This summer, the Republic of Zimbabwe, a landlocked country in southern Africa suffering through a years-long economic and monetary crisis, began issuing gold coins as legal tender.

It’s important to get a sense of why it has done so. Once we know that, we’ll know why it should matter to gold investors around the world.

The First 2,000 Gold Coins

During the time that Robert Mugabe was president, Zimbabwe’s economy was devastated by hyperinflation.

The present government, which has been around only for five years since the coup that overthrew Mugabe, has tried a number of means by which to restore some fiscal and monetary rationality to the economy. Thus far, it’s had little success.

In the latest effort, on July 25, 2022, the Reserve Bank of Zimbabwe disbursed 2,000 gold coins to commercial banks. These first gold coins were actually minted outside the country, but eventually (according to John Mangudya, who is the governor of the RBZ), minting will be localized.

Each coin weighs one troy ounce and has a purity of 22 carats. At the time of launch, the cost of each coin was $1,824 USD. In general, their value will be determined by the international market rate for an ounce of gold plus the cost of production.

Any individual or company can purchase the coins from authorized outlets, like banks.

The central bank said the coins “will have liquid asset status, that is, it will be capable of being easily converted to cash, and will be tradable locally and internationally. The coin may also be used for transactional purposes,” adding that they can only be traded for cash 180 days after the purchase date.

The coins can also be used as security for loans and credit facilities.

 

Indirect Benefits for the “Common Man”

The issue is that many Zimbabweans struggle with daily survival, like paying for food, so they don’t have extra funds to buy the coins.

In the words of a Zimbabwean economist, Prosper Chitambara, who spoke to the Associated Press, “For the common man, there is not really much to benefit directly from this, especially if you don’t have any excess cash.”

But there is, Chitambara added, an expectation “that indirectly it will benefit the ordinary person through moderating the prices.” And that, given Zimbabwe’s tragic recent history, could be an important benefit indeed.

 

Zimbabwe’s Monetary History

From 2004–2008, under President Mugabe, RBZ officials created two distinct interest rates in pursuit of contradictory goals. They offered low, concessional interest for what they considered the productive economy and market-determined interest rates for the non-productive economy.

The two-track approach, and a confused effort to target exchange rates, exacerbated economic distortions. At the same time, foreign reserves dried up. The central bank responded by buying foreign currency on the “parallel market,” that is, the black market. This further undermined their exchange-rate targeting efforts.

Underlying and worsening those difficulties, the RBZ had no lawful means to resist the government’s demands for the creation of money. This was a period of fiat money creation in its pure form.

In February 2008, the inflation rate was officially deemed to be 165,000% year-to-year. Unfortunately, that was not the peak.

Soon thereafter, the government stopped even filing official inflation statistics, presumably because civil service accountants were in danger of injuring their hands by writing 0s over and over again. By November 2008, unofficial estimates say, the year-on-year inflation rate was 89.7 sextillion percent. (A sextillion is a thousand raised to the seventh power.)

 

The End and a Worrisome Restart

The wild ride came to an official end in 2009 when the government gave up on printing the Zimbabwean fiat dollars at all. People and businesses were told to use the foreign currency of their choice. The U.S. dollar became predominant, although other currencies, notably the South African rand, also circulated.

The subsequent history of Zimbabwe and its fiscal and monetary policies is complicated, but it continued to be calamitous. Let’s limit ourselves here to identifying four high points:

  • In 2016, Zimbabwe introduced a new national currency, called bond notes.
  • In 2017, the country’s military stepped in to oust Mugabe: Emmerson Mnangagwa became the new president.
  • By 2018, it appeared that the value of the new national currency was headed in the same direction as the previous one.
  • In January 2019, price increases sparked street protests and a violent crackdown.

The general sense of economic chaos in Zimbabwe has not receded. Nor has the temptation, on the part of the government, to have the RBZ manufacture fiat money to resolve its fiscal difficulties.

 

Zimbabwe’s Mining History

The central bank’s decision to mint gold coins comes a year after it agreed to authorize miners to export some of their gold. For years before that, miners were only allowed to sell to the central bank itself, through the latter’s buying arm, Fidelity Printers and Refiners.

That effort at central control never really worked. According to the government’s own estimates, when private sales were prohibited outright, gold worth $1.2 billion was nonetheless leaving the country every year.

Most of the mining in Zimbabwe takes place through small-scale operations, and those miners could not survive the combination of the low prices and the late payments from the FPR without resorting to black market exports. 

The gold still in the ground is a valuable resource for the country. Freeing up the mining industry and minting coins: each is a step to making good use of that resource. Last year, the chief executive of the Chamber of Mines, Isaac Kwesu, told a committee of parliament that the country had not carried out any meaningful exploration of gold deposits for a decade.

The chamber is confident, Kwesu said, “We have significant, extensive gold deposits in Zimbabwe, although we have not been exploring much.”

 

The Present Crisis

In 2022, inflation has reached nearly 200%. This doesn’t look like 2008 yet, but it’s not good news.

It’s true once again, as it was 15 years ago, that the central bank has no independence from the politicians, and the former can find no brakes so long as the latter can always find reasons to inflate.  

Some of Zimbabwe’s neighbors have sought to avoid, or at least to mitigate, the inflationary temptation by joining together into a “common monetary union” of four nations. This union consists of South Africa, Namibia, Lesotho, and Eswatini. In South Africa, the unit of currency is the rand. The other three countries in the union also accept the rand as legal tender, even though each also has its own national currency. In each of those three cases, the local currency is pegged to the rand.

