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BFI Bullion
April 5, 2023

Gold: Price 'Check Up' & Outlook

Since the start of the year, we’ve seen a lot of contradictory views on the yellow metal’s prospects in the mainstream financial press. Analysts appeared to be confused by gold’s performance in the first couple of months, while there are numerous factors currently at play that can be selectively used to support almost any forecast, from ultra-grim, bearish scenarios to a $4,000 price target by the end of the year, as the chief investment officer of Swiss Asia Capital predicted.

As we have repeatedly highlighted to our clients and readers, at BFI Bullion we are not in the business of forecasting. However, we are in the business of hedging against real risks, of protecting our client’s assets, and of planning ahead. This requires us to take into account not only what came before and what’s happening now, but also to use this knowledge and experience to anticipate what might come next. This is why we chose to prepare a much more well-rounded analysis on gold that goes beyond mere price forecasts and offers a more nuanced perspective that can provide real value to long-term physical precious metals investors.

Market dynamics

One of the reasons that mainstream analysts seem to be so confused and divided over gold’s outlook is the fact that conventional wisdom appears to have failed us this time: if inflation goes up, gold prices should follow. Especially after last year’s record CPI readings, and with inflation still stubbornly high, a lot of investors have been disappointed to see gold prices trending lower, contrary to expectations. The series of interest rate hikes by the Fed and the general global monetary tightening efforts haven’t tamed consumer prices, let alone bring them anywhere close to the “2% target”. One would expect investors to be flocking to gold by now, clearly doubting the ability of central bankers to bring inflationary pressures under control, but that hasn’t happened yet. Of course, we’ve seen an encouraging price recovery since last November, but it’s far from a “moon” rally that many gold bugs expected.

Well, as we explained in our last issue of the Digger, that’s not entirely true. Even at the peak of consumer price increases, gold might not have soared in USD terms, but it certainly did in other currencies and in countries that have been hit the hardest by inflationary pressures and by uncertainly over an imminent global recession: gold prices recently surged and demand hit all-time highs in Egypt, Turkey and most notably India, one the world’s biggest hubs of gold demand. Even for dollar-centric investors, however, the outlook is far from negative. While it’s true that the rate hikes and the relatively strong USD did put downward pressure on gold, the present dynamics are clearly not sustainable. This is not an “equilibrium” and we cannot possibly expect the higher rate policy to persist without causing a serious and prolonged economic meltdown, especially since the Fed has so little to show in its fight against inflation.

Realistically, there are only two scenarios we can expect to see unfold in the coming months. As investor concerns grow louder and louder over a Fed-induced recession, and as household budgets get increasingly squeezed by higher rates, we could see a premature monetary policy reversal, likely encouraged by political pressure. If central bankers do “blink first” and swiftly return to rate cuts while inflation is still raging to avoid triggering a full-blown recession, gold investors are clearly going to benefit. But they also stand to benefit from the opposite scenario: should the Fed stay the course, even a mild recession is bound to lift gold prices, due to safe haven demand. We’re already catching a glimpse of this: The recent bank failures in the US and in Europe that sparked contagion fears in the minds of many investors have already served as a remarkable boost for the yellow metal.

A lot of market analysts today tend to rely too much on central bankers’ comments, speeches, and forward guidances. However, we find that it is a lot more helpful to focus on their actions and not their words. This is why we see last year’s central bank gold-buying spree as a very convincing argument in favor of a bullish outlook. In 2022, central banks globally purchased around 1,136 tonnes of gold, the most in 55 years and up from 450 tonnes the year before. And the trend shows no signs of reversing anytime soon. According to the World Gold Council, “central bank gold demand in 2023 picked up from where it left off in 2022. In January, central banks collectively added a net 31 tonnes to global gold reserves (+16% m-o-m).”

The far-reaching implications of the Ukraine war

Looking beyond the most commonly cited factors we examined above, we feel it is essential for precious metals investors to consider the bigger picture too. If we “zoom out” and look at all the current “hotspots” and possible destabilizing factors for the world economy, there’s one that clearly stands out. The war in Ukraine has already defied all initial predictions and expectations by entering its second year and showing no signs of abating. There have been no attempts at peace talks and no indications that either side is prepared to negotiate an end to the hostilities. If anything, the war seems to be escalating, as the allies step up their financial and military aid to Ukraine and as Russia is proving increasingly resourceful in sidestepping sanctions and in finding alternative funding for its own war effort.

