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Real-World Problems: The Current State of The Gold Market In Plain Language

Real-World Problems: The Current State of The Gold Market In Plain Language

There have been recent rumors in the gold market about the availability of physical gold. Some social media personalities and news agencies have claimed that there is a shortage of physical gold on the market. However, it is not so much about a shortage of gold, but rather a sudden demand for gold in places where it cannot be quickly supplied in the desired form. <span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Real-World Problems: The Current State of The Gold Market In Plain Language</span>“></p>



<p>These availability problems are largely due to what I like to call real world problems. Logistics and production processes play an important role in the journey of the gold from the mine or warehouse to the end-user. </p>



<p><strong>Logistics</strong></p>



<p>After the gold has been mined, the rough gold material is often transported to gold refiners for further processing. Another option is that the gold moves from warehouses around the world in various shapes and sizes to the refineries. In this case, gold is often delivered in the form of roughly 12.4-kilo bars (400 Troy ounces) or as recycling material. </p>



<p><strong>Roughly, a typical gold production chain goes like this:<br></strong>Gold Mine or Other Warehouse – Logistics Company – Refinery – Logistics Company – Mint – Logistics Company – Bullion Dealer – Individual</p>



<p>As you can see from the chain, logistics companies play an important role in the flow of gold. Mostly gold moves with air cargo, and as recent news has shown, international air traffic has fallen significantly. This has caused problems in moving gold from one country to another. </p>



<p>At Voima, the supply chain is a bit shorter because our sourcing department obtains some of our gold directly from the refineries. </p>



<p><strong>The production chain of Voima: <br></strong>Gold Mine or Other Warehouse – Logistics Company – Refinery – Logistics Company – Voima’s Vault Service</p>



<p><strong>Production </strong></p>



<p>…click on the above link to read the rest of the article…</p>
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Hitting Zero: 700 Years of Declining Global Real Interest Rates

Hitting Zero: 700 Years of Declining Global Real Interest Rates

Are negative interests here to stay?

<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Hitting Zero: 700 Years of Declining Global Real Interest Rates</span>

A recent study by Yale economist Paul Schmelzing suggests that global real interest rates “could soon enter permanently negative territory.”

In Mesopotamia around the third millennium B.C. there were two types of money circulating: barley and silver. The interest rate on a barley loan was usually 33%, whereas, on silver, it was 20%. At the time of writing, the interest rate where I live (the Netherlands) on my savings account—technically a loan to the bank—is zero percent. And my country is no exception. An enormous difference compared to the earliest economy we have written evidence of—that of the Sumerians living in Mesopotamia 4,500 years ago.

Schmelzing’s study, titled Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311-2018, illustrates the historical decline in not only nominal interest rates, but also real interest rates. According to Schmelzing, there is a seven-hundred-year declining trend in real rates, which is not likely to reverse course.

In one of my previous articles I showed the (current) correlation between long-term real interest rates on sovereign bonds and the price of gold. I wrote:

One of the key drivers … for the US dollar gold price is real interest rates. It is thought that when interest rates on long-term sovereign bonds, minus inflation, are falling, it becomes more attractive to own gold as it is a less risky asset than sovereign bonds (gold has no counterparty risk).

Regarding this correlation, it’s valuable to get a sense of where real rates are heading.

Schmelzing points out real rates have declined (depending on the type of debt) by 0.006-0.016 % per year since 1311. Remarkably, he states, “that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates” have been falling.

…click on the above link to read the rest of the article…

China’s Gold Hoarding: Will It Cause the Price of Gold to Rise?

China’s Gold Hoarding: Will It Cause the Price of Gold to Rise?

There are reasons to think that the gold price will rise faster than expected.

<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >China’s Gold Hoarding: Will It Cause the Price of Gold to Rise?</span>

Since 2009 China has withdrawn 12,000 tonnes of gold from the rest of the world, where the short and medium-term gold price is set. For reasons I will explain, a tighter market outside of China can make the price of gold price rise faster than many expect. I believe the gold price will rise, because of excessive debt levels around the world, and incessant money printing by central banks. Central banks will try and resolve the debt burden through currency depreciation (inflation). China has been preparing for this scenario by buying gold.

One of the key drivers in recent decades for the US dollar gold price is real interest rates. It is thought that when interest rates on long-term sovereign bonds, minus inflation, are falling, it becomes more attractive to own gold as it is a less risky asset than sovereign bonds (gold has no counterparty risk). However, gold doesn’t yield a return (unless you lend it). So, when real rates rise, it becomes more attractive to own bonds.

Real Interest Rates and US Dollar Gold Price

Although the correlation is clear, it might change in the future. Possibly, when real rates fall, the gold price will rise faster than before. Let me explain why.

In my previous post, we have seen that the gold price in the short and medium-term is mainly set in the West by institutional supply of and demand for above-ground stocks. For the gold price, what matters is how much above-ground stock is in strong hands, i.e., owners of gold that will not be easily persuaded to sell.

…click on the above link to read the rest of the article…

German Central Bank: Gold Is the Bedrock of Stability for the International Monetary System

German Central Bank: Gold Is the Bedrock of Stability for the International Monetary System

European central banks are slowly preparing for plan B: gold.

<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >German Central Bank: Gold Is the Bedrock of Stability for the International Monetary System</span>
Deutsche Bundesbank [CC BY-NC-ND 2.0 (https://creativecommons.org/licenses/by-nc-nd/2.0/)]

It was long believed in the gold space that Western central banks are against gold, but things have changed, for quite some years now. Instead of discouraging people from buying gold, or convincing them that gold is an irrelevant asset, many of these central banks are increasingly honest about the true properties of this monetary metal. Stating that gold is the ultimate store of value, that it preserves its purchasing power through time and is a global means of payment. Such statements, combined with actions that will be discussed below, reveal that more and more central banks are preparing for plan B.

The Bundesbank (the German central bank) published a book last year named Germany’s Gold. In the introduction, written by the President of the Bundesbank Jens Weidmann, the view of this bank leaves no room for interpretation. Weidmann writes (emphasis mine):

Ask anyone in Germany what they associate with gold and, more often than not, they will say that it is synonymous with enduring value and economic prosperity.

Ask us at the Bundesbank what our gold holdings mean for us and we will tell you that, first and foremost, they make up a very large share of Germany’s reserve assets … [and they] are a major anchor underpinning confidence in the intrinsic value of the Bundesbank’s balance sheet. 

The Bundesbank produced this publication to give a detailed account, the first of its kind, of how gold has grown in importance over the course of history, first as medium of payment, later as the bedrock of stability for the international monetary system.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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