Since the end of apartheid and the removal of related sanctions, South Africa has built a large and diversified economy, fully integrated with the global markets. Such an economy does generally have some anti-inflationary inertia, and the other members of the common monetary union seek to benefit from that inertia by association.

Zimbabwe, though, is not likely to check its own inflationary temptations with such a tie. Indeed, the relations between Zimbabwe and South Africa have never been good. Early this year, South Africa worsened them by announcing that it wasn’t going to renew its “Zimbabwean Exemption Permits” (ZEPs), the documents legitimating the presence in that country of 180,000 Zimbabweans. This amounts to a demand that they return home.

So Zimbabwe has been casting about for a way to harden up its money against its own politicians’ inflating temptations and without a tie to the rand.

It’s fitting that they come around at last to the oldest idea of all: gold sovereign coins. That also bodes well for gold worldwide, as a confirmation of its status as the last and still the best of safe harbors for value. 

If you’d like to invest or want to learn more, claim your free one-on-one consultation.

The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.

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During the Winter Olympics in February, the People’s Republic of China availed itself of the opportunity to illustrate what it can do with money: it showed off its central bank digital currency (CBDC) incarnation of the yuan.

China required visitors to the Games to pay for meals, hotels, and so forth by means of QR codes on mobile phones linked to digital yuan accounts.

A movement toward the digitization of the euro at the hands of the European Central Bank is also well underway, and a movement toward the digitization of the dollar by the Federal Reserve is at least a probability.

As James Rickards wrote recently for The Daily Reckoning, “[A] CBDC is not a new currency. It’s just a new payment channel. A digital dollar is still a dollar. A digital euro is still a euro. It’s just that the currency never exists in physical form. It is always digital, and ownership is recorded on a ledger maintained by the central bank.

Some readers may not see the rise of CBDCs as an especially newsworthy prospect. After all (they may think), the average consumer in developed economies already uses electronic means to change the digits in a lot of databases routinely. For instance, you may buy socks by swiping a plastic card. If it’s a credit card, the swipe increases the amount of the buyer’s debt to the company that issued it. If it is a debit card, the swipe decreases the size of the buyer’s bank account. Either way, no physical cash has changed hands, though the socks have been sold. In an important sense, then, money has long been digitized.

The reason why these developments (in China, Europe, the U.S., and elsewhere) are worrisome, though, is that CBDC goes far beyond the digitization of money. It involves centralized and opaque control of those digits. It is a push to put an unprecedented level of power in the hands of central banks. Furthermore, as we shall see shortly, CBDC is bound up with the stigmatization of savings.

The Surveillance State

CBDC matters, and it is frankly alarming, in the first instance, because with the advent of a CBDC run out of the central bank—let us say, the Federal Reserve—the central bankers will have disintermediated the whole of the banking and credit card industries. Everything will be run through the Fed with a single account for payments and receipts.

The surveillance state will have won.

This sort of development is precisely the sort of thing against which precious metals have long been thought to be a bulwark. Oh, yes, the usual arguments for possession of gold and silver are that they help you hedge against inflation and diversify your portfolio. Those are perfectly good arguments.

However, one school of thought has long held that there are deeper threats to which the continued presence of a private sector trade in precious metals is a bulwark. There are threats to the whole idea of private savings at play. That current of opinion, long derided by “mainstream” pundits as survivalist melodrama, clearly has some merit.

Alex Gladstein put the point well in a single tweet.

Gladstein is the chief strategy officer at Human Rights Foundation, a pro-cryptocurrency group that sees financial freedom as a critical human right. He tweeted a year ago that the introduction of CBDCs “makes censorship and blacklisting easier, helps to activate forced spending and negative interest rates, kills privacy and freedom preserving cash, and creates a much more effective and unencumbered surveillance state.”

Nothing that has happened in the last year has alleviated those concerns.

 

CBDC Before and Through the Pandemic

It was in 2019 that the Bank of International Settlements published what has since stood as an influential discussion of CBDCs. The BIS found that half of the central banks it surveyed reported that they were “looking at both wholesale and general-purpose CBDCs” and that 40% had progressed from “conceptual research to experiments.”

In a lot of ways, the world looks much different now than it did in 2019. A new U.S. president, a war in Ukraine with enormous implications for global markets, the coming and (for the most part) the fading of a global pandemic, the fall of an administration in London, and much else separates that year from ours.

Yet, a bandwagon has rolled on at least since the BIS publication appeared. As usual, the news that everybody is doing X has helped to advance the process in which everybody picks up on doing X.

In 2020, France and South Korea explicitly began experimenting with test-use cases for CBDCs.

RELATED: Will Central Banks Switch From the U.S. Dollar to the Chinese Yuan?

In October 2020, the ECB issued a detailed report explaining why a CBDC may be necessary for Europe, and it promised to hold public consultations on the idea. That may have sounded tentative, but the ECB has since gone a good deal further.

In June 2022, Fabio Panetta, a member of the ECB’s executive board, outlined to a committee of the European Parliament the board’s plans for a digital euro as something that “could be used for any digital payment, would meet Europe’s societal objectives, and would be based on a European infrastructure.”

In April 2021, the Bank of England and Her Majesty’s Treasury announced a joint task force to look into the possibility of a CBDC there, one soon cutely called “Britcoin” by the press.

 

President Biden and the U.S. Treasury 

On March 9, 2022, U.S. President Joseph Biden signed an executive order on “ensuring responsible development of digital assets.” Among its other bullet points, the order called for the “exploration” of the “technological infrastructure and capacity needs” for a potential U.S. CBDC that would “protect Americans’ interests.”

