Certain indicators warn investors when the tide is about to turn… However, these indicators are not always obvious. Sometimes, you have to read between the lines.
Dear Investor,
This morning the Financial Times ran a headline that immediately caught my eye: “Gold stockpiling in New York leads to London shortage.” The article reported that the Bank of England (BoE) was making customers wait as long as eight weeks to redeem gold that they had purchased. Typically, the wait would have been a few days.
That alone raised a few questions. But some of the statements in the article raised a lot more – and suggest we may be seeing one of the most significant developments in the gold market in the last 50-plus years.
According to the FT, 393 tonnes (a metric measure) of gold have been moved from the vault of the BoE to the COMEX in the U.S. since the U.S. presidential election in November. The implication, which struck me as absurd on the face of it, was that this relatively paltry amount – accounting for approximately 6% of the BoE’s 5,300 tonnes of gold – supposedly was enough to account for the dramatically longer redemption waiting time. The FT did acknowledge that the gold transfers could have been larger than 393 tonnes.
Also asserted was that the reason for the stockpiling of gold at the COMEX was the fear that Trump might place tariffs on British gold. This, too, seems, a whimsical notion. Gold, after all, is a currency; how do you tariff a currency?
Smoke Signals
So what might really be going on? What follows is a very rough and speculative working hypothesis of one potential scenario – one in which gold, in the not-too-distant future, could be dramatically revalued.
First, to justify the BoE’s level of delay, you have to think that far more than 393 tonnes of gold has been sent to New York. Second, Trump’s new treasury secretary, Scott Bessett, has said that he likes gold and that it’s his largest position. Third, in his campaign, Trump said he wanted to completely eliminate U.S. government debt, which stands at nearly $36 trillion.
Now let’s suppose for a moment that Britain sent 5,000 of its tonnes of gold to the U.S., not 393 tonnes. And suppose the U.S. already had the 8,000 tonnes it says it maintains. At gold’s current prices, those 13,000 tonnes would be worth around a bit more than $1 trillion.
If the U.S. wanted that gold to fully back U.S. government debt, gold’s price would have to rise to around $82,00 per oz. Even if it were to back just half the debt, it would imply gold at $41,000 per oz.
As I said – pure speculation. But it’s fair to say that the gold market isn’t going to be static. To mention just one other development here, today there was an unprecedently large differential of $30 between the price of physical gold, which is fixed in London, and the price of gold in U.S. futures trading.
We’ll be following all these developments and more in our forthcoming issues of my new investment venture, Turbulent Times Investor. Hope you’ll join us.
