Quarterly Report | Tuesday June 16, 2020

The SA Bullion Gold Report | Second Quarter 2020

  The SA Bullion Gold Report Second Quarter 2020   Analyst: Hilton Davies Date: 12 July 2020                  Gold Price Action In US Dollar gold had an outstanding quarter as the price per troy ounce moved up from $1,618.30 to $1,771.60 to post a return of 9.5%. Over … Continued


The SA Bullion Gold Report

Second Quarter 2020


Analyst: Hilton Davies
Date: 12 July 2020




Gold Price Action

In US Dollar gold had an outstanding quarter as the price per troy ounce moved up from $1,618.30 to $1,771.60 to post a return of 9.5%. Over 12 months the price appreciation was more than 25%, and since the last day of the previous century (31 December 1999), gold has appreciated by an annualized 9.2% per annum. These returns are outstanding for a hard currency alternative to paper currency, free of any credit risk and tangible in nature.

In South African Rand gold had an excellent quarter as it appreciated by 5%. Some Rand pullback took some of the gloss off the Dollar result, but the result was excellent nonetheless. Over 12 months the price appreciation was the outstanding Dollar return of 25.7% plus Rand depreciation (-18.3% against the Dollar) to give a total Rand return of a staggering 53.8%. This century gold has rewarded investors with a compound annual return of 14.9% per annum. South African holders of gold have been massively compensated and can feel well-pleased with their decision to hold gold.

Since the turn of the century gold in rand has delivered an astounding compound return of 14.8% per annum over the 20 years and 3 months. We are so glad that so many South Africans have been invested in gold with us but we are also despondent in that we have not been able to get our message out sufficiently. South Africans need investment in gold bullion for currency protection in the long term.


“In Chaos Theory, the Butterfly Effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.” [Source: Wikipedia].

Chaos Theory and the Butterfly Effect are emerging as extremely helpful in understanding the COVID-19 pandemic and its transmission. Simply put, tiny decisions and differences in reaction can have an extraordinary effect on the spread of the coronavirus. This is because many tiny decisions can compound dramatically in a complex system to result in enormous consequences

The extremely low incidence of COVID-19 in Vietnam, South Korea, Japan and China is not a coincidence. The extremely high incidence of COVID-19 in the USA is similarly not a coincidence. Even when differences from place to place appear too dramatic to pin on a failed national response, they are in fact not. A failed national response can be blamed.

Early failures to test and shut down in the US have been amplified through the Butterfly Effect. Now it is likely that the virus is endemic to the US and will end only when herd immunity is reached. This herd immunity being when a sufficient proportion of the population has been infected, or vaccinated, such that transmission breaks down and huge spikes can no longer occur. Unfortunately for the US however, in the words of Dr Anthony Fauci: “a general anti-science, anti-authority, anti-vaccine feeling” means that even the development of a vaccine might be of limited benefit.

The Case Fatality Rate for COVID-19 appears to be settling around 1%. But the effects of the virus are not linear. The virus affects individuals and populations in widely differing ways due to what mathematicians call ‘heterogeneity’. Small differences in the make-up of populations can lead to very different outcomes as the effects are compounded over time. And infection is not random. Highly susceptible people are more likely to get infected first, and susceptibility gets lower over time.

It is this susceptibility phenomenon that leads to initial spikes that generally do not repeat. And it is the large variability of susceptibility that translates into herd immunity being lower than one might initially expect. For Coronavirus herd immunity is likely to be reached in the range of 20% to 60% of infection of the general population, but Chaos Theory (dealing with complex systems) prevails throughout and herd immunity levels change as inputs change.

Complex mathematical modelling would now seem to indicate that an approach of “let it just run wild and be done with it” is catastrophic. Vastly more people would die as compared to an approach that takes even just the smallest steps like physical distancing, wearing a mask in public, ventilating buildings and washing hands. This means that Switzerland and Germany might now be able to avoid any further big outbreaks. It also means that the US, with negligent leadership, probably cannot avoid a high herd-immunity level. Dangerous decisions will continue to be amplified in their complex system.

