Chris’ note: At Daily Cut AM… Market Mission Control, our job is to get you through the coronavirus panic with your health and your wealth intact.
For a long time, I’ve been urging Daily Cut readers to prepare for panics like this before they happen. You do that by owning “disaster insurance” in the form of gold bars and coins. Now, the panic is here… and a lot of folks seem to have ignored that message.
Supply of retail bars and coins has dried up thanks to surging demand and refineries shutting down. This is a situation a lot of Legacy folks want answers on. So today, you’ll hear from our commodities investing expert, Dave Forest, on the next shoe to drop in this unfolding saga – mine closures.
Make sure to stick around to the end of Dave’s insight. You’ll find more mailbag responses from your fellow readers about how they’re coping in the crisis… as well as important updates on the pandemic.
Let’s talk about gold. It’s one of the big stories right now.
And I know a lot of Legacy Research readers want to know more about its ability to protect them in a crisis like the one that’s unfolding right now.
So far in this crisis, the S&P 500 has seen a maximum “drawdown” (peak-to-trough fall) of 34%.
And gold wasn’t spared in the panic, either. It saw a maximum drawdown of 12%.
Now, I know which loss I’d prefer to take.
But there has been some disappointment about the gold price falling when stock markets crashed. And that’s understandable. Folks are worried their “disaster insurance” might not be working.
But here’s the thing… temporary selloffs, like the one we just saw in gold, are pretty normal.
Chris Lowe wrote about this yesterday in these pages. You can get the full details of that here.
But in brief, if you look back to past stock market crashes, gold usually falls with everything else before it runs higher. It happened after the dot-com crash in 2000.
It also happened after the 2008 financial crisis. Gold initially dropped by as much as 29% before it rallied 166% to its last bull market peak of $1,895 in September 2011.
Why these initial drops for gold?
When these market crunches hit, overleveraged traders sell everything they can to satisfy margin calls. In other words, they need to come up with extra cash as collateral for shares they borrowed.
They basically sell everything that isn’t bolted to the floor. This includes gold and “paper” gold – stuff like exchange-traded funds (ETFs) and futures contracts that give you exposure to the gold price without actually being gold.
In many cases, it’s not people selling physical gold. It’s people liquidating paper gold to raise cash.
As Chris put on your radar last week, physical precious metal supply is incredibly tight right now.
And it’s something I’ve been picking up from my global network of contacts in the gold industry.
For instance, I got a note from a bullion dealer I know in Singapore recently. He told me he had no gold – or silver – left to sell. Anything that is moving is selling at premiums of 20%, 30%… even 40%… above “spot” price (the quoted gold price).
Bottom line: Demand is strong for physical precious metals. And that’s exactly what you would expect during a crisis like this.
Gold – along with silver, platinum, and palladium – is doing what it’s supposed to be doing. It’s just going to take some time to flush the selling in the paper market out of the system.
We’re seeing some massive spikes in volatility in the gold price as a result.
We’ve been seeing hundred-dollar swings. That’s going to continue.
We could also get another few dumps in the gold price if we have another stock market drop… which I believe is likely.
Stocks have been mainly reacting to the coronavirus panic.
The next issue investors are going to have to grapple with is the impact of the pandemic on the economy.
I’m talking about border closures, government orders to go into lockdown, businesses closing, folks losing their jobs. That’s probably going to bring more “unexpected” news… and some more moves lower for stocks.
Here’s what you need to know… Gold could see more temporary falls if we get more big down days in stocks.
If it does, stay the course. There is no need to panic.
As we’ve seen already, these are temporary drops. Gold dropped to $1,460 an ounce on March 16. But it shot back up to nearly $1,640 an ounce in a matter of days.
One of the effects of the coronavirus pandemic is a lot of mines are shutting down.
There’s been a lot of news, particularly the last few days, about governments ordering non-essential businesses to close.
That includes gold mines.
South Africa is a top-10 gold-producing nation. Its government has said it’s closing all of the nation’s gold mines.
These shutdowns alone will reduce global gold supply by 4%.
There have also been mine closures in the Canadian provinces of Quebec and Ontario. Peru and Argentina have also shuttered mines nationwide.
Add that to more limited closures in Russia. And we’re seeing a global fall in the gold supply of 14%.
Below is the map view of these closures. We’ve color-coded nations with the highest gold output.
The black numbers show each country’s percentage of total global production. The red numbers show the percentage of national supply lost due to coronavirus closures.
You don’t need me to tell you that this is good news for the price of gold bars and coins. Supply is disappearing just as demand ramps up.
Chris here – As I showed you in last Thursday’s dispatch, the best way to get ownership of physical gold right now is to pick up shares in the Sprott Physical Gold Trust (PHYS).
