SPDR Gold Trust Archives - Stansberry Pacific

Uncertainty around the world is rising. And while that makes investing more difficult, it also creates opportunity.

With worries building up around the U.S.-China trade war… its knock-on effect on an already slowing Chinese economy… a potential slowdown in the U.S. economy… and a prolonged U.S. government shutdown, stock markets around the world have fallen.

Last year, the S&P 500 Index fell 5.7 percent while the MSCI Asia ex Japan Index dropped 14.5 percent. Singapore lost 8.8 percent, Hong Kong fell 11.7 percent and the Shanghai Composite Index collapsed 26.4 percent.

But there’s one asset that has held up relatively well in the face of these widespread declines. That’s gold, which saw its price fall just 0.9 percent in 2018.

Gold is a friend in times of uncertainty

For centuries, an ounce of gold has purchased the equivalent of a fine men’s suit. It still can today.

That’s because gold is an economic constant. Never will it become worthless. It will never wither away from the decay of inflation over time like a fiat currency.

Gold carries no risk of default, unlike a bond, nor can it go bankrupt, like a company.

So when stocks fall, gold tends to hold its ground (or go up). It’s great portfolio insurance.

For instance, gold tripled during the 1973 Arab oil embargo that caused the U.S. stock market to crash and the economy to go into recession.

It quadrupled in the late 1970s as inflation soared to double-digits, leading to then-Fed Chairman Paul Volker raising prime lending rates to a historic high of 20 percent.

During the dot-com boom, gold fell out of favour, but came roaring back after the tech bubble burst and the U.S. economy went into a recession. Gold rallied 5.3 percent from March 2001 through November 2001.

More recently, during the global economic crisis, the S&P 500 fell 56 percent from peak to trough between October 2007 and March 2009. Gold gained 25 percent during the same period.

When global markets fell late last year, investors once again turned to gold. Its price rallied 5 percent as stock markets fell across the board.

And I believe gold prices could rise more this year.

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Read his shocking prediction here.

The gold-to-S&P 500 ratio remains high

Because of gold’s proven ability to hold its value, and even rise, during turbulent markets, it’s been used as one gauge of how expensive (or cheap) the stock market is.

The measure is called the gold-to-S&P 500 ratio. It indicates how many ounces of gold it would take to equal the S&P 500 index at any given time.

For example, if the S&P 500 index closed today at 2,560 points and the current price of gold is US$1,200, then the gold-to-S&P 500 ratio would be 2.13.

The higher the ratio, the more ounces of gold it takes to equal the S&P 500 index. A high ratio, therefore, indicates an expensive stock market relative to gold.

The chart below shows that the ratio has hit three major highs in the last 90 years.

Chart - Gold to S&P Ratio for the Past 90 Years

Even after gold’s recent year-end rally, the gold-to-S&P 500 ratio is still above 2. That’s lower than the past two peaks, but still high on a historical basis.

Looking at gold this way, it has more room to rise than fall.

But there are two other reasons why gold should continue rising this year.

1. China is buying

China was already the world’s largest buyer of gold at 1,089 tonnes in 2017. It was on-track to increase purchases at least another 5 percent in 2018.

It’s the world’s largest buyer for two main reasons.

First, the Chinese have a cultural affinity for gold, which they view as auspicious for important events (like weddings, birthdays and New Year’s celebrations).

Second, the Chinese government has been buying up increasing amounts of gold to diversify away from the U.S. dollar. China’s official central bank holdings of gold grew from 1,054 tonnes at the start of 2015 to 1,843 tonnes by the second quarter of 2018.

That’s the second-largest increase in official central bank gold reserves during this period (Russia was first), and the 789-tonne increase alone is equivalent to the entire gold reserves of Japan’s central bank.

In the first three quarters of 2018, China’s official gold consumption reached 850 tonnes of gold – a 5 percent year-on-year increase. This includes gold purchases by individuals, as investments and jewelry, as well as by industry and the central bank.

