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The world’s super-rich are hoarding physical gold as bullion is the only real hedge

Gold has had a great run in 2019.

Over the last year, gold prices are up nearly 20%. The yellow metal is on pace for its best year since 2010.

In a note to clients published over the weekend, analysts at Goldman Sachs outlined why the strategic case for owning gold remains strong. The firm cites political uncertainty and recession fears that are unlikely to abate as primary catalysts, among other worries among the global elite like wealth taxes and increasing talk about MMT and central bank effectiveness.

By 2020, the firm thinks the price of gold will reach $1,600 an ounce; on Monday, gold was trading near $1,460.

But the firm also surfaces some really interesting data on how investors have expressed their desire to own gold. Which is that owning the physical metal seems to be the global elite’s preferred way to hedge against tail events.

“Since the end of 2016 the implied build in non-transparent gold investment has been much larger than the build in visible gold ETFs,” the firm writes, citing the chart below.

Trade data implies that gold in storage has increased far more rapidly than is reflected by financial market instruments, indicating a widespread preference for physical gold instead of gold-linked financial assets. (Source: Goldman Sachs)
Trade data implies that gold in storage has increased far more rapidly than is reflected by financial market instruments, indicating a widespread preference for physical gold instead of gold-linked financial assets. (Source: Goldman Sachs)

In plain English, this means that for those including gold in their end-of-the-world trade, owning gold bullion is a must.

“This [data] is consistent with reports that vault demand globally is surging,” the firm writes.

“Political risks, in our view, help explain this because if an individual is trying to minimize the risks of sanctions or wealth taxes, then buying physical gold bars and storing them in a vault, where it is more difficult for governments to reach them, makes sense.”

“Finally, this build can also reflect hedges by global high net worth individuals against tail economic and political risk scenarios in which they do not want to have any financial entity intermediating their gold positions due to the counter-party credit risk involved.”

This thesis also brings to mind Evan Osnos’ 2017 New Yorker story that chronicled efforts from the super rich to prepare luxurious hideaways that will see them through the apocalypse.

A 31 kilogram gold Vienna Philharmonic coin, known as 'Big Phil', stands on display inside the precious metals vault at Pro Aurum KG in Munich, Germany. (Photo: Getty)

The head of an investment firm told Osnos that, “A lot of my friends do the guns and the motorcycles and the gold coins. That’s not too rare anymore.”

As Osnos chronicled, underground bunkers with air-filtration systems and helicopters that are gassed up and ready to go are now the real differentiators in the prepper community.

If you want to be truly prepped, then owning gold is just table stakes.

And for Goldman Sachs, that reality helps round out the already strong thesis for investing in gold.

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U.S. inflation firms in November; Fed seen on hold

U.S. consumer prices increased solidly in November, which together with labor market strength could support the Federal Reserve’s intention not to cut interest rates again in the near term after reducing borrowing costs three times this year.

The report from the Labor Department on Wednesday also showed underlying inflation firming last month. It came as Fed officials were due to conclude a two-day policy meeting. The U.S. central bank is expected to keep rates on hold. It signaled a pause in October in the easing cycle that started in July when it cut rates for the first time since 2008.

“There are not worrisome deflation undercurrents in this economy and Fed officials do not need to cut interest rates further to boost economic demand,” said Chris Rupkey, chief economist at MUFG in New York.

The consumer price index rose 0.3% last month as households paid more for gasoline and food prices increased for a third consecutive month. The CPI advanced 0.4% in October. In the 12 months through November, the CPI increased 2.1% after gaining 1.8% in October.

Economists polled by Reuters had forecast the CPI climbing 0.2% in November and rising 2.0% on a year-on-year basis.

Excluding the volatile food and energy components, the CPI rose by 0.2%, matching October’s increase. The so-called core CPI was up by an unrounded 0.2298% last month compared to 0.1572% in October. The core CPI was lifted by gains in healthcare and prices of used cars and trucks, recreation and hotel and motel accommodation.

In the 12 months through November, the core CPI increased 2.3% after a similar gain in October.

The Fed tracks the core personal consumption expenditures (PCE) price index for its 2.0% inflation target. The core PCE price index rose 1.6% on a year-on-year basis in October and has undershot its target this year. November PCE price data will be published later this month.

The dollar was little changed against a basket of currencies after the CPI data, while U.S. Treasury prices dipped.

RISING RENTS

November’s firmer inflation readings followed a report last Friday showing the economy added a robust 266,000 jobs in November and the unemployment rate fell back to 3.5%, its lowest level in nearly half a century. Other data on housing, trade and manufacturing have also been relatively upbeat, and suggested the economy was growing at moderate speed rather than stalling.

