By David Forest, editor, Strategic Investor
Most people don’t know it, but Britain’s Industrial Revolution in the 1700s was funded by an unusual source.
In 1693, some of the biggest gold discoveries ever seen were made in the Brazilian jungle. The discoverers were Bandeirantes, the equivalent of American cowboys. They were Portuguese adventurers who roamed Brazil’s difficult wilderness seeking fortune.
The discovery of Brazilian gold caused the first recorded gold rush – the first time people moved en masse to chase a rich mining find.
One particular Brazilian town became the focus of this frenzy. It’s named Ouro Preto, or “black gold” in Portuguese. Today, it’s a tourist town a couple of hours outside Brazil’s modern mining center, Belo Horizonte. Back then, it had a population larger than the New York of the time.
Ouro Preto’s gold production surged, and the Portuguese government moved to take its cut. Authorities imposed a 20% duty on all gold production, called the “Fifths Tax.”
Portugal ended up with more gold than Spain got from all its South American colonies combined – vaulting the tiny country to prosperity.
But the gold didn’t stay in Portugal for long. In 1703, the country signed the Methuen Treaty with Britain. This facilitated trade between the two nations. The idea was Portugal would buy British textiles and manufactured goods, while the British would purchase Portuguese wine.
The resulting trade, however, was one-sided. Flooded with gold, Portuguese importers bought way more product than the British. The result was a massive outflow of gold from Portugal to British manufacturers.
By some estimates, a full two-thirds of Brazil’s gold windfall ended up in the U.K. Historian Nuno Palma estimates Portugal shipped out gold worth 45 million British pounds between 1700 to 1790. Adjusted for inflation, that’s $169 billion in gold.
That massive wealth injection funded Britain’s continued industrialization. By 1740, the supply of gold coins circulating in the U.K. more than doubled. The British textile industry boomed. Manufacturing became increasingly mechanized and sophisticated.
This spawned new industries and products. Steam power, modern iron working, cement, gas lighting, continuous paper production, and industrial chemicals were all born in the boom funded by Brazilian gold.
Some historians argue this was the greatest increase ever for standards of living in the Western world.
Today’s Industrial Revolution Is Being Funded by Debt
Today, groups like the World Economic Forum believe we’re at a new industrial revolution. World-changing trends are unfolding, such as 5G communications, cloud computing, Internet of Things, electric vehicles, artificial intelligence, and renewable energy.
These brand-new sectors are potentially worth trillions of dollars. They’re reshaping the entire planet – not just the developed world.
But this industrial revolution is happening in a completely different financial environment. Britain’s Industrial Revolution was built on massive amounts of hard currency. Today, the Federal Reserve and other central banks create digital dollars out of thin air.
British industrialists took big risks in developing new technology. But they had reserves of gold to back them up if things went awry. The U.K. was in a strong financial position. It could afford to push the envelope in reshaping the economy.
It’s the exact opposite today. Tech entrepreneurs are pouring hundreds of billions of dollars into new technology. At the same time, the U.S. government – and most developed nations – are essentially broke.
COVID-19, and the ensuing economic slowdown, has pushed finances to the brink. The state of Illinois, for example, had to take out an emergency $1 billion loan from the Fed in June to keep its lights on. That’s a state of 12.6 million people simply running out of money.
Cash keeps going out, and nothing’s coming in.
Sophisticated Investors Turn to Time-Tested Wealth Protection
In June, a Reuters survey found big investors are going big into gold. Nine elite private banks were surveyed – managing a collective $6 trillion for the world’s ultra-rich. All said they’re advising clients to increase gold holdings.
It’s easy to see why. Gold has crushed the wider markets during the recent corona-crash. Since February, bullion is up 19% while the S&P 500 is up 3%. Even with the market jitters of recent weeks, gold has held firm at multi-year highs.
And legendary hedge fund manager John Paulson – the guy who made billions from foreseeing the housing collapse in 2008 – cut his fund’s exposure to Big Tech stocks in the first quarter of 2020.
He redeployed these funds into gold stocks.
Today, Paulson’s portfolio holds just under 10% in technology and communications investments, according to GuruFocus. But he’s got over 20% of his money in the basic materials sector, which includes gold.
Paulson’s far from the only major investor betting big on gold. Warren Buffett, gold’s biggest critic, just bet over half a billion dollars on a gold mining company. And cash flowing into gold exchange-traded funds (ETFs) just hit record levels. In the first five months of 2020, investors poured $33.7 billion into gold ETFs. That crushes the previous record for yearly inflows – $24 billion, set during full-year 2016.
History Shows This Is a Winning Strategy
Rather than buying physical gold, John Paulson’s fund is invested in gold stocks – companies producing the world’s hard money supply.
During the gold bull market of 2008 to 2011, gold stocks – as measured by the VanEck Vectors Gold Miners ETF (GDX) – gained 200%, while physical gold was up 165%.
The world’s savviest investors noticed gold stocks outperforming. Today, they’re loading up once again.
I recommend readers do the same. These stocks offer upside leverage to the price of gold. And as it continues moving higher, miners in particular stand to benefit.
To gain broad exposure, consider taking a position in the VanEck Vectors Gold Miners ETF (GDX). Just remember to position size appropriately.
Keep walking the path,
Editor, Strategic Investor
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