Tag Archives: hyperinflation

Golden Stockpiles – The Key to Gold as a Store of Value and Safe Haven

Much is written in the precious metals world about gold’s characteristics, as well as how the behaviour of the gold price allows gold to play the role of a unique financial asset that retains purchasing power over time, acts as a safe haven asset, diversifies risk, and provides hedging benefits.

However, much of the material written in this area skips over an explanation of how the simple, yet powerful, relationships and interactions of the gold price actually work. The appreciation of these simple characteristics and relationships facilitates a far more intuitive understanding of why holding gold - in the form of physical gold - can be so beneficial.


One of the commonly overlooked yet critical attributes of gold that allows it to play the role of a monetary asset par excellence is that physical gold has a vast above ground supply, thereby making the global gold market highly liquid.
Gold is mined to be accumulated and nearly all of the gold ever mined is still in existence in various forms, such as in the form of above ground central bank gold holdings, private investment gold hoards, gold jewellery, or within industrial, medical and scientific applications. With gold recycling services now highly advanced and widespread, this also allows gold holdings to be easily transformed between uses by refineries in a cost-effective manner.

Since nearly all the gold ever mined is still in existence, the world’s accumulated stock of gold is multiple times the annual addition to the stock, i.e. the flow of gold. For ease of illustration, assume that 186,000 tonnes of gold have been mined throughout history and that annual mine production is 3,100 tonnes of gold. This gives a total gold stock-to-flow ratio of 60 times. Depending on the gold price, global holders of gold (in all its forms) are able, and sometimes willing, to step up and participate in gold transactions.

Global gold supply is therefore affected, not just by annual gold mining output, but by the existence of this vast above-ground stock of gold. And it is this stock of gold, over the long-term, that has an influence on the gold price, and that can explain gold’s role as a store of value and as a safe haven asset, as well as explaining gold’s price correlations with other asset prices.


Store of Value and Long-Term Inflation Hedge

Over long periods of time, gold has been proven to retain its real purchasing power. Therefore, gold acts as a long-term inflation hedge and as the ultimate store of value. This may appear to be a complex magical process but the theory is quite simple.

A fiat currency whose supply expands recklessly (which is really all fiat currencies throughout history and at present) will become debased. This leads to price inflation, i.e. an increase in the price levels of goods and services expressed in that fiat currency. As goods and services prices rise, the price of gold also adjusts upwards to compensate for these price rises.

The gold price rises, because on a global basis, there always exists an exchange ratio between physical gold and all fiat currencies, and the vast worldwide above-ground stock of physical gold can always be valued in terms of fiat currencies. But unlike fiat currencies, physical gold cannot be debased. Therefore, the gold price, and the valuation of gold, simply captures and reflects the purchasing power of all fiat currencies, and acts as an inflation hedge and a stable store of value. In practice, in a free market, the gold price is actually a signal of future inflationary expectations, and so gold is known as an inflation barometer.

Is his 1977 book of the same title, a UC Berkeley professor, Roy Jastram coined this phenomenon “The Golden Constant”. Jastram analyzed price level data from 1560 to 1976 for England/UK and from 1800 to 1976 for the United States. He then measured gold’s purchasing power over these periods and found it to be constant over time. Jastram’s study was updated in 2008 by Jill Leyland and also extended to the French and German economies. Leyland’s analysis arrived at similar findings, and was especially illustrative of gold’s critical role during the hyper-inflationary period in early 1920s Germany during which paper currencies rapidly became worthless. The ‘Golden Constant’ was interpreted by both studies as being due to gold’s large but slowly growing supply, resistance to debasement, as well as the gold price's unique behaviour in times of currency depreciation and market and political stress.

The gold as a currency hedge phenomenon can also explained by the above relationships. As fiat currencies become debased or suffer confidence shocks, they depreciate in value relative to gold, because gold has a large, slowly growing and finite above ground stock and cannot be debased. This brings us to the next point.