In early July, the Treasury issued a report filling in some of the gaps in that executive order. The Treasury is now on board with a broad international move toward CBDCs with the goal of countering the “illicit finance and national security risks posed by misuse of digital assets.”

When does finance become “illicit?” The question brings us back to the Gladstein tweet. The underlying premise is now that there is something suspect about the very fact of saving. Thus, the powers-that-be look to “activate forced spending and negative interest rates.”

Nothing that has happened in the year since Gladstein wrote those words has alleviated his concerns.

Let us look further into the issue of negative interest rates. The term means what it sounds like it means. The Riksbank of Sweden announced in 2009 that it would charge banks to hold deposits. In effect, then, it was charging them for a failure to put the money to work. That, of course, was a response to the global financial crisis then bottoming out.

Others have repeated the experiment in other forms since. The central bank of Denmark in 2012 set its key policy rate in negative territory.

Once the use of a CBDC is widely accepted throughout a society, its use must ease the implementation of a negative interest rate policy. The central bank, as the focal point of all financial transactions in such a system, can then by fiat make holding cash reserves costly.

It is a truly perverse policy idea, and such experiments as have been done along these lines have been unsuccessful. They are, by definition, disastrous for savers. That is one of the central purposes, after all: to stigmatize saving as “hoarding.”

 

A Final Thought

Some political pushback against such plans may be developing at last. How far or fast the U.S. will move toward CBDC and/or negative interest rates is known only to those with properly functioning crystal balls.

Still, the prospect is sufficiently real to make a clear case for the ownership and physical possession of precious metals. With gold and silver, at any rate, holders know they have savings that have no digits, that can never be erased or reduced by a central bank’s computer.

Ready to invest or want to learn more? Claim your free one-on-one consultation.

The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.

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Some of the elderly who work do so because they want to, some because they have to, and some for a blend of those reasons.

People well over 65 are remaining in, or returning to, the U.S. workforce in impressive numbers. According to Indeed, as of April 2022, 1.7 million people had unretired over the preceding 12 months. Indeed’s economist, Nick Bunker, analyzed data from the federal government’s Current Population Survey.

 

Why is this a trend in 2022? One background consideration: many older workers were pushed out of work during pandemic-related closures. Or maybe they retired as part of a broader desire to isolate themselves. Either way, as the pandemic has receded, they have returned to the picture.

If we take the pandemic as having begun in February 2020, the number of people who retired in the following year and a half who were under 60 is greater than the number who did so in the age bracket 60-67 (700,000 and 500,000 respectively).

More poignantly, though, the unretirement trend of 2022 is a consequence of inflation as it impacts a fixed income. Inflation hit an annual rate of 8.6% in May. It hasn’t been in that neighborhood for 40 years, since the time when the people now retiring were still new to the workforce.

 

Glass Half Empty or Half Full?

“There is no more retirement,” John Tarnoff, a career counselor, bluntly told Yahoo Finance. “The costs of living were going up even before the current inflationary cycle that we’re in now—costs were rising, fixed incomes were no longer good for people, Social Security as an institution is under threat.”   

Bunker has a more optimistic view of the reasons for the return than Tarnoff.

“As COVID seems to be waning, the labor market continues to be strong, and nominal wage growth is still fairly high; that’s enticing people to take jobs,” he said.

Jun Nie and Shu-Kuel X. Yang, the co-authors of an analysis for the Federal Reserve Bank of Kansas City, speak of unretirement as a “postponement” of plans. Perhaps a couple still plans to travel, or move to a condo near a Tampa beach. “Many of those who postponed their plans [in order] to rejoin the labor force still have time to do so when the pandemic ends,” said the analysts.

As these different analyses suggest, Tarnoff may have overstated matters with the blanket assertion that “there is no more retirement.” There are other ways of looking at this “glass.”

Still, if there are people in the workforce who still have the idea, even if only in the back of their heads, that there exists a secure safety net that comes into position for them at some point between the ages of 60 and 70 and that rescues them from the need to keep working, it would be wise for them to abandon that premise.

 

Tax Considerations

As this idea is abandoned, tax considerations come into play. Retirees on social security who are returning to the workforce may have to re-acquire the abandoned habit of filing tax returns.

They may then encounter some unpleasant surprises. For example, consider a retiree (John Smith) who had a long career in footwear marketing. Smith comes out of retirement because the world traveling that he had hoped to do is more expensive than he had thought it would be.

It may prove that the most convenient way for Smith to get back into the workforce is for him to become a contract consultant. Nike may be reluctant to expand its payroll to take him on.

In that case, as a 1099 consultant rather than a retiree, Smith will have to pay both the employers’ and the employees’ side of the retirement tax. This may mean that his real pay is a good deal less than he had expected.

Spencer Betts, a certified financial planner in Massachusetts, told Yahoo that workers should be mindful of what stage of retirement they are in before they unretire. Retiring before full retirement age and then unretiring has consequences.

“If you’re below full retirement age, you can make up to $19,560 and receive all your benefits.” But above that threshold, you give $1 of your social security back for every $2 you earn.

 

The Future of Unretirement

Of course, one can at best make guesses about the future of unretirement as a trend. A rosy scenario is that the inflation beast is quickly tamed. Morningstar suggests that consumer prices could fall precipitously in 2023. That would presumably reduce the rate of unretirement and allow us to say to people who have delayed their travel plans, “bon voyage at last!”