Consumption jumped 14 percent in the third quarter alone, which indicates China has been accelerating purchases during periods of weakness in gold prices.

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Find out more.

2. Gold ETF holdings are rising

The creation of the first U.S.-listed exchange-traded fund (ETF) backed by physical gold, the SPDR Gold Trust (Exchange: New York; ticker: GLD), back in 2004 revolutionised the way gold was bought.

It allowed ordinary investors to own and trade gold just like a listed stock for a minimal fee.

Since then, the popularity of gold-backed ETFs has exploded.

During the peak of gold prices in September 2011, gold-backed ETFs controlled nearly 2,400 tonnes of physical gold. That was larger than most countries’ central bank gold reserves.

As of the end of 2018, the total gold held by gold-backed ETFs amounted to 2,440 tonnes. That was a net increase of 75 tonnes from the previous month, and the third straight month of increased gold holdings.

Chart - Gold-backed ETFs Flows vs. Gold Price by Month

These increases coincided with the downturn in global stock markets, particularly for the U.S.

And with stock markets still seeing volatility, more and more investors will likely turn to gold-backed ETFs.

2019 could be big for gold

As we said earlier, gold tends to go up as stocks go down (thanks to its negative correlation).

It has also outperformed through countless crises and “black swan” events throughout history.

Gold has already been marching higher for months. And the recent three-month streak in ETF gold-buying is an indication that investors are starting to pay attention to gold.

If another crisis comes along, gold is going to be a backstop for investors. And those who already own it will have taken an early step to mitigate potential losses in their portfolios.

So now is a good time to add some gold to your portfolio through an ETF like the SPDR Gold Trust (Exchange: New York Stock; ticker: GLD; Exchange: Singapore; ticker: 087) or the Value Gold ETF (Exchange: Hong Kong; ticker: 3081).

Good investing,

Brian Tycangco
Edtior, Stansberry Pacific Research

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Conspiracy theories are (almost) never true. As we wrote last week, though, sometimes they are – like when a global bank admits that it’s been fiddling with the price of gold, and when China steps up its efforts to take control of the gold market.

So what if some of the more unbelievable gold conspiracies are also true?

Some people think that these recent announcements are just the tip of the iceberg. They think there is a much larger conspiracy by governments – principally the U.S. – to hide the truth about gold. They believe that this conspiracy is covering up a deep weakness in the U.S. dollar, which (possibly) could collapse at any time. A natural hiding place for investors from this gathering storm is gold bullion.

Gold conspiracy theorists also believe China is secretly hoarding gold as part of a scheme to accelerate the U.S. dollar’s decline, and wrestle global financial dominance from the U.S.

Given that conspiracy theorists seemed to be proven at least partially right by recent gold developments, we thought it would be interesting to look at other gold conspiracy theories. If any of these are proven to be true, the ensuing scandal would cause people to lose confidence in the U.S. dollar and cause the price of gold to rise.

Here are three prominent gold conspiracy theories, along with the chances of them coming true:

Fort Knox actually holds no gold.

Facts: The U.S. government has long reported that its massive top secret Fort Knox vault in the eastern state of Tennessee holds 5,000 tonnes of gold – that’s nearly 3 percent of all the gold ever mined, worth about US$182 billion at current market prices. It’s roughly equivalent to 2.5 times China’s total stated gold reserves.

Located below a U.S. Army facility, the vault was built in 1937 to house U.S. gold reserves, which were at the time used to back the dollar. (The U.S. abandoned the gold standard in 1971.) The vault’s blast-proof door weighs 25 tonnes. Apache attack helicopters circle the skies above the heavily fortified army post and 30,000 soldiers with armoured vehicles are stationed nearby.

What’s suspicious: The last full audit of Fort Knox was conducted in 1953. The site is classified top secret by the U.S. government, and over the past 60 years, only a few people have set foot inside the vault. In 2011, U.S. Congressman Ron Paul called for a new audit of Fort Knox, expressing doubts about its contents. The U.S. government has refused to do so, calling it unnecessary and a waste of tax dollars.