Gold as a Safe Haven and Hedge against Extreme Risk

Physical gold is a proven and accepted safe-haven. But why is this so? The answer is because gold acts as an inflation hedge and a currency hedge and so preserves wealth. In periods of market or economic stress, gold’s price rises because there is a flight to gold since, due to historical experience, the counterparty and default risk potential of most other assets gold comes to the fore, while gold has a highly liquid market, and gold is universally perceived as having no counterparty risk and no default risk. Therefore, gold takes on the role of financial insurance against monetary crises, geopolitical risks, and systemic financial system risks. Because of its high liquidity and lack of counterparty risk, gold also becomes the high-quality collateral during periods of extreme risk.

Gold’s Price Correlation vs Other Asset Prices

Fans of modern portfolio theory will be familiar with the fact that the gold price is not highly correlated with the prices of most other financial assets. Therefore, adding gold into an investment portfolio can lower portfolio risk. Again, the question is why? The answer is quite simple.

The low, and sometimes negative, correlation between the gold price and other asset prices is due to the gold price not being as dependent on economic and business cycles as most other financial asset or commodity prices. Therefore, the gold price doesn’t react to economic cycles in the same way as most other asset prices. This differing price reaction is… you guessed it… due to the large above-ground stocks of gold which can, due to gold’s liquidity and transformability, be mobilized (by price inducement) to enter the market place irrespective of the economic cycle.

Mobilizing physical Gold

As a practical example, this ability of existing above ground stockpiles of gold to be mobilized into the market is well illustrated by the large number of 400 oz gold bars that flowed out of central bank vaults and ETFs in London during 2013-2015, were transformed by Swiss gold refineries into smaller bars, and then flowed east to Asia. The west to east movement reversed in 2016, with large amounts of gold being imported into Switzerland from locations such as Dubai, Thailand, Turkey and Hong Kong for processing back into large gold bars and then sent back to the London market. Another example is gold recycling, which has an ongoing inverse relationship with the gold price. As the price rises, supplies of gold from recycling sources rise, since the price motivates potential sellers to enter the market. It's therefore worth remembering that gold mining supply is not the full story. Some of these huge above ground stocks of physical gold can and do enter the market in various ways and at various times. In this article, we have not even touched on the controversial subject of central bank gold leasing, a potentially large and hidden supply overhang, but a subject left for future analysis.

Gold Price: USD 65,000/oz in 5 years?

16 June 2021 is exactly five years from today. What will the gold price be on 16 June 2021?

Currencies are Worthless

As the world’s fiat paper currencies have lost 99% or more of their purchasing power over the last 100 years, its critical to understand that fiat paper currencies are not a suitable unit of account for accurately measuring prices.

In fact, gold is a far superior measuring stick of value than paper currencies.

A paper currency doesn’t measure anything. It merely has an arbitrary value placed upon it by the population using it. It’s not backed by anything and it can fail at any time. From historical experience, we know that the unbacked fiat paper currencies used today will ultimately destruct and become worthless. All unbacked fiat currencies throughout human history have failed.

A more accurate measurement would be to measure fiat currencies in gold. If we look at the US Dollar measured in gold, we can see that the US Dollar has utterly failed in retaining its value, as its value has plunged about 98% over a mere 50 years. It cannot therefore be seen as a store of value.

Chart of US Dollar measured in Gold. USD price instead of Gold Price.Source: Gold Price Charts, BullionStar

Extrapolating into a likely future, a future in which you will need a stack of USD 100 bills to buy a carton of milk and a couple of eggs, underlines that the US Dollar gold price is meaningless as an indicator of value. When discussing the price of gold, the key is to recognise that gold retains its purchasing power over time. If a 1 oz gold coin can buy an exclusive men’s suit today at USD 1,300 and the same 1 oz gold coin buys an exclusive men’s suit at USD 2,600 tomorrow, this only means that gold is still reflecting USD 1,300 in today's purchasing power and hasn’t gained in value. It’s the US Dollar that has depreciated vis-à-vis gold. Similarly, if the gold price goes to USD 650 and it can still buy the same suit, then it’s merely the US Dollar that as appreciated vis-à-vis gold.