The conflict is also indirectly spreading and dividing the planet even more, with formidable economic powerhouses, who previously remained on the sidelines, starting to get more actively involved in recent months. The world’s biggest democracy, India, has refused to condemn Russia and join the Western allies in imposing sanctions. While Europe has gone to great lengths to reduce its Russian oil and gas imports in order to cut Moscow’s funding, India seized the opportunity and agreed to buy Russian oil at bargain prices. The transactions in the last three months amounted to the equivalent of several hundred million dollars and this move presented a challenge to the USD too. As Reuters reports: “after a coalition opposed to the war imposed an oil price cap on Russia on Dec. 5, Indian customers have paid for most Russian oil in non-dollar currencies, including the United Arab Emirates dirham and more recently the Russian ruble.”

China, a long-time Russian ally in the de-dollarization push, has also become more vocal on the war recently, by putting forward a twelve-point proposal to resolve the conflict that has been dismissed by the US and its allies as too biased towards Russia. And while Beijing has publicly and repeatedly proclaimed its neutrality over the last year, the country’s exports and imports with Russia soared at a double-digit pace in January-February from the year before, while its seaborne imports of Russian oil are expected to hit an all-time high in March. On the matter of the currency, Chinese Foreign Minister Qin Gang was also quite clear: "Currencies should not be the trump card for unilateral sanctions, still less a disguise for bullying or coercion”.

Russia has been stockpiling gold since the invasion of Ukraine

The question of de-dollarization is one that has the potential to impact the gold market very heavily and as we also outlined in a recent article on our blog, there are many relevant developments that investors should pay attention to in the coming months. It is too early to tell whether the Ukraine conflict will act as a catalyst, but it is certainly accelerating long-standing efforts by the world’s “superpowers-in-waiting” to dethrone the greenback.

Special considerations for physical gold investors

The points we discussed so far are certainly worth evaluating for all gold investors, however those with physical holdings have some additional factors to include in their strategic planning process. As we already predicted in 2020, in our Special Report, On the Brink of a New Era – Are You Prepared?, one of the key risks to investors and ordinary savers over the coming years would be financial repression. Regrettably, what we saw in the years that followed more than justified these concerns and today we see this risk as imminent and as serious as ever.

The political rhetoric in the West on issues of economic equality and wealth redistribution has hardened exponentially over the last years. In the US and in many European nations, tax increases, once considered taboo in any political speech, have become a favorite talking point for both incumbents and for the opposition. The idea of responding to inflationary pressures and to an economic crisis by simply forcing the rich to “pay their fair share” is promoted as an easy fix and it is understandably popular, but the extremely dangerous real-life implications of it are hardly ever discussed.

To make matters worse, the continued push towards digitalization, the significant government advances in the “war on cash” and the introduction of Central Bank Digital Currencies (CBDCs) that is already on the horizon, make the outlook for individual financial sovereignty even darker. Banking secrecy and transaction privacy are already largely a thing of the past, but these developments could mean that states could soon be handed nearly absolute control over individual accounts. And as these states grow increasingly indebted and increasingly desperate, we can expect the measures they take to reflect that too.

When you combine this with the recent banking turmoil, this is exactly why we feel that it is more important than ever for investors to hold at least part of their wealth in physical precious metals, and to do so outside their home country, securely stored in a predictable and stable jurisdiction like Switzerland, and outside of the banking system.  

ESG investing: A pendulum swing?

So far, 2023 has proved to be a tumultuous year for ESG advocates. After a decade of policy gains and of ever-expanding support by international bodies and the private sector, it would appear that a turning point has been reached, at least in the financial services industry.

With a growing number of dissenting voices pointing out various flaws, loopholes, and inconsistencies in ESG policies and goals, both lawmakers and investment professionals are doubting the wisdom and the effectiveness of the reigning orthodoxy on this all-important matter and exploring ways to achieve the relevant goals faster, cheaper, and smarter.

