- Despite reaching all-time highs, gold is still in a particularly precarious position
- The downside risks associated with gold ownership are flying under many investors’ radars
- The war on gold has begun, and anyone with exposure needs to be aware of this key threat
The war on gold has already started. And yet nobody, no media, no government, nor the companies are actually talking about it.
To understand the blueprint of what is going on geopolitically and the coming war on gold, all you have to do is focus on the US Dollar SWAP lines.
The swap lines are a big tell on what is happening globally. Let me first explain what a swap line is.
And if your favorite mining stock has significant production in what I call negative swap nations, it could be at serious risk.
I’ve talked to several gold company CEOs and gold fund managers.
As I walked them through my concept, all agreed the risk factors will soon become impossible to ignore.
Are there built-in risk premiums to the prices of certain stocks?
Yes. But not at the cost of creeping government ownership and eventual nationalization.
The Latin phrase Premeditatio Malorum tells you to prepare for all evils.
And today I’m going to get you up to speed on the overlooked risks to some of your biggest gold holdings.
I’m not making any friends with this theory. But I have to prepare my portfolio for the risks.
And what happens next could be the difference between you making the biggest gains you’ve ever seen in your life…
Or watching your gold investments go to zero during this unprecedented time in the world.
I urge you not to buy another gold stock until you understand what’s really going on behind the scenes… and how you can profit from it.
The Importance of Dollar SWAP Lines on Your Gold Investments
It will take more time than most expect for the world economy to recover from the psychological and financial impacts of the pandemic…
But what the pandemic lockdown proved was that the world needs A LOT more U.S. dollars.
When the virus started spreading internationally, and economies started shutting down, the U.S. Federal Reserve became the “lender of last resort” for nearly the whole world.
The Fed began providing what’s called Dollar SWAP lines to certain U.S. selected and approved governments.
According to the International Monetary Fund (IMF), the global U.S. Dollar shortage could be crippling for many countries – and the world economy.
The SWAP line is set up by the US fed and this is just the beginning. What a SWAP line means is that the fed has pre-approved nations as allies who’ve accepted the terms and conditions to be able to draw down money.
Here is a list of countries where U.S. Federal Reserve SWAP Lines exist (think of them as Lifelines by the Fed):
- Bank of Canada
- Bank of England
- European Central Bank
- Bank of Japan
- Swiss National Bank
- Reserve Bank of Australia
- Banco Central do Brasil
- Danmarks Nationalbank (Denmark)
- Bank of Korea
- Banco de Mexico
- Reserve Bank of New Zealand
- Norges Bank (Norway)
- Monetary Authority of Singapore
- Sveriges Riksbank (Sweden)
- Bank Indonesia
For example, the Bank of Japan has drawn down over $200 billion on their SWAP line. Now, the reason they’re doing that is they need access to US Dollars.
This is just starting and will accelerate at the next sign of trouble. And what this really means is the US government has approved those nations essentially as a real ally. Now, I call these positive swap line nations (+SWAP).
Here’s why this is so important for gold companies:
If you have a producing gold mine or any asset in a positive swap line nation…
Foreign governments are not going to want to mess around with companies that are backed by Uncle Sam, the American government, the American military.
Yes, taxes will increase across the board. That is the only thing all politicians in all countries have effectively executed throughout time.
- The war on gold is increasing royalties, increasing taxes and increasing government take of ownership.
In some situations, there’s going to be outright nationalization of foreign-owned mining assets.
I Own Gold Stocks in Negative SWAP Countries, What Does This Mean?
To really understand what this all means and the implications, we go back to the US Dollar, which is the reserve currency of the world.
When you take all the central banks around the world, the US dollar makes up just a little over 60% of the foreign reserves of all the central banks in the world. The next highest one is the Euro at about 20%, then it’s the Japanese yen.
But really what happened was that during the global financial crisis, so much QE and stimulus got into the market and from the period of 2000 to 2008, these were the golden years of globalization.
The emerging-market nations that were commodity-rich took massive debt to build these infrastructure projects and mining operations and oil programs in US Dollars.
