A town built from gold

It was the event that made a region.

And it started, like many historical moments, with an accident.

In 1909, a group of prospectors were trekking over a rocky knoll in rural Ontario when the leader of the group, Harry Preston, lost his footing.

He slipped on a patch of moss, his boot sliding down the side of a rocky outcrop. And that’s when he saw it – a vein of gold, jutting out of the rock face.

That was the start of something much bigger: the Porcupine Gold Rush.

Over the next century, 50 mines in the region produced around 70 million ounces of gold. It wasn’t the only gold rush in history, but it was certainly one of the biggest.

Perhaps the most significant “by product” of the Porcupine Gold Rush was the settlement of much of Ontario. Seemingly overnight, a haphazard collection of tents and campfires evolved into full-fledged towns as people rushed from across the country to make their riches.

Much of the gold in the region has, today, been dug out of the ground, but Ontario’s population has grown many times since the turn of the 20th century since then as a result.

It’s strange to think that what is essentially a lump of metal can change the world so quickly.

The idea of thousands of people dropping all commitments and racing to start a new life in an all but uninhabited region of Canada sounds alien to us now. But if an equivalent amount of gold reserves were found today, I wouldn’t be surprised if it had the same effect.

After all, if the same discovery were made today, it would be worth over C$100 billion.

So Porcupine, and Ontario as a whole, owes a lot to the yellow metal.

All roads lead to gold

Gold has an enduring appeal that seems to cut through to even the most ardent of sceptics.

Take Warren Buffett, for example. In 1998 he said this:

“[Gold] gets dug out of the ground in Africa or someplace, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Strong words. But this year Buffett’s company, Berkshire Hathaway, acquired a $565 million stake in Barrick Gold Corporation, the second largest gold miner in the world, so he appears to have had a change of heart.

As a tangible asset, it’s still seen as a store of wealth that investors rush to in times of uncertainty. And uncertainty is what 2020 has brought with abundance.

It’s no surprise, then, that gold-backed ETFs have had a storming year. Even though November saw the first monthly outflows in 12 months – likely driven by election and vaccine news – net inflows for the year remain far above the highest amount on record.

The November news cycle took the wind out of gold’s sails – though I’d argue that this is more temporary. With uncertainty over the US election subsiding and the announcement of a vaccine, two of the major causes of fear in the market fell away. The end of the pandemic came into sight, and political worries in the US were put to bed (well, sort of).

This, as you would expect, pushed gold into bearish territory.

Source: BullionVault

Jumping the gun

But it looks as though the market may be getting ahead of itself. After all, we’re a long way from normality yet.

Wednesday marked the first day that deaths from coronavirus in the US exceeded the total number of deaths from 9/11. The UK is ahead of the game when it comes to rolling out a vaccine, being the first country in the world to do so, but there is not yet a clear timeline with regards to when the general population will be vaccinated and when restrictions will be eased.

Meanwhile, hopes of an effective US stimulus bill rest on the January runoff elections in Georgia. The November election failed to produce an outright majority for either of the state’s senate seats, meaning that there will be a rerun of the election in the new year.

Why does that matter? Because the Democrats need to win both seats to control the senate. And they need to control the senate to pass an effective stimulus bill and kick-start the economy. There’s currently a bipartisan stimulus bill in the works – worth approximately $900 billion – though it’s unclear whether that will be too little, too late to prevent a more long-term economic dip.

Then there’s the fallout from the pandemic to contend with. The most obvious issue will be for global debt. By the end of the year, the Institute of International Finance forecasts that global debt is expected rise to a record high of $277 trillion. Yes, interest rates are at record lows, but if they should rise then this will pose a few problems then the fact that economies are essentially running on life support will quickly become apparent.

There’s equities apparently unstoppable bull run to address too. According to Absolute Strategy Research, equity valuations in the US are more extended than any time since the 2000 bubble.

If – in a perfect world – a recovery does take place and we revert to the pre-pandemic growth cycle, then there’s little reason to think that policymakers wouldn’t raise interest rates. Which would make all of the cheap money flowing into growth stocks such as Tesla, which have buoyed the US stock market this year, far less sustainable.

And renewed focus on value stocks – those deemed to be undervalued – could pull attention away from growth stocks, putting more pressure on sky-high valuations.

In such a scenario, the stock market would lose its edge and fall. And historically when stock markets take a beating, gold prices move up.

So even with the end of the pandemic in sight, gold could have a lot further to climb.

All the best,

Nathan Tipping
Research Analyst, Southbank Investment Research

PS Eoin Treacy, editor of Gold Stock Fortunes, has had his fair share of experience with the yellow metal. He’s the man hedge fund managers turn to when they need advice, and he’s been investing in the yellow metal in all sorts of ways for years. And he’s got a recommendations to share with you today. Click here to find out more.

Category: Investing in Gold

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