Ever since Joe Biden’s victory in the US, there has been considerable resistance against his “green” agenda and other policy priorities like diversity and equity. One key flashpoint in this battle was the fierce opposition to a White House rule that would allow private retirement plan fiduciaries to include ESG considerations, and not only profit maximization, in their investment decisions. In March, Republican lawmakers struck down the rule, but it went through anyway by way of Presidential veto, the first of Biden’s presidency.

On a state level, the pushback is even more pronounced: officials in various red states have launched investigations into big financial companies over their votes on shareholder proposals, while state legislators have either already passed or are considering laws requiring government pension funds to divest from money managers who include ESG factors in their investing process.

And it's not just politicians who are going against the grain: Vanguard, one of the world’s largest investment firms, recently withdrew from the Net Zero Asset Managers initiative, an international effort designed to get institutional money managers to commit to fighting climate change.Two thirds of investors are pessimistic about ESG fund performance in 2023

The background

The main idea behind ESG investing, which stands for Environmental, Social and Governance, is that companies should be concerned not only about profits, but also with how their businesses affect the environment and society. It is closely linked with the more recently popularized concept of “stakeholder capitalism”, which posits that a business isn’t only answerable to its shareholders, but to anyone that is directly or indirectly affected by it.

The term ESG first appeared in a 2004 United Nations report which argued that investors would achieve better long-term performance if they focused more on environmental and social progress. However, it wasn’t until 2009 that it entered the investment and banking arena. The industry’s “ESG pivot” began in the aftermath of the 2008 crisis and at the height of public outrage against the finance sector. It was spearheaded by BlackRock, which had just acquired Barclay’s Global Investors Ltd for $13.5 billion. It was a historic deal that created the world’s biggest asset manager with almost $3 billion under management. In what many cynics painted as a calculated survival maneuver and a rebranding effort to appease public anger, the company’s chief executive, Larry Fink, heralded a new era in the way companies in the sector appeared to prioritize social and environmental concerns. He has remained one of the loudest advocates of ESG investing ever since.

It didn’t take long for other big players to adopt the strategy and to start issuing reports on their initiatives to advance sustainability goals or workplace diversity. Fink’s “annual letter to CEOs”, in which he frequently berates companies for not doing enough, also became something of an industry event. Soon enough, politicians and regulators joined the efforts too. Especially in more interventionist markets like the EU, ESG targets, goals, and exclusion lists became the norm, and more and more private companies were forced to toe the line. New ESG-focused private equity firms and funds popped up every year, and in January, Bloomberg Intelligence forecast that global ESG assets could top $50 trillion by 2025, making up one-third of the projected total assets under management globally.

Many opponents to ESG investing argue that the ideology behind it alone is controversial enough, as it inserts political considerations and agendas where there should be none. They claim it can be used as a backdoor to sneak policy priorities into the private sector without going through the proper democratic avenues. For example, in the US, voters in oil states, whose livelihoods depend on the fossil fuel sector, would most likely reject candidates and proposals that would seek to punish their employers and subsequently cost them their jobs. However, such an initiative can be enforced indirectly, by forcing pension funds to exclude said companies from their investment selection process. That could be seen as a violation of both the voters’ rights, but also of the pensioners’, since the decision to invest in what’s “right”, but not in what’s profitable, could affect their returns.

The greenwashing problem

Overall, the issue of how a private company should address and pay for the externalities it causes is still open and the ESG debate really gets heated when, inevitably, practical questions need to be answered in clear cut ways: Who decides what constitutes a priority and how do we measure “positive” and “negative” impact?Cumulative number of sustainable finance policy interventions

ESG fund flows have been steadily declining

As a recent Fortune article highlights, “the problem with ESG as an investment approach is the lack of standardized criteria for what makes an investment sustainable. An ESG approach ostensibly yields guilt-free returns—for example, by excluding fossil fuel and defense investments, or prioritizing sectors like green energy. But in fact, it could really refer to any strategy that results in a fuzzily defined positive impact somewhere in the world.” Indeed, a 2022 paper by MIT and the University of Zurich demonstrated that there’s very little consistency in the assessments of ESG rating agencies, making it extremely challenging to compare the ESG performance between companies and investment portfolios.

