Stock Market Frenzy: Ride the bandwagon but be sure to take along some gold coins

What is it with billionaires and gold?

When billionaire Sam Zell warned at the end of December that the dollar’s status as the world’s principal reserve currency was in jeopardy, it nudged something in the back of the mind about the number of billionaires over the past year who issued similar warnings. The wealthiest among us, it seems, are also the most vocal and proactive about the dangers they see dead ahead. Meanwhile, the unschooled masses utilize online investment portals from Robinhood to Schwab to dash headlong into the most wildly overvalued stock market in history.

In a recent MarketWatch interview, Charlie Munger, another billionaire and Warren Buffett’s business partner called the current stock market frenzy “the most dramatic thing that’s almost ever happened in the entire world history of finance.” He believes that “we’re in very uncharted waters. Nobody has gotten by with the kind of money printing now for a very extended period without some kind of trouble. We’re very near the edge of playing with fire.” Ray Dalio, who heads up the world’s largest hedge fund (Bridgewater Securities) and another billionaire, believes that the world is likely to change in “shocking ways” over the next five years, including a loss of faith in the U.S. dollar: “Within the next five years you could see a situation in which foreigners who have been lending money to the United States won’t want to.”

Other billionaires with a similar mindset include Leon Copperman, Jimmy Rogers, Thomas Kaplan, Mohammed El-Erian, John Paulson, Jeff Gundlach, David Einhorn, Frank Giustra, Naguib Sawiris, Jacob Rothschild, and Paul Tudor Jones – to name a few. Each, to a man, has expressed concern about the future of the dollar and publicly advocated gold ownership as a portfolio countermeasure. Even Charlie Munger, who previously had nothing but disdain for the metal, purchased a stake in Barrick Gold Corporation, the world’s largest gold mining company, through his Berkshire Hathaway fund.

This time around, no one will be able to say that they weren’t warned or that they didn’t see it coming. A long-list of the best and brightest in the financial world have issued their warnings, and it is becoming increasingly apparent that the super-rich are hoarding gold bullion. We return to a report in Financial Times featured in this newsletter back in November about Swiss money managers advising their clients to “stay in the stock market but build hedges.” In short, if you are going to ride the stock market bandwagon, be sure to take along some gold coins.

Click to enlarge

“Sentiment indicators are moving to euphoria.”
Cedric Ozazman, Reyl & Cie (Geneva, Switzerland)
12/19/2020

GOLD: Where-to in 2021?
With a few exceptions, the big banks are bullish.

Amidst an election and a pandemic, gold turned in its best year since 2010, rising over 24% and ending with a Santa Claus rally that took it right at the $1900 mark. What, though, might we expect for the rest of 2021?  By and large, the experts profess an unusually strong and unified bias toward higher prices with opinions ranging from $1600 per ounce on the low side to one decidedly bullish big bank predicting a $2500 price on the high side. As you can see in the chart below, gold has posted gains in sixteen of the last twenty years – a formidable record by any standard. Big institutions are typically conservative in their predictions and often adjust their forecasts as circumstances change.

Gold Price
Percent increase or decrease over prior year
2000-2020

Data sources:  St. Louis Federal Reserve [FRED], ICE Benchmark Association
Chart by USAGOLD.com • • • Click to enlarge

Goldman Sachs is calling for $2300 gold by the end of 2o21, citing not only a weaker dollar but an assault on the greenback’s status as the world’s principal reserve currency. It also foresees market “concerns over the long-term inflation rate and more inflows to gold in order to hedge it.”

UBS describes itself as “very bullish on gold” and sees $2100 as in the cards in early 2021 as “global uncertainties persist.”

Citigroup is looking for $2500 gold in 2021, “comparing its mosaic of catalysts” to the 1970 to 1980 bull market.

Australia’s ANZ Bank predicts gold will race towards $2300 early in 2021, driven by negative interest rates and dovish central banks.

Standard Chartered has a tempered view of gold’s upside for 2021. It sees the metal rising past the $2000 mark as central banks ramp up asset purchases.

ABN Ambro, the Dutch bank, see gold hitting $2100 by the end of 2021 as financial markets establish a “new normal,” and the Fed keeps policy rates low – a clear negative for the dollar and a positive for gold prices.”

