A Metal Shield
Interview With David J Mitchell
19 Jun 2020
How have gold and precious metals performed through the recent several weeks of market volatility?
The price moves have been largely expected and have mirrored the price action of the early stages of the Global Financial Crisis in 2008, namely the impact of the margin call events triggered by the substantial falls in the stock markets at the time.
With major stock indices falling over 50% in just 1 month from February to March 2020, precious metals were used to provide liquidity to shore up margin calls in cash for financial institutions. With precious metals being highly liquid, they are sold to raise cash to shore up the losses that these institutions have suffered elsewhere in their trading books. They are literally forced into raising cash liquidity as quickly as possible and so they panic sell precious metals as well as any other liquid assets that they have with no real regards to fundamentals.
As in 2008, precious metal prices recovered very quickly from the initial negative price action and gold has already now surged to new all time highs by mid May, in over 72 global currencies including the Singapore Dollar. This price action is extremely positive and clearly reinforces that the global “insolvency crisis" we are facing, requires a considerable revaluation in precious metals moving forward over the next few years.
What does that say about gold and precious metals as an investment instrument?
I would advocate that it clearly demonstrates two main dynamics, firstly gold and precious metals are extremely liquid and used by financial institutions as funding vehicles; a quick cash conversion conduit in times of distress to shore up areas of their trading books as well as exposures in their balance sheets where cash is required quickly.
Secondly precious metals and especially gold; are an asset class that global funds flow into as a distress hedge against a deteriorating global macroeconomic picture. This has been proven time and time again and unequivocally confirmed by the 2019 sovereign banking re-classification of gold as a 'Tier-1 Asset'. This has clearly re-affirmed that gold is the premier investment capital of the banking system.
The investment prognosis supporting gold and precious metals is the very fact it has zero third party liability versus every other global asset class; all of which have exposure to liabilities out of our control. We are presently entering into a very dynamic insolvency event built from the foundation of the largest global debt crisis ever measured. That considered, I would suggest that holding liquid assets with zero third party liability is now of paramount importance to investors.
How does gold's performance compare to other precious metals?
The distinction and price valuations between precious metals are very real and must be recognised by investors; with each metal moving within its own cycle and very distinct wave length. Gold for example is money, the yellow metal was officially re-classified as a 'Tier-1 asset' class by The Bank of International Settlements (BIS), which now recognises central banks’ holdings of physical gold as a reserve Tier-1 asset equal to cash. This has a very powerful effect on all banks' balance sheets. To be more succinct; gold is money and currencies are effectively sovereign script which are used as mediums of exchange and payment. It is important to understand the definitions and the characteristics of each. So gold is the classic crisis hedge, the "money of last resort" and the perfect uncorrelated asset that should be utilised as such, in one's overall asset portfolio.
The other precious metals, mainly silver and platinum alongside the lesser known precious metals palladium and rhodium have their own price drivers over and above those of gold. They are used as industrial metals driven by industrial demand curves, cost of production, global supply-demand balances etc.. These other precious metals (other than gold) also very importantly incorporate the investment demand side alongside industrial demand, these are precious metals each with their own unique cycles which makes their investment prognosis so exciting.
Historically, how has gold performed as an investment instrument?
I have studied market price history in great detail and feel very strongly that without understanding market history and how asset classes have historically performed against one another through economic cycles risks leaving investors without a clearly definable roadmap.
The generally accepted logic is that gold and precious metals are inflation hedges. This theory simply does not carry any weight of proof whatsoever. Investments into precious metals and their corresponding price moves are predominantly driven in their capacity as a crisis hedge and as wealth preservation vehicles in times of uncertainty and a deteriorating macro-economic landscape. Their price is also guided in varying degrees by industrial supply and demand curves.
This was proven in the Great Depression of the 1930’s when gold was revalued substantially during a gold nationalisation under Roosevelt, as a result of which public investment funds were then directed towards gold mining groups as a proxy to gold; with many such mining groups such Homestake, rising over +600% in value. Gold was revalued higher in what was a great deflationary event.
With the 1970’s stagflation - as a result of the USA reneging on its international commitment to the Bretton Woods monetary system, gold was allowed to be revalued on the free markets, rising + 2,400% in the face of the new US$ fiat monetary system that many feared was going to collapse alongside extreme inflation, all of which was driven by an energy crisis.
From 1980 into 2003 we saw consistent reasonably high inflation and yet gold lost nearly three quarters of its value thereby undermining the thesis that gold functions as an inflation hedge.
From 2004 to 2011 gold was revalued by over 800% in yet another global crisis and an effectual monetary debasement event driven by a liquidity crisis that nearly took the western banking system down.
Between 2011 and 2016 gold fell away again and lost 50% of its value in what was perceived to be a sustainable high growth period augmented by a drive to zero percent interest rates and global central bank support.
Today the realisation has hit home that the last 10 years of growth was actually built on the foundations of giant debt leverage events, today’s global debt versus GDP is the largest ever recorded in history. The only route left remaining for central bankers and government policy makers is to effect a global monetary debasement and together with this insolvency crisis clearly points to a substantial revaluation of precious metals.
Walk me through the process of investing in physical precious metals, particularly through IPM Group.
Clients ofIndigo Precious Metals Group have a number of options, the easiest of which is to open an account with us online, decide if they wish to open a vaulted account under their own family name ensuring sole titled and fully segregated ownership of bullion at Le Freeport, Singapore. At that point clients can simply purchase products (coins or investment bars) online as they deem appropriate.