It stores gold bars in your name at a vault in the Royal Canadian Mint. It’s a trust, not an ETF. So you don’t get stiffed if the custodian or the ETF provider goes bust (say, in a financial crisis).
The bars PHYS stores are allocated in your name. You own specific bars in the vault, in other words. Most gold-backed ETFs store unallocated gold. You don’t have title to the individual bars. So you’re more at risk in a crisis. The best way to think of PHYS is as secure storage for gold you legally own.
Even better, gains on PHYS are taxed at the long-term capital gains rate of 15% (20% for higher income taxpayers). Gold-backed ETFs, on the other hand, trigger a tax rate of 28%. So there’s a saving when you sell. You can find out more about PHYS here.
And you have the option to redeem your shares in PHYS for your bars and store them personally. (This is subject to a minimum delivery value.)
But as the CEO of Sprott U.S. Holdings, Rick Rule, spoke about on the gold panel I led at last year’s Legacy Investment Summit in Carlsbad, California… beware of “midnight gardening.” In other words, burying your gold on your property. As he put it…
If you do take it home, don’t tell anybody. The important part of secrecy is… shut up!
I probably talk to a dozen people a week about their precious metals portfolio. They tell a complete stranger that they have a thousand ounces of silver in the bricks, or something like that. This is just trading one set of amorphous risks for a self-created, real risk. Don’t do it.
As I mentioned up top, gold is one of the big themes in our reader mailbag here at The Daily Cut… especially when it comes to physical gold.
Please outline the most efficient way to buy gold – in coin form, in ingots, or in mining shares?
When you say you will take it abroad if the government forbids ownership, how can you go through security at airports? Or is there a way to buy it in Europe or in South America and keep it there in a bank? Would you be obliged to declare it as a type of investment? Which gold dealer would you recommend in the U.S.?
Sorry for the deluge of questions, but more practical advice following your recommendations would be greatly appreciated.
– Ilka A.
And one of our go-to gold experts, E.B. Tucker, is on hand with an answer.
Ilka, this is an important question. I prefer to own gold two ways: Common one-ounce coins and gold royalty shares.
For me, physical gold means hold-in-your-hand (or a safe place) metal. Most ETFs traded on the public market are not the same. These funds traffic in the futures market – let’s call that “paper gold.”
Last week, the price of gold futures and London physical gold diverged by a record $70 an ounce. This may be just the start of paper claims on gold and gold itself having different prices.
Most online gold dealers in the U.S. are out of stock right now. Try Gainesville Coins. They offer my paid-up Strategic Investor readers special pricing on common coins. And I’ve extended that pricing to Daily Cut readers, as a courtesy. They typically notify customers when supplies replenish.
Second, I am a big investor in gold royalty shares. These companies are not mining gold. They merely have a small claim – often 1% – on all gold produced within a defined property boundary.
A rising gold price means the value of that royalty rises while costs stay fixed to the acquisition date of the royalty. Franco Nevada (FNV) is the market leader in the gold royalty sector. There are only six serious companies in the group.
I expect they’ll be some of the largest wealth creators in the stock market over the next two years.
As for portability, gold is hard to move in serious quantities. I met a German man once who fled Sri Lanka during a coup. He had his gold hoard melted and reshaped into belt buckles, necklaces, and all the jewelry he could comfortably wear. If you’re in this type of situation, Godspeed.
I expect governments to attempt a gold confiscation at some point. But at much higher prices. If that happens, go with the flow. You’d likely be far better off than your fellow countrymen who don’t own anything worth confiscating.
Meanwhile, many of your fellow Daily Cut readers have been keeping a cool head during the coronavirus crisis.
Dana wrote to let us know that, in spite of the uncertainty, 2020 has brought a windfall…
How am I doing during this crisis? Better than most, I guess. I am still working, but 450 of my fellow workers have been furloughed until… well, we’ll see how long.
As far as crisis investing, I’m making some rather large gains. Back in January, I bought two rounds of XLF puts [bearish bets on banks] going out to April 2020 and January 2021. The April 14 strike was purchased at 4 cents per contract ($4) and I sold them for 90 cents ($90). And I had a pile of them.
The January 2021 puts had a strike price of 15 and I paid 15 cents ($15) per contract and sold at $2.55 ($255). And I had a pile of these, too. Not too shabby, eh?
I have many other pokers in the fire. I am long gold and a boatload of miners. I’ve been a long-time subscriber to Casey’s International Speculator and will probably always be. Concerned but not panicked.
– Dana D.
Despite the U.S. having the most confirmed cases in the world, some Daily Cut readers reckon the coronavirus panic is overblown. Some have even gone as far as to call it a “scam”…
The virus is no more dangerous than the ordinary annual flu. But what matters is that the entire world economy is being deliberately destroyed in order to bring about World Communism… THAT is what IS serious about this “pandemic.”
– Astra P.
