Insights

$18T Reasons to Give Gold for the Holidays

Gold, silver, palladium and gold mining equities have all had a tremendous year. Year-to-date through December 23, 2020, gold has gained and 23.44%.1 Silver bullion2 has risen 43.07% YTD. Gold mining equities are up 22.20% YTD (as measured by SGDM).3 Palladium climbed 20.04% YTD and platinum is up 5.48%.4 By comparison, the S&P 500 TR Index5 has tallied 16.28% YTD.

Beyond this strong precious metals performance, there are several macro-economic reasons why gold and other precious metals may make the perfect gift for the holidays. 

Real Interest Rates are at a Five-Year Low

At this writing, the U.S. 5 year real yields have declined to a five-year low. With real yields at -1.56%, investors are being charged 1.56% annually to own U.S. 5-year Treasury bonds after adjusting for expected inflation. With the U.S. Federal Reserve (Fed) and other central banks pinning interest rates to the floor, real yields will likely continue their trend downward.

Figure 1. U.S. 5-YR Treasury Investors Are Being Charged 1.56% Annually

Figure 1. U.S. 5-YR Treasury Investors Are Being Charged 1.56% Annually
Source Bloomberg. Data as of 12/22/2020. U.S. 5-year Treasury yields are measured by the USGGTO5Y Index (Generic Government Treasury 5 YR).

A Growing Pile of IOUs Financing the U.S. Debt

Traditional buyers of U.S. debt have included countries such as China, Japan, and our European partners. The prospect of a guaranteed loss does not amuse them much. As a result, U.S. debt held by non-US entities has continued to drift sideways or lower, while the all-powerful Fed has stepped in. Since June of 2019, Fed holdings of U.S. debt has jumped by more than 125%.

Like many developed economies around the world, the U.S. deficit is being financed with IOUs to itself. This circus cannot end well.

Figure 2. U.S. 5-YR Treasury Investors Are Being Charged 1.56% Annually

Figure 2. U.S. 5-YR Treasury Investors Are Being Charged 1.56% Annually
Source Bloomberg. Data as of 12/22/2020. Bloomberg FARBTRSY Index represents US Factors Supplying Reserve Funds US Treasury Securities Held Outright; HOLDJN Index represents the value of U.S. Treasuries held by Japan; HOLDCH Index represents the value of U.S. Treasuries held by China; HOLDUK represents the value of U.S. Treasuries held by the U.K.

Another absolutely nonsensical figure I have come across is the gross value of negative-yielding debt in the world. Not negative yielding on an inflation-adjusted basis but negative yielding on an absolute basis. Holding any of this paper will lose an investor money.

Nearly $18T and Counting

There is now almost $18 trillion of negative-yielding debt in the world today, which is nearly equal to the size of the U.S. economy. I have colored this chart red because this represents debt that is GUARANTEED to lose investors money.

Figure 3. Global Negative Yielding Debt Nears $18 Trillion

Figure 3. Global Negative Yielding Debt Nears $18 Trillion
Source: Bloomberg. Data as of 12/22/2020. Global negative yielding debt is measured by the BNYDMVU Index (Bloomberg Barclays Global Agg Neg Yielding Debt Market Value USD).

We See Gold Building on its Momentum in 2021

With approximately 198,000 tonnes of gold being mined throughout history, the total value of above ground gold is just north of US$11 trillion at $1,850/oz. The annual turnover in gold is much lower at around 4500 tonnes or 2.3% of all available gold. This equates to ~$250 billion at today's gold prices. What would happen to the price of gold if a miniscule 2% of investors proudly holding negative-yielding debt decided to switch into gold? When over $350 billion of new money enters a market with $250 billion of annual supply, prices will have to adjust much much higher. 

Figure 4. Above Ground Stocks of Gold are ~198,000, or ~US$11 Trillion

  1. Jewelry: 92,947 tonnes, 47.0%
  2. Private investment: 42,619 tonnes, 21.6%
  3. Official Holdings: 33,919 tonnes, 17.2%
  4. Other: 28,090 tonnes, 14.2%
  5. Below ground reserves: 54,000 tonnes

Figure 4. Above Ground Stocks of Gold are ~198,000, or ~US$11 Trillion


Source: Metals Focus; GFMS, Thomson Reuters, US Geological Survey, World Gold Council as of 12/31/2019.

Gold Provides an Alternative to Bonds

If you don’t hold some gold, silver and other real assets, you should. The old argument of gold not paying a yield is now moot. Tens of trillions worth of bonds across the world have negative yields in real terms and nominal terms. Bonds really cannot function as a portfolio risk mitigator the way they've done traditionally, and we really need to re-examine the traditional 60/40 portfolio configuration.

Finally, I would be amiss if I did not remind you about the remarkable opportunity we see in gold mining equities. Gold miners have never been this profitable in decades. Many pay a healthy dividend yield while allowing you to partake in any upside to the gold price. Read A Yuletide Present for more on gold mining equities.

1 Gold bullion is measured by the Bloomberg GOLDS Comdty Index.
2 Spot silver is measured by Bloomberg Silver (XAG) Spot Rate.
3 Sprott Gold Miners Exchange Traded Fund (NYSE Arca: SGDM) seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index, the Solactive Gold Miners Custom Factors Index (Index Ticker: SOLGMCFT). The Index aims to track the performance of larger-sized gold companies whose stocks are listed on Canadian and major U.S. exchanges.
4 Palladium and platinum prices are measured by the Bloomberg PALL Comdty and PLAT Comdty Indices.
5 The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. (TR indicates total return and reflects the reinvestment of any dividends).

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