It’s Here: Zero Hour

  • Love is in the air: Asia *hearts* gold
  • Silver’s “Zero Hour” arrives
  • Hedge fund legend on interest rates and stocks
  • Ray Blanco on healthy bull-market corrections
  • Burger King’s social media blunder
  • A vaccine by any other name?

As pandemic fears recede in Asia, the “love trade” in gold is in full swing.

The “love trade” is a term coined by longtime friend of The 5 Frank Holmes, chief of the U.S. Global funds family. Westerners, he says, tend to buy gold motivated by fear — of inflation, societal breakdown and so on.

But in China, India and the Middle East, people routinely give gold as gifts, as a gesture of love, and of wealth to be passed from one generation to the next. There’s even a seasonal spike to Asian gold demand — with Chinese New Year and Indian wedding season frequently coinciding in late winter and early spring.

Last year, the virus put a hurt on the love trade. This year, Chinese and Indians appear to be making up for lost time.

The World Gold Council reports sales of gold jewelry, bars and coins in China are up 80% year over year. In addition, “leading gold jewelry retailers told us that sales during the 2021 [Chinese New Year] holiday dwarfed their 2019 levels.”

Meanwhile in India, gold imports jumped 41% year over year during February — to the highest levels since November 2019. “The festival and wedding season looks good,” Ashish Pethe of the All India Gem & Jewellery Domestic Council tells Bloomberg.

Whatever price these folks are paying for their gold, it has only the most tenuous connection to the “gold price” reported in the financial media. Ditto for whatever you pay.

For the record, gold futures on the Comex in New York are $1,687 as we write — the lowest since last May. Silver’s at $25.18. Rest assured you will pay more for real metal you can hold in your hand.

“A futures contract gives the holder price exposure, but it does not give you physical gold or silver,” explains our macroeconomics maven Jim Rickards. “It is a paper contract governed by exchange rules. It can be subject to early termination under those rules in the event of disorderly markets or other market disruptions.

“There is a process for taking physical delivery at the expiration of a long contract position, but this is used in only a small number of expiring contracts. Most contracts are cash settled, rolled over or paired off.

“If more than a small number of contract holders asked for physical delivery, the authorized vaults would quickly run out of bullion and the exchange would intervene to cash settle the contracts or order that holders ‘trade for liquidation only.’ Physical delivery would be denied.”

Even the famous “London Gold Fix” has relatively little to do with physical gold anymore.

“The London Gold Fix is conducted twice daily on an electronic trading platform operated by Intercontinental Exchange on behalf of the London Bullion Market Association. The electronic platform is a recent innovation launched in 2015.

“From 1919–2004, the fix was conducted face-to-face (with some telephonic participation) in the offices of N.M. Rothschild & Sons on St. Swithin’s Lane in London. After 2004 it was conducted telephonically until the 2015 electronic fix began. There is also a London Silver Fix, which works on an electronic platform.

“There are 15 participating banks in the gold fix including HSBC, Goldman Sachs, Citi, JPMorgan Chase, Bank of China, Koch Supply, Morgan Stanley and Toronto-Dominion Bank. This process does involve the purchase and sale of physical bullion and it is done through an auction style process.

“The problems are that the fix is not open to the public, involves large quantities only (minimum size is a 400-ounce gold bar worth about $720,000, typical trade size is much larger), and most of the gold never physically moves. It just remains in a designated vault and ownership changes hands through a warehouse receipt or ledger entry.”

It’s when you try to find real, hold-in-your-hand metal that gold’s and silver’s true prices are revealed.

Apart from the challenge of finding a reputable dealer — of course, you know by now we like Hard Assets Alliance — there’s the matter of pricing.

“Dealers,” Jim says, “typically quote prices as ‘spot plus’ (this is a spot price close to the Comex price plus a commission, which can vary by dealer) or ‘all in’ (this is a set price including any commission or markup by the dealer).

“Of course, the bid price (what you pay the dealer as a buyer) and the offer price (what the dealer will pay you as a seller) can involve a significant bid/offer spread typical of two-sided markets.”

Typically these days, you’ll pay about a 4% premium over spot gold… and a 15% premium over spot silver. In the case of silver especially, that’s an elevated figure — but our sources within the industry say that increasingly looks like the “new normal” given the persistent supply-demand imbalance. (We suspected as much when last we addressed the topic in depth three weeks ago.)

In other words, for silver “Zero Hour” has now arrived.

We’ve been anticipating this development for eight years — a time when the price for real metal permanently breaks away from the “paper price.”