One can’t count on “rosy,” though. In some areas (such as the market for rental housing), the inflation dangers are more ahead of us than behind. Furthermore, more-or-less explicitly pro-inflation ideas, such as “modern monetary theory,” are getting a foothold in the academic and think-tankers’ mainstream, and that foretells trouble.

The future of unretirement also depends on epidemiology. The pandemic seems to have faded, much of the populace is vaccinated, and there are treatments available that were undreamt of two years ago. All that said, though, it is still possible that COVID has tricky new variants up its sleeves that will persuade some of the retired, those on the margins of a back-to-work decision, that they are better off staying retired.

Another epidemic entirely, the monkeypox or something now unforeseen, could further complicate the lives and decisions of people on that margin.

Epidemiology cuts in at least two ways. On the one hand, as noted, retired people may well decide that it is easier to isolate themselves and avoid contagion if they remain in retirement. But on the other hand, a viral outbreak may also exacerbate labor shortages or create new ones in industries where they don’t already exist. This could push wages up, luring people out of retirement.

 

The Bottom Line

The bottom line, though, is that there is no guarantee of tranquil, trouble-free golden years outside of the portfolio you have built for yourself.

A sound portfolio will be a diversified one, and precious metals will be part of that diversification.

Ready to invest or want to learn more? Claim your free one-on-one consultation.

The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.

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Too much talk about generations in finance is flip and vacuous, to the level of declarations that the greatest generation stormed the beaches of Normandy, the boomers grew their hair long and unkempt, and the kids today can’t pull themselves away from their screens.

In what follows, we will avoid flippancy and approach in an analytical spirit the question of how the distinct generations in American life over recent decades have adopted different attitudes toward their investments and especially (although not uniquely) different attitudes about precious metals.

 

Generations Defined

Discussion is advanced by a definite terminology, even if it has to be a bit arbitrary.

  • Baby boomers were born between 1946 and 1964. This means that the oldest of them began retiring around 2011, and the youngest will reach the traditional retirement age in 2029.
    • Boomers, early or late, want the money they saved through their working lives to last at least as long as they do, with perhaps something left over for their heirs.
  • The members of Gen X were born between 1965 and 1980. The youngest of them have a lot of time left in the working world.
    • By now, even the very youngest of them, have set some savings aside for retirement and may be looking for good ideas as to how to make that nest egg grow.
  • Millennials, who were born between 1981 and 1996, are in their younger working years.
    • Most of the millennials who do invest are still in an early exploratory stage of their own experience.

With those demographics in mind, we’re going to focus on what each generation thinks about precious metals. Are there differences in attitudes across these groups, and are those differences value drivers?

RELATED: Retirement Woes Only Baby Boomers Will Understand

Our conclusions, in brief, are as follows:

  • Boomers still have a comfort zone in which equity, debt, and realty dominate portfolios. To them, precious metals are largely a niche asset.
  • Gen X is less set in its ways than boomers, but its members do retain a certain hesitancy about gold as an investment.
  • Millennials have a broader comfort zone than older investors. A greater attraction toward precious metals as an asset class is a part of that.

 

How Baby Boomers Became Bullish on Stocks

Even the oldest baby boomers weren’t born until years after President Franklin Roosevelt broke the strong tie between the U.S. dollar and the value of gold. They were born under the Bretton Woods system (which entailed a weaker tie between the two), but they were still in their 20s when President Richard Nixon broke that tie, too.

RELATED: What to Own When the Dollar Collapses?

The value of the dollar has “floated” freely (usually sinking) vis-a-vis the value of gold ever since.

Meanwhile, the stock market was largely stagnant through the 1970s. This stagnation coincided with rampant inflation. The combination held until 1982, by which time Paul Volcker at the Federal Reserve had administered the tough medicine necessary to wring inflation out of the system.

Volcker thus had set the stage for a boom in the value of U.S. equities that began in 1982 and continued for the remainder of the century, with an aggregate move of 1,100%.

Boomers fell in love with stocks during this long period. This became part of something broader: equity was part of a comfort zone of the sensible investments, along with bondssovereign and corporateas well as real estatenot limited to but including a boomer’s own home, which was the single most important investment for many families.  

Many have, of course, made investments outside of that zone, in part because the boomers have never forgotten that they witnessed the persistent inflationary spirals of the 1970s in their youth. Some have looked to precious metals as a hedge against a recurrence of that pestilence.

 

Gen X and Millennials

Gen X members have lived past the exploratory investing stage in which the millennials remain. But they are not as settled into their ways as many of the boomers are.

There can, indeed, be an air of impatience to Gen X investing. In these uncertain times, they have little confidence that the time they have left until retirement will be “enough.”

Yet for all that, Gen X retains a certain hesitancy about precious metals as an investment. They may have inherited this hesitancy, or they may have picked it up in the 1990s when investments in the three traditional portfolio components did very well.

A 2020 survey asked adult Americans of a wide range of ages whether they own precious metals in the form of bars or coins and, if so, which metal(s).

The results show that 10.8% of Americans own gold, while 11.6% own silver. Those are overlapping sets, and the percentage of Americans who own one or the other is 16%.

Women were more likely than men to say that they own neither, and Gen X was more likely to say this than millennials. The percentage of Gen X women who said that they own neither gold nor silver was very high at 89%.

