Gold Telegraph Weekly Rundown: January 10, 2021

Introduction:

We are off to a wild start in 2021.

From the development of central bank digital currencies to the volatility in debt markets, things are only getting more interesting from a macroeconomic perspective by the day.

We have had numerous people ask us what the sell-off in gold on Friday was driven by, and it was due to the rise in yields in debt markets. We believe this will be short-lived as central banks globally understand that they must keep real rates negative for a prolonged period to help service costs to keep debt manageable.

The major theme for gold this year will be major financial repression.

For our readers new to the economic world, financial repression means:

“Financial repression is a term that describes measures by which governments channel funds from the private sector to themselves as a form of debt reduction. The overall policy actions result in the government being able to borrow at extremely low interest rates, obtaining low-cost funding for government expenditures”

This is the type of economic environment we will be in for the foreseeable future. In fact, central banks are already signaling this with the testing of digital currencies. They are building the infrastructure which will enable them to seamlessly put their economies on universal basic income while financial repression helps with the deleveraging process.

These are truly unprecedented times economically, which will only accelerate in 2021.

We will be with you every step of the way to try to make sense of this ever-changing marketplace.

Our founder, Alexander Deluce, will be publishing a 2.0 version of the Federal Reserve’s One Last Hail Mary, which was published last April. At that time, gold was at $1583 an ounce, and many things in his outlook have come to fruition:

  • Why gold was heading much higher
  • Why central banks were purchasing gold since 2008
  • The strange present dynamics of the debt market
  • Supply chain issues

This upcoming report will be a much more comprehensive outlook covering many items more in-depth.

Here are notable headlines from this past week with our commentary to help simplify what these headlines mean:

Central Banks Are Trying  Earn Their Keep by Acting as Market Makers of Last Resort

Monetary policy is clear.  Managing a financial crisis is murky.  Recovering from an unforeseen financial crisis with almost 50% of the world’s financial assets held in non-bank companies is impossibly opaque.  

Central bankers are beginning to act as Market Makers of Last Resort.  In times of crisis, when markets are disorderly and fail to match buyers and sellers of securities; only the central bank has the advantage and perspective to play a central role in assessing and pricing credit risk – influencing the allocation of credit in the global economy. Central Banks have chased major wealth effects which has totally disconnected wall-street and main street which is why we have seen surging wealth inequality. 

Unpredictability and global upheaval, like that of the COVID financial crisis, central banks will likely play a more aggressive role in the years to come.  With powerful investment firms in the trenches for this and future volatility – the central banks are preparing with more extreme tools and autonomy to fill the role as market makers of last resort. 

Fed Says Inflation May Be ‘Higher Than We’re Used To’ This Year- But Not to Panic, It Won’t Last

 St. Louis Federal Reserve President James Bullard spoke to the press this week spouting optimism about the recovery of the economy. “Quite a bit faster” than most economists predict.  The caveat being that 2021 will likely see a “higher inflation rate than we’re used to”.

Slack in the labor market, rising U.S. Treasury yields and a booming stock market, to name a few, all equate to liquidity being forced into the market and driving up inflation.  Bullard and his team are confident this is a temporary rise that will correct itself quickly. 

However, we all know this is much easier said then done. Once inflation really gets away from us, it will be hard for economists to control. 

Gold Outperformed Many Traditional Reserve Assets in 2020, Says WGC

Gold just wrapped up its best annual performance in years, proving once again that investors tend to buy the yellow metal when they are nervous about holding riskier assets such as stocks or corporate bonds.  This trend carries true all the way up to the central banks, where gold played a crucial role in stabilizing markets and currencies throughout the pandemic upheaval. The World Gold Council reported consistent gold purchases throughout the year with a few notable sales which saw central banks teeter back and forth between net buyers and net sellers throughout the year.  Gold finished the year up 25%.  

Canada’s Trade Deficit Narrowed in November Due to Demand for Gold   

Taking advantage of demand for gold, Canada was able to narrow the trade gap and reduce their trade deficit to $3.3 Billion in November.  The majority of Canada’s export product categories saw a decline this year due to the pandemic caused manufacturing disruptions, strengthened Canadian Dollar/ weakened US Dollar, and decrease in demand and service offerings.  Unwrought gold, silver and platinum group metals and their alloys together rose by 25.8% this year.  This was mostly the result of a surge in refined gold purchased by the United Kingdom, as sales of cast gold bullion bars and gold transfers within the banking system soared.

Agnico Buys Arctic Miner Just Weeks After Canada Nixed Sale to Chinese

Canadian gold giant Agnico Eagle Mines Ltd. has officially agreed to buy TMAC Resources Inc. mine in Nunavut, which comes with an air strip and port, for about C$287 million.  This announcement comes just two short weeks after Justin Trudeau intervened and shut down the purchase of the TMAC Resources Inc. mine by the Chinese state-backed metal producer, Shandong Gold Mining Co.

Agnico will pay a premium for the mine.  It was announced on Tuesday that they will pay C$2.20 per share in cash, roughly 40% more than TMAC’s closing price on Monday, and 26% higher than the C$1.75 proposed by China’s Shandong Gold Mining Co.  This premium is a result of further demand for gold and increase in positive cash flow by the mine in recent months.

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