A Metal Shield

by Marc Almagro
19 Jun 2020

In 2008, precious metal prices recovered very quickly from the initial negative price action; gold has surged to a new all-time high by mid-May – in over 72 global currencies, including SGD. Is it high time to invest in precious metals?

The price moves of precious metals have been largely expected, and have mirrored the price action of the early stages of the global financial crisis in 2008: namely, the impact of the margin call events triggered by the substantial falls in the stock markets at the time, explains Mr. David J Mitchell, Founder and Partner at Indigo Precious Metals (IPM). “This price action is extremely positive and clearly reinforces that the current global ‘insolvency crisis’ requires a considerable revaluation in precious metals moving forward over the next few years.” 

IPM trades in the physical precious metals business, and is primarily focused on the supply and physical delivery of investment-grade precious metals – gold and silver bars or coins, as well as platinum, palladium and rhodium bars – to international clients comprising private individuals, institutional investors, financial advisors, and family trusts. The company is registered and has a presence in Singapore and Malaysia.

With a passion for market analysis, Mr. Mitchell’s has taken on senior managerial roles, including Head of Proprietary Trading Europe and Head of Spot Trading Asia-Pacific at HypoVereinsbank AG, Chief Dealer and Manager of the G10 Desk at HSBC, and Chief Dealer of the forex Desk at NationsBank Group Singapore.

Portfolio sat down with Mr. Mitchell to discuss the wisdom of investing in precious metals given the particularly volatile financial reality.

With major stock indices falling over 50 percent in just one month, from February to March 2020, precious metals were used to provide liquidity to shore up margin calls in cash for financial institutions. What does that say about gold and precious metals as an investment instrument?

 Mr. David J Mitchell: I would advocate that it clearly demonstrates two main dynamics: Firstly, gold and precious metals are extremely liquid and used by financial institutions as funding vehicles – a quick cash conversion conduit in times of distress to shore up areas of their trading books as well as exposures in their balance sheets where cash is required quickly.

Secondly, precious metals, especially gold, are an asset class that global funds flow into as a distress hedge against a deteriorating global macroeconomic picture. This has been proven time and time again and unequivocally confirmed by the 2019 sovereign banking re-classification of gold as a ‘Tier-1 Asset’. This has clearly re-affirmed that gold is the premier investment capital of the banking system.

The investment prognosis supporting gold and precious metals is the very fact it has zero third-party liability versus every other global asset class; all of which have exposure to liabilities out of our control. We are presently entering into a very dynamic insolvency event built from the foundation of the largest global debt **** ever measured. That considered, I would suggest that holding liquid assets with zero third party liability is now of paramount importance to investors.

Historically, how has gold performed as an investment instrument?

I have studied market price history in great detail and feel very strongly that without understanding market history and how asset classes have historically performed against one another through economic cycles risks leaving investors without a clearly definable roadmap.

The generally accepted logic is that gold and precious metals are inflation hedges. This theory simply does not carry any weight of proof whatsoever. Investments into precious metals and their corresponding price moves are predominantly driven in their capacity as a **** hedge, and as wealth preservation vehicles in times of uncertainty and a deteriorating macro-economic landscape. Their price is also guided in varying degrees by industrial supply and demand curves.

This was proven in the Great Depression of the 1930’s when gold was revalued substantially during a gold nationalization under Roosevelt – as a result of which public investment funds were then directed towards gold mining groups as a proxy to gold, with many such mining groups such Homestake rising over +600 per cent in value. Gold was revalued higher in what was a great deflationary event.

With the 1970’s stagflation, as a result of the USA reneging on its international commitment to the Bretton Woods monetary system, gold was allowed to be revalued on the free markets, rising + 2,400 per cent in the face of the new US$ fiat monetary system that many feared was going to collapse alongside extreme inflation, all of which was driven by an energy ****.

From 1980 into 2003, we saw consistent reasonably high inflation and yet gold lost nearly three quarters of its value thereby undermining the thesis that gold functions as an inflation hedge.

From 2004 to 2011, gold was revalued by over 800 per cent in yet another global **** and an effectual monetary debasement event driven by a liquidity **** that nearly took the western banking system down.

Between 2011 and 2016, gold fell away again and lost 50 per cent of its value in what was perceived to be a sustainable high growth period augmented by a drive to zero per cent interest rates and global central bank support.

Today, the realization has hit home that the last 10 years of growth was actually built on the foundations of giant debt leverage events, today’s global debt versus GDP is the largest ever recorded in history. The only route left remaining for central bankers and government policy makers is to effect a global monetary debasement and together with this insolvency **** clearly points to a substantial revaluation of precious metals.