 

Confidence in the Choice of Metal

Let’s look more specifically at the older half of the millennial bracket, those born in the period 1985–95. We find that those who were invested in at least one of these metals were likely to be particular. A healthy 5.1% of the men in that group said that they owned only gold, not silver. This was the highest percentage of any demographic to select the “only gold” option. Meanwhile, 5.6% of the women in the same age cohort said they owned silver but no gold.

Therefore, millennials are both more likely than their elders in Gen X to say that they own one or the other, and more likely to own only one, suggesting that they are comfortable enough with the category to be particular in their choices.

We can offer some broad hypotheses about the significance of these numbers in terms of the recent economic history of the United States. Typical members of Gen X became responsible for earning their own income, paying off their student loans, etc. in the 1990s. This was a time of boom when the internet was bringing a new level of efficiency and productivity to the economy.

 

Attitudes Toward Wealth and Toward Crashes

Members of Gen X — in this respect, they are akin to the boomers before them — came to expect that a traditional portfolio, with equities, bonds, and perhaps some real estate, will stand one in good stead for the future. Indeed, ownership of a family’s principal residence is 12% of the investment portfolio of this generation. Outside of these familiar investments, many Gen X’s see gold and silver as chancy commodities, useful niche investments at best.

Millennials, on the other hand, have attitudes toward wealth informed by the dot-com collapse at the turn of the millennium and the attacks on New York and Washington on September 11, 2001. Some became adults concurrently with the global financial crisis of 2008, a meltdown of traditional financial structures.

The older generations, the boomers and Gen X, drew one lesson from that meltdown. But the younger generations, the millennials and their successors, Gen Z, have drawn another. Older folks have often reasoned that the best thing to do after a crash is to hold on to one’s assets and await the recovery. Equities come back; another hill follows every valley in the stock charts, they remind us.

 

A Broader Comfort Zone

Millennials, on the other hand, have never acquired the expectation that a traditional portfolio will do the job they need done in order to feel secure in their retirement, so that absent expectation leaves them with no reluctance to look elsewhere.

The turmoil at the end of the first decade of this century made them more likely to add metals to their portfolios and, over time, may make them more confident in being picky about which metals they buy. This accounts for the many “only gold” or “only silver” responses in the above-mentioned survey.

The same generational shift also manifests itself in a greater comfort level regarding cryptocurrencies. Although the two asset classes seem antithetical (crypto assets, of course, have no physical existence, while precious metals are the ultimate in the tangible), they are both outside of the once-fashionable portfolio mix of stocks, bonds, and real estate. And they are both becoming more acceptable to new investors as they get, wellnewer.

 

Less Trusting of Advisers

Another related point is that millennials are less trusting of professional financial advisers than their baby-boomer or Gen X elders. In a survey by Accenture, they appeared four times more likely than boomers to say that they would not act on the suggestion of a financial adviser without doing their own independent research.

 

If it’s time for you to invest, you can sign-up for your free, no-obligation, one-on-one consultation. Our account executives are happy to answer all of your questions and figure out which option is best for you.

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A gold ETF, (exchange-traded fund), is a commodity ETF that holds derivative contracts backed by gold.

RELATED: Gold ETFs and the Global Gold Marketplace

Gold ETFs, that is, gold-based passive investment instruments designed to track the ups and downs of the value of that metal, will mark their 20th anniversary as an asset class in March 2023. This is a good time to review the instruments, their pluses and minuses, and their impact on the market for physical gold.

 

 

Why Gold ETFs?

Gold ETFs have exerted an appeal to many investors over the years since their creation. Why? They can be inexpensive, and thus accessible to investors who would balk at the price of coins or bullion. Furthermore, investors daunted by the idea of storing and safeguarding physical gold are sometimes relieved to think that this “paper gold” gives them the same risk-adjusted reward with less fuss.

Gold ETFs also offer intraday liquidity, akin to stocks and bonds. This is attractive because it gives people a sense that the door would not be locked should they need to make a quick exit from a tight spot. (We will have something more to say about that metaphorical door later.)

 

Three Questions

The very attractions of ETFs raise several questions, though:

  1. How large is the market for gold ETFs?
  2. Does it have an impact on the physical gold market?
  3. Should someone holding physical gold, or considering that possibility, worry about negative feedback from the ETF market?

Our answers to those questions below are, respectively: very large; possibly; no. This will lead us to an observation about the reasons why many investors stick with physical gold.

 

How Large is the Market?

If we exclude from our count leveraged or inverse funds, or any funds with an asset under management figure below $50 million, and if we focus our attention on funds that invest directly in gold futures contracts or gold bullion–setting aside those that own stock in companies that mine for gold–there are 10 exclusively gold-oriented ETFs now trading in the United States.

Even with this narrow definition of the subject matter, the size of the market is impressively huge. Those 10 ETFs have among them, at this writing, more than $103 billion in AUM. That is roughly a respectable 1.11% of the dollar value of the total supply of above-ground gold in the world.

 

What is the Feedback Mechanism?

The question about the impact of ETFs on their underlying asset is not unique to gold. One can ask analogous questions about the net asset value that underlies any exchange-traded fund. Is the ETF merely a price discovery mechanism, or is there a feedback mechanism? Is an ETF for, say, widget manufacturers a reflection of what is happening in the widget space, or does it become a driver?

There was a lot of turmoil in a lot of markets in March of 2020, as the significance of the pandemic first became obvious in much of the world. For illiquid underlying securities, investors traded in the liquid ETF shares instead. In this situation, ETFs were a valuable price discovery mechanism, working the way their designers long thought they would.

But 10 years earlier, in the flash crash of 2010, feedback from equity ETFs seemed to have played a role in shocking the underlying equity markets.