So, the government MUST be hiding something, right? Has the gold been sold off over the years by the U.S. government for nefarious reasons? And if so, where has it gone?

The chances: The probability that there’s no gold in Fort Knox is pretty low. If there was no gold and someone discovered it, the damage to the U.S. dollar and to the credibility of the U.S. government would be enormous. There’s no point in the U.S. taking that sort of risk. So, there’s gold in Fort Knox. The chances that there’s less gold in Fort Knox than has been reported? That’s higher, just because there’s so much uncertainty about the real amount.

Half of Germany’s total gold reserves were held in safekeeping in New York, but they’ve disappeared.

Facts: The Federal Reserve Bank of New York reportedly holds the world’s largest known depository of gold, some 6,350 tonnes, below its office building in New York City. The New York Fed safeguards the gold for account holders, including the U.S. government and foreign governments.

The vault securing the gold rests on bedrock, 80 feet below the streets of Manhattan. Since WWII, Germany has believed that keeping its gold in New York was safer than keeping it in a place where it could be taken by the (now-former) Soviet Union, if they invaded.

What’s suspicious: In 2013, under pressure from domestic activists, the German government announced it would transfer all of its gold held in vaults around the world back to the homeland. Half of Germany’s gold reserves – reportedly some 1500 tonnes – were held in the U.S. But for some reason, the volume of gold to be sent back to Germany was reduced to 300 tonnes, and was to be returned over the course of five years.

Conspiracy theorists questioned why Germany needed five years to move its gold, when that amount of gold could be flown from New York to Frankfurt in a week using a few C-130 transport planes. Was the gold actually there? Was it illegally lent out, or illegally sold? Could much or all of the German gold held for safekeeping by the U.S. be gone?

The chances: Most of Germany’s gold is probably there. Is some of it not available? Perhaps.

The 9/11 terrorist attacks were actually the largest gold heist in history.

Facts: Prior to the terrorist attacks, World Trade Center 4, which was next to the collapsed towers, was home to five commodity exchanges, and housed one of the world’s largest trading floors. Seventy feet under the building was a huge vault, which at the time was leased by the Bank of Nova Scotia. The bank reported that weeks after the attacks, all of the contents of the vault were recovered – US$200 million of precious metals.

What’s suspicious: Several reports prior to the attacks listed the gold and silver housed under building 4 as valued at nearly US$1 billion, five times more than the amount the bank said was recovered and accounted for. Is it possible the attacks were not a terrorist plot, but rather an elaborate diversion to hide a US$800 million theft?

The chances: This is the realm of the tinfoil hat people – people who are hard-core conspiracy theorists who don’t let reality or reason interfere.

There’s little evidence that any of these gold conspiracy theories are true. However, scientific research tells us this much about such theories: If you believe one is plausible, you probably feel the same about the rest.

If some, or all, of these theories were true – or partly true – what would it mean? Any of the three would be a big blow to the credibility of the U.S. government, and to the U.S. dollar. And if suddenly there would be less gold that’s accounted for in the world, the price of gold would probably rise. But again, the chances of any of these coming to pass is slim.

In the meantime, there are other good reasons to own gold, as we’ve discussed before. It’s a great way to diversify your portfolio, and it’s a great hedge. And in a world of deflation it’s a good asset to own.

To invest in gold, you can buy gold bars and store them in a safe or safety deposit box. You can also buy an ETF that tracks the price of gold. The biggest in the world is the SPDR Gold Trust that trades on the New York Stock Exchange (ticker: GLD.) You can also buy it on the Singapore Exchange (code: O87.) In Hong Kong, you can buy the Value Gold ETF (code: 3081.) All of these ETFs track gold prices by holding actual gold bullion (or do they…)

Here’s why 2019 could be big for gold

Gold is a friend in times of uncertainty

The gold-to-S&P 500 ratio remains high

1. China is buying

2. Gold ETF holdings are rising

2019 could be big for gold

These crazy gold conspiracies aren’t true (but what if they are?)

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