The virus, the drugs and the healthcare systems are important, but most important in the system are the people. Their behaviour, their choices and their collective actions (as led by national leadership) will largely determine the extent of the pandemic.



The world’s fourth largest economy had its first reported case on 27 January in Bavaria.

Prevent: Government implemented its National Pandemic Plan in mid-January. The public health institute began daily situation reports, communicating important information to the public without bias. Scientists mobilized to understand the epidemiology and to launch crisis management.

Detect: A national crisis management group was established. A diagnostic test was developed and testing for the virus became available at no cost. Approximately 200 public and private laboratories were mobilized and scaled up for testing. Travel and contact restrictions became imposed and many businesses became shuttered. Testing of asymptomatic people began. A massive program of contact tracing and isolation was pursued. Antibody studies were conducted.

Contain: The first major international outbreak outside of China occurred in Germany. A strong focus on infection control for hospitals and elderly care facilities was developed as early study indicated these to be “most at risk” groups.


The WHO advises that the COVID-19 mortality rate is 3.4%. When infection counts are growing exponentially, any stated mortality rate massively understates the real rate – by even up to 10 times. Presently America has a mortality rate of 2.4% (5,112 deaths divided by 215,000 cases). The numerator (viz 5,112) is from yesterday. But the denominator, which is from yesterday, is actually incorrect. When a person contracts the virus in the first week they are incubating. In the second week they are sick. They only begin to die in the third week (more or less). Therefore the cases in the denominator (viz 215,000) that have been incurred in the last 14 days should largely be excluded. Those cases are yet to begin dying.

As of 1 April Trump has done a complete about-turn and stated that he now believes the advice of scientists and that his government expects 100,000 to 240,000 American deaths. If we work on Trump’s numbers and a who death rate of 3.4%, this implies that 2.9 million to 7 million Americans will contract the coronavirus. As at 1 april that figure is 215,000. Ten days previously it was 33,592. The growth rate is over 20% per day. Giving a doubling time of 3.5 days. Those figures of 2.9 million and 7 million cases will be achieved at this rate after just four and five doublings. That is to say, in 14 and 17 days. President Trump is pinning his hopes on the pandemic completely ending by 15 to 18 april. Given the catastrophic ineptitude of Trump’s COVID-19 response to date, we wouldn’t hold our breaths. (but we do hope for the innocent citizens).

Treat: In March data became nationally coordinated for ICU capacity and free ICU care was offered to neighbouring countries. PPE became centrally managed and procured.

The German government is presently focusing on three indicators — infection rate, disease severity and healthcare system capacity. Chancellor Angela Merkel (herself a scientist), speaks to the public on science and data. Government communication to the public is transparent and sets clear expectations. Public trust in government is extremely high and the public willingly adopts guidance from its leaders. Restrictions are being eased while infection rates rapidly fall.


The world’s largest economy had its first reported case in Washington State on 21 January.

On 31 January the Department of Health and Human Services declared Coronavirus a Public Health Emergency, the CDC issued a 14-day quarantine order, the major airlines suspended flights to China and President Trump signed an order denying entry to foreign nationals who had been to China recently.

On 13 March President Trump declared a Federal Emergency Declaration over the Covid-19 outbreak. By virtue of this declaration Trump’s federal government asserted control over the nation’s response. Trump thereafter sought to completely undermine and damage his own Declaration and his government’s response.

In February and again on 1 July President Trump stated that the virus will “just go away, it will disappear”. He has repeatedly denied reality and called the pandemic “a little flu”. He has mocked the wearing of masks. He has attacked science and the scientists. He says his own CDC officials are lying (but he does not fire them). He has said that he does not take responsibility.

In our First Quarter 2018 report we wrote about Trust and Trump. We said:

“It is profoundly important that the head of a nation should be trustworthy – more so, the leader of the most important nation on the only planet habitable to mankind. Where a society loses trust the quality of governing deteriorates and society, the economy and the currency pay the price.”

We went on: Trump’s deceits “have a profound impact on US politics, US law, the US economy and the US Dollar….and therefore gold.”