It takes many years to build these projects, to produce commodities in USD. China took a lot of debt to build manufacturing hub of the world to sell to the US.
So because of the global financial crisis (all the QE, all the debt), we ended up seeing negative interest rates around the world and that’s actually deflationary.
As commodity prices are going down, the emerging markets, their currencies are getting devalued relative to the US Dollar and gold in these emerging market nations.
And even in the Euro and the yen, the Canadian Dollar, the Aussie Dollar, they’re all getting devalued to the US Dollar and gold.
The Dangers of Not Having a SWAP Line
Can you imagine, for example, Mexico receiving hundreds of billions of SWAP dollars from the U.S…. then turning around and seizing an American backed gold mine (that the pension funds own) in their country?
Or Sweden? Or Canada?
That’s not going to happen. That would be catastrophic for those countries who are all strong U.S. allies.
Now, a lot of mining executives aren’t going to like this, but they need to hear the truth.
If you’re buying a gold stock with a mining project in any non-SWAP country (I call those nations “-SWAP” line nations), you could see your entire investment seized by a desperate government and go to zero.
Now, this next chart shows the emerging market superpower nations have been aggressively buying gold over the last three years. This will continue.
The top 10 producers of gold in the world combined production is about 75 million ounces of gold last year.
Almost two thirds of that was in negative swap line nations, meaning they do not have swap lines with the US.
Do you think those mines were developed by the governments? A very small percentage of them actually were.
Most of that two thirds or over 48 million ounces of gold were found, developed, permitted, built, and operated by North American owned gold mining companies.
A big percentage of that production will be a victim on these negative swap line nations on the war on gold.
This risk is very real. Expect higher royalties, expect higher taxes, expect a creeping take back of ownership of the mine from the government.
- You’re going to see threats or outright nationalization of these foreign owned gold mines in these negative SWAP line nations happen.
In addition, they’re going to add controls on these companies where it’s going to be harder to get their US dollars out and they’re going to be taxing it on the conversion.
You’re also going to be selling the gold to the governments of these negative SWAP line nations in their local currency.
- You won’t get the price of gold that’s shown in the international market in the negative SWAP nations.
This is going to be very difficult for a lot of people to understand and for many mining executives, they don’t want this to happen.
It doesn’t matter what you want. The reality is the world’s geopolitics is changing so fast and the virus could well be accelerating another lockdown.
There’s a line being drawn between positive SWAP line nations and negative SWAP line nations.
What Kind of Gold Companies Are at Risk?
Here’s a chart of the ten largest gold producing companies in the world, and their exposure to -SWAP (negative SWAP Line Nations) in red:
Now, I have nothing against any of these companies. I know all of the people who run them, and they have some great producing gold mines, along with some very smart people…
But you should think twice before buying a company with a lot of red – the ones whose projects are located in ‘-SWAP’ Negative SWAP Line nations.
I’m not recommending you buy Agnico, the one with the full green bar. But as you can see, this company’s full project portfolio is ALL in +SWAP (positive SWAP) line countries.
We’re in a whole new world… with a whole new era of market risks that have never been seen before.
If you want to make a lot of money from the gold bull market, you must understand the difference between +SWAP vs -SWAP nation risks to your portfolio… and know the right gold stocks to buy.
- I’ve prepared a special presentation to show you how I plan to position my portfolio
I’ve done some exciting, stupid and dangerous things and travelled to some crazy places to find the next “Big Score”.
But after truly becoming one of the few in the industry who can say “been there, done that”, I learned a major lesson I want to share.
Yes, it’s true some big scores are waiting for those who are first to an exotic or war-torn place with a massive tier 1 mining deposit.
It makes for a sexy story that sells newsletters, and people love to read about it (Indiana Jones Speculation, I like to call it). But those success stories are so rare.
The reality is, just as big of a score (and in many cases even bigger scores) can be made when you are patient in major sell offs in politically stable jurisdictions like the U.S.
Yes, it’s not as sexy. Yes, it doesn’t sell newsletters.