With a gold price of USD 65000, what will the USD be for Milk, Egg and Bread

As a society, we should by now have transcended the idea of measuring value in fiat currencies. Currencies are not a reliable measuring stick. Just imagine if the centimeter, meter, yard or foot were to fluctuate in length.

100 cm 100 years ago has become 2 cm today. Think about it. This is what has happened with our currencies.

The Gold Price                                  

The gold price is an interesting term because the gold price doesn’t reflect what’s happening on the physical gold market whatsoever.

In today’s marketplace, a lot of things are regarded as “gold”. On the London Gold Market alone, there’s 600 times more gold traded each day than there is gold mined globally on that same day.

All sorts of paper gold passes for “gold” on the financial markets. The vast majority, certainly more than 95%, and likely more than 99% of this paper gold is not backed by any physical gold.

“Gold” is created out of thin air as paper obligations. The demand for and supply of this paper gold has little to do with the physical gold market.

During the last couple of year, demand for real physical gold has been insatiable , however the price of gold has not reflected this huge demand. Physical gold has been flowing from the Western vaults to Asia. The Chinese in particular have been vacuuming the London vaults for gold. However, this substantial physical demand hasn't been reflected in higher gold prices because whereas Easterners have been buying physical gold, Westerners have been selling paper gold.

Given that the price of “gold” is set on the OTC paper market in London and on the COMEX futures market in New York, the US Dollar denominated gold price continued to fall between 2012 and 2015 despite the massive physical demand, and instead, it created a physical shortage of gold.

Whether physical demand is up or down 5 tons in China or India matters little when there’s 5,500 tons of paper gold traded each day in London  as visualized in this infographic. London, and to a lesser extent COMEX in the US, are the price discovery markets for gold. However, paper gold on these markets is almost exclusively cash settled with less than 1% of the contracts/futures settled with delivery of physical gold.

The gold price is therefore not dependent on the market fundamentals of physical gold but this may very well change in the future.

With China picking up all physical gold available every time the price slides, widespread shortages are a likely outcome if the gold price ever were to decrease significantly again. Given that the historic vaulting capital of the world, London, has already been running out of stockpiled gold, there just wouldn't be enough physical gold to satisfy demand if the price were to ever plunge significantly again.

It's actually been a healthy development for the physical market’s demand/supply balance  that the gold price has increased 22% in USD Year-to-Date 2016. However, we have to understand that the largest potential for a revaluation of the gold price paradoxically may be preceded by a decrease in gold prices.

When trend seeking Western investors sell their paper gold and the price slides, Easterners take the opportunity to buy physical gold at bargain prices, thereby stressing the physical market with shortages as a result. Such shortages may very well be what ultimately breaks the neck of the paper markets. Because when there is no longer any physical gold available at the price dictated by the paper markets, there will be a disconnect between the price of paper gold and the price of physical gold. Paper gold will go towards zero whereas the price of physical gold will skyrocket.

Such a revaluation of physical gold will bring the fiat paper currencies to their knees as their worthlessness as a store of value will become clear to all.

USD 65,000/oz

What will the price of gold be in 5 years’ time?

Gold is savings - Gold is wealth, and as such, the price denominated in something as inferior as the US Dollar isn't very important.

For the sake of reflection, we can play with the idea of what the price of gold would have to be if the US Dollar were to go on a fully-backed gold standard.

The US gold reserve officially stands at 8,133.5 tons although it has never been properly independently audited. At USD 1,300/oz, this would be equivalent to 340 billion dollars. The total US money supply is about 17,000 billion dollars. For each "gold backed" dollar today, there are therefore 49 unbacked dollars. The gold price would thus have to increase 50-fold to USD 65,000 if the US Dollar were to be fully gold-backed by 16 June 2021.


Offshore Bullion Storage or 3 eggs?

What does one hundred trillion dollars buy you?

How about a mansion in every country, an airplane at every airport and a private island in every ocean?

How about 3 eggs?

When Zimbabwe issued its infamous 100 000 000 000 000 dollar bill, it could buy 3 eggs on the day it was issued. A few days later, it could only buy one egg.