In the time of Covid-19 Trump has committed gross negligence in his handling of the pandemic (don’t wear masks, drink bleach, take hydroxychloroquine, hold rallies, go to church, open the economy etc), he is contributing to the crisis by petitioning the Supreme Court to strike down the Affordable Care Act that provides healthcare insurance to millions of workers that have lost their jobs, and he has incited a racial injustice/Black Lives Matter crisis. One could go on ad nauseum.

The vast majority of Americans do not approve of Trump’s handling of the public health crisis or the social injustice crisis. “Where a society loses trust the quality of governing deteriorates and society, the economy and the currency pay the price.” We witnessed this in South Africa under the dreadful presidency of Jacob Zuma. So too, we witness this now under the dreadful presidency of Donald Trump in America. History will not be kind to either of these self-serving, incompetent and negligent men. But history again reminds us that this is why one holds one’s cash in gold.



The International Monetary Fund reports on a larger than expected economic blow caused by lockdowns in the first half of 2020 and projects enduring damage to productivity as businesses begin to resume activity but with costly hygiene and safety practices impacting them. Economic growth rates for 2019, 2020 and 2021 are projected as follows:

In our previous quarterly report we stated that Global GDP in 2019 amounted to $90.5 trillion and that we guessed that COVID-19 could cost 5 percentage points of GDP at around $4.5 trillion in terms of economic impact and then additionally, relief packages could take the all-in figure to around $10 trillion. According to this latest data from the IMF the economic ‘hit’ to GDP is looking more like 7.8 percentage points (2.9 + 4.9) or $7.1 trillion. The cost of relief packages is also likely to be greater than our guess of three months ago.

France, Italy, Spain and the UK have been massively impacted, as have the US, Brazil and Mexico. The grim numbers for France, Italy and Spain are largely a function of bad luck, while the grim numbers for the UK, the US and Brazil are largely a function of very poor government response. On the whole, Asian nations have done very well in mitigating the economic fallout of Coronavirus. Asian nations have understood the benefits of testing, tracing, isolating and wearing masks in public and citizens have supported government led efforts.



At SA Bullion we are known to recite our mantra: we see gold not as a competitor to equities and property, but as a competitor to cash. Gold is the lone tangible hard currency that cannot suffer at the hands of shockingly poor government. In fact, gold is the antidote to shockingly poor government.

Covid-1g9 has inflicted a staggering cost on virtually all countries of the world. Simplistically, the cost to the US is around 10.3% of GDP (loss of 2.3% baseline plus 8.0% contraction in 2020) or $2.2 trillion (2019 GDP of $21.4 trillion), plus the extent of new national debt raised in order to finance rescue and recovery, which in 2020 will probably amount to around $3 trillion (equating to roughly 14% of GDP).

There are no direct transmission effects (or formulae) from economy and fiscus to gold price but there are generalized effects, one of which is to say in 2020 gold in dollar should appreciate 24.3% (10.3% + 14%). Year to date it has appreciated 16%. Next year we would expect economic rebound but fiscal struggle, resulting in more muted performance from gold.

South Africa has been terribly mismanaged by the ruling party and suffered with its own Donald Trump in the form of Jacob Zuma for nearly ten years to create a very poor platform from which to confront COVID-19. President Ramaphosa’s present government has attempted to shoe-horn a First World pandemic response into a Third World country, and this has inflicted deep, deep damage to society and the economy. The South African Rand is badly and permanently wounded. Economic growth in 2019 was dismal at 0.2%. South Africa’s GPD growth forecast by the IMF for 2020 is -8.0%.

The fiscal trajectory is dire. Ramaphosa’s relief package will cost the state approximately R500 billion, or 10% of GDP. And this package will be far from sufficient to mitigate the economic toll inflicted by Corona. National debt will rise to approximately 80% of GPD and at this point one recognizes that South Africa finds itself in a Classic Debt Trap.

The rating agencies will in all probability be looking to downgrade South African sovereign debt in the next cycle, and this would lead to increased debt-servicing costs on new government borrowings.

