Category: MK

Gold in the attic

In this month’s issue of News & Views, we do something a bit unusual.  We celebrate USAGOLD’s 20th year on the World Wide Web by reprinting some of our more interesting and timeless short-form treasures from over the years.  We think you will thoroughly enjoy this walk down memory lane.  Newcomers, we hope, will find inspiration here and some very sound reasoning as to why gold should become a part of your long-term portfolio plan. The following is list of vignette titles in the retrospective.  If you are new to USAGOLD and did not receive our latest newsletter issue by e-mail, we invite you to visit some time. . . . . . when you have a moment for quiet contemplation.

√ Gold in five easy lessons

√ Question: When is a billionaire not a billionaire?
Answer: When just about everyone else is a billionaire.

√ Yap stone money inflation

√ What it would take to make the dollar as good as gold

√ Computer software gone mad

√ The PhD standard and what to make of it

√ Nine lessons on investing your money

√ Approaching gold with the right attitude, Part 1

√ Approaching gold with the right attitude, Part 2

√ The ethics of interest rates

√ For gold owners, the inflation-deflation debate is purely academic

√ The seven ages of gold

√ Keynes would be buying gold hand over fist

√ A telephone call from an old client and friend

News & Views / February, 2017/FREE SUBSCRIPTION

Posted in all posts, Author, MK |

Gold isn’t behaving in practice the way it should in theory

Bloomberg/Eddie Van Der Walt/2-19-2017

“The market worries more ahead of the event than after,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by e-mail. “Once the hike was out of the way, a more balanced picture emerged and that together with a reality check of the potential Trump impact did the rest.”

MK note:  Gold continues to climb this morning though in somewhat subdued fashion probably a result of the holiday in the United States.  Ole Hansen’s comments focus on the United States, but it seems that every area of the globe has its own unique concerns driving physical demand.  China has a currency problem, massive debt and capital flight to contend with.  In Europe, investors are worried about the rise of Marine LePen in France and her promise to take France out of the euro, possible debt default in Greece and teetering banks in Italy. In the United States, inflation expectations have begun to influence investment decisions across the boards.  Altogether these singular, localized dimensions form an imposing whole.

Posted in all posts, Author, MK |

Goldman Sachs is majorly bullish on commodities

ETF Daily News/2-16-2017

“Using its sentiment analysis tools, however, Goldman managed to come to these conclusions as early as November—which is the same month the investment bank turned bullish on commodities for the first time in four years. Goldman’s line of reasoning? When business optimism goes up, capital expenditure (capex) also goes up, and when capex goes up, commodities tend to follow. I should add that the bank has historically been neutral on commodities, recommending an overweight position only four times in the last 20 years. So when it does become bullish, investors should pay attention.”

MK note:  The expectation for rising commodity prices, needless to say, rolls into inflationary expectations and helps explain professional money’s big move into gold since the start of the year.  Gold is up over 8% in 2017 while stocks are up only a little over 4%.

Posted in all posts, Author, MK |

BlackRock backs gold to hedge market risk

Bloomberg/Susanne Barton/2-16-2017

“While the stock surge and below-average volatility show investors are more optimistic, markets are underpricing global political risks, said Russ Koesterich, who helps manage the $41 billion BlackRock Global Allocation Fund. He recommends gold as insurance. Looming elections in Europe and political uncertainty in the U.S. are among developments that could shift investor sentiment, Koesterich said. Adding to the threat is the potential impact of Britain’s exit from the European Union and a debt crisis in Greece. Such concerns have helped boost haven demand for gold, which has climbed almost 8 percent this year after posting the worst quarter since 2013.”

MK note:  All of a sudden Greece’s name keeps popping up in the litany of reasons to own gold, and with good reason.  Marine LePen’s, who has a plurality in the upcoming first round of French voting, says she will take France out of the euro, an event that would surely sink both the currency and the European Union.  That is an even bigger and more dangerous threat than what Greece brings to the table.  Given the growing populist mood across Europe, I would think that European money managers might be as interested in gold for portfolio insurance purposes as BlackRock is in the United States.

Posted in all posts, Author, MK |

Alan Greenspan renews gold advocacy, Part 2

“Do something. Help!”

Gold Investor/World Gold Council/2-16-2017

Alan Greenspan, as quoted in the World Gold Council’s interview linked above:

Significant increases in inflation will ultimately increase the price of gold. Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection. I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counter-party signature. Gold, however, has always been far more valuable per ounce than silver.

No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counter-party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.

(Pictured below. Lydia gold stater, King Croesus, 561-541 BC, electrum blend silver and gold, ‘heavy’ stater specimens bring upwards of $30,000 in top grades. This specimen is from the British Museum collection and reproduced here with permission.)