 

Considering Two Flash Crashes

The DJIA collapsed on May 6, 2010, falling 998.5 points in 20 minutes. This implied a market value loss of $1 trillion.

As the term “flash” suggests, this didn’t last. The market rebounded and ended the day close to where it had begun. It wasn’t a disaster.

Yet, it was a scary ride, and it threw a harsh spotlight on a number of market structural issues: the rise of high-frequency trading, the use of aggressive algos, and the presence of an “information channel” that allows for feedback between ETFs and their underlying asset.

Likewise, on January 6, 2014, a gold derivative (gold futures at New York’s Comex) had a flash crash of its own. More than 4,000 sell orders hit the electronic trading markets at 10:14 EST. This showed up on charts as a straight vertical line. In milliseconds, gold lost $30 per ounce, from $1,245 to $1,215. Again, the recovery was quick.

Assume that there is an information channel connecting ETF and derivative moves to physical value. Is that a negative factor weighing on the latter? Especially with regard to gold? Perhaps, but the year 2014 was an unremarkable one from that point of view. There was a broad bull rush early in the year, then the ground was lost. The metal ended the year about where it had begun. It isn’t easy to find the effects of derivatives feedback in the noise.

 

The ETF-Gold Relationship

In theory, one would expect the prices of ETFs to follow the net asset value of the underlying. After all, wouldn’t arbitrage quickly close any gap that developed?

In practice, though, there are inefficiencies at work that involve such gaps.

Let’s return to the question of an “information channel.” The hypothesis of an information channel can be stated simply, and applies to gold as readily as to stocks: if investors are using ETF numbers as a symptom of the near-future value of gold, then those ETF numbers will impact the demand for the physical metal.

If the gold-based ETFs make a sharp upward move, even for a technical reason only tenuously related to the underlying asset, this upward move will cause some people to buy gold who otherwise wouldn’t. Some of these buyers will be mistaken about the value of what they are buying, others may be engaged in deliberate arbitrage.

What we can say in general about the relationship between ETFs and the underlying market is that there is some feedback from the price discovery, and the feedback may be inefficient. But such effects as there are, are generally swamped by noise and evened out, over time, by arbitrage.

 

Profit Taking in April 2022

To consider a recent development: profit-taking in the ETF markets has been blamed by some for the drop in gold prices in mid-April 2022. Gold was above $1,950 in the middle of the month and fell into mid-May before finding a ceiling below $,1800. By the end of June, it was back above $1,800 but still well below its mid-April value.

It’s possible that profit-taking among gold ETF investors kicked off the downward move. By mid-May, some gold ETF analysts were talking about how they had had to recalibrate their models.

Yet, there are real-world developments that likely overwhelm the paper-gold/physical gold tie. The initial shock of a war in Ukraine may have kicked gold up to unsustainable levels, and the fall may simply be a typical correction.

Where there are inefficiencies and the possibility of mistakes, there is also the possibility of manipulation. None of this should keep one from owning and holding physical gold if it serves a valuable role in one’s portfolio.

 

A Problem with Gold ETFs

We began with a brief account of the attractions of gold ETFs vis-à-vis the physical stuff. Let’s conclude with the other side of that ledger.

An investor should also consider whether gold ETFs are selling something that they aren’t really providing: a tie to that physical gold. As Addison Wiggin suggested 12 years ago, ETFs can be a vehicle to allow duped investors to believe they have gold when, in fact, they have merely “a claim on the same chunk of gold as, say, Goldman Sachs. But Goldman would have the actual metal. The ETF investor [in a crunch] would have to settle for pennies on the dollar.

It may turn out, then, that the greater liquidity in the event of a rush for the metaphorical door, one of the attractions of paper gold, is illusory when it is needed most.

 

A Final Point

As a related and final point, one of the most attractive features of gold, as an investment, is that there is no “counterparty” whom one has to trust to preserve its value. The value of a stock depends on the profitability of the issuer. The value of a bond depends upon its solvency. But the value of gold in storage is blessedly free of such worries.

Paper gold, though? It’s rife with counterparties and attendant risks.

 

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The month of May witnessed a further intensification of the western world’s sanctions against Russia.

These new moves bring to the front burner again questions that have been on the financial stovetop ever since the war in Ukraine began: questions about Russia’s likely responses as the west’s sanctions do ever-greater damage, and questions about whether and to what extent those responses may hurt owners of gold throughout the world.

Our short answer here will be that Russia may well soon sell large amounts of gold through difficult-to-trace transactions. But even if that happens, the consequences for the value of gold will not be devastating. The best advice may be a cliche from another war: “Keep Calm and Carry On.”

Fleshing this out requires some history.

 

Russia Becomes “Radioactive”

Russia invaded Ukraine in February. Almost right away, nations and international organizations began imposing economic sanctions on Russia in hopes of depriving that country of the economic wherewithal to wage a sustained military campaign.

One very important example involved the Society for Worldwide Interbank Financial Telecommunication (SWIFT). SWIFT is headquartered in Belgium and is owned by member financial institutions. It exists as a cooperative society under Belgian law.

The SWIFT messaging system is central to cross-border financial transactions.

On February 26, the United States, the United Kingdom, the European Union, and Canada all agreed to block the access of Russian banks to SWIFT. On the same day, Ross Delston, an American lawyer and a former consulting counsel with the International Monetary Fund, said, “It’s going to result in Russia being viewed as radioactive by US and EU banks, which in turn would be a major barrier to trade with Russia.”