There are, of course, reasons why the Rand can do relatively well in the short term. Amongst other things, it is the most tradeable emerging currency in the world and can be used for short term speculative plays, both risk-on and risk-off. But in the long term, where we observe high levels of predictability, we see a very difficult time for the Rand. In our Third Quarter 2019 report we made the following Rand:Dollar predictions —

30 September 2029 (10 years) R31.07 /$
30 September 2039 (20 years) R62.80/$

COVID-19 has made us much more certain of our predictions. Of course, this also makes us all the more certain of Rand gold appreciation.



Our ‘Investment Case for Gold’ was written in September 2007 and has existed, unchanged, on our four iterations of websites since that date. Our position remains virtually unchanged today. But the Global Financial Crisis of 2008 and the COVID-19 pandemic of today have given us modern examples of reasons to hold some gold and we have incorporated these into a new updated 2020 version of our Investment Case for Gold. This position paper is dispatched with this quarterly report to our clients, associates and friends.


SA Bullion has evolved substantially in the past few years. For the past year we have had teams at Mustard (our design studio) and Silicon Overdrive (our software engineers) developing our fifth-generation website. This new website is due to go live within the next few weeks. It will reflect recent developments in our business and most importantly, it will bring a tremendous level of self-servicing capability to you, our prized client. Clients in South African channels will be able to login and view their portfolios live. Clients in our International channel will be able to login and view the full ‘Client Register by Alias’, which as the name suggests, is by anonymous alias. They will also be able to view Vault Holding Reports to cross-reference and validate client investments and gold in the vault. Prospective clients will have powerful tools to get investment illustrations, make online applications, and transact in secondary market gold.


As advised to clients some weeks ago, we are introducing a Fractional-Ownership Option for our South African facilities. This option is in beta testing and is scheduled to go live this quarter. New and existing clients will have the option to apply cash to invest in co-owned Krugerrands in the case where funds are insufficient to acquire a full Krugerrand. This fractional-ownership programme will unitise full Krugerrands to 1/100th. Think of these as ‘Krugercents’. The value of a Krugercent will therefore be 1/100th of a Krugerrand, meaning a minimum entry requirement of approximately R320 as opposed to R32,000.

For the small starter client this development means that they can gain early access to gold ownership. And when they acquire 100 Krugercents, they get to own their first full Krugerrand outright and become regular clients of SA Bullion. For larger clients this option gives them the means to gain almost 100% gold exposure for their investment. Only cash less than approximately R320 would not be applied to gold investment. For all regular clients holding full Krugerrands with SA Bullion, it means that they get an easy option for the payment of SA Bullion fees — simply liquidate Krugercents as required.

The fee rate on Krugercents will be nil. SA Bullion will not charge fees on co-owned, fractional Krugerrands. SA Bullion will pick up the tab for vaulting and insurance of the co-owned Krugerrands. As proudly-South African businesspeople with a strong civic-minded bent, we are delighted to be able to assist emerging investors.


South African gold, for South Africans, by South Africans, offshore. This was our vision in developing SA Bullion International. We are idealistic people, and this was our ideal. Coronavirus however, had other ideas. South African export gold became a fiction when South Africa went into lockdown and even 100 days later air freight from Johannesburg to our international vaulting in Zurich and Dubai is not achievable.

Necessity is the mother of invention, however, and leveraging excellent long-term relationships in the gold industry, we were able to gain entrées where entrées are exceedingly difficult to come by. We are very proud that we were able to join the exclusive ranks of gold dealers with contracts with two of the world’s leading and most highly-accredited gold refineries, namely PAMP Gold of Switzerland and Al Etihad Gold of Dubai. These refineries complement our pipeline for the procurement of 99.99% purity, accredited gold bars that we previously exclusively obtained for our clients from Rand Refinery in South Africa. In a few short months we have done tens of millions of Rands of business with “Pamp” and “AEG” and this gold is vaulted at Brink’s in Zurich and Dubai. Gold for South Africans, by South Africans, offshore.


Hilton Davies

12 July 2020

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