MK note:  Gold is not like other assets that depend upon another individual or institution’s performance for value.  It  stands alone and as Greenspan states without mincing words:  “No one questions it value.”  It is for those reasons that gold protects wealth no matter the economic malady visited upon the economy – inflation, hyperinflation, disinflation, stagflation, runaway stagflation and deflation.  It is the ultimate armchair investment – the one asset you can rely upon no matter what happens politically or economically.

Greenspan believes stagflation is in our collective futures and he has made that prediction publicly on several occasions over the past few months.  Here is what he said in the same interview linked above:

As productivity growth slows down, the whole economic system slows down. That has provoked despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!

At the same time, the risk of inflation is beginning to rise. In the United States, the unemployment rate is below 5%, which has put upward pressure on wages and unit costs generally. Demand is picking up, as manifested by the recent marked, broad increase in the money supply, which is stoking inflationary pressures. To date, wage increases have largely been absorbed by employers, but, if costs are moving up, prices ultimately have to follow suit. If you impose inflation on stagnation, you get stagflation.

Our mission at USAGOLD is not to take sides politically and, anyone who has frequented these pages over the years will attest to the fact that we tend to shy away from partisan politics. What we do concern ourselves with, however, is the manner in which the policies pursued by politicians and central bankers might affect the investment portfolio.  You might say that our business is the preservation of wealth. Alan Greenspan clearly sees gold and silver as  means to that end.  At the moment the political tide is running in the direction of inflation and inflationary expectations have taken hold of the investment markets, gold included.  The “inflation trade” has played large in gold’s price appreciation thus far this year, and as I mentioned in an earlier post, professional money managers are leading the charge through their purchases in gold ETFs.

Investors last tangled with stagflation in the the decade of the 1970s, and we all know how gold performed during that period.  For the record, here is a chart that shows how gold performed superimposed over the purchasing power of the dollar.  As you can see, while the dollar declined by 85%, gold rose by 17-times.  It tells at a glance the value of diversifying with gold and goes to the heart of the point Dr. Greenspan is making. (The Dow Jones Industrial Average over the same period gained only about 16%.)

Posted in all posts, Author, MK |

Alan Greenspan renews gold advocacy, Part 1

Gold Investor/World Gold Council/2-16-2017

MK note: Former Fed chairman Alan Greenspan is interviewed in the most recent issue of the World Gold Council’s Gold Investor magazine.  As most of you already know, Greenspan is a long-time advocate of private gold ownership as well as the gold standard.  Some see his chairmanship of the Fed and gold advocacy as contradictory, but in fact, Greenspan always saw the two as complementary.  Here is a very interesting quote taken from the interview:

“When I was Chair of the Federal Reserve I used to testify before US Congressman Ron Paul, who was a very strong advocate of gold. We had some interesting discussions. I told him that US monetary policy tried to follow signals that a gold standard would have created. That is sound monetary policy even with a fiat currency. In that regard, I told him that even if we had gone back to the gold standard, policy would not have changed all that much.”

Many years ago, we catalogued those exchanges between then Texas congressman Paul and Greenspan.  I was among the small group at the time who appreciated the dialogue as friendly intellectual exchanges between two heavyweights and not as contentious arguments.  As I wrote in the preface to the transcripts several years ago, I think both enjoyed and relished the exchanges, and it is interesting that Greenspan would reference the banter between the two in such a telling way so many years later.  Here is what I wrote in that preface:

In putting this page together, I was struck with Dr. Paul’s ability to cut through the political gamesmanship that necessarily comes with being chairman of the Fed to Alan Greenspan, the man and political/economic philosopher. What emerges is a powerful figure conflicted between the practical manager charged with operating within the current fiat monetary system and the philosopher-academic with a “nostalgia,” as he puts it, for the days of the gold standard. Without Dr. Paul’s incisive questioning, I doubt that this aspect of the Greenspan character would have found its way to the public venue and the historical record. Though the relationship appears adversarial at first blush, one also detects a certain amount of mutual respect and interest. Says Dr. Paul of the exchanges: “My questions are always on the same subject. If I don’t bring up the issue of hard money vs. fiat money, Greenspan himself does.”

Let me include one final short story from that preface that I have always appreciated:

In closing, I would like to pass along an anecdote reported by SmartMoney’s Donald Luskin in a 2002 interview of Ron Paul. Paul told Luskin the story of his owning an original copy of “Gold and Economic Freedom,” and asking Greenspan to sign it. While doing so, Paul asked him if he still believed what he wrote in that essay some 40 years ago. That tract, written during Greenspan’s days as a devotee of Ayn Rand, is a strongly worded, no-holds-barred attack on fiat money and the central banks as an engine of the welfare state. It also endorses the gold standard as a deterrent to politicians’ penchant for running deficits and printing money. Greenspan — enigmatic as ever — responded that he “wouldn’t change a single word.”

