InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
NOVEMBER 9, 2016
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
The long presidential election campaign is finally over, and world markets began roiling last night by midnight. As expected, the elevation of Donald Trump to President-Elect reverberates both domestically and internationally.
Most foreign markets dropped immediately by 2-4%, and U.S. stock futures fell by up to 4% overnight (when U.S. markets were closed). However, by the time that U.S. markets opened this morning, things were already returning to normal. It is likely that markets around the world will calm down and return to (relative) normal within a day or two.
That includes the Gold market, which is up roughly 5% as a reaction to Mr. Trump’s election, but will likely pull back this week.
At IntelDigest, we try to have a long view, so we go forward with our discussion of the Gold market in the coming year, as we promised in our last issue. There are very important developments coming in the Gold market, which convinces us to continue accumulation of Gold and Gold-related investments going forward.
Fundamentals
We have previously discussed the “fundamental forces” which drive the Gold markets; you can review the archive copy of the July 26 issue of IntelDigest for a detailed discussion of the issues. Weak economic fundamentals in many countries around the world, ultra-low … even negative … interest rates, and enormous amounts of public and private Debt, all propel investments in Gold.
As we stated in that issue:
“Gold is a traditional safe haven in times of insecurity; it can provide insurance against cyber and political risks. And, there are good, old-fashioned fundamentals at work …. demand for gold is growing in the marketplace, from Russia and China to western markets, while supply has been dormant because new mining projects were delayed or closed down over the last few years, when the gold price was receding from its 2011 highs.
All of these factors argue in favor of much higher gold prices.”
Looking To The New Year
Now, we look at three important international developments in the Gold market, which argue in favor of increasing investments in Gold by the end of this year.
The first is the Shanghai Gold Exchange.
China is the top consumer, importer, and producer of Gold in the world. China probably has the largest Gold reserves of any country, as it has acquired massive amounts of Gold in the last decade, much of it secretly. But, government actions are opaque, so outsiders can only make estimates of the reserves.
Existing Gold markets are centered in the London exchange, and Gold prices are controlled by participating banks … mostly Western banks, but also including the Bank of China. Many believe that these banks manipulate the price of Gold at the behest of their (Western) governments and for their own purposes.
We won’t get into the full conspiracy theory re: Gold pricing (perhaps in a later issue). But, remember this significant fact: the LIBOR and COMEX exchanges price Gold based on futures contracts, and there are currently 252 ounces of Gold claims FOR EVERY OUNCE OF DELIVERABLE GOLD!
China is set on dominating the Gold market. It established the Shanghai Gold Exchange in 2002, and would now like to make it the center of Gold trading and pricing for the world. China has proposed that the Shanghai market would set the price on the basis of ACTUAL PHYSICAL GOLD, not on paper futures contracts.
Increased activity in the Shanghai Gold Exchange would be a significant factor in propelling growth in the Gold market.
The second development is a change in Islamic law which would allow massive investments in Gold by Muslims around the world, who number 1.6 Billion.
Some interpretations of Islamic law prevent Muslims from investing in trades considered “immoral,” such as alcohol and tobacco; this ban has included investment in Gold bullion as a tradeable commodity for the last few decades.
As a result, approximately 23% of the population of the world has stayed out of the Gold market. Now, however, the Accounting and Auditing Organization for Islamic Financial Institutions is working with the World Gold Council to set a standard allowing Gold trading by Muslims.
If the pent-up demand by this group of investors is unleashed, Trillions of Dollars could soon pile into the Gold market!
Finally, the last important development in the Gold market is Peak Gold, the theory that the production of new Gold is shrinking around the world. Declines in new Gold discoveries have coincided with a surge in the costs of mining exploration. This has resulted in a reduction in mining operations and a steady decrease in Gold production.
Goldman Sachs has warned that there are “only 20 years of known mineable gold reserves.” Blackrock, the largest asset manager in the world, has also warned about “Peak Gold,” and asserts that Gold production is likely to decline by 20% per year for the foreseeable future.
There is no way to predict if Peak Gold is a concept which will last for years, or if new technologies or discoveries will change the dynamic. But, for now, the production of Gold is decreasing at the same time that Gold demand is about to soar!
A New Bull Market
Based on these three pivotal factors, a new, strong bull market in Gold is likely in the New Year. We see the opportunities in Gold as yielding high Returns on Investment going forward, so we are applying our research efforts to finding the best prospects in this sector.