Wall Street Buys Gold (and the Saudis)

Atlas Pulse Gold Report Issue 97;

Not only are the central banks still active, but Wall Street has finally noticed what’s going on. I say Wall Street because most of the action has indeed happened on Wall Street through ETP (ETF) buying, wherever the orders originated from around the world. Since May, the gold flows have turned the corner and started accumulating.

Highlights

Technicals: New Highs Even in the World’s Strongest Currency

Charts can sometimes be a thing of beauty, especially when it’s gold. Do you remember us talking about the cup (2015) with a handle (2022) pattern developing two years ago?  Well, it worked out spectacularly. How high could it go? I am still on record for $7,000 by 2030, but I very much doubt we will go straight there without a few corrections to flush out the doubters.

Gold All-time High

To those who say it’s just the dollar, gold is doing well in all currencies, even in the yen, which is on its way to becoming the world’s strongest currency. It’s interesting to see how gold in yen has maintained a range in recent months.

Gold in Yen Breakout

It wouldn’t be the first time. When gold was dying during the 2011 to 2015 gold bear market, the yen was too. That meant gold in yen held the same price for eight years. Now the yen is surging, gold is too.

Gold in Yen Flat 2011 to 2019

How high is gold going to go? Maybe we should ask how high the yen is going to go. The yen trades 48% below purchasing power, which suggests it may double. On that basis, gold is going to double as well – at least!

Yen Purchasing Power Is Twice the Current Level

To double, we need buyers, and fortunately, they are starting to join the queue.

Positioning: Wall Street Buys Gold (and the Saudis)

Jan Nieuwenhuijs has had another scoop, highlighting the secret gold buying by the Saudi Central Bank. He says they bought 160 tonnes under the radar through Switzerland.

Saudi Arabia last updated their reserves in 2008 at 332 tonnes, which makes this purchase significant. Yet again, there is another giant source of demand that is driving gold.  He says, “One thing is for certain: Saudi Arabia owns much more gold than it wants the world to believe.”

Not only are the central banks still active, but Wall Street has finally noticed what’s going on. I say Wall Street because most of the action has indeed happened on Wall Street through ETP (ETF) buying, wherever the orders originated from around the world. Since May, the gold flows have turned the corner (blue line) and started accumulating. The bars show weekly changes, which these days are generally positive.

Gold Held by ETFs

Putting the gold held into a historical perspective, the equity ETFs hold $7.6 trillion according to ICI, but Debbie Fuhr from ETFGI says it’s $13.14 trillion as of the end of June. In any event, we have a consistent sample, and the $215 billion of gold held in the ETFs makes up 2.8% of the equity total. Or 1.6% using Debbie’s numbers.

Gold ETFs as a Percentage of Equities

The 10-year average, which covers a brutal bear market, is 3.7%, so gold exposure is still below average compared to a low base. Take it back to the heyday, and gold was a core holding. There is plenty of room for growth in the allocation of gold across investment portfolios.

There is excellent work done by the World Gold Council on optimal gold exposure. It demonstrates how a 5% allocation boosts returns, reduces volatility and therefore enhances risk-adjusted returns.

I believe 5% gold is a good core position for a non-gold bug and a comfortable place to start. But if the going is good, that can be increased materially alongside gold miners, silver, and even Bitcoin, which I’ll come onto later. The time is right because not only are the technicals and flows strong, but the macro is favourable too.

Macro: Rate Cuts and Money Printing

The Fed finally cut interest rates by 0.5%. It marks the beginning of a cutting cycle around the world for all but Japan (red). Gold likes rate cuts and has been anticipating them for a while.

Global Rates Are Falling Everywhere Except in Japan

But what gold really likes are falling real interest rates. The bond yield (black) has been falling over the past year, but inflation expectations (red) have been falling more slowly and have perhaps found a floor at 2%. This means the real yield has been failing, which is positive for gold.