Perhaps later today, I will be back to comment on one or two more quotes from the Greenspan interview.

From our Gold Classics Library:

Ron Paul-Alan Greenspan transcripts (1997-2005)

Gold and Economic Freedom / Alan Greenspan / 1967

Posted in all posts, Author, MK |

Gold up sharply

Reuters/2-15-2017

Consumer prices post largest gain in nearly four years

“Inflation is trending higher as prices for energy goods and other commodities rebound as global demand picks up.”

MK note: After a minor waterfall drop earlier this morning, gold has rallied sharply off the $1217 low.  Now trading at near $1231.  Not sure what prompted the rally, but one thing we’ve noticed in the trading pattern is that gold is finding significant support on downside corrections.  It comes quickly and usually during the same trading session.

We have hinted here before that professional money is supporting this market which has begun to trade an inflationary bias. That bias was confirmed by the .6% gain in consumer prices in December, reported earlier today, and that could be what’s behind gold’s rally.  Of course, chairwoman Yellen is talking an inflationary line with her warnings about another interest rate increase.  As we have mentioned here consistently, the Fed is likely to chase the inflation rate higher rather than attempt to stop it in its tracks. Real rate of return will become an issue particularly among well-heeled, old line money managers, and that is where gold bobs to the surface as an important factor in portfolio allocations.

Gold is up almost 6% thus far this year and 9.2% from its December low of $1128 per ounce.  Do you remember this chart and commentary first posted 12/10/16?

observationgoldtrading2016Click to enlarge

What are we advising now?  The same thing we always advise.  If you do not own gold and silver currently, fix your sights on a percentage of your portfolio you think would make for a proper diversification and then work toward achieving that target.  None of the negative elements in the economy that launched and supported gold’s long-term secular bull market since the early 2000s has been addressed in a meaningful way. They are not likely to be for a long time to come, and watching the way Washington operates buttresses that notion.  If you do not own enough gold and silver to afford adequate protection, add more now while the price is low.

As published in our most recent News & Views newsletter:

Gold in five easy lessons

1. Don’t buy it because you need to make money; buy it because you need to protect the money you already have.

2. Don’t look at price as a barrier; look at it as an incentive.

3. Don’t buy its paper pretenders; buy the real thing in the form of coins and bullion.

4. Don’t fall prey to glitzy TV ads; do your due diligence instead.

5. Don’t allow naysayers to divert your interest; allow yourself the right to protect your interests as you see fit.

Posted in all posts, Author, MK |

China gold demand much greater than major analysts tell us

Sharps Pixley/Lawrie Williams/2-15-2016

“This suggests that China ‘consumed’ around 2,000 tonnes of gold in 2016, which equates quite closely to the Shanghai Gold Exchange (SGE) gold withdrawals figure for the year of 1,970 tonnes . . .  This would seem to confirm [Bullion Star’s Koos]Jansen’s oft-made assertion that SGE gold withdrawals are equivalent to total Chinese gold demand – a premise largely dismissed (perhaps without adequate reason) by the major gold consultancies which virtually all put Chinese demand at less than 1,000 tonnes.”

MK note:  This augments my recent posts on the West to East gold pipeline.   At 2000 tonnes China’s consumption equals near two-thirds of global mine production – nothing to sneeze at.  China remains the dragon in the Gold Room.  Lawrie Williams does a good job of outlining the China demand situation in the article above – summarizing Koos Jansen’s latest.

Posted in all posts, Author, MK |

The SPDR gold ETF is up 7% this year, as Trump honeymoon ends

ETF Daily News/2-10-2016

“It is not just in Trump’s case that conventional rules no longer apply, they also appear to have been thrown out the window for precious metals in these first few weeks of 2017, namely that a strong US stock market means weak gold. Instead apparently strong economies, a record breaking stock market and recent highs for gold all seem to be able to exist in one realm of reality.”

MK note:  Though the point is well-taken, that was a quick honeymoon.

A good deal of the buying, as reflected in the strong uptick in ETF volume, is among knowledgeable fund managers.  Pushing that concern, in my opinion, is a growing belief that a coordinated devaluation of the dollar along the lines of the 1985 Plaza Accord might be in our collective futures.  Many of the same circumstances that prevailed then are in place now, i.e., concern in both the U.S. and overseas about an overly strong dollar (including on the part of the Trump administration) and major capital flight in places like China and parts of Europe.