How does gold's performance compare to that of other precious metals? And what do investors need to know?

The distinction and price valuations between precious metals are very real and must be recognized by investors, with each metal moving within its own cycle and very distinct wave length. Gold, for example, is money; it was officially re-classified as a 'Tier-1 asset' class by The Bank of International Settlements (BIS), which now recognizes central banks’ holdings of physical gold as a reserve Tier-1 asset equal to cash.

This has a very powerful effect on all banks' balance sheets. To be more succinct; gold is money and currencies are effectively sovereign script which are used as mediums of exchange and payment. It is important to understand the definitions and the characteristics of each. So, gold is the classic **** hedge, the ‘money of last resort’ and the perfect uncorrelated asset that should be utilized as such, in one's overall asset portfolio.  

The other precious metals, mainly silver and platinum, alongside lesser known precious metals palladium and rhodium, have their own price drivers over and above those of gold. They are used as industrial metals driven by industrial demand curves, cost of production, global supply-demand balances, etc. These precious metals, other than gold, also very importantly incorporate the investment demand side alongside industrial demand. These precious metals each has its own unique cycle, making their investment prognosis exciting. 

Walk me through the process of investing in physical precious metals, particularly through IPM Group.

Clients of IPM Group have a number of options, the easiest of which is to open an account with us online, decide if they wish to open a vaulted account under their own family name, thus ensuring sole-titled and fully segregated ownership of bullion at Le Freeport, Singapore. At that point clients can simply purchase products (coins or investment bars) online as they deem appropriate.

We encourage all clients to utilize and leverage from our long-standing experience and ask for advice on what their metal portfolios should look like, and which products to purchase in order to generate maximum returns from the time of entry. We specifically launched Auctus Metal Portfolios to complement IPM, which uses proprietary algorithms with over 55 live data feeds to correctly re-balance our clients' physical precious metal holdings at specific intervals throughout the year.

Our experience in investment banking and trading financial markets allows us to provide comprehensive investment advice to our clients on physical precious metal portfolio diversification and specific product selection. We are fully geared to provide highly tailored advice to individual clients.

What would be the basic requirements from a person looking into investing in precious metals? 

My first piece of advice would be to get involved sooner, rather than later, and invest as a studied part of an overall portfolio rebalancing, including your liquid savings. If you believe that you are at the very start of building your asset portfolio, then savings are an essential ingredient. Higher net savings can help finance higher levels of future investment and boost productivity over the longer term. However, you must be extremely cautious in what you save in. If you save in the government's currency script that only pays sub-standard interest rates, and is set to be devastatingly debased, then saving in real money (i.e., gold) is the natural choice for its considerable wealth preservation component.

How much involvement do precious metals require from investors in terms of watching the market (performance)? 

When you understand the role of precious metals in portfolio capital preservation, and when compared to other asset classes in the greater macroeconomic cycle, watching performance becomes a sideline spectator event. What is way more important is understanding precisely where we are in the economic cycle. Understanding how this economic **** can be rectified and the time frame needed; provides us with a clear indication of when to move out of precious metals and back into other asset classes.

What we are going through is a truly historic event in global history. There are no quick fixes other than continued monetary debasement and debt deflationary pain, as attempts are made to cover over the cracks. This will be until such time as the monetary system breaks down completely and the sovereign world order has put in place a more sustainable, long-term growth path and very importantly a new monetary system.

What is an ideal investment horizon for an investor to realize good returns on his investment in precious metals? Would you suggest that investors view it as a long term investment?

Probably one of the most successful analyses of market pattern recognition is the study of the Pi cycle, which demonstrates that investment cycles have lengths of 8.6 years or multiples of this number thereof. Recognizing where we are within each cycle gives us the time frame to use as your foundation. 

When comparing gold's historical price moves, each major cycle revaluation event higher in gold has lasted approximately one Pi cycle time frame of 8.6 years. Be it the 1930’s, 1970’s or 2000’s. This particular cycle event started at the turn of the year into 2016 and should then take us into mid-2024, this wavelength clearly being supported by the deteriorating macro-economic picture.

The other precious metals such as silver and platinum have lagged the gold cycle. Their cycles have created enormous lag-events and I see the ultimate highs in the other precious metals extending well into 2026-28 and beyond.

Come 2024, you would want to weigh-up the macroeconomic picture with the fiscal irresponsibility of global sovereign governments and then determine a revised portfolio weighting in precious metals and across the spectrum of other asset classes. We then have further important cyclical time frames entering into both 2026 and 2032.

Of course, other dynamics will also be impacting these precious metal prices, especially industrial demand curves versus overall mine supply, recycling, and the cost of production. 

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