We encourage all clients to utilise and leverage from our long-standing experience and ask for advice on what their metal portfolios should look like and which products to purchase in order to generate maximum returns from the time of entry. We specifically launchedAuctus Metal Portfolios to complement Indigo Precious Metal which uses proprietary algorithms with over 55 live data feeds to correctly re-balance our clients' physical precious metal holdings at specific intervals throughout the year. This has historically ensured an 'alpha return' that has far outperformed the benchmark for gold. Auctus portfolio accounts offer a high growth and diversified metals investment strategy that delivered a 54% net return to clients in 2019 and at the end of May 2020 are up nearly 700% since 1 January 2016, over 90% since 1 January 2019 and circa. 25% since the start of 2020. These performances are based on zero exposure to collateralization, paper trading or any leverage whatsoever, as our clients keep physical metals in their own fully segregated vaults at Le Freeport.
Our experience in investment banking and trading financial markets allows us to provide comprehensive investment advice to our clients on physical precious metal portfolio diversification and specific product selection. We are fully geared to providing the best advice to our clients, providing in-depth education and making absolutely sure that they understand the full macroeconomic cycle, especially when to invest or water down exposures and which of the individual precious metals offers the best investment sense at that time.
Our service is therefore highly tailored to individual customers, family trusts and funds rather than blanket selling across large banking platforms without due care.
What would be the basic requirements from a person looking into investing in precious metals?
My first piece of advice would be to get involved sooner rather than later and invest as a studied part of an overall portfolio rebalancing, including your liquid savings.
If you believe that you are at the very start of building your asset portfolio, then savings are an essential ingredient. Higher net savings can help finance higher levels of future investment and boost productivity over the longer term. However you must be extremely cautious in what you do effectively save in. If for example, you save in the government's currency script, that only pays sub-standard interest rates and is set to be devastatingly debased; then saving in real money (i.e. gold) is the natural choice as there is a considerable wealth preservation component.
It's also important to understand your own timeframe, are you looking for immediate investment profits or are you conversant in the fact that investment cycles are exactly that - cyclical.
I'd also never recommend leverage when investing across assets unless you clearly understand your exit levels and have a great deal of market trading experience.
What other costs must a prospective investor pay when he or she invests in precious metals?
How do investments in metals turn in a profit?
Firstly let me be very clear here; as I have had this conversation with several wealth managers and family trusts, avoiding various paper instruments such as ETFs that purport to represent gold or precious metals is critically important. These products are trading vehicles only and not wealth preservation assets. I must emphasize this as we have entered a truly historical insolvency crisis event and therefore having no claims to your assets, no liabilities or 3rd party risk is absolutely essential.
Buying physical bullion investment bars does not have to be an expensive exercise at all. Finding the cheapest investment precious metal product that is suitable to your needs, knowing that as time goes by, premiums over the spot price will once again rise due to global demand and a lack of supply.
We advised and offered our clients physical silver at the recent lows in mid-March as a huge opportunity with all-in-costs of just US$13/oz. Today that same physical metal is trading at US$18.60.
Our macro, technical and wave analysis forecasts are all pointing to triple digits in silver in US$ terms, so it's quite easy to ascertain how to generate significant profits from investments into physical precious metals. Clients who invested in gold during the turn into 2016, have today made a net return of +64% after all transaction costs have been stripped out.
How much involvement do precious metals require from investors in terms of watching the market (performance)?
When you understand the role of precious metals in portfolio capital preservation and when compared to other asset classes in the greater macroeconomic cycle; watching performance becomes a sideline spectator event. What is way more important is understanding precisely where we are in the economic cycle. Understanding how this economic crisis can be rectified and the time frame needed; provides us with a clear indication of when to move out of precious metals and back into other asset classes.
What we are going through is a truly historic event in global history. There are no quick fixes other than continued monetary debasement and debt deflationary pain, as attempts are made to cover over the cracks. This will be until such time as the monetary system breaks down completely and the sovereign world order has put in place a more sustainable, long-term growth path and very importantly a new monetary system.
What is an ideal investment horizon for an investor to realize good returns on his investment in precious metals and would you suggest it as a long term investment?
Probably one of the most successful analyses of market pattern recognition is the study of the Pi cycle, which demonstrates that investment cycles have lengths of 8.6 years or multiples of this number thereof. Recognising where we are within each cycle gives us the time frame to use as your foundation.
When comparing gold's historical price moves, each major cycle revaluation event higher in gold has lasted approximately one Pi cycle time frame of 8.6 years. Be it the 1930’s, 1970’s or 2000’s. This particular cycle event started at the turn of the year into 2016 and should then take us into mid 2024, this wave length clearly being supported by the deteriorating macro-economic picture.
The other precious metals such as silver and platinum have lagged the gold cycle. Their cycles have created enormous lag-events and I see the ultimate highs in the other precious metals extending well into 2026-28 and beyond.
Come 2024, you would want to weigh-up the macroeconomic picture with the fiscal irresponsibilities of global sovereign governments and then determine a revised portfolio weighting in precious metals and across the spectrum of other asset classes. We then have further important cyclical time frames entering into both 2026 and 2032.
Of course other dynamics will also be impacting these precious metal prices, especially industrial demand curves versus overall mine supply, recycling and the cost of production.
If you need any advice or help in your metal allocations then just give us a call.
Disclaimer : The information contained in this website should be used as general information only. It does not take into account the particular circumstances, investment objectives and needs for investment of any investor, or purport to be comprehensive or constitute investment advice and should not be relied upon as such. You should consult a financial adviser to help you form your own opinion of the information, and on whether the information is suitable for your individual needs and aims as an investor. You should consult appropriate professional advisers on any legal, taxation and accounting implications before making an investment.