Degussa, the Frankfurt-based precious metals refinery, sees the equilibrium price of gold at $2500 but says one cannot say with any degree of precision when the market will push the gold price towards the estimated level.

JP Morgan, Bank of America, and Deutsch Bank head up a minority with a neutral to negative view on gold for 2021. JP Morgan says gold will “suffer from a structural flow headwind” as institutional investors opt for bitcoin over the yellow – a flow of which we have seen scant evidence thus far. Deutsch Bank sees gold trading at $1600 in the near term. Bank of America predicted earlier in the year that gold would hit $3000 in 2021. It recently adjusted its call to $2000, citing a risk of rising interest rates making it “tricky to hit $3000.”

Note: We post this year’s predictions survey with our usual caveat that what you have just read is opinion, along with a reminder that USAGOLD advocates owning gold and silver for long-term asset preservation purposes, i.e., as portfolio insurance, rather than for speculative gain.

On bitcoin and gold

Over the past few weeks, there has been considerable speculation about bitcoin rivaling gold as a store of value, i.e., that investors were selling gold to buy bitcoin. Goldman Sachs’ Jeffrey Currie had some interesting things to say on that score in a recent Bloomberg interview, “Gold’s recent underperformance versus real rates and the dollar,” he said, “has left some investors concerned that bitcoin is replacing gold as the inflation hedge of choice. While there is some substitution occurring, we do not see bitcoin’s rising popularity as an existential threat to gold’s status as the currency of last resort.”

Institutions and wealthy investors, he says, avoid so-called cryptocurrencies “due to transparency issues while speculative retail investment causes bitcoin to act as an excessively risky asset. We do not see evidence that bitcoin’s rally is cannibalizing gold’s bull market and believe the two can coexist.” We process client gold and silver sell orders all the time, and to date, not one has mentioned a bitcoin purchase as the reason for the sale.

In a recent series of tweets, market analyst Fred Hickey explains why bitcoin should not be confused with the yellow metal – a down-to-earth assessment likely to resonate with most gold owners: “Gold has attributes making it superior to bitcoin. There’s an innate human attraction to gold…an allure that has caused humans (of almost all cultures, the world over for thousands of years) to desire it – for its beauty, its equation with power, and more. Put a beautiful, shiny gold American Eagle coin in your hand & now put a bitcoin there. See the difference? Women will never desire to adorn themselves with bitcoins, nor will the religious pray to bitcoin-clad icons. Bitcoin is just a digital string of numbers.….” 

Silver:  Where to in 2021?Silver Price
Percent increase or decrease over prior year
2000-2020

Data source: macrotrends.net• • • Chart by USAGOLD.com • • • Click to enlarge

In recent years, silver has taken on a new role in investment portfolios as a store of value. After all, like gold, it too is an asset that is not simultaneously someone else’s liability. That recognition sustained its bull market through the disinflationary period from 2000 to present. With the election results a matter of record, silver is getting a kicker courtesy of the incoming Biden administration, i.e., its importance as a green commodity with multiple uses in clean energy production. In fact, one analyst recently referred to it as the “new oil” – a reflection of its newfound strategic importance. In 2020, silver recorded its best percentage gain in a decade – 46.3%.  Here is what the experts think silver will do in 2021.

Bloomberg commodity strategist Mike McGlone sees silver “following a similar trajectory as the aftermath of the financial crisis toward $50 an ounce, but with greater potential for staying power on a path paved by gold.”  He says that silver will be at the forefront of favorable trends in electrification and quantitative easing, with technicals pointing to a nascent bull market.”

TD Securities sees silver reaching $30 in 2021, saying “it should respond positively to the same favorable macroeconomic, monetary conditions and fiscal drivers as does the yellow metal. Since silver has historical volatility roughly double that of gold, based on historic norms it should outperform gold, when the yellow metal once again follows an upward price trajectory.”

Commerzbank says the argument for higher prices is overwhelming and predicts the metal will go to $32 per ounce by the fourth quarter of 2021, citing a pick-up in industrial demand led by its solar panel usage. It also says a “flood of cheap money” will lift silver and that it has more “catch-up potential” compared to gold.