 

Gold as Russia’s Answer

Russia’s central bank, though, has more than $140 billion in gold. It may draw upon this stash to mitigate the consequences of that radioactivity.

Within two weeks of the action regarding SWIFT, the mainstream media saw a rash of speculation about how President Vladimir Putin and those around him could liquidate their gold reserves in order to raise the cash to keep paying the interest on those bonds.

 

Delston was Right

The exile from SWIFT, and other sanctions, have in fact had the predicted consequences. One manifestation: according to a report by the Congressional Research Service (CRS), the volume of Russia’s imports has contracted and will continue to contract. Russia’s imports by volume, the CRS projects, will fall by 22% in 2022.

Another impact is that more than 750 multinational corporations have limited business with China beyond what legal/regulatory changes require.

Many factories in Russia have suspended production because the supply chain difficulties have become insuperable.

What the elite in Russian society and government probably care about even more than any of that, though, is the country’s ability to continue to make payments on its bonds. If their bonds, too, become radioactive, they will not be able to go into the international credit markets in support of an increasingly expensive war.

 

If Gold is the Answer, What Are the Questions?

Russia’s central bank has been a net buyer of gold in recent years. In 2014, it picked up the pace of its gold purchases. That was also (not coincidentally) the year that Russia occupied Crimea. The stepped-up purchases were likely to prepare, precisely, for a contingency in which an unfreezable asset would be critical to a face-off with western countries.

This raises some obvious questions:

  • More than three months into the sanctions, have there been any big Russian sell-offs?
  • If not: might there be yet, as the pressure ratchets up further?
  • Could Putin and the Russian elites pull off a scaled-up gold sale?
  • If so: what would be the likely impact of those sales on the value of gold?

By the time the first month of the war was out, the United States was reacting to the speculation on such subjects. It announced, in effect, that it wasn’t going to allow the Russians to sell their gold.

Gold traders expressed skepticism immediately about the ability of the United States, or even the broad coalition of sanctioning nations, to prevent such sales.

 

Russia Can Likely Still Sell Gold

There is a general consensus that Russia could sell the gold. Specie can be moved about the world physically without leaving a paper or digital trail for sanctions-enforcing officials to track.

If Russia did this, it would be following in the footsteps of Venezuela under Hugo Chavez and Nicolas Maduro, who took over after Chavez.

In 2011, Chavez repatriated 160 tons of gold reserves from Europe. The US Congress passed a law in 2014, early in the Madura period, mandating sanctions with the goal of regime change. President Barack Obama complied with this law in 2015, and the sanctions were tightened later by President Donald Trump.

The Venezuelan financial system has been increasingly isolated from the rest of the world since then, over a period of eight years. But there has been no regime change because the regime has its gold.

It is worth observing that Putin assisted Maduro in this. Gold bars have traveled from Venezuela to a number of gold-buying destinations, where such transactions can be kept off-book (Uganda, the UAE, and Turkey among them) in Russian charter planes. Venezuela exchanged the gold for euros and used the cash infusion to purchase imports.

Russia, then, knows the playbook and could follow it with its own gold stash. For the sake of the re-enactment, the third-party currency it receives for its gold would not be the euro. But Russia might well trade physical gold for Chinese yuan or Turkish lira.

Why has it not done so yet? Since, as noted, such things can be difficult to track, it is not clear that it hasn’t. But gold sales on a scale necessary to counter the sanctions would be sure to become common knowledge and would be a blatant sign of desperation. Understandably, the Putin circle is less than eager to send such a signal.

 

What Are the Consequences for Gold’s Value?

After that long trip, we have arrived at our destination. If Russia does in fact liquidate much of its gold in order to continue its war, what impact will that have on the gold in investors’ safes in the US and elsewhere?

A priori one might expect that such a development would depress the value of gold. There would be a larger supply of gold circulating around the world and no extra demand for it. Doesn’t that situation definitionally depress value?

Perhaps. But Russian sales would not necessarily mean a larger supply of gold circulating in any very strong sense. Whoever purchases such Russian gold is unlikely to sell it on the open market anytime soon. The transaction may amount in effect to what happens when one hoarder sells part of a stash to another hoarder. The impact on third parties of such a trade can be slight and (unless those third parties happen to be selling at just the same moment) largely hypothetical.

In broad strokes, the recent discussion of the fate of Russia’s gold may remind us that the value of gold is not driven by short-term supply and demand in the manner of a commodity. It is determined, rather, by financial factors and longer-term expectations.

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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.

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“The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice.” — Henry Hazlitt, “The Search for an Ideal Money”

Hazlitt, when he wrote the above words in the midst of America’s struggles with inflation in the 1970s, could have been writing of the precious metals as a group.

“Gold” often serves as a synecdoche of the whole asset class. The precious metals constitute a hedge against inflation, they have intrinsic value, holding these assets creates no counterparty risk, they are easy to sell (that is, very liquid), and they add diversity to a portfolio. But these points are all merely variations on Hazlitt’s theme.

Half a century later, many investors decided that Hazlitt was right. They want in on precious metals. This brings them to the next question: how should they go about choosing the particulars?

As a partial answer to that question, what follows is a discussion of the differences among gold, silver, platinum, and palladium, and how they matter.

We will not discuss financial derivatives, indexes, ETFs, mutual funds, or mining stocks as ways of gaining exposure to these metals. All those options exist, and they are important, but they are the proper subject of subsequent articles.

For now, we will generally assume an investor interested in the physical ownership of a precious metal, though some of our observations here will be pertinent to those other plays as well.

