You Think Toilet Paper Is Scarce? Try Gold!

There’s a common argument against owning gold. You can’t eat it, drink it, shoot it or build with it. It’s good for nothing, so why bother?

I’ve heard people say that in a “real” crisis, every bullion coin and bar in the world will be worth less than a roll of toilet paper — a sentiment that seems particularly apt these days, if not ironic.

Well, first, the fact is that you technically can eat, drink, shoot and even build with gold — but why bother? There are far less expensive alternatives.

Still, I’ve heard of upscale restaurants decorating expensive food and drink with gold leaf. And gold would make a decent bullet; the Lone Ranger used to pack silver bullets. And we’ve all heard stories of ultra-rich people owning solid-gold objects, like those fancy gold bathroom  fixtures in the palaces of Arab sheiks.

(Along such lines, Vladimir Lenin once boasted, “After we are victorious… we will line with gold the public toilets of Moscow!”)

Meanwhile, we are in a crisis thanks to the coronavirus. Yet gold is still very much in high demand even as toilet paper becomes scarce on the shelves of merchants.

In fact, if you show up early at Walmart, you can still buy one package of toilet paper. At the same time, you can’t show up early enough anywhere to acquire physical gold. The floating supply of gold in the world is just… gone.

Gold dealers report bare shelves and empty supply lines. Few are accepting new customers. Markups are through the roof. You can “buy” now for delivery at some indeterminate date in the future. Maybe.

If you own physical gold, great. Good for you. Hang on and keep quiet about it.

If you did not buy gold in the past couple of decades — an era of relatively low prices and good availability — I regret to say that you’re very late to the game.

I’ll explain the problem below. And I’ll offer one workable solution…

According to Bloomberg News, “Just as demand for (gold) soars with investors seeking a safe haven from unprecedented economic turmoil, a glitch has appeared in the global market. The price of gold in New York and London has diverged by the most in four decades after lockdowns and grounded planes strangled the supply routes that allow physical gold to move around the globe.”

A “glitch”? Such understatement…

No doubt the lack of planes is playing a role. Quite a bit of gold moves by air.

For example, here’s a photo I took about a year ago while waiting for a flight at New York’s JFK Airport.

swiss air

Brinks armored truck approaches SwissAir jet at JFK. Something valuable, I suspect…

It’s a SwissAir jet parked at the gate. You can see a Brinks armored truck approaching the aircraft. I watched what happened next… The truck discharged a couple of boxes that went into the cargo bay. A short while later, the jet took off, bound for Zurich.

That was gold from U.S. vaults, destined for a Swiss refinery.

If you are in the right spot at the right time, you will see this kind of thing across the globe at major air hubs. Every day, volumes of gold move in commerce across continents, oceans and national lines.

Or I should say… You “used to see” this kind of thing.

As you likely know, most international air traffic is grounded. Flight schedules are down by 70 – 90%, although it varies from carrier to carrier. Major global players like Lufthansa have ceased 95% of flights. The high end, UAE-based carrier Emirates Airlines is entirely grounded. So is Australia’s main carrier Quantas.

Point is, aside from the lack of connectivity across cities, nations, oceans and continents, there’s no surety of transport anymore, particularly for something as compact and valuable as gold.

If there’s no assured means to transport the gold, then there’s no insurance coverage either. Without transport or insurance, nobody in his/her right mind would ever allow even one ounce of gold to leave the vaults. It’ll all just sit there.

That just covers one end of the supply line, however.

In truth, there are “glitches” at every step in the chain.

There are “glitches” on the mining-side too, and I mean big time. The scope of the production problem is illustrated in another recent Bloomberg article: “South Africa’s iconic mines, from the ever-deepening gold shafts on which the economy was founded to massive iron ore pits and rich platinum seams, are about to go silent.”

According to Bloomberg, for the first time in 150 years, mining is about to cease in South Africa, save for a few coal pits that feed the nation’s power plants. Everything else is closed for the duration.

And it’s not just South Africa…

Courtesy of industry contacts, I’ve followed a long list of mining companies and projects that are shut-in or dramatically scaled back during the virus crisis. And that list is getting longer by the day.

gold bar

Your editor, holding a 66-pound gold bar last October, at Victoria Gold’s Eagle Mine in the Yukon.

It’s mind-bending. Well over 100 major projects have simply ceased work.

The list identifies mine closures from giants like BHP and Rio Tinto, to pure-play gold companies like Barrick, Newmont, Yamana and more. Plus, there are numerous other intermediate and smaller plays that you may not know unless you follow the business; but which are important within the gold supply chain.

