Mining
Three Major Reasons for Gold in 2016
Three Major Reasons for Gold in 2016
Presented by: Advantage Gold
This year looks to be another one of increased volatility as the market see-saws in different directions. Here are three compelling reasons why 2016 may be the perfect time to add gold to your portfolio.
1: “Stay the Course”
Financial experts often mention that “buying and holding” stocks through good and bad times is the best way to guarantee returns.
Investors that bought equities before the Financial Crisis have had a 20.2% return up until January 25, 2016. They “stayed the course” and were rewarded with an eventual return.
However, those that held gold during that same time period until today have had a 48.6% return, which is more than double that of the general market. This is even true with gold declining roughly 40% from its peak since late 2011.
Does it make more sense to “stay the course” in 2016 with stocks, or gold?
2: Two-Term Presidents
The last four presidents to serve two terms have had stock markets rise significantly during their tenures.
However, the stock markets also suffered catastrophic losses in each of their final years as president.
For example, during George W. Bush’s tenure, the S&P 500 nearly doubled from a bottom of 801 during the Dotcom bust to a peak of 1,562. Then the Financial Crisis hit at the end of Bush’s second term and the market went down to 677 points.
Obama is now in his last year, and the market is up 178% from its bottom in 2009. Will the trend continue?
3: Oil vs. Gold
Oil and gold have a relatively strong historical relationship. They are hard assets that move similarly in inflationary environments.
However, gold and oil also have some major differences in how supply and demand tends to affect the price.
Oil: Every day the world consumes 93 million barrels of oil. However, over the last two years there has been an excess of supply coupled with weakening demand from China and a slowing world economy. This has led to oil falling from over $100 per barrel to $30. Despite this glut, OPEC continues to produce record amounts of oil to maintain market share. Oil is delivered and consumed, and these fundamentals of supply and demand closely apply. More supply + weakening demand = lower prices.
Gold: Meanwhile, gold miner production is expected to peak in 2015 or 2016, and to decrease from there. Since gold is mostly traded via paper markets and not delivered, the nearly five-year low price point for gold may not fully reflect its supply and demand fundamentals. Gold discoveries are rarer than ever, and the cost and risks to mine are very high. Yet, this declining output is not yet seen in the gold price.
Gold to Oil Ratio
Lastly, the ratio between these two goods helps to explain what is going on in the world. Gold represents a safe haven during times of financial stress, and oil represents the overall health of the economy and industry.
The gold to oil ratio is expressed in the amount of oil barrels that can be bought with 1 oz of gold. A lower ratio means that the economy is doing well. Meanwhile, history shows that whenever the ratio is above 20, there has been some type of market crisis.
Today, this ratio is higher than ever in history at 37.
Would you rather own oil or gold?
Gold
The World’s Gold and Silver Coin Production vs. Money Creation
In 2019, the value of global money creation was over 500 times higher than the world’s gold and silver coin production combined.
Global Gold & Silver Coin Production vs. Money Creation
Note: Data has been updated to correct a previous calculation error pertaining to Japanese Yen money supply.
Both precious metals and cash serve as safe haven assets, intended to limit losses during market turmoil. However, while modern currencies can be printed by central governments, precious metals derive value from their scarcity.
In this infographic from Texas Precious Metals, we compare the value of the world’s gold and silver coin production to global money creation.
Total Production Per Person, 2019
We calculated the value of global currency issuance in 2019 as well as precious metal coins minted, and divided by the global population to get total production per person.
Throughout, global money supply is a proxy based on the 5 largest reserve currencies: the U.S. dollar, Euro, Japanese Yen, Sterling Pound, and Chinese Renminbi.
| 2019 Production | Ounces | Dollar Value | Dollar Value Per Person |
|---|---|---|---|
| Global Gold Coins | 7,204,982 | $10.9B | $1.42 |
| Global Silver Coins | 97,900,000 | $1.8B | $0.23 |
| Global Money Supply | $4.3T | $556.33 |
All numbers are in USD according to exchange rates as of December 31 2019. Gold and silver values are based on the 2019 year close price of $1,510.60 and $17.90 respectively.
