Guest post:
Gold & Hindsight 2020
Imagine being a fly on the wall on that analyst floor back in April - when ABN Amro declared the rest of the year to be ‘risk-off’. There was a point, though, when their prediction of gold consolidating around $1700 by the end of the year proved frustratingly tangible, as the U.S. dollar climbed just ahead of the U.S. presidential election and gold seemed hamstrung for a tight day or two.
Pair that with a vaccine set to restart the global economy and you would have been forgiven - even in the middle of twisting and turning POTUS election - for offloading some gold while organising a three-course meal of Bear with your state-authorised bubble-buddy.
But the fundamentals crucial to gold’s success remain - and it is the fundamentals that consolidate gold’s cruising altitude, not one-off scares and jubilations one way or another. Fundamentals, fundamentals, fundamentals; the indisputable fact is that we find ourselves in an environment of aggressive global quantitative easing, rising fiscal deficits and, critically, continuously negative-yielding government bonds.
In an environment of contended elections, potential Russian successions, ceasefires, epidemics and vaccines, that same old trio of fundamentals come across as disappointingly simple. But predictability in simplicity is the base tenant of good, and many - those who’ve never experienced risk and its consequences - are disappointed by simplicity, when really it's the most important tenet of all.
The key to gold’s success is not the financial aspects of its system of logistics or valuations - it is rather people and their behaviour, behaviour which is almost always disappointingly simple. Investors will always desire a fire exit and the nearest one - government bonds - is wedged shut, because buying Fed IOUs with real negative rates makes zero sense. The next, VIX (a statistician's favourite) enjoyed a quick early pump but inevitably blew a piston before the end of Q1, while oil trackers alongside CPI-fused bonds are a deep negative non-starter this year. The usual hip-hop risk strategies for portfolios are melting and there's only one guaranteed way out. That's why current fundamentals do more than favour gold - they're a casebook example of a facilitative catalyst to Pet Rock’s rocketship back home to System $3,000.
As we covered last time, the EU and US printers got their justification for posterity, with IMF’s green light to fiscally flood-irrigate their way out of the current recession. Now the globe is caught between a $900 billion Chinese plan, a $750 billion European plan and an unbracketed US plan as the nation embarks on a cunningly brutal - or brutally cunning - experiment in modern monetary theory.
And that there is the exact foundation where the counterargument to ABN Amro lies. So far, non-performing government bonds worldwide are projected to reach $1.4 trillion - a figure that's bigger than the global ‘08 and the European ‘11 crises. The IMF’s message last month forsaking austerity specifically caveats a concern regarding both China’s and the United States’ ability to address or stabilise their public debt burdens by the middle of the decade. But the U.S., always in character, took a detraction and ran with it to the endzone.
The entirety of the United States federal treasury continues to act as a single consolidated balance sheet. One branch borrows and spends while the other prints and monetises, with the fed keeping all the assets, bought - assets that when caught in an inflationary environment conveniently gain in value while the rest of us continue to tread water in the usual predominantly green current of currency. Cunning for them, brutal for us.
Looking east, There’s an alternative to the Way of the Fed: China ruled out “flood irrigation” stimulus at the start of the year. It recognised and challenged “Robinhood” financial engineering by government-fused market participants, while it’s treasuries avoided sheet expansion and a corrosive monetisation of the budget deficit. Now China’s 10yr bond yield finds itself weightier than it was at pre-Covid levels.
Meanwhile, sanction scarred Russia is well versed in its own Kung-Fu. Continuous defensive financial policymaking has found itself comfortably napping behind rising walls of diversified foreign currency holdings and a particularly rocketing mountain of gold.
Indeed, Russia is on its way to becoming the world-leading gold miner by the end of the decade. Until then, there is a reason Russia looks to allow its National Wealth Fund to invest in precious metals - Joe Foster of VanEck International Investors Fund hailed gold mining stocks as ‘undervalued based on the statistical norm of share prices to cash flow at a time when producers are on their best financial footing in recent history’.
Back to technicalities - it’s a balm to every miner’s soul that so far in 2020 the DOW Jones barely treads a 0% gain, while your humble GDX Gold Miner’s index is up at 20% even considering post-correction. For gold itself, a quick tactical analysis during that one-day drop of 4.5% revealed a daily DNA of gold volatility at a mere 1%; this quick calculation served well to maintain morale the other week when the boat threatened to capsize at one point thanks to the machinations of bullion banks manipulating extreme sell-offs to cover wayward short positions. As for the drop itself: a glass half full is an opportunity to charge for a refill. The veterans of the market held faith in fundamentals and saw an opportunity to buy the weakness.