About the coronavirus: It is a big scam. Dangerous yes, but not as lethal as the annual flu. I think Trump has been snookered and our lives will never be the same. I am 74, so I remember how much simpler life used to be. My gut is telling me that the Deep State or some other nefarious body is involved.
– Florence L.
You have attempted to educate the masses, but they don’t listen. What may one do to help?
I am not wealthy, nor near comfortable. The effects of what appears to be coming might destroy the freedoms we have enjoyed (but are losing daily) without the people being aware of the loss until it’s too late.
My children (at this rate) will not recognize what freedom is. All I hope and work towards is a general wake-up.
– Bernie H.
What do you think? Are governments using the coronavirus as a cover to strip away our liberties? Or are the lockdowns vital in the fight to save every life we can?
Let us know your thoughts… and send us any pressing concerns you have about your health or your wealth… to feedback@legacyresearch.com.
During the coronavirus crisis, our tech expert, Jeff Brown, has been clear on one thing above all…
The importance of keeping a sense of perspective.
As I’m sure you’re aware by now, the talking heads on TV are only interested in ratings. They have no incentive to give you a balanced view.
That’s why they tend to sow fear and panic… instead of distributing rational, useful information.
If you’re a reader of Jeff’s free daily tech investing newsletter, The Bleeding Edge, you’ll know he’s much more positive about the fight against COVID-19 than the folks on CNN or CNBC.
Over the last two weeks, Jeff has shown readers how AI (artificial intelligence) is helping search for a cure… how an online video game may hold the key to understanding the virus… and how the pandemic will boost the buildout of 5G technology.
And yesterday, Jeff revealed surprising news from Oxford University in Britain.
Scientists there have been studying the infection rate of the coronavirus. And they just released research suggesting that Britain is on its way to achieving “herd immunity.”
That’s when a population becomes immune to a virus because enough people have become infected.
The team of scientists from Oxford’s Evolutionary Ecology and Infectious Disease Group assumed that COVID-19 first reached Britain in mid-January.
Their research model reveals that the disease has already infected somewhere between 36% and 68% of the British population.
Here’s Jeff with more…
It is highly likely that a third to more than half the population (of Britain) has had or has COVID-19… And most are asymptomatic. They don’t even know they have it.
This data is consistent with research out of Iceland. Iceland is unique because it has tested nearly 3.4% of its entire population for COVID-19. On a percentage basis, this is more than any other country in the world.
It found that half of those who tested positive for COVID-19 are asymptomatic, and the other half display “very moderate cold-like symptoms.” Only 30 have been hospitalized out of the country’s 1,086 confirmed infections, and there are no deaths as of the time of writing.
Like many of you, we’ve been paying close attention to infection rates of COVID-19 here at The Daily Cut AM.
But we know that without a widespread rollout of testing, the numbers are still shaky.
At writing this morning, the Johns Hopkins Coronavirus Resource Center reports that there are 801,400 cases worldwide. Of those, 38,743 have been fatal.
Taking those numbers on their face value suggests a death rate of almost 5%.
But Jeff has a more optimistic take…
On March 1, I spoke with an infectious disease expert at Johns Hopkins who told me the number of cases was likely 100 to 200 times higher than what was being reported.
But we don’t see those cases because they’re asymptomatic or too mild to justify testing.
And here’s why this latest research is such good news. Jeff again…
Johns Hopkins University reports that there are more than 800,000 confirmed cases. The reality is that there are almost certainly more than 80,000,000 cases.
That may seem scary, but it means that the REAL mortality rate would be 0.05% or less. Compare that with the mortality rate from influenza in the 2017 to 2018 season (0.14%).
Every day, the data is giving us a lot to be optimistic about. The world is quickly building immunity to COVID-19.
I’d encourage you to share this alternative news about the virus with your friends and family. We want to get the facts out to as many people as possible.
And look out for more from Jeff in our evening edition of The Daily Cut. It will hit your inbox this evening.
Finally, don’t forget to write us with your thoughts and ideas. How are you coping? Are the lockdowns necessary? Do you have a personal story to share about the fight against the virus?
Write us at feedback@legacyresearch.com.
Regards,
Chris Lowe
March 31, 2020
County Kilkenny, Ireland
P.S. Above, I mentioned the gold panel I led at last year’s Legacy Investment Summit in Carlsbad, California. The panel was called, “Your Roadmap to Profits as Gold Shoots Higher.” And it was an all-star line-up. On the stage with me were legendary natural resource investor Rick Rule, Bonner-Denning Letter coauthor Dan Denning, our globetrotting geologist, Dave Forest, and gold industry insider E.B. Tucker.
As a special bonus today, we’ve unlocked the video and transcript for you. Just click here to watch it.
Like what you’re reading? Send your thoughts to feedback@legacyresearch.com.