The coming super spike in gold and silver prices
By Philip Judge – CEO, Physical Gold Fund
With Gerhard Schubert – Advisory Board, Physical Gold Fund
Multiple factors appear to be converging at the same time that will put immense upward pressure on the gold price moving into 2019 with the increasing likelihood of a super spike in precious metals prices moving forward.
The aforementioned report looks at the growing military, economic, financial, technological and trade tensions internationally that are likely to only escalate in the medium term. Gold is becoming a major factor in moving away from US dollar dependence to enable non-US-dollar trade among newly-forming geopolitical alliances. Many analysts see the potential for regional or global military conflict to be at the highest in decades.
The strength of the US dollar in recent years, which has seen poor performance in precious metals in US dollar terms, is unlikely to continue in the medium term.
Central bank gold-buying has been significantly higher in 2018. As a combination of price opportunity buying, it is more importantly an indication of the rebalancing of central bank reserves and disinvestment from US dollar assets. This is most likely to continue as the geopolitical world becomes more uncertain.
The paper derivatives markets and physical gold market have become increasingly disconnected. An infinite amount of paper contracts can be printed and traded, and the size of the derivatives markets has grown exponentially in recent years, as has the size of open shorts in that market.
Meanwhile, the physical market, which is dictated by supply/demand only, has reached the tightest supply levels in many decades. Disinvestment from the West has seen increased gold flows from the West to the East. When the West becomes a net buyer again, this will place additional stress on supply/demand adding yet more upward pressure on the price.
Retail and investment demand remain high and has been growing from the East and the Far East. This is likely to continue as international geopolitical tensions remain. The Shariah standard on gold has opened a whole new market for investment grade products in the Islamic world and is only expected to grow in 2019.
In an already extremely tight physical supply/demand market, we appear to have reached peak gold production. This may change slightly as gold prices rise and some reserves become economic to produce again; however, in most cases, it takes many years to bring new projects into production (production lag). Gold mine supply is expected to continue to decline even in a rising price market.
Cryptocurrencies were thought by some to be the ‘new gold’ but it seems there has been a shift from that thinking in 2018 leaving the precious metal where it has always been – the ultimate protection and store of value in uncertain times.
Let’s take a look at how the 10% allocation to gold works:
If gold declines 20% (unlikely in Physical Gold Fund (PGF)’s view), the impact on the portfolio is a 2% decline (20% x 10%). That’s not highly damaging and will be made up as other assets outperform.
Conversely, if gold goes up 500% (highly likely in PGF’s view, on the way to US$10,000 per ounce), you have a 50% gain on your portfolio (500% x 10%).
There is a conditional correlation between the world where gold goes up that much and where stocks, bonds and other assets are declining. The gains on the gold (500% overall and 50% on your total portfolio) will preserve your wealth against an 82% decline in the 60% stock portion of your portfolio (the 30% cash holds constant). So, if 60% of your portfolio drops 82% (about equal to the stock market drop in 1933’s Great Depression), you lose 50% of your portfolio on stocks, but you make 50% on your portfolio on gold, so your total wealth is unaffected. That’s the insurance aspect!
In summary:
1. Gold has asymmetric performance characteristics. It has a limited downside (20%) but a huge upside (500%).
2. The gains on gold are likely to come at a time when stocks are crashing, that’s conditional correlation.
3. In the scenario where gold rises 500% and stocks fall 82%, the gain on gold (10% allocation) equals the loss on stocks (60% allocation), so the overall portfolio is unchanged. You have survived the storm with your wealth intact.
Another aspect to consider which PGF representatives can talk about while other managers promoting other products cannot do is the huge risk within the current economic system because they will stop selling their products if they do! This is the incredible underlying systemic risk in the banking system – the too-big-to-fail banks before the global financial crisis (August 2008) are now approximately 20 to 30 times more riskier than before the August 2008 crisis hit. The debt has grown to alarming proportions and cannot be paid back without a collapse in the economy or a war which resets debts on a sovereign level. Also, there is a huge amount of risk in the geopolitical situation globally among nation leaders that can come at any time randomly and does affect asset prices negatively for equities in the case of a nation’s disputes being unresolved.
Prior to 2008, a 10% allocation to physical gold which is non-correlated with equities (paper assets) only discounted the global financial crisis decline of all equities by 7% for approximately 30 to 90 days while many assets dropped by 75% or more and some were even delisted and went into bankruptcy. Over the period of the crisis and the next 12 months, gold became the best-performing asset doing exactly what it is supposed to do as insurance. Basically, the insurance transferred to becoming the best investment in the portfolio.
Gold is insurance and as all insurance products go, the fund manager must have the allocation (policy) in place before the event occurs for their clients. PGF is not a mining operation or a traded fund, where there are managers making decisions which adds counterparty risk to your investment dictated by those managers’ decisions being either good or poor decisions; this risk aspect is totally eliminated with physical allocated (bars with serial numbers on them) gold within PGF.
PGF meets these requirements for protection, insurance, investment and above all, peace of mind to the clients and the managers. PGF has full theft and geopolitical confiscation insurance.
PGF is only for managers who really care about their clients over and above commissions.
We at PGF trust this helps in your prudent decision-making process.
To request a copy of the full report
(Market outlook for precious metals in 2019 The coming super spike in gold and silver prices) or gain further information on Physical Gold Fund please contact us:
Email: [email protected]
Web: www.physicalgoldfund.com
Tel:
Europe: +44 (0)208 584 0063
Middle East: +971 (0)52 963 5263