As always, the most important lesson to be learned is to hear the signal in the noise - it is our belief that COVID is the noise while yields are the true signal - it is they that dictate the movement of the risk-averse herd that truly influences the macro-tier of gold pricing. We pity those dragged off by the margin-calling siren song.
Chart by Northstar
And as for the Pfizer vaccine, at the time no writing there has still been no study published for a vaccine of a novel type - a literal kitchen sink of we-don't-know-which-part-works genetic instruction drivers (of a cascading, snowballing variety) that has never been used in a licenced pharmaceutical before. And this family-friendly fusion reactor in pill form will take maybe until summer, box-to-jab, to some of the population, or at least some demographic of it, with some effect on some strains of a fast mutating Covid19 already found to be bouncing around between cats and minks (with these brand new flavours already human-compatible).
But at least the FT has taken a full-page spread this weekend to illuminate the vital details concerning the vaccine - namely the wonderful identity politics of (some) of its creators and why we should all be excited about this impending victory. Because declaring premature victory in 2020 has worked out wonderfully for so many so far.
What’s more, the world of actual peer-reviewed scientific studies continues to add to the tally of research that postulates the idea of a specific Covid19/Sars-Cov-2 virus not actually existing. The argument goes that the original strain of Covid19 is long dead, that instead the entire globe is being harrowed at the hands of a fast-mutating pathogen more akin to a collection of homogenous viral strains of extreme similarity but each with its own little quirk - each mutating fast enough that Covid19 antibodies were found to consistently expire after less than 6 months.
Dr Fauci himself stated at the start of this epidemic that a vaccine will not provide long-term immunity if Covid19 ‘behaves like other coronaviruses’. But the market doesn't remember that, neither does it know the technicalities of scientific due diligence, it sees only the headlines, and we will hold the dignity of not discussing Pfizer CEO’s decision to sell off 60% of his holdings for $5.6m immediately post-announcement if duly scheduled back in August.
Rising gold prices shine a pleasant spotlight on our company described by Alastair Ford: "TNR Gold Has Huge Potential Upside At The Shotgun Gold Project, Plus Significant Potential Cashflow From Two Sizeable Royalties."
These two potential future royalty streams with industry majors are plugged into the new chapter of business - our usual message for lithium aside, copper has been an ace performer during the closing quarter of this year as manufacturing shrugged off the coils of the ‘Rona and resumed chugging along while other economic activity in the EU and US continued to deteriorate.
Copper remains Goldman’s favourite based on cyclical and structural support as even Eurozone and U.S. purchasing manager’s indices showed a solid recovery past pre-covid levels in September. Looking to China one last time, as in ‘08 so in ‘20 - the Chinese locomotive hoovered up the last of the world’s copper surplus under the cover of low prices while signing in a wave of infrastructure-induced economic recovery.
Stubbornly rising Gold prices are great seasoning for great projects nestled in safe, ready to grow mining jurisdictions like Alaska.
Dr Tim Baker
Kirill Klip, CEO of TNR Gold, recently presented Shotgun Gold: “My belief is TNR's Shotgun Gold Project can potentially grow and become a foremost, immediate satellite site Gold deposit to Donlin Gold's Mining Camp infrastructure. This vision is based on our exploration work and academic studies like the ones from Dr Tim Baker in which Shotgun Gold Project is not only listed alongside Donlin Creek as one of the "Major Porphyry Gold Deposits" but is also projected to contain the similar porphyry intrusion-related type system as Donlin.”
“Shotgun Gold Project is already part of academic research and scientific papers, now we are moving forward with our strategy to make its development the part of Gold industry studies to unlock its full potential. Our preparations are set for this golden opportunity. We have the academic research and inferred resource has been already defined in the produced Shotgun Gold NI 43-101 Technical Report. The Gold Bull market finally brought us a favourable environment in which Eric Sprott doubles his "mental valuations" from $50 to $100 per oz Au in the ground. Barrick Gold warns of supply crisis and calls for consolidation, while VanEck International Investors Fund calls gold mining stocks "undervalued based on the statistical norm of share prices to cash flow … at a time when producers are on their best financial footing in recent history".
Please always read legal disclaimer. There is NO investment advice on any Kirill Klip feeds and blog. Always consult a qualified financial adviser before any investment decisions.
Do Your Own Research.
Dr Tim Baker
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