It is precisely this lack of consistency, standardization, and transparency that facilitated and even encouraged a practice that is now widely known as “greenwashing”. Often arbitrary and increasingly costly regulations have established a strong motive for many companies to inflate their ESG claims, and the absence of reliable metrics has provided them with the means to do so. One common greenwashing tactic is the use of vague “goals”. These are usually phrased in a noncommittal fashion, and they are to be fulfilled at some point in the not-so-near future, like promising to try and work towards carbon neutrality by 2040. Another trick is using extremely dubious statistics to brag about the impact of a certain initiative, or just very publicly donating to a “good cause” while still profiting from polluting or other damaging activities.

In the financial services sector, greenwashing can be even harder to spot, as there are no clear and industry-wide minimum requirements to determine what qualifies as an ESG fund. A 2021 Greenpeace study of 51 sustainability-focused funds in Luxembourg and Switzerland revealed that those funds “barely managed to redirect more capital toward a sustainable economy than conventional funds, not contributing to addressing the climate crisis, and misleading asset owners who want to increasingly invest their money in sustainable projects.”

Shifting priorities

One of the original arguments employed by ESG advocates and one that we still hear frequently to this day is that it is not only moral, but also actually profitable for investors to put emphasis on these considerations in their selection process. If that were true, however, then surely there would be no need to impose any regulatory burdens at all. Purely profit-oriented investments would beat the rest and even the greediest and most cynical of money managers would embrace ESG just for the sake of their performance bonuses.

But that doesn’t seem to square with what we are actually seeing. It is true that ESG-focused funds enjoyed several years of outperformance against conventional ones. That’s partly due to their large holdings of tech stocks which boomed at the time and partly to the regulatory incentives (and sometimes outright subsidies) that many of the “green” companies they invested in also enjoyed, compared to the “penalties” that offending companies had to contend with. However, there was a sharp reversal in 2022, as the funds saw steep outflows for the first time in 10 years, especially during the last quarter.

On a sociopolitical level, there appears to be a sea change underway too. Support for climate activism and for policies that would further other causes under the ESG umbrella has significantly waned after the covid crisis, when most people were faced with much more immediate and tangible threats to their survival. This became even more apparent after the war in Ukraine and the subsequent spike in demand for gas and oil highlighted some of the more practical vulnerabilities of the ESG push.

For example, it became painfully clear to many investors, and to many of the directly affected citizens as well, that the shift to renewables might have been premature. Especially in Europe, people started to question the wisdom of rushing the divestment process and becoming almost entirely dependent on energy imports. Finally, the wider cost-of-living crisis served to rearrange priorities in the minds of many voters. When inflation is at record highs and so many people are struggling to put food on the table, it is unlikely that they’d be willing to pay double to ensure that that food is ethically sourced, locally grown, and has a low carbon footprint.

Practical solutions to practical problems

Apart from the lack of standardized measures, the unrealistic promises, and the overbearing regulatory demands of the ESG wave, there is another problem that runs much deeper and it has to do with the term itself. The goals and priorities under the ESG umbrella are simply too diverse and while there can be overlap between them, it can be that a policy that’s good for the environment in the long run might actually be bad for society today, as the fossil fuel example demonstrates. It might therefore be a lot more sensible to tackle these issues separately, especially when it comes to the financial services industry.

However, what’s even more important is for the private sector to develop practical solutions to practical problems. Focusing on what one knows best is also helpful. That’s how BFI Capital Group’s venture, aXedras was born: through the need to solve a practical problem in our own industry. In the precious metals business, tracking, documenting, and proving the providence of gold bars has thus far been a cumbersome, inefficient, and paperwork-intensive process.

For more thoughts on ESG, greenwashing, as well as how aXedras has developed a product integrity solution that can be used to back ESG claims (or perhaps better said as “product integrity” claims), have a look at BFI’s Fireside Conversation II with Bruno Ciscato here.

Taking shelter from the banking storm

It all started with the surprise collapse of the relatively unknown Silicon Valley Bank that failed to survive the Tech Winter.

