Today’s gold price is irrelevant
- The urge to merge
- Don’t waste time thinking about 1,300
- The big picture
I’d been working at a derivatives trading firm for all of about a week when my manager pulled me into his office to see how I was feeling about my new role.
It was the sort of environment where you had to hit the ground running.
The pressure was intense.
Think on your feet. Be adaptable, not rigid. But back your view.
I welcomed the sit-down in the office. I was a complete newbie. The only female in the office. The only one without a decade of experience behind me.
My manager was a former FX trader at a major bank.
He started his career at a time when trading rooms were full of cigarette smoke and the ashtrays would overflow. There’d be a bucket in the corner for…ahem…so people didn’t have to leave their ‘post’.
Basically, he knew things…things I didn’t.
Here we were. Sitting down before the market opened, discussing tactics I’d used, and he shared his ideas. He had noticed my daily morning ritual of analysing the gold charts. Then, he told me gold was one of the hardest markets to trade.
‘Why?’, I asked him.
‘No one really gets it.’
I left his office wondering. Why was gold so hard to trade?
Gold went from being an occasional curiosity to a genuine fascination. I wanted to know and understand the gold market in depth.
We can pretty much blame that one meeting with my former manager for my current views about gold.
The urge to merge
Yesterday, I had an exclusive one-on-one phone chat with Jim Rickards. If you’re a subscriber to Strategic Intelligence Australia, you’ll get access to it next week.
I can’t share much information with you here about the interview.
However, one thing Jim and I did talk about in detail was the gold market.
There are big things happening behind the scenes in the gold market right now.
Jim noted that perhaps the biggest trend right now is just how many central banks are buying gold. ‘No one is selling’, he said.
Central banks buying gold isn’t really visible to the average investor. It’s the sort of information that is generally only reported in obscure data. And even then, you need to know where to look to find that information.
Yet central bank gold buying is part of a much bigger trend in the gold market.
That is, the rush to secure gold before anyone else can.
Big gold finds are becoming rarer.
And this is evident through the surge in gold mining mergers.
A couple of weeks ago, gold mining giant Newmont Mining Corporation [NYSE:NEM] (worth around US$17 billion) made a US$10 billion offer for Canadian-owned Goldcorp Inc. [NYSE:GG].
Together, they will become the world’s largest gold miner, pouring six to seven million ounces of gold per year…for the next 10 years.
The new gold behemoth will pour a minimum of 60 million ounces of gold in a decade. Once combined, these companies will have the largest gold resource in global history.
This merger comes only a few months after Barrick Gold Corporation [TSX:ABX] made a US$6.5 billion bid for Randgold Resources Limited [NASDAQ:GOLD].
Furthermore, this is a sign of what’s to come.
That is, more mergers.
Some speculate that it’s partly because gold is getting harder to find. Merging gold assets makes more sense than taking on exploration risk.
However, I suspect it has less to do with how hard gold is to find…and is more likely an unwillingness of top gold mining CEOs to take on exploration risk for shareholders.
Looking for gold is expensive and risky. You can spend $50 million digging up a promising patch of dirt…only for the drill results to be extremely disappointing.
Shareholders in big blue-chip miners don’t like that. And when exploration results disappoint the market, they sell their shares.
Big gold mining CEOs are possibly taking the easy path of protecting the value of their shares by not taking on exploration risk.
The end result, from a lack of looking for gold, is mine depletion.
To offset that, big miners are merging with even bigger miners to shore up their gold reserves.
Don’t waste time thinking about 1,300
Today’s takeaway isn’t about which gold miners will track the physical price of gold.
My analysis for you this afternoon is much bigger than that.
Central banks are buying more gold than at any other point in history.
Giant gold miners are joining forces to become industry powerhouses.
Yet, the most insightful information I can share with you here is that today’s price of gold doesn’t matter.
Or, as Tocqueville Gold Fund head John Hathaway says, ‘Don’t waste time thinking about 1,300.’
In a recent podcast, he told listeners that what gold is going for today is irrelevant. There are much bigger trends happening in the gold market that investors should be paying attention to.
Mergers and central bank buying is all a precursor for what could be the biggest currency devaluation of the US dollar ever.
Hathaway cites a September 2018 interview where billionaire hedge fund manager Ray Dalio says the greenback could fall as much as 25-30%…in a couple of years from now.
A collapse in the US dollar by that amount is basically the world’s way of saying we have lost faith in the linchpin of the monetary system.
It would be a catastrophic event for markets…but an enormous boost for gold.
It would perhaps put the yellow metal on a trajectory not seen since the 1970s gold window.
The US dollar has an inverse relationship with gold. The stronger the US dollar, the weaker the price of gold. The weaker the greenback…the higher gold soars.
The big picture
This journey into understanding the gold market really began on Monday.
All because one reader wrote in and asked which was better: Gold exchange traded funds (ETFs) or gold miners?
But as you can see, the gold market is much more complex than deciding on one stock over another.
Don’t let complexity deter you from buying either a gold ETF or a gold mining stock, either.
The point is to pay attention to the bigger trends unfolding in the market and apply that information to your investing decisions.
Global demand for gold is increasing, and the supply of the metal isn’t. Plus, there are the complications of the US dollar and related economic policies.
These factors are very bullish for the price of gold.
This means any gold-related investment may rise significantly in the years to come.