In November, gasoline prices rose 1.1% after rebounding 3.7% in October. Food prices edged up 0.1%, rising for a third straight month. Food consumed at home gained 0.1%.

Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.2% last month, matching October’s rise.

The rent index gained 0.3% after edging up 0.1% in October, which was the smallest gain since April 2011. It was lifted by a 1.1% rebound in the cost of hotel and motel accommodation after tumbling 3.8% in October.

Healthcare costs rose 0.3% in November after surging 1.0% in October, which was the most since August 2016. The cost of hospital services rose 0.3% last month and prices for doctor visits gained 0.1%. But prices for prescription medication slipped 0.1% after surging 1.8% in October.

Apparel prices nudged up 0.1% last month after declining 1.8% in October. Used motor vehicles and trucks prices increased 0.6% after rising 1.3% in October. The cost of recreation goods and services increased 0.4%, boosted by rises in the prices of cable and satellite television services and sporting goods.

But new vehicle prices fell for a fifth straight month, likely because of deep discounting by automakers trying to get rid of stocks of older models. There were also decreases in the prices of airline tickets and motor vehicle insurance. The cost of household furnishing and operations was unchanged.

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NEWS: Plus Products Announces Transition to HERBL Distribution Solutions as its Primary California Distribution Partner, Along with the Termination of Distribution Relationship with Calyx Brands Inc.

Plus Products Inc. (CSE: PLUS) (OTCQX: PLPRF) (the “Company” or “PLUS”), a cannabis branded products company in the U.S., today announced the transition of its primary California distribution partner from Calyx Brands Inc. (“Calyx”) to HERBL Distribution Solutions (“HERBL”) for the Company’s best-selling cannabis products.

Highlights

  • PLUS products are currently available in 360 licensed retailers in California
  • HERBL distributes to more than 600 licensed retailers in California
  • PLUS has an internal sales team of fifteen individuals who have been working closely with HERBL and retailers to make the transition a success

“After an extensive review of the major California cannabis distributors, we determined that HERBL was best positioned to scale with PLUS and reliably deliver product to retailers at the lowest cost,” said Jake Heimark, Co-founder & CEO of PLUS. “One of our goals at PLUS is to put our products on every shelf at an affordable price, and we believe HERBL is the perfect partner to help us reach that goal. Their substantial market reach and world class management team give us confidence that they will help PLUS further solidify our position as the largest cannabis-infused gummies brand in California.1

HERBL is a leader in the California market with active distribution to over 600 licensed retailers across the state, 240 more locations than the 360 licensed retailers in which PLUS cannabis-infused edibles are available today.

PLUS has an internal sales team of fifteen individuals working directly with HERBL’s team to ensure a quick and efficient transition for the Company’s current retail partners, and to open new accounts moving forward.

PLUS, as a part of this transition, has entered into a settlement agreement with Calyx dated December 9, 2019, which addresses, among other things, the termination of the distribution arrangement between the two parties.  In accordance with the terms of the settlement agreement, the Company has arranged with HERBL to take responsibility for distributing the Company’s branded products inventory currently held by Calyx. Additionally, a qualified third party will assist in the collection of a portion of outstanding accounts receivable associated with the sales of PLUS branded products by Calyx. PLUS has also agreed to forbear any claims against Calyx and its parent company, Nutritional High, through June 5, 2020.

(1)  Year-to-Date According to BDS Analytics GreenEdge Platform in 2019

Availability

California THC: PLUS cannabis-infused edibles are currently available in 360 licensed retailers across the state of California.

Nevada THC: PLUS cannabis-infused gummies are currently available in 30 Nevada dispensaries, including all three MedMen locations and Planet 13. They are expected to be rolled out to more dispensaries across Nevada in the coming weeks.

National Hemp CBD: PLUS recently launched a line of 100% Hemp CBD-infused gummies. They are available for purchase in 43 states across the country at plusproducts.com.

About PLUS

PLUS is a hemp and cannabis food company focused on using nature to bring balance to consumers’ lives. PLUS’s mission is to make cannabis safe and approachable – that begins with high-quality products that deliver consistent consumer experiences. PLUS is headquartered in San Mateo, CA and has 80 employees.

About HERBL

Founded in 2016, HERBL provides distribution solutions to the cannabis industry with the use of innovative technology, state of the art climate-controlled facilities, high security climate-controlled trucks, and sales/marketing professionals. Currently servicing over 600 dispensaries throughout California, they are supply chain experts, guided by a proven team with extensive experience in world class distribution. The company has multiple licenses and locations across the state of California. To learn more about HERBL, visit www.HERBL.com.

