Written by Adem Tumerkan @ Palisade-Research.com April 26, 2018
Emerging markets are starting to get restless with the U.S. about gold and the dollar’s hegemony.
Just last week, Turkey announced that during 2017 they had withdrawn about 27 tonnes of gold from the New York Federal Reserve’s vault.
The Turkish Central Bank also reported that their gold holdings increased by 83 tonnes during 2017.
And adding salt to the wound, the Turkish Dictator President (Erdogan) said that all International Monetary Fund (the IMF) loans should be paid in gold – not dollars.
“What I’m saying is that these debts should be in gold. Because at this point the karat of gold is unlike anything else. The world is continually putting us under currency pressure with the dollar… We need to save states and nations from this currency pressure.”
I’ve written about Turkey and their worsening currency crisis, so gold for them is important.
But these kinds of comments are publicly discouraging to the U.S. and the dollar.
Countries understand the free-lunch the U.S. has. . .
If all debts are in dollars, the U.S. can print up as much as they want to pay off their own debt. But other countries can’t do that. They’re subjected to the dollar and its inflation or deflation; the Fed’s rate hikes and rate cuts.
If it was just Turkey, no one would care.
But it’s not. . .
Here are just some of the countries moving to secure their own gold and avoid the ‘dollar dominance’.
Russia is aggressively adding gold to their vaults.
In March they added 300,000 ounces of gold. Their gold reserves are about to eclipse 2,000 tonnes.
This is more gold than what China officially reports.
Mentioning China, it is difficult to gauge how much gold they have and are continuing to buy.
Just in-case you didn’t know, China is also the world’s largest producer of gold.
If you look at the physical gold withdrawals from the Shanghai Gold Exchange (SGE) – the best measure of the Chinese gold market – the demand is growing.
China also launched the Petro-Yuan last month which allows them to bypass the U.S. Dollar and trade gold for oil.
There is a growing list of countries publicly pulling their gold out from the U.S. Vaults.
Germany, Netherlands, Austria, Belgium, Russia, China, Turkey…
They all want their gold back – at least out of the U.S.
It’s not hard to see that the price of gold is setting up for a huge run.
Not only is global demand strong, but the supply side is what I’m really excited about.
For instance, take a look at the collapsing gold output from Barrick Gold (NYSE: ABX) – one of the world’s largest producers. It’s been in steep decline for years – down nearly 50% since 2012.
Most media will shrug at this data – but we see something much bigger.
It reminds us that gold is finite and that unless they continue replacing reserves, there won’t be any more gold to mine.
The already mined gold was the easy supply – the low hanging fruit.
Mining for gold is only going to become more expensive and difficult as time goes on – and the last few years has left the sector vulnerable.
Once gold prices explode higher, the mining sector is ill-prepared to take advantage of it.
These are the foundations for my favorite type of bull markets – caused from supply destruction.
The gist goes like this. . .
After years of high prices – they will eventually crash.
Remember, bear markets are authors for bull markets and vice versa.
For example, think about oil from 2008-2014. A barrel of crude was over $100 for years. Then in 2014 and 2015 prices crashed all the way down to $20 – over 80% loss. . .
Once a bear market kicks in, investors leave – fast, and marginal companies go bust. Only the strongest survive until the glut’s liquidated.
It’s very Darwinian during this period of the cycle – the bottoming phase.
Producers that can still squeeze out a profit will do so, but they will be conservative with their reserves, exploration, and construction projects. They’ll cut out anything that isn’t economical – by putting them on hold until prices rise.
Putting it simply, they trim all the fat.
It’s an ugly, unexciting time for the crowd. But historically, this is the absolute best time to get involved and start making big positions.
This strategy of ‘creative destruction’ is what I learned from the famous Austrian economist – Joseph Schumpeter. Many of the old mining companies that couldn’t survive are liquidated and the projects they mishandled are transferred to new innovative entrepreneurs to improve.
Betting against the fragile, over-indebted, high-cost producers and buying the most robust companies for your portfolio.
Especially the junior gold mining stocks that are well-run with a quality asset that are selling at bargains below liquidation price. These companies will be tomorrows premium acquisitions once the gold price erupts and producers need them to survive.
Another example of a sector that’s suffered through a ‘destructive’ bottoming phase for years and is now in the first stages of a huge bull market is nickel. You can see the similarities it has with the gold market. And it’s very exciting.
The long-term play is simple: gold demand is growing worldwide, and supply is decreasing.
Take advantage of the opportunity at hand.
Be like the Austrian Schumpeter and use the creative destruction to your advantage..