The Electrum Group’s Thomas Kaplan characterizes “silver as gold on steroids” and sees it pushing back to its record high at $50 per ounce. He adds that there is no reason why it can’t go to $100 an ounce, though he does not offer a time frame.

Delta Harbour Assets tells its clients that silver “fits comfortably into a well-diversified group of holdings or even as an insurance policy for what you have already amassed.”  It says there is “no longer an excuse” to leave it out of one’s holdings. “If it should sit above $26 for any length of time it most certainly has a fairly clear path to $30 and above,” it concludes. “Now might be your chance.”

Goldman Sachs is a ranking member of the $30 silver club. Commodity analyst Mikhail Sporgis says solar applications will drive prices in 2021.

Citibank believes silver will hit $40 per ounce in 2021. It’s the case “is based on growing demand from investors who see silver as a cheap entry point into the world of precious metals dominated by gold, with a bonus of strong industrial demand.”  It goes on to say that a case could be made technically for gold to double from current levels – even quadruple.

Will the coming decade be inflationary?

“Similarly, the global paradigm of recent decades with its repeated warnings of inflation has consistently reinforced disinflation,” writes Incrementum’s Ronald Stoferle and Mark J. Valek. “Now, as trust in public institutions continues to erode, populist policies could serve as the bedrock of a new inflationary paradigm. We suspect the monetary developments of 2020, coupled with the recent paradigm shift, could push inflation rates significantly higher. Policymakers and investors at large are reluctant to acknowledge this possibility. Decades of the deflationary paradigm have rendered them wholly skeptical of a potential wolf attack: spiking inflation.” So what happens if you buy gold and the forecast inflation never arrives? Not a lot. Gold protects against disinflation (as it did in the 2000s), and stagflation (as it did in the 1970s), hyperinflation (as it is in Venezuela now), and deflation (as it did in the 1930s). It is the investment for all seasons, all the bear market scenarios. 

Final Thought
An unambiguous course of action for 2021

Chart courtesy of TradingView.com • • •  Click to enlarge

Since the beginning of gold’s secular bull market in the early 2000s, we have recommended an unambiguous course of action: Own the physical metal – fully paid for and stored nearby – then sit back and watch the show. Those two courses of action have paid handsome dividends over the years, both in terms of peace of mind and a healthier balance sheet. In fact, for some, that prescription has created significant wealth. Since the turn of the century, gold is up 562%; silver, for its part, is right at 402%. By way of comparison, the Dow Jones Industrial Average is up a meager 178% over the 20-year period. The precious metals have preserved wealth over the past tumultuous two decades while other, often more complicated courses of action, have fallen short. (Taking a longer view, since 1971 – the year the United States severed the tie between gold and the dollar – gold is up 4460%; silver is up 1524%, and the Dow is up 3250%.)

With “The Crown” – the award-winning Netflix series on the tumultuous reign of Queen Elizabeth II – now one of the more popular series being streamed by viewers, it is perhaps fitting to recall a story involving the queen and the 2008 financial crisis. Then, when the financial system was on the verge of a breakdown, she asked a fundamentally important question during a visit to the London School of Economics: “Why didn’t anyone see this coming?” The answer she got apparently left something to be desired, so she decided to give it another try during a visit to the Bank of England’s gold vault in 2013. Appropriately, amidst all those gold bars, she asked the question again. Sujit Kapadia, a member of the BoE’s Financial Services Committee, responded by likening the 2008 crisis to an earthquake, saying it was difficult to predict. “People had got a bit lax, had they?” was the queen’s polite response.

Perhaps attempting to push for something better and underline the concern expressed by the Queen (and one held by a good many others), Prince Philip ventured to ask, “Is there another one coming?” Needless to say, there was another one coming, and we are in the middle of it now – seven years from the conclusion of the last. With the spacing between these stressful events closing, one wonders how long until the next. Once again, though, as it did in the aftermath of the 2008 breakdown, gold has performed convincingly – up about 24% on the year, while stocks are up just over 5%. Silver, we might add, is up almost 46% – one of 2020’s star performers. 

Our advice for the coming year? Own the physical metal – fully paid for and stored nearby – then sit back and watch the show.

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