Rates Fall Faster Than Inflation

I would think that large public deficits fuel inflation for several reasons. Not least, they boost the public sector and crowd out the productive private sector, making the economy less efficient. Not only that, but the charts of industrial metals look very bullish as well. If rates can cool while inflation holds firm, that means real rates are falling around the world, and we are back into Russell Napier’s financial repression, which is a positive environment for gold.

Global Real Rates Have Peaked

The money supply is another driver, and following three years of drought, the printing presses are firing up. Historically, M2 for the G20 nations has grown at 7.4% per year. That now puts the money supply at the bottom of the range, and it is entirely reasonable to expect normalisation, which would see a growth spurt in fresh money. Gold likes that too.

The Money Supply Is Growing Again

Yet gold has done so much that we should reasonably expect it to pass on the baton. It is well known how the gold miners have lagged by so much over the years, but the juniors have lagged even more. That is emphasised by the grey line, which shows how they have tended to do well in gold bull markets – except for this time.

Miners: Go Junior

We live in a market environment where big is beautiful. Investors love big stocks because they are more liquid. Yet the junior miners are cheaper and have great potential. It is strange how gold trades at an all-time high while the most sensitive stocks have held back. There’s that old joke about the economist who denies there is a £10 note on the pavement because someone would have already picked it up. In this case, they haven’t!

Centamin (CEY) was bid for last week by AngloGold Ashanti (ANG) for a 37% premium. I had recommended CEY in ByteTree Venture last October, as it was very clearly undervalued. All it takes is a bull market, and the consolidation begins.

Centamin

In this case, one thing that stood out was how the revenues were robust while the valuation had collapsed. The stock rallied 83.8% up until the bid, which was a great reward for ByteTree clients.

Centamin Bid

There are four more gold stocks in Venture, and I have recently shifted attention to juniors, and plan to do more. There’s also undervalued technology, energy, consumer, healthcare and so on, with coverage across Europe, the US and Canada. It’s all excellent value.

To read my Venture recommendations, please sign up for Pro. There is no lock-in period, and you can change or cancel your subscription anytime.

BOLD: 21Shares Slash Fees

21Shares have announced that the fees on the 21Shares ByteTree BOLD ETP (BOLD) have been reduced from 1.49% to 0.65% from Monday, 24th September 2024. It had always been intended that the fees would be lowered as the assets grew, and with $10.7 million in assets under management, that is now possible.

The BOLD Index was created to track the performance of Bitcoin and gold on a risk-weighted basis. The index is rebalanced monthly according to the assets’ 360-day inverse volatility. At the end of August, that meant 25% in Bitcoin and 75% in gold. Due to the low correlation between Bitcoin and gold, rebalancing transactions have delivered excess returns of approximately 5% per year over buy and hold since Bitcoin has become a more mature asset.

The 21Shares ByteTree BOLD ETP (BOLD) was first listed on the SIX Exchange in Zurich on Wednesday, 27th April 2022. It trades in CHF, USD, GBP and EUR. It also has additional listings in Frankfurt, Paris and Amsterdam.

Since launch, $100 invested into BOLD has returned 48.7%, which compares with 50.7% for Bitcoin and 36.3% for gold.

BOLD ETP vs Bitcoin, Gold, and Equities Since Inception

Remarkably, and due to the low correlation, the BOLD ETP has materially lower volatility than Bitcoin and similar volatility to gold. That has resulted in attractive risk-adjusted returns shown by the Sharpe Ratio.

The BOLD Report website has lots of information and publishes the monthly weights free of charge. At ByteTree, we are here to help.

Summary

Few investors recognise how gold has outperformed the S&P 500 this century, and that trend keeps on running. Investors are behind the curve, and it’s only when everyone’s in that the risks will outweigh the rewards.

Thank you for reading Atlas Pulse. The Gold Dial remains on Bull Market.

Charlie Morris is the Founder and Editor of the Atlas Pulse Gold Report, established in 2012. His pioneering gold valuation model, developed in 2012, was published by the London Mastels Bullion Association (LBMA) and the World Gold Council (WGC). It is widely regarded as a major contribution to understanding the behaviour of the gold price.

Please email charlie.morris@bytetree.com with your thoughts.