 

Palladium: Coins, Converters, and Risk

Let us consider palladium.

Like each of the other metals just described, palladium is used in jewelry. But most of the action of this metal is in its industrial uses.

And there’s the rub, for palladium’s chief industrial use is in neutralizing harmful emissions. That is 80% of the metal’s demand. A scaled move away from the internal combustion engine toward alternative means of transit could be a serious blow to demand. Even short of that, automakers could devise a way to accomplish the catalytic conversion with a less expensive metal.

Palladium is also used in coinage, although that is rare and recent. The first recorded case was occasioned by the coronation of a King of Tonga in 1967. The government of that South Pacific island commemorated the ascension of King Taufa Ahau Tupou IV with a palladium coin.

In general, palladium is a very speculative play for a retail investor.

 

Platinum Bars, Coins, and Price Moves

Let’s move on to platinum, another industrial metal.

It is possible to buy physical platinum either as a bar (the sizing of the bars depends on the foundry) or as a coin. But platinum bars are both inconvenient to store and illiquid.

Platinum coins are a somewhat more recent phenomenon than gold or silver coins, but still, they preceded the coronation of the King of Tonga by more than a century. Such coins were an innovation of the Russian monarchy in the early 19th century. They’ve had a spotty history since, in part because they can be uncomfortably easy to counterfeit.

More recently, there has emerged a very convenient way for retail investors to expose themselves to this metal: the U.S. mint has been issuing the American Platinum Eagle since 1997.

As to price, what is intriguing about platinum is that although its price moves roughly correlated with those of gold from 1985 to 2014, they have followed very different paths in the years since.

Both metals peaked and fell sharply in the midst of the global financial crisis of 2008, and both quickly recovered.

Platinum hit another peak in January 2011. Gold did the same. Then each headed south, but gold reversed its course, heading up again in 2014 as platinum continued down. One likely explanation for this divergence: in June 2014, the European Central Bank announced nominal negative interest rates, because the ECB was afraid of deflation. This may have pressed some investors to look for an inflation hedge. Gold is among those, platinum is not.

Gold and platinum have been uncorrelated since that time, although it is too soon to declare that a reliable trend. What is clear, though, is that platinum has not attained the safe harbor status that belongs so conspicuously to silver and gold. Historically, it is also the most volatile of the four.

 

The Two Ancient Plays: Gold and Silver

The history of gold and silver is measured not in centuries but in millennia. Gold has been employed for decorative purposes since around 4000 BC. Silver, likewise, was used to fashion beads in predynastic Egypt. Gold and silver may have had a common origin as currencies somewhat later. Both were used as such in Lydia (Asia Minor) in the late 8th century BC.

Today, while gold and silver each maintain their aesthetic appeal, they also have acquired industrial uses that would have been unimaginable to the Lydians. In the words of Bert Chandler, Penn State professor of chemical engineering, “Gold is valuable because it is highly selective, reacting with one molecule but not another. This is a very desirable characteristic in lots of separation and purification processes in chemical engineering.

Silver may be found in electrical switches and solar panels. It is also used (because it is antibacterial) in a lot of surgical equipment.

 

How Do Gold and Silver Compare?

Silver and gold are each a sounder play than platinum or palladium for the broad purpose of helping an investor manage the risks of a portfolio, for the reasons Hazlitt set out. But how do silver and gold compare to each other?

Silver has what seems to be an obvious advantage for many. It is a good deal and more affordable on an ounce-by-ounce or coin-by-coin basis.

There is a more subtle point in silver’s favor. Institutional stockpiles of it are shrinking over time. Relevantly, silver stockpiles considered as a percentage of all silver ever mined are smaller than gold stockpiles as a percentage of all gold ever mined. Some investors may find in this a comforting assurance that the price of silver is not going to be undermined by a glut.

Relatedly, at contemporary prices for each of the ancient metals, the annual gold supply is 12 times bigger than silver’s.

But there are two important negatives investors have to consider before committing to silver. Its price is more volatile than gold. This raises the possibility that if one has to liquidate one’s position quickly for some reason, one will end up doing so in a trough created by that volatility. It can feel like a “fire sale.”

On the flip side, silver can outperform gold during times of higher industrial demand.

 

Silver and Storage

The second important negative: there are storage complications with the ownership of physical silver.

This is a granular matter often ignored even by careful analysts. There are at least three aspects to it. First, for any given amount of money you have invested in a precious metal, you have to ownand storea lot more of it if you bought it in silver than if you bought it in gold. This is just the flip side of its greater affordability.

Second, though, gold is a lot denser than silver. An ounce of gold takes up more space than an ounce of silver. If you combine these two points and do the math, you find that silver requires 128 times more space than gold for a given dollar value.

Third, silver will tarnish in an environment that is not monitored and kept dry.

 

Final Thought

Every investor ought to study his portfolio needs with due diligence, of course, and conclusions will vary. It is safe to say, though, that many will reach the conclusion that the most suitable precious metals are the ones that have been prominent assets for the longest: gold and silver.

The relative assessment between those two is more difficult, but again, it is likely that many will reach the conclusion that there is room for each.

Let us provide you with a free one-on-one consultation.

The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.

60 Years Experience

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GOLD IRA GUIDE

By clicking the button above, you agree to our Privacy Policy and authorize Red Rock Secured or someone acting on its behalf to contact you by email, text message, pre-recorded message, or telephone technology on a recorded line, for marketing purposes. Consent is not a condition of any purchase.