Gold Bugs Should Prepare for ‘All Evils’

Gold Bugs Should Prepare for ‘All Evils’

$XAU $GLD $USD

The Latin phrase Premeditatio Malorum tells us to prepare for all evils, and that means to prepare investment portfolios for all risks.

It may take more time than most expect for the world economy to recover from the psychological and financial impacts of The China Virus chaos.

But what that chaos proved was that the world needs more USDs.

When The China Virus started spreading internationally, and economies started shutting down, the Fed became the “lender of last resort” for the world. 

The Fed began providing what’s called Dollar SWAP lines to certain US selected and approved governments.

The Big Q: Why?

The Big A: No USDs, no safe-haven liquidity.

What a SWAP line means is that the Fed has pre-approved nations as allies who have accepted the terms and conditions to be able to draw down money.

For example: the BoJ has drawn down over $200-B on its SWAP line, as it need access to USDs.

What this means is the US government has approved those nations essentially as a real ally.

This is why this is so important for gold mining companies: If you have a producing gold mine or any asset in a positive swap line nation, then foreign governments are not going to want to mess around with companies that are backed by Fed, the American government, the American military. 

To really understand what this all means and the implications, we go back to the USD the reserve currency of the world. 

When you take all the central banks around the world, the USD makes up just a little over 60% of the foreign reserves of all the central banks in the world. The next highest is the EUR at about 20%, then it’s JPY.

What happened during the 2008 global financial crisis, so much QE and stimulus got into the market.

During the golden years of globalization the emerging-market nations that were commodity-rich took massive debt to build these infrastructure projects and mining operations and Crude Oil production programs in USDs. 

It takes years to build these projects and to produce commodities. China took a lot of debt to build manufacturing hub of the world to sell to the US.

So because of the global financial crisis all the QE, all the debt, we soon started seeing negative interest rates around the world and that is deflationary.

As commodity prices trend South, the emerging markets, their currencies are getting devalued relative to the USD and gold.

And the commodity currencies, Japanese Yen, the Canadian Dollar, and the Aussie Dollar are all getting devalued Vs USD and gold.

If you are buying a gold stock with a mining project in any non-SWAP country you could see your entire investment seized by a desperate government and go to Zero. 

Now, this chart shows the emerging market superpower nations have been aggressively buying gold over the past 3 years. This will continue.

The Top 10 producers of gold in the world combined production is about 75-M oz of gold last year. 

About 67% of that gold was mined in nations that do not have swap lines with the US.

A very small percentage of those mines were developed by the governments. 

So, over 48-M oz of gold were found, developed, permitted, built, and operated by North American owned gold mining companies. Meaning a large percentage of that production will be a victim of negative no swap line nations in the War on gold.

This risk is real.

Expect higher royalties, expect higher taxes, expect a taking back of ownership of the mines by the governments.

And they will add controls on these miners where it is going to be harder to get their USDs out and they will be taxing the conversion. 

You’re also going to be selling the gold to the governments of these negative SWAP line nations in their local currency.

It makes a lot of sense to buy gold and silver miners that produce in the US, Canada and Australia, they are strong US allies.

We are in a new world of market risks that have not been seen before.

So, be prepared mentally and financially for what to do if gold prices take a big hit. Luck is being prepared when the opportunity arises.

Have a healthy day, Keep the Faith!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge. Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.