The value of new global money supply was 390 times higher than the value of gold coins minted, and 2,400 times higher than silver coins minted.
Put another way, for each ounce of minted gold coin, the global money supply increased by more than $593,000.
Change in Annual Production, 2019 vs. 2010
Compared to the start of the decade, here’s how annual production levels have changed:
| 2010 | 2019 | % change | |
|---|---|---|---|
| Global Silver Coins (oz) | 95,900,000 | 97,900,000 | 2.1% |
| Global Gold Coins (oz) | 6,298,331 | 7,204,982 | 14.4% |
| Global Money Supply (USD) | $2,936,296,692,440 | $4,268,993,639,926 | 45.4% |
Annual increases to global money supply have increased by half, far outpacing the change in the world’s gold and silver coin production.
Even more recently, how has production changed during the COVID-19 pandemic?
The COVID-19 Effect
In response to the global pandemic, central banks have enacted numerous measures to help support economies—including issuing new currency.
The global money supply increased by more than $6.8 trillion in the first half of 2020. In fact, the value of printed currency was 930 times higher than the value of minted gold coins over the same timeframe.
Investors may want to consider which asset is more vulnerable to inflation as they look to protect their portfolios.
Want to learn more? See the U.S. version of this graphic.
Mining
Visualizing U.S. Money Supply vs. Precious Metal Production in the COVID-19 Era
Amid trillions in COVID-19 stimulus, this graphic compares new U.S. dollars printed to U.S. precious metal coin production.
U.S. Precious Metal Coin Production in the COVID-19 Era
Gold and silver have played an important role in money throughout history. Unlike modern currencies, they can’t be created out of thin air and derive value from their scarcity.
In the COVID-19 era, this difference has become more prominent as countries print vast amounts of currency to support their suffering economies. This graphic from Texas Precious Metals highlights how the value of U.S. precious metal coin production compares to U.S. money creation.
Year to Date Production
In this infographic, we have calculated the value of money supply added as well as bullion minted, and divided it by the U.S. population to get total production per person. Here’s how the January-September 2020 data breaks down:
| Total (Ounces) | Dollar Value | Dollar Value Per Person | |
|---|---|---|---|
| U.S. Gold Ounces | 826,000 | $1.6B | $4.79 |
| U.S. Silver Ounces | 22,261,500 | $544M | $1.65 |
| U.S. Money Supply | $3.4T | $10,250.16 | |
| U.S. Debt | $3.8T | $11,578.36 |
Gold and silver dollar values based on Oct 5, 2020 spot prices of $1,915.93 and $24.47 respectively.
The value of new U.S. money supply was more than 2,100 times higher than the value of new gold minted. Compared to minted silver, the value of new U.S. money supply was over 6,000 times higher.
Production Per Day, Per State Over Time
Here’s how production has changed on a per day, per state basis since 2010:
| 2010 | 2020 YTD (Jan-Sep) | Min-Max Production, 2010-2019 | |
|---|---|---|---|
| Minted Gold Coins | 78oz | 61oz | 12oz-78oz |
| Minted Silver Coins | 1,945oz | 1,631oz | 899oz-2,633oz |
| U.S. Dollars | $19M | $255M | $19M-$50M |
Year to date, U.S. precious metal coin production is within a normal historical range. If production were to continue at the current rate through December, gold would be above historical norms at 81 ounces and silver would be within the normal range at 2,175 ounces.
The issuance of U.S. dollars tells a different story. Over the last nine months, the U.S. has already added 400% more dollars to its money supply than it did in the entirety of 2019—and there’s still three months left to go in the year.
A Macroeconomic View
Of course, current economic conditions have been a catalyst for the ballooning money supply. In response to the COVID-19 pandemic, the U.S. government has issued over $3 trillion in fiscal stimulus. In turn, the U.S. Federal Reserve has increased the money supply by $3.4 trillion from January to September 2020.
Put another way, for every ounce of gold created in 2020 there has been $4 million U.S. dollars added to the money supply.
The question for those looking for safe haven investments is: which of these will ultimately hold their value better?
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