Full release

Denmark Explores Construction of $45 Billion Wind Power Island

Denmark’s government is looking into the merits of plowing as much as 300 billion kroner ($45 billion) into a mega wind park.

The project would entail building one or more islands to house the turbines, according to a statement published by the ministry of climate on Tuesday.

The park would have a capacity of 10 gigawatts and would be able to supply power to 10 million homes. The ministry expects that most of the investments will be made by private companies.

The government is spending 65 million kroner of Denmark’s 2020 budget on the project, mainly on exploring different technologies.

The wind power capacity from such a large park would be five times higher than is currently installed in Denmark, Climate Minister Dan Jorgensen said in the statement.

The ministry will explore different locations for the project, including in the North Sea and the Baltic Sea.

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“Fed will launch ‘QE4’ before year-end to stem Street cash crunch” – Credit Suisse

The Federal Reserve could be launching another round of money-printing in the next few weeks as problems in the overnight lending markets re-emerge and force the central bank into more aggressive action, according to a Credit Suisse analysis.

A fourth version of quantitative easing — often referred to as “money-printing” for the way the Fed uses digitally created money to buy bonds from big financial institutions — would be needed by year’s end to bridge a funding gap as banks scramble for scarce reserves, Zoltan Pozsar, Credit Suisse’s managing director for investment strategy and research, said in a note to clients.

“If we’re right about funding stresses, the Fed will be doing ‘QE4’ by year-end,” Pozsar wrote. “Treasury yields can spike into year-end, and the Fed will have to shift from buying bills to buying what’s on sale – coupons.”

That would mean a shift from purchasing short-term Treasury debt and expanding into longer duration and more aggressive balance sheet expansion.

The Fed is in the midst of a buying T-bills in a process that it has insisted is not QE but instead an effort to keep its benchmark overnight funds rate within the 1.5%-1.75% target range. In addition to the outright purchases, the Fed is conducting daily repurchase operations to stabilize the market.

All of those efforts stem from mid-September tumult in the repo market, the place where banks go to get overnight funding critical to their operations. A Sept. 17 spike in rates amplified funding issues that Pozsar said are not going away.

“The Fed’s liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn,” he said, adding that investors have become complacent after an initial flare-up in 2018 turned out to be “benign” and as “repo rates have been trading normally since the September blowout” and amid the Fed’s efforts to keep reserves plenty.

“But these facts are less relevant than they seem,” Pozsar said.

In fact, he warned of even potentially more dire consequences should market dislocations and another spike in rates upset the carry trades institutions employ, where lower-yielding currencies are used to buy those with higher yields, with investors pocketing the difference.

“If carry makes the world go ’round, and reserves make carry possible … the day we run out of reserves would be the day when the world would stop spinning.” Pozsar said. “No, this is not an overstatement.”

Diagnosing the causes

The problems he identified are two fold — a Fed that raised rates too much and cut its bond holdings and balance sheet too quickly, coming at the same time as Basel III international banking guidelines made capital requirements more stringent. 

Prior to the balance sheet rundown, the Fed had been running what it considered an “ample reserves” regime, where reserves a year ago had been around $1.8 trillion. That number dropped close to $1.4 trillion in September, and the Fed has wrestled since with what is the right number.

Pozsar specifically described the potential QE4 process as helping “through the backdoor,” with the Fed buying back the bonds that banks were forced to buy during the balance sheet rundown “and giving back the reserves they gave up in the process.”

Poszar said the concept of excess reserves is now “an oxymoron” due to the new capital requirements.

His analysis, however, is fairly contrarian.

While there remain concerns on how the Fed calibrates the right level of reserves, most fixed income experts think the central bank’s market operations have kept the market running smoothly. Indeed, the funds rate for the past month has been trading at 1.55%, which is near the bottom end of the target range. The Fed usually is satisfied if the rate trades around the midpoint, which would be about 1.62%.

Still, he points out that since the Fed reversed its balance sheet contraction and started buying Treasury notes, actual reserves have grown little. The Fed’s balance sheet since mid-September has expanded by nearly $300 billion to $4.1 trillion; reserves in that time have expanded by about $110 billion.

A Bank for International Settlements analysis of the issue, released Monday, also warned of future funding problems and said the Fed’s diagnosis of the September tumult was incomplete. Central bank officials have attributed the upset to a surge of corporate tax payments and an unusually large Treasury auction settlement as sucking capital out of the system.

However, the BIS said hedge funds and big banks contributed as well, with the former placing high capital demands on the market while the latter did not provide liquidity as the market became stressed.

The BIS did note that the Fed’s operations have “calmed markets.”

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