Monetary Elite from Multiple Camps Plot Currency Strategies

Investments in physical bullion continue to outperform mining stocks

Mike Gleason Mike Gleason
Interview with: Mike Gleason
August 25th, 2023 Comments

Also listen and subscribe on:

Welcome to this week's Market Wrap Podcast, I'm Mike Gleason.

Precious metals markets are rebounding this week as central bankers from around the world gather at Jackson Hole.

Investors nervously awaited remarks by Federal Reserve chairman Jerome Powell. Fears of a hawkish tone to this year's conference helped drag down the stock market on Thursday.

Gold and silver markets, meanwhile, are holding firm compared to stocks. Earlier in the week, gold rallied off support at the $1,900 level – gaining despite the U.S. Dollar Index moving higher for a sixth straight week.

As of this Friday recording, the monetary metal checks in at $1,918 an ounce -- up 0.9% since last Friday's close. Silver shows a weekly gain of more than $1.25 or 5.6% to bring spot prices to $24.29 an ounce. Platinum is up 2.7% this week to trade at $953. And finally, palladium prices are moving lower by 2.3% for the week to come in at $1,271 per ounce.

Metals markets appear to be well positioned for a seasonal rally heading into the fall. Bulls would like to see more assurance that the Fed is content to stop hiking interest rates. In that regard, any bad news for the economy will likely be seen as good news for precious metals markets.

As investors look for clues about what monetary central planners are thinking at Jackson Hole, the BRICS countries – Brazil, Russia, India, China, and South Africa – are holding a summit of their own in Johannesburg. There, South Africa's president announced that the BRICS alliance will be expanding to include Saudi Arabia, Iran, the United Arab Emirates, and other African nations. Argentina has also been invited to join.

Among the goals of the growing BRICS bloc is to create a new currency order. Brazilian president Lula da Silva called for the creation of a BRICS currency to rival the U.S. dollar.

However, representatives of India and South Africa stated that developing a new currency is not yet feasible.

Russian officials had teased that the BRICS would move to establish a currency backed by gold. That may continue to be a long-term goal, but it's not happening quite yet.

In the meantime, Russian president Vladimir Putin continues to advocate that BRICS countries switch away from the U.S. dollar in international trade. That means using rubles, yuan, and other national currencies as final payment.

But the value of the Russian ruble has been plunging recently. And hostilities toward China are rising in the West and among some of its Asian neighbors.

Other countries that are in or could be soon joining the BRICS bloc have serious domestic inflation problems. The one currency that would be universally trusted by all member countries would be gold.

Remonetizing gold on a large scale could set off a scramble among central banks to acquire bullion reserves.

Even under the current fiat currency regime, central banks have been big buyers of gold in recent years. It makes sense for them to diversify their reserves away from U.S. dollars regardless of whether “King Dollar” is dethroned as the global standard for international trade.

The fact is that the Federal Reserve note is losing market share and real value. Both central banks and individual investors gain some measure of protection against ongoing currency devaluation by diversifying out of fiat cash instruments and into hard money.

In other news, the flagship VanEck Gold Miners ETF which holds a basket of majors including Newmont, Barrick, and Agnico Eagle, is down about 4% year to date.

It's a continuation of a long-term trend of underperformance. Since its inception in 2006, this mining ETF has delivered a dismal total return of -16%. Over that same period, spot gold prices have gained a stellar 200%!

It's not even close. The difference in performance reflects the fact that these are entirely different asset classes. Even though gold stocks and gold bullion both attract investors who are bullish on spot prices, only the metal itself is sure to gain in a bull market for gold.

Mining stocks are capable of delivering outsized returns in the right conditions. But unfortunately for investors, the mining sector's woes seem to persist year after year.

At the core of the problem for gold majors is rising production costs and declining production volumes.

All-in sustaining costs for the largest gold miners are soaring at an annual rate of over 7%.

The mining industry is financially unsustainable at current spot prices for metals. The only thing that will turn its fortunes around – and incentivize exploration and development of new mines – is higher market prices for what it produces.

It's true that some smaller operators are faring better in this environment than the majors.

And, as usual, royalty and streaming companies are outperforming – thanks to their superior business models which avoid most cost inflation and operational risks because they take their revenue right off the top.

It's also true that total global gold production from all sources has so far not shown an annual decline.

But amid growing demand for metals, supply deficits loom for gold, silver, platinum, and palladium. The more pain the mining industry suffers, the bigger those deficits are likely to be.

The same forces that threaten to bankrupt mining companies paint a hugely bullish long-term picture for physical precious metals markets. It's all about supply and demand.

When gold and silver bull markets do resume in earnest, shares of well-positioned miners will undoubtedly go up as well. Some may even deliver explosive gains. But history shows that run ups in the mining sector tend to be fleeting.

At the end of the day, a mining stock is a financial asset. Its performance depends heavily on factors such as management acumen, the regulatory environment, sentiment on Wall Street, and costs for capital, labor, and energy.

The actual mined and refined product, physical bullion, carries none of these business risks. An ounce of gold is money itself. As such, it can be expected to retain its purchasing power over the longest of timeframes more reliably than any financial asset.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a wonderful weekend everybody.

Mike Gleason

About the Author:

Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.