Is gold still a safe haven?

by
Claudio Grass
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There have been moments in recent months when many gold owners, myself included, have asked themselves whether gold might have lost its safe haven status, at least in the western world. Was it enough for two generations, who grew up in a paper money system, to forget the history and the 5000-year-old status of gold as real money? 

And yet, just as these doubts began to arise, reality struck back and decisively dispersed them. A few hours prior to writing this, a surprising number of physical precious metals traders suspended their operations, as a result of the overwhelming wave of new orders. The supply of physical gold, disrupted by the various coronavirus measures and restrictions, has in many cases failed to keep up with the ongoing gold rush that shows no signs of slowing down any time soon. 

Separating the signal from the noise

First off, we should begin by understanding the difference between what we saw in the gold market so far and the price uptrend that captured mainstream headlines, with what we begin to see now, for these are very different beasts. The rise in the price of gold that we witnessed in the previous months was not due to physical trading, but primarily to the comparatively massive increase in the paper gold demand on the part of institutional customers. In the physical market, on the other hand, I noticed that around 60-70% of trades were liquidations and only 30-40% bought additional gold. The experienced investor and long-time owner of physical gold did not yet trust that price increase and secretly expected a downward correction, a chance to add to his position. 

On the other hand, it can also be taken as a confirmation that before the physical boom, paper demand always rises first. The reason for this is the rising uncertainty and dwindling confidence in the current system by institutional clients. This only solidifies and boosts the strength of the next stage of the bull market in gold.

To put it this way, it should be understandable that in a stock market crash, many will have to sell everything in order to stem the margin calls, or, in some cases, to even pay their bills. The market is thus flooded with paper gold, which pushes the price down. I have often said in the past that the paper price of gold could go to zero and it still wouldn’t really say anything about physical gold. It seems logical that the price of a debt security on a commodity is not the same as the price of an ownership title on the physical metal itself. It would therefore also be unsurprising if the price of paper and the price of physical gold were to move in opposite directions, especially in times of extremely heightened anxiety. I am already observing this phenomenon on a small scale at the moment, but who knows how it will develop in the weeks and months to come. 

However, the last week has shown worldwide that gold is still the king of all currencies. All the gold traders I know have gone through a week that is without comparison in their experience. Some had to suspend trading in some cases because they were simply overwhelmed by demand and lost track of the transactions. Turnover, which had been budgeted for until the end of the year, was achieved within a few days. Such a week is without comparison in the history of gold trading. 

Practical implications

So what does this all mean exactly? Let’s take a look at the general situation here in Switzerland. Our country refines about 70% of the gold available worldwide. Due to the coronavirus crisis, logistics chains have been severed, production facilities have suffered operational cutbacks or simply shut down, as is currently the case in Ticino, where all refineries have been closed for this week. Nobody knows yet what it will look like next week. The Canadian Mint will not deliver any metals for the next 3 months because of the border closures and the situation in other mints does not look much better either. 

Currently, the premiums on physical bars have already increased and the surcharge on coins is 5-7% higher than it was 10-14 days ago. In addition, nobody knows whether the gold trade could come to a standstill, because no gold is coming in that can be melted down, sold and delivered. Another problem is that the big traders are unable to hedge their positions as everyone is uncertain how and if it will continue next week. Whatever happens, this does not mean of course that there will be no more gold trading, as private individuals can also offer their gold at any time at a price that is right for them. If demand continues to grow, which is likely to happen, the price of physical gold will decouple from the paper price and, especially as the supply crunch becomes more widely known, it is bound to keep rising on runaway demand.

Therefore, I can only advise everyone to follow these developments very closely in the coming days, should they have the intention to buy gold – prepare now! The same applies, in my view, to silver and platinum, especially since both are extremely cheap at the moment and present a rare buying opportunity. 

The current pandemic has not yet caused any real panic among the masses as far as the financial markets are concerned. Thus, I think, the worst is yet to come. That is why rational thinkers should use this time to make the right decisions, before fear and greed erupt among the masses.

Something that should make us think, however, are the political measures that have been taken worldwide in the last few days. The media has used this virus to fuel mass hysteria, thus enabling a massive wave of interventions by the “administration” of the individual countries that are facing this “existential threat”. Individual freedom is now subject to the collective dictate that the corona crisis can only be solved centrally and not, as in the past, at the level of people thinking on their own and taking responsibility. In the West, we are seeing unprecedented measures, new rules and restrictions that reflect all too closely the Chinese approach to “problem solving”. I think that this alone is a point that should be carefully considered. 

Just for comparison, based on the official data available to us today, the swine flu pandemic of 2009 infected between 700 million and 1.4 billion people worldwide.  The estimates speak of 11-21% of the world population. Furthermore, the deaths today, as they were then, are to a large extent always to be found where they always have been. It hits the old and weak the hardest and most frequently. The current figures confirm the usual picture. Consequently, I have a hard time understanding why political measures are currently being taken that do not appear to be proportionate to the threat and are, in my view, merely orchestrated to create widespread hysteria, a global media frenzy and an unrivaled economic destruction of an unbelievable scale.

The global economic shutdown is only just beginning and will not take full effect for several weeks and months. In these times of great uncertainty, the only thing we can tell for sure is that the world in 6 months will be a very different one than the one we know today. 

At this point, the most important thing is not to let fear paralyze you. Never forget that the “nocebo” effect is just as powerful as its benevolent sibling, the placebo. The mere expectation of negative outcomes can bring them about. For this reason, you must look ahead rationally, weigh the risks calmly and seize the opportunities that arise in times of crisis.

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland.

This work is licensed under a Creative Commons Attribution 4.0 International License.