Plus, the list includes many mines under development and construction, and numerous important exploration plays.

One key problem is that we’re moving into spring and summer months. Many mine operations have a limited weather window for major activities like roadbuilding, earthmoving, transporting supplies through otherwise icy waters or erecting steel and pouring concrete. Miss the seasonal work, and a project may be set back by a year or more, with associated carrying costs.

Of course, it’s not just gold that has stopped coming out of the mines. Silver is impacted, as are platinum and palladium. Copper, lead, zinc, nickel, cobalt… many more.

In essence, the metals business is tightening as mines close across the globe. Or as the Bloomberg article above described it, the sector is getting “strangled.”

In this respect, no wonder traders are scrambling to line up physical supply. The production pipeline is in turmoil. Get it now, or maybe don’t get it for a long time to come, if ever.

Meanwhile, three of Europe’s largest precious-metals refineries, located in Switzerland near the Italian border, have closed their doors to protect the workforce. Reopening is up in the air.

Bloomberg quotes a well-regarded metals trader from Bank of Montreal: “This isn’t anything that we’ve seen in a generation because refiners never had to shut down — not in war, not in the great financial crisis, not in natural disasters. It’s never happened. And it happened astonishingly rapidly.”

Absent an assured supply of refined metal from Switzerland, the question is whether there will be enough gold in New York to deliver against futures contracts traded on the Commodities Exchange, better known as Comex.

Futures trading is a complicated business. Technically, traders buy and sell contracts that represent physical commodities. But much of it is just what’s called “paper gold”. (Actually, most gold trading is electronic.) Most gold contracts never really settle, with real metal changing hands. It’s just a trade.

Sometimes the contracts do settle, however, and for that you need real gold. The spot market in London is dominated by 400-ounce bars of gold. But only 100-ounce and “kilobars” are deliverable on the Comex contract, and almost all of those kinds of bars come from the now shut-in Swiss refineries.

You see the problem, right? It’s a recipe for large upswings in gold prices, and certainly for physical metal.

Meanwhile, large retail-oriented, gold-selling sites like APMEX (American Precious Metals Exchange) report “extreme order volumes.” They are accepting pre-orders and warn to “expect delays” in shipping.

Street-level coin dealers across the U.S. are charging significant markups on single or small-lot coins, both gold and silver. At current precious metal prices, I’ve heard of “$13” silver U.S. Eagles (which usually would sell for about $14) going for $10 markups or more; $23 or $24. And “1,650” gold Eagles (usually marked up by $50 or so, to $1,700) going at $225 markups; well over $1,900.

I should mention that Agora Financial has a relationship with a firm called the Hard Assets Alliance, which deals in precious metals.

Hard Assets has in-stock supply right now, with among the lowest premiums in the business and the easiest website interface to navigate, bar none.

(Note: Agora Financial owns a share in the Hard Assets Alliance. We’ll collect a small cut if you open an account and buy. But we wouldn’t have made that deal unless we liked how they treated their customers to begin with.)

So, where do things go from here? When it comes to how the virus will run its course, nobody knows, frankly…

But when it comes to gold, here are some points to consider based on what I’ve learned over many years in and around the mining biz…

  • It’s not unusual for a mine here or there to have a problem. But right now, the numbers are in the 100s. This has never happened. The mines will eventually reopen but will likely require startup and ramp-up time to get back into production. Nothing is going to resolve fast. And we can only hope that most or all the workforce will be intact.
  • It is extremely unusual for refineries to shut down, and for air transport not to be available. I suspect that, as governments across the globe tackle virus-related problems, there will be priority for refining gold. That kind of thing is right up there with obtaining medical supplies. And sooner — rather than later — we’ll see some sort of air cargo system to move metal and settle international accounts and trades.
  • If you own shares in mining companies, this whole mess is no reason to sell. Unlike an airline or a hotel company, demand for physical gold and silver will be deferred for a time, but not permanently lost. When the virus crisis abates, I suspect demand for gold, silver and more will increase for all manner of monetary reasons.
  • The great thing about being a gold miner is that there’s always a market for your product. If production is down this or next quarter, the gold will still be there in the ground. You’ll mine it at some future date. And likely sell it at a higher price.

Finally, for many years Bill Bonner, Jim Rickards, I and many others at Agora Financial have been talking about the importance of owning gold. Well, guess what… We hate to be right about our forecasts for this particular reason. But as the virus situation evolves and eventually resolves, everyone should revisit their approach to preserving wealth.

And that means owning physical gold.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

This “old rock hound” uses his expertise and connections in global resource industries to bring...

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