Contributed Commentaries
Gold futures in blue sky territory as china rolls out the e-RMB
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Blue skies
Smiling at me
Nothing but blue skies
Do I see
- Irving Berlin “Blue Skies” 1926
With gold futures ripping through its final resistance level at the $1921 all-time high earlier this week, everyone that has purchased an ounce of gold at any time in history is “in the money”, as the safe-haven metal is now trading in blue-sky territory. In overseas trading on Tuesday evening, December Gold nearly touched the $2000 per ounce mark in Hong Kong before reversing strongly from this psychologically important level.
However, adjusted for inflation, the real gold record was set 40 years ago. While this week’s all-time high made headlines, gold prices have yet to reach the inflation adjusted price set Jan. 21, 1980, when prices closed at $850 an ounce. In today’s dollars, that would equate to about $2,800 an ounce, according to the World Gold Council.
Gold has historically traded violently around significant round numbers. Once the $1000 level was nearly reached in 2008, bullion was unable to close above this significant price point until 18 months later, when the Federal Reserve was forced to create “money from nothing” to re-capitalize the U.S. banking system. With the world’s largest central bank delving into the realm of Modern Monetary Theory since mid-March, I do not foresee a consolidation period taking nearly as long before the $2000 price point is vanquished.
Although the world’s largest economy was saved by the “Fed Put” during the 2008 financial crisis, the rapidly expanding can of debt has been kicked down a road that is running out of pavement. China is well aware of the world growing weary of the U.S. dollar maintaining its status as the world’s reserve currency and are patiently waiting for its opportunity to announce a gold-backed renminbi.
In April, the president of the Shanghai Gold Exchange (SGE) called for a new super-sovereign currency to offset the global dominance of the U.S. dollar, which he predicted would decline long term as gold prices rally.
It has long been speculated by analysts that China has plans to make the renminbi exchangeable for gold, but at a market price, rather than at a fixed price, as the U.S. did after 1944. If this is indeed their plan, China will act only when the fiscal and monetary policies of Western countries have reached the end of the road and visibly fail.
With gold in a runaway move to the upside since making a quarterly close above $1800 during the last Comex trading session of Q1, China will begin a trial for payments using its new digital e-RMB currency system in four major cities from next week. It will also be used at the 2022 Beijing Winter Olympics.
While the U.S.-China relations have become more heated in recent weeks, China’s central bank has stepped up its development of the e-RMB, which is set to be the first digital currency operated by a major economy.
This is one of the driving forces behind the country’s recent move to take control in Hong Kong. China has steadily been building a renminbi-based international payments system based in Hong Kong and backed by its laws, which is partly driven by China’s goal of securing national financial security.
Additionally, Reuters reported this week that Chinese regulators and major banks are rushing to curb precious metal trading by domestic investors to temper speculation that some fear could cause a repeat of this year’s oil trading mishaps. The SGE, where gold and silver futures contracts are traded, also urged its members to strengthen risk-management efforts and invest rationally.
Earlier this week, after Goldman Sachs raised its gold price target to $2300 within the next 12 months, the investment bank said that the U.S. dollar may soon lose its status as the world’s reserve currency. Goldman Sachs’ strategists wrote: “Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge.”
The investment bank and financial services company explained that the U.S. dollar faces several risks. Citing that the debt level in the U.S. has now exceeded 80% of the country’s gross domestic product, they anticipate that the government and central bank may allow inflation to accelerate. The value of the U.S. dollar fell to a two-year low heading into the FOMC meeting earlier this week, amid growing spikes in COVID-19 cases in the U.S.
At the conclusion of the FOMC meeting on Wednesday, Fed Chairman Jerome Powell repeated a vow for the central bank to use all tools at its disposal to support the economy, to leave interest rates at zero for the foreseeable future and to extend emergency measures. Powell also promised the central bank would “do what we can, and for as long as it takes” to support the U.S. economy.
The continued efforts of global central banks to save floundering economies with creative stimulus measures has spurred concern over rising inflation, which has been a big reason behind investor's piling into the entire precious metals complex. With even more stimulus from Washington on the horizon, it is likely gold will remain well bid heading into what promises to be a very heated U.S. election on November 3rd.
After gold futures closed above its upper daily Bollinger Band for a highly unusual 7 consecutive sessions, yesterday’s selloff was a normal corrective price pullback in still-strong uptrends on the charts. The safe-haven metal has been riding this line higher in its monthly chart since breaking out of a 6 ½ year base last summer.
With the miners beginning to show some exhaustion this week, this healthy pullback is giving sidelined investors a chance to buy long-term holding positions in quality juniors on weakness. Retail investors have only recently moved towards an appreciable return of market interest and participation into this tiny sector, while the entire complex remains undervalued in relation to the price of gold.
As the senior producers remain focused on demonstrating capital discipline rather than expanding project pipelines, the capital markets have opened up recently to fund a plethora of juniors. The long overdue cash infusion to this capital-intensive sector has given them more flexibility to advance projects on their own. Capital raised by the juniors in 2020 has totaled $1.5B, up from $0.7B at this point in 2019. In fact, Q2/2020 was the strongest quarter of equity raises by the juniors since Q1/2012.
While the gold price has good support at its former multi-year resistance level at $1800, investors should consider focusing on juniors controlling high-quality assets with exploration upside in established mining jurisdictions and at a more advanced stage. Once M&A begins to heat up again in the mining space, I expect transactions are likely to focus on recently cashed-up juniors that fit these criteria.
My goal for the past few years has been to carefully construct a concentrated portfolio of exceptional junior resource stocks in the context of an investment time horizon at least as long as one cycle, which I feel has just begun. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at https://juniorminerjunky.com/subscribe.
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