Dear Reader, As I predicted, gold has consolidated a little from last month’s highs. At time of writing, it’s holding steady at just below US$1,410 an ounce. That makes gold an urgent buy. To add to your physical holdings. And, if you’re a speculator, buy these four massively undervalued ASX juniors. Because I’m more convinced than ever that the lid is about to blow off the gold market. And that every period of consolidation is an opportunity. I outline my strategy for gold for the rest of this year and 2020 here. I’ve followed gold closely for most of my professional life. After such a long period of time, it’s a market I have come to know pretty well. And as we sail into the second half of 2019, my view is that something very big is about to occur with bullion. If I’m right, this won’t just be a breakout year for gold. It will be the start of a bull market the likes of which we’ve only seen a couple of times before. I show you the main reason for this belief here. But now I’d like to give you some historical context. It’s a bit in depth. But it’s fascinating. So stick with me. I want to show you what happens when pressure builds, and then the ‘lid really blows off’. Because the results were spectacular... When does pressure build? When you try to hold something in, or down. The longer you hold it down, the more pressure builds, and the more explosive the outcome when that pressure is finally released. The following is a story of perhaps the greatest build-up of pressure in financial history. The Failure of the London Gold Pool In 1934, US President Franklin Roosevelt revalued gold (after confiscating it from US citizens) from US$20.67 an ounce to US$35. In effect, it was a devaluation of the US dollar. The US$35 an ounce US dollar/gold peg was the lynchpin of the post-war international monetary system, often referred to as the Bretton Woods system. Management of the gold/US dollar peg occurred in the London gold market, the largest gold trading centre in the world. It reopened in 1954, following its war related shutdown. This is how central banks kept the price at US$35 an ounce, as told by John Koning, writing for the Mises Institute: ‘Through the 1950s the London price fluctuated between $34.85 and $35.17. These upper and lower limits were set by arbitrage and the threat thereof. Foreign central banks, as stipulated in Bretton Woods, could go to the Federal Reserve in New York and convert their dollars into gold or gold into dollars at $35 plus 8.75¢ commission. The cost of shipping and insuring gold from New York to London and vice versa was 8¢ to 10¢ per ounce. ‘Thus, when the London price traded down to $34.82 or so, it made sense for central banks to buy gold in London, ship it to New York for 8¢, then sell it to the US Treasury at the $35 official price less 8.75¢ commission, earning arbitrage profits of around 1¢ an ounce. Conversely when gold rose to $35.18 in London, it made sense to buy gold from the US Treasury at $35.0875, ship it to London for 8¢, sell it at $35.18, and earn arbitrage profits of 1¢.’ By 1958, the supply of US dollars began increasing. Foreign central banks exercised their right to convert their dollars into gold, and US gold reserves began to fall. Reserves declined 10% in 1958, 5% in 1959 and another 9% in 1960. In response, the US asked foreign central banks to hold onto their dollars. It set limits on citizens travelling overseas, and restricted private investment in Europe. At the same time, it became apparent John F Kennedy would win the upcoming election, with promises to lower interest rates and increase spending. The gold price started to rise well beyond that, implied by simple arbitrage (US$35.18). In October 1960, it closed at $38/ounce. Such a premium exacerbated US gold outflow questioned the effectiveness of the Bretton Woods system. In response, the Bank of England, in an agreement with the US, sold gold to get the price back down. President Eisenhower also made it illegal for US citizens to buy metal overseas (US citizens were already banned from buying gold domestically). Creation of the Gold Pool The gold price fell back to $35.10. But Western central banks feared another price spike. As a result, they (the US and eight European central banks) came up with a plan to pool several hundred million dollars’ worth of gold to control the gold price in London. As Koning writes: ‘The pool became an active buyer of gold when the London price fell below $35.08 an ounce and a seller at $35.20. In its first test — the week of the Cuban Missile Crisis in October 1962 — the pool effectively supplied the London market despite demand for the metal being greater than the 1960 gold rush. Prices could not penetrate $35.20. The pool’s reputation strengthened: gold would stay benign and near $35.08 for the next few years.’ But with military spending increasing due to the Vietnam War, US trade deficits were again on the rise. In addition, Lyndon Johnson and his Great Society program meant domestic spending was on the rise, too. US gold reserves started to flow out of the Treasury again. The London Gold Pool participants defended the dollar at $35.20, resulting in gold flowing out of the pool, too. In 1967, France bailed. The British devalued the pound and then, in 1968, the Vietnam War escalated with the Tet Offensive. The London Gold Pool had spent about $2.75 billion defending the dollar, but to no avail. In March 1968, the Pool requested the Queen close the London gold market. Two weeks later, it reopened, and gold immediately shot up to $38. So while the ‘official’ gold price was still $35, the market price was trading well above that level. While the London Gold Pool was officially dead, the US had other plans to keep a lid on the gold price. Upon the reopening of the gold market, US Treasury Secretary Robert Fowler announced that global central banks would no longer purchase gold...their reserves were sufficient. South African Gold Embargo The idea behind this announcement was to force South Africa, who at the time produced 75% of the world’s gold, to deliver their production into London (rather than to central banks) and therefore put downward pressure on the ‘market’ price of gold. The US Treasury sent letters to 95 central banks asking them to no longer purchase any gold. The gold embargo had started. But it was ineffective. The market price of gold rose to $42. This incentivised central banks to sell dollars and buy gold from the New York Fed, further draining US gold reserves. And South Africa’s Reserve Bank bought gold from its miners and hoarded it, instead of selling it into the London market. But gold was a primary income source for South Africa. It could only do this for so long. By 1969, a global bear market was underway. This resulted in capital flows into South Africa drying up. South Africa had to sell gold to pay for imports. Gold started to flood into the London market, pushing the market price down. By October 1969, gold fell below $40. By the end of November, it was back down in the $35 range. On 16 January 1970, gold traded at $34.80, the lowest price since the market reopened in 1954! Due to the effects of arbitrage, the US was now accumulating gold again. This ‘victory’ over gold was short lived. By the end of 1970, gold traded at $37.50. And it kept moving higher during 1971. Obviously, at these prices it made sense for central banks to swap their ever-increasing holdings of US dollars for gold at $35. This resulted in gold again draining out of the US Treasury. The scramble for gold (or ‘attacks’ on the dollar) intensified to such an extent that on 15 August 1971, President Nixon went on national TV to declare the end of gold convertibility, and an end to the Bretton Woods financial system. The Lid Comes Off! In effect, this move put an end to a coordinated gold price suppression operation. Central banks could no longer convert their excess US dollars into gold at $35. They could still buy gold in the open market, but would have to pay market prices to do so. Following the closing of the gold window in August 1971, the lid came off the gold price. Years of building pressure manifested in strongly rising prices. The annual price rises for gold were as follows: 1971 — 14.65% 1972 — 43.14% 1973 — 66.79% 1974 — 72.59% Then, the price corrected for two years, before picking up steam again... 1975 — -24.2% 1976 — -3.96% 1977 — 20.43% 1978 — 29.17% 1979 — 120.57% 1980 — 29.61% It was an extraordinary bull market. It reflected a decades’ long catch up after central banks (particularly the US) tried so hard to keep the gold price tied down. As you’ll see here, if you owned the right gold mining juniors you could have done spectacularly well. I mean, the returns really were breathtaking? Is it about to happen all over again? Well, no. Certainly not exactly the same way. The precise conditions of the 1970s will never be repeated. HOWEVER…as you’ll see here…there are several key similarities. Plus a wild card in the mix. I’m absolutely convinced you’re about to see another ‘lid blow’. And that you’re lambast yourself in a few years’ time for not making your move when you were advised to! What is that move? Click here for more. Regards, Greg Canavan, Editor, The Rum Rebellion |