How the Biggest Trend for 2020 Was Predictable in 2018

Dear reader,

What a year it has been.

We have seen markets boom, sectors bust, and a whole lot of volatility.

Just like 2018, politics and trade have weighed on stocks across the world. But, it wasn’t enough to stop the ASX from roaring higher this year. A result that has been at fascinating odds with some of the gloomy talk.

Which brings us to perhaps the most bizarre turn of events this year: a boom in gold.

It is not often you’ll find us talking about this precious metal in Money Morning. Unless it is speculative junior miners who are one drill result away from striking it rich.

No, typically we’re pretty averse to gold. Not because we don’t believe in it, but simply because usually it trades inversely to the stock market.

Normally when the stock market is up, gold is down — and vice versa.

In 2019 though, this hasn’t been the case.

Stocks have boomed, but so has gold…

So, what the hell is going on?

Well, to give you an expert insight I’ve enlisted the help of Shae Russel. The Editor and gold aficionado over at the Daily Reckoning Australia.

And today, Shae is here to tell you why gold is going to be even bigger in 2020.

Enjoy,

Ryan Clarkson-Ledward,
Editor, Money Weekend

***

Down, but Not Out

It was the sector that was left for dead…

The value of the commodity fell so sharply, that for some companies it simply became too expensive to mine.

Blueprints for new plants were shelved.

Existing operations were shut.

Firms gave up looking for it.

Only idiots were sticking their money in this asset…

2014 was a bad year

The year was 2014.

Bitcoin was still only a novelty for the indoorsy, gamer types. Nobody had heard of the ‘FAANGs’.

The Fed had yet to begin raising interest rates. And that year, the best performing sectors of the US stock market were real estate and utilities stocks.

Closer to home, our own Reserve Bank of Australia had set the cash rate to 2.50%.

Iron ore prices fell 46% and oil continued to slide by almost half.

So, it comes as no surprise that the Aussie dollar tumbled along with commodity prices. Falling 13% against the US dollar, from 89 US cents in January to 77 US cents by December that year.

In spite of all of this, the S&P/ASX 200 somehow managed to end the year higher by 9.3%.

And then there was gold.

The 2011 gold bull market was over.

In the three years since its US$1,900 peak, the yellow metal was down a whopping 35% by the end of 2014.

Yet even the falling Aussie dollar couldn’t protect the Aussie dollar gold price.

Once the metal reached AU$1,390, many gold miners in Australia closed up their gold operations.

Smaller gold miners were rapidly becoming unprofitable. Even major gold mining companies struggled. Both Newcrest Mining and St Barbara saw almost no share price gains that year.

The sector was dead.

Surely only a fool would put their money in gold.

What happened when you weren’t looking?

Things all began to change in 2015.

Oh don’t get me wrong, the yellow metal dropped another 10% in US dollar terms.

However, while investors were dumping their gold stocks…other investors were moving into physical bullion.

But those investors just happened to be central banks.

Not major central banks either.

The smaller ones…the sort of emerging markets no one pays any attention to.

Central bank gold reserves — 2000–18


Money Morning

Source: Palisade Research

[Click to open in a new window]

While most of the West wasn’t looking, China, India, Russia, Turkey, Mexico, and Kazakhstan slowly began to increase their physical gold position.

Gold rush 2.0

That brings us to today.

The yellow metal is now back in a bull market.

As I write it’s currently sitting around US$1,466 — give or take a buck or two.

Central banks bought more gold in 2018 than ANY year since 1967.

And in the first 10 months of 2019, central banks have bought 17 more tonnes than last year.

In other words, central banks are continuing to drive gold bullion purchases.

But the bullion purchases are solely driven by China or Russia.

This time, Poland, Egypt, and even Hungary were keen to publicly announce their decision to hold more physical bullion.

For the first time, a small collection of central banks are on the front foot.

They are preparing to protect their countries’ wealth with a robust physical gold holding.

Once again though, their moves are invisible to the rest of the market.

And as 2019 draws to a close, both Germany’s and the Netherlands’ central banks are making noise about the importance of gold to them.

Are they sudden advocates of sound money?

Or are they moving away from fiat currencies?

Miner mergers were a sign

As central banks gobble up gold at a rate never seen before, there’s another side to this gold rush.

We got a glimpse of it at the end of 2018, when Newmont Mining made a bid for Goldcorp.

Two months later, Canadian-based gold giant Barrick Gold made an offer for Randgold.

Together those two became a US$24 billion gold behemoth with the largest gold reserve base in the world.

Yet the ink had barely dried on that merger, and Barrick has come out swinging again. This time with a US$18 billion bid for Newmont.

Newmont’s management have rejected the offer. Saying Barrick have undervalued the company.

Whether there’s another takeover attempt next year doesn’t matter.

Because coupled with central bank gold buying, this merger activity is a very big signal for what’s to come.

The gold mining giants are fighting over each other’s assets.

Essentially they are setting the stage for a mega melt-up in gold companies.

That is, a rush to buy up one another to become the gold miner with the largest resource base.

This excitement filters down through to the smaller and mid-cap stocks as well.

Giving us a modern-day gold rush.

Gold in the ground is getting harder and more expensive to find.

For gold miners that want to expand and increase their share price, mergers and acquisitions are often the only way to go.

In other words, to become bigger and leaner in the expensive world of digging for gold, companies need to buy each other out.

This is the year gold mine assets become controlled by just a few.

Of course, is all this analysis just hindsight?

Nope. Today is mostly excerpts from an article I wrote in January this year.

This gold activity is a trend I have been watching, monitoring, and recommending investors benefit from all year.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia


Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis. Joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends. Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.


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