The majority of its core clientele, namely tech startups and other companies exposed to the tech industry, have been in crisis mode for months, as easy money dried up thanks to the Fed’s tightening U-turn. Wave after wave of layoffs and other cost cutting measures have failed to make a dent in many cases, so many of SVB’s clients had been making massive withdrawals, squeezing the bank’s liquidity.

The situation for most banks had already been dire enough as a result of U.S. Treasury bills and government-backed mortgage securities positions, but the added pressure from the tech clients’ outflows sent SVB over the edge. When it hit the news, the market reaction was instant, and the panic spread quickly. As the second largest bank failure in US history and the largest since the 2008 crisis, it justifiably raised widespread fears of contagion. The fact that Signature Bank followed days later only served as further justification of those fears.

The US government’s reaction was swift. The Biden administration sought to reassure investors and citizens alike that the American banking system and their deposits are in no real danger and that this is nothing like 2008. The government went as far as to announce they would be guaranteeing all deposits, even those above the standard $250,000 limit backed by the Federal Deposit Insurance Corporation (FDIC). As investors and the public grew increasingly uneasy, the uptick in withdrawals started to become a real, existential concern for all banks, from regional ones to systemic ones. The up-until-now unthinkable threat of a nationwide bank run became a mainstream talking point - after all, the memories of the 2008 crisis are still too fresh. Treasury Secretary Yellen rushed to dispel public fears of a déjà vu of the last crisis, to highlight that this time is different, and that “a major government bailout is not on the table.”

Still, none of what unfolded in the US comes anywhere close to the panic that the Credit Suisse collapse triggered. On March 14th, in its 2022 annual report, the bank revealed that it had identified “material weaknesses” in its financial reporting over the past two years. Specifically, as the WSJ reported, “As part of the annual report, PricewaterhouseCoopers, the bank’s auditor, issued an adverse opinion on the effectiveness of its internal controls over financial reporting as of Dec. 31. PwC said the bank’s control system for preparing consolidated financial statements had deficiencies, including ineffective controls over how noncash items were classified and presented in its consolidated cash flow statements.”

The revelation and its reverberations rippled around the world, as investor and public confidence was shaken, and as realistic fears of a systemic meltdown emerged. Credit Suisse stocks sank by 30% and caused a broader sell-off in European and US bank stocks. But once again, government and central banking officials acted swiftly, with the Swiss National Bank and the Swiss Financial Market Supervisory Authority (FINMA) scrambling to reassure investors and pledging unprecedented support to the 167-year-old bank, if it should be needed. And indeed, it was: hours after the SNB announcement, Credit Suisse said it would take the offer of the central bank lifeline and that it planned to borrow as much as $54 billion.

However, none of this really convinced investors or managed to stem the bleeding from outflows and plummeting stock prices. What did help, however, was the subsequent announcement by rival banking giant UBS that it will acquire Credit Suisse at a fire sale price of 3 billion Swiss francs ($3.2 billion), as part of a government-backed deal. As it emerged from later reports, the Swiss National Bank, FINMA and the minister of finance, Karin Keller-Sutter, all helped facilitate this rescue operation with great urgency and by applying a great deal of pressure on both sides. Even though the terms of the resulting “shotgun wedding” are controversial, the deal so far seems to have reassured investors while creating a true, yet uncomfortable, banking behemoth.

Switzerland’s credibility and reputation took a hit, but what many don’t realize is that there already had been a decade’s worth of mismanagement, overblown bonuses, and other issues at Credit Suisse. Since falling so far from what traditional Swiss private banking is still about, many Swiss have long abandoned even calling CS a “Swiss” bank thanks to massive US concerns and involvement.

Fascinating as the events of the past few weeks have been, the most interesting part of this story is the one that received the least mainstream coverage. During the massive sell off, not only in the banking sector, but also where investors thought contagion could spread, and throughout the significant losses that equities suffered in general during this time, there was only one kind of investor that benefited. Precious metals prices shot up, after fears of a global banking crisis took hold. Gold breached $2,000, climbing to its highest level since March 2022, rising around 10% since the SVB run was made public.

This represents the latest real-life and indisputable confirmation that the world’s oldest and most reliable safe haven still fulfills that role better than any other asset.

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