What happens next? “The scarcity of physical bullion relative to paper gold and silver contracts will emerge with a vengeance in a buying panic resulting from any number of catalysts including war, a new pandemic, a stock market crash, bank failures or social disorder,” Jim says. “The paper holders will try to convert to physical and find that it’s too late. The vaults will be empty.

“The lesson for investors is also clear. Get your physical gold or silver now while you still can. Don’t sweat the commissions because that’s the real price. Then rest easy. The buying panic is just a matter of time.”

Again, we’re partial to Hard Assets Alliance — and not just because our firm owns a piece of HAA. We bought our stake in 2019 precisely because of how well HAA has been serving our customers since its inception in 2012.

Bonus points right now: U.S. Silver Eagles and Canadian Maple Leafs are once again available — thanks to HAA’s unparalleled wholesaler network — and while the premiums are elevated, they’re among the lowest you’ll find anywhere.

If you don’t have a Hard Assets Alliance account yet, best get a move on.

To the markets, which are stabilizing because — if the mainstream is to be believed — a hedge-fund legend is saying the same thing we’ve been saying here for weeks.

Rising interest rates? “Basically I think rates have temporarily made the most of the move and should be more stable in the next few months, which makes it safer to be in stocks for now,” Appaloosa Management’s David Tepper tells CNBC.

That echoes, more or less, what our floor-trading veteran Alan Knuckman said here on Friday. And what your managing editor said in mid-February. Rising interest rates rarely choke off a stock-market rally during the early stages of recovery from a recession.

Whether Tepper’s remarks have anything to do with it or not, the Dow is up 1.4%, or more than 400 points, at last check — back within 75 points of the 32,000 mark. The S&P 500 is up a half percent at 3,864. But the Nasdaq has shed another two-thirds of a percent, down to 12,842. The great rotation out of stay-home names and into reopening names continues — about which more, momentarily.

We chronicled the latest sell-off in precious metals above. The paper prices might well have further to fall, and the real price will fall in sympathy — just not as much. Nothing like scooping up metal at a discount. Bitcoin, meanwhile, is holding steady at $50,809.

Crude popped overnight when Houthi rebels in Yemen lobbed a missile at an oil storage yard in Saudi Arabia… but at last check a barrel of West Texas Intermediate is back in the red at $65.20.

“It’s easy to forget after a market that’s gone up and to the right for so long, but corrections are an important part of a healthy bull market,” says our tech and biotech maven Ray Blanco.

“In the context of the stellar second half of 2020 that most momentum stocks had, this year’s cool-off doesn’t look so bad.”

So yes, the iShares MSCI USA Momentum Factor ETF (MTUM) — whose top holding is Tesla — tumbled 12% in three weeks. But it’s still up more than 25% in the last nine months. And Tesla, for that matter, is way higher than it was last summer.

“I think that the choppy market conditions could persist for a little while longer,” Ray allows.

“I recently saw a research piece that said momentum funds are set for one of their biggest rotations in history, and that could prolong the bumpiness for a week or two. But zooming out a bit, this rally doesn’t look like it’s in any kind of jeopardy.”

Corporate social media fail…

Burger King UK

To be sure, the Twitter account of Burger King’s U.K. division was not hacked.

Rather, the company put this out there on International Women’s Day as an attention-getting device — followed up with a tweet that said, “If they want to, of course. Yet only 20% of chefs are women. We’re on a mission to change the gender ratio in the restaurant industry by empowering female employees with the opportunity to pursue a culinary career” via a new scholarship program.

Did no one have a discussion about this beforehand? You know, something to the effect of, “If people only read the headlines of news articles and jump to conclusions, they’re liable to see only our first tweet and not the follow-up tweets. This could backfire.”

But no.

So the initial tweet was retweeted tens of thousands of times. The follow-up tweets? Only a few thousand. Well played, BK-UK. Not…

“Please, please,” says a short email from a reader, “stop calling the COVID-19 jab a vaccine! It is an experimental gene therapy at best.”

The 5: We’re keenly aware that mRNA vaccines aren’t like traditional vaccines. We’ve described the distinction in the past.

But our primary beat is the markets and the economy. We prefer not to get dragged into debates over nomenclature if we can help it.

Most people have settled on “vaccine” as a convenient shorthand to describe what’s on offer. For us to depart from that shorthand would get real tedious, real quick — and also serve to distract from our mission to identify the companies with the most potential to benefit from the vaccine race. (As we said three months ago, first isn’t always best.)

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. If you’ve already accumulated a sufficient precious metals stash, you need to check out the ultimate in portfolio diversification. Jim Rickards says this one investment play has the potential to outperform gold by 21-fold — because that’s exactly what it did the last time circumstances broke the right way.

And Jim says history is on the verge of repeating — for reasons you’ll see when you click here.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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