But we should only care about making the most amount of money with the least possible amount of risk. And for that reason, I want to prepare everyone for this potential scenario in the gold market.
Know the plan. Get the playbook.
Be prepared both mentally and financially for what to do if gold prices take a big hit to the downside.
Luck is being prepared when the opportunity arises.
Stocks to watch as gold enters turbulent territory:
Kinross Gold Corporation (NYSE:KGC, TSX:K)
Kinross Gold Corporation is relatively new on the scene, founded in the early 90s, but it certainly isn’t lacking drive or experience. In 2015, the company received the highest ranking for of any Canadian miner in Maclean’s magazine’s annual assessment of socially responsible companies.
While Kinross posted a significant loss in the fourth quarter of 2018, the company is making strong moves to turn around its earnings, including the hiring of a new CFO, Andrea S. Freeborough.
“Andrea’s successful track record at Kinross and throughout her career, including accounting, international finance, M&A, and deep management experience, will be an excellent addition to our leadership team,” said Mr. Rollinson. “We have great talent at Kinross and succession planning is a key aspect of retaining that talent for the future success of our Company.”
Agnico Eagle Mines Ltd (NYSE:AEM, TSX:AEM)
Canadian based gold producer, Agnico Eagle Mines is an especially noteworthy company for investors. Why? Between 1991-2010, the company paid out dividends every year. With operations in Quebec, Mexico, and Finland, the company also is taking place in exploration activities in Europe, Latin America, and the United States.
Agnico is a company with a lot of exposure to gold, letting investors take advantage of long-term price movements.
Though the company joins a long list of gold majors that reported losses in 2018, but its cash flow deficit is largely attributed to its growth in production and new projects coming online.
Yamana Gold (NYSE:AUY, TSX:YRI)
Yamana, has recently completed its Cerro Moro project in Argentina, giving its investors something major to look out for. The company plans to ramp up its gold production by 20% through 2019 and its silver production by a whopping 200%. Investors can expect a serious increase in free cash flow if precious metal prices remain stable.
Recently, Yamana signed an agreement with Glencore and Goldcorp to develop and operate another Argentinian project, the Agua Rica. Initial analysis suggests the potential for a mine life in excess of 25 years at average annual production of approximately 236,000 tonnes (520 million pounds) of copper-equivalent metal, including the contributions of gold, molybdenum, and silver, for the first 10 years of operation.
The agreement is a major step forward for the Agua Rica region, and all of the miners working on it.
Eldorado Gold Corp. (NYSE:EGO, TSX:ELD)
Eldorado Gold Corp. is a mid-cap miner with assets in Europe and Brazil. It has managed to cut cost per ounce significantly in recent years. Though its share price isn’t as high as it once was, Eldorado is well positioned to make significant advancements in the near-term.
In 2018, Eldorado produced over 349,000 ounces of gold, well above its previous expectations, and is set to boost production even further in 2019. Additionally, Eldorado is planning increased cash flow and revenue growth this year.
Eldorado’s President and CEO, George Burns, stated: “As a result of the team’s hard work in 2018, we are well positioned to grow annual gold production to over 500,000 ounces in 2020. We expect this will allow us to generate significant free cash flow and provide us with the opportunity to consider debt retirement later this year. “
First Majestic Silver (NYSE:AG, TSX:FR)
Though First Majestic recently took a significant blow, as a strong dollar weighed on precious metals resulting in a poor quarterly earnings report, there’s still a lot of bullishness surrounding the stock. Adding to the negative numbers, however, was a string of highly valuable acquisitions which are likely to turn around for the metals giant in the mid-to-long-term.
While it’s primary focus remains on silver mining, it does hold a number of gold assets, as well. Additionally, silver tends to follow gold’s lead when wider markets begin to look shaky. And with analysts sounding the alarms of a global economic slowdown, both metals are likely to regain popularity among investors.
Further boosting its portfolio, the company also entered a share-repurchase program, as it feels that its stock is. at the moment, undervalued, and will benefit all shareholders by increasing the value of the stock.
By Marin Katusa
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