view. Owning Gold and Silver up to at least 25% of total liquid assets and not that much else is probably all the protection people need. Clearly markets will develop massive financial opportunity, but who cares if the only matter of importance is one’s health. We are not out of the woods by a long shot, so this has become a long term play as it has been for 18 months already. No Change

GOLD/SILVER Ratio	LT-M	MT-W	ST-D
111.00 (118.00)
Trend	↑ (↑)	↓ (↓)	↓ (↓)
% Risk Weight	67 (70)	80 (88)	50 (78)
Allocation	50/50 AU/AG (50/50 AU/AG)

No Change. Be patient and wait for the recovery to materialize.

Last week: Last week we’ve tried to purchase more silver, but margin’s were so ridiculous we’ve left it. Since we only buy physical, which was still in very high demand the option did not seem relevant under these extremely volatile conditions. Derivatives is not an option for us so it doesn’t matter as these are not normal times and we have basic portfolio protection in place. It is impossible to predict where traders or sovereign manipulators take this market in the next few days or weeks.Technicall the Gold/Silver ratio sits at an extreme bearish divergnce level on the Long term time frame. Missing an opportunity at an extreme is an opportunity lost but otherwise no big deal in the wider scheme of things. No Change and still looking for an equilibirium level nearer 50 on the ratio. Right now we would say. Do not sell any physical metals and especially Gold, Silver and Platinum until they reach the levels that are consistent with free market price discovery. Right now that already indicates a gold or Platinum price of nearer $10,000 and Silver at $125 all things being equal which they are not. Against other currencies is less relevant too at this stage as fiat may become worthless with the kind of extreme monetary financing that takes place today and tomorrow.