Zimbabwe 100 trillion dollar note buying 3 eggs

Hyperinflating Currencies

Unbacked fiat/paper/credit, and nowadays electronic currency, has a poor track record. After studying this list of 609 defunct currencies, out of which 153 died due to hyperinflation, it's obvious that every time fiat currencies are tried, they die through hyperinflation, war or political decrees.

Using the debt-based US Dollar as a store of value creates massive imbalances and misallocations globally. With an unprecedented debt bubble fuelling paper markets such as stocks and bonds, we stand on the cliff edge of a vertical drop.

Since the Nixon era, we have suffered under a fiat currency ponzi scheme wiping out most of the purchasing power of our currencies.

In MLM schemes, the idea is to recruit naive participants downstream to generate compensation for the recruiter.

This is exactly how the US Dollar and other fiat currencies work.

Early receivers of the MLM scheme such as the government, the banks and the central bank gain purchasing power whereas late receivers, such as us normal people, lose purchasing power.

Fiat paper currency is nothing but a cleverly designed MLM scheme to slowly over time steal and redistribute your private wealth.

Defend Your Assets

With the massive redistribution of wealth taking place through taxation and inflation, you have to defend your assets. Key self-defensive tactics include:

- Protect yourself by keeping your assets out of reach for the government and banks
- Minimize counter-party risks
- Ensure you are protected against currency collapses and bank runs
- Hold your assets in such a way that there's no reporting required to government
- Protect yourself against exchange and capital controls

Crooks can't help steal whether it's directly in broad daylight through a bail-in like in Cyprus in 2013, through taxation, through inflation or through confiscation such as the gold confiscation in the 1930's when the US president Roosevelt took the United States off the gold standard and confiscated private gold holdings.

How can you protect yourself? Gold is the natural answer as it resists inflation, maintains purchasing power and can be held confidentially.

Buying gold isn't enough though. What if your gold purchase is within reach of the government? If you buy gold in your home country, a tax agency such as the IRS in the United States can easily audit the bullion dealer to find out about your purchases. In addition, there's also reporting requirements for certain bullion transactions.

Defend your bullion from confiscation risks

When it comes to bullion storage, diversification is key. It's certainly wise to keep some of your bullion in your own possession but don't put all your gold eggs in one basket.

Offshore Bullion Storage

With the financial repression we are witnessing in the West expressing itself through taxation, inflation, bail-ins and confiscations, it's important to store some of your bullion offshore in a safe jurisdiction favoring confidentiality and security.

Gold has traditionally been stored in financial hubs such as in London, New York and Zurich. With doubts whether there is any gold left in the London and New York vaults which isn't already encumbered, Singapore is emerging as the strongest alternative for offshore bullion storage. Singapore clearly distinguishes itself as the best jurisdiction in the world to buy and store gold:

  • Singapore has no taxes on bullion
  • Singapore has no reporting requirements when you buy/sell/store bullion
  • Singapore has a stable pro-gold government creating a gold trading hub
  • Singapore has a strong rule of law and is one of the safest countries in the world
  • Singapore is a centre for wealth and asset preservation
  • Singapore consistently ranks top 3 in the world for business friendliness
  • Singapore strongly protects property ownership rights

Although we don't recommend holding wealth with banks, other than what you need for short-term expenses, Singapore is host to some of the best capitalized banks in the world such as DBS, UOB and OCBC.

With banks and international institutions pushing for a cashless society so as to be able to impose negative interest rates, surveil your transactions, and impose restrictions on your wealth, Singapore continues to be a cash-friendly jurisdiction. Although Singapore in 2014 stopped printing the world's most valuable banknote, the SGD 10000 dollar note, it's possible to use cash for all purchases including purchasing bullion. The SGD 10000 dollar note will continue to be valid indefinitely and the SGD 1000 note is still one of the most valuable worldwide.

Offshore bullion storage pamp gold bars sgd 10000 sgd 1000

With Singapore emerging as the new global center for wealth protection, it's wise to check how you can buy & store gold in Singapore.