David Marsh, the highly respected advisor on foreign exchange to asset management firms, recently told CNBC that there will be a new “accord” in the next 12 to 24 months. The dollar, he says, is mid-stride in one of its strongest showings since the end of World War II, up 10% or more in each of the past three years. It is doing, he says, “exactly the opposite of what (President Donald) Trump says he wants.” He concludes, “I foresee it will carry on getting stronger for a year or so and then we will have a dollar collapse, just like we did in the early 1980s.”

The next G-7 meeting is scheduled for May in Italy, and with the Trump administration’s penchant for negotiating in full public view, I would suspect that any attempt at a new accord will be front and center with accompanying fireworks in the investment markets rather than something that evolves behind closed doors. We suspect in the meantime that a good many will follow the lead of analysts like David Marsh and get ahead of the potential dollar devaluation. An argument could be made that the recent increases in the gold price and ETF demand are a direct reaction to the possibility of a devaluation.

Posted in all posts, Author, MK |

Germany brings its gold stash home sooner than planned

Reuters/Andreas Framke/2-9-2017

But with Europe stumbling from crisis to crisis, the German public has grown uneasy about keeping the gold abroad. Some even argue the world’s second biggest bullion reserve may be needed to back a new deutschmark, should the euro zone break up.

MK note:   Germany has completed its transfer from the New York Fed and 91 tonnes still need to be transferred to Frankfurt from the Bank of France.  Germany will now leave 1236 tonnes at the New York Fed and another 432 tonnes in London.  The remainder of its 3378 tonne national holding will be stored in Frankfurt.  The repatriation transfers to Frankfurt were completed three years ahead of schedule.

With respect to the gold left at the Fed, Bundesbank’s Carl-Ludwig Thiele told reporters: “We have a lot of discussions about (U.S. President Donald) Trump, regarding implications on monetary policy, macroeconomics, etc., but we trust the central bank of the U.S.”

The irony here is that when Hjalmar Schacht, head of Germany’s central bank in the 1920s visited the New York Fed, he asked to see Germany’s gold stored in its vaults.  “Strong**,” wrote Schacht in a 1955 autobiography, “was proud to be able to show us the vaults which were situated in the deepest cellar of the building and remarked: ‘Now, Herr Schacht, you shall see where the Reichsbank gold is kept.’ ”  Storage staff went off to retrieve the gold.  “At length,” Schacht goes on, “we were told: ‘Mr. Strong, we can’t find the Reichsbank gold.’ ”  To which Schacht replied: “Never mind; I believe you when you say the gold is there. Even if it weren’t you are good for its replacement.”  One need presume that nearly 100 years later, the level of trust conveyed by Schacht remains in place.

It is unlikely that Germany would back a new Deutschmark with gold directly, but having an asset set aside that is detached from erratic national currencies in this day and age is a wise move for the prudent nation state – just as it is for prudent the private investor.

** New York Fed president at the time, Benjamin Strong

Posted in all posts, Author, MK |

Doomsday prep for the super-rich

The New Yorker/Evan Osnos/1-30-2017

“Survivalism, the practice of preparing for a crackup of civilization, tends to evoke a certain picture: the woodsman in the tinfoil hat, the hysteric with the hoard of beans, the religious doomsayer. But in recent years survivalism has expanded to more affluent quarters, taking root in Silicon Valley and New York City, among technology executives, hedge-fund managers, and others in their economic cohort.”

MK note:  Everyday on this page we report on the reasons why gold ownership makes a great deal of sense to ordinary investors.  In doing so, we have always taken exception to the mainstream media’s portrayal of the ordinary gold owner as “the woodsman in the tinfoil hat”. . . .etc, etc, etc.  I would think that many among the media are utterly amazed that people like Steve Huffman (Reddit, CEO), Peter Thiel (PayPal founder) and the long roster of other luminaries mentioned in this article have been identified as “preppers” in one capacity or another.

They would probably be even more amazed to find that a good many of this same group are likely to be gold and silver owners as well. As such, they take their place alongside a wide range of Americans who own gold – physicians and dentists, nurses and teachers, plumbers, carpenters and building contractors, business owners, attorneys, engineers and university professors (to name a few.) In other words, gold ownership is pretty much a Main Street endeavor. One Gallup poll a few years ago found that 34% of American investors rated gold the best investment “regardless of gender, age, income or party ID. . .” In that survey, investors rated gold higher than stocks, bonds, real estate and bank savings.

Posted in all posts, Author, MK |

China stocked up on Swiss gold as turbulent year came to a close

South China Morning Post/Wendy Mu/2-5-2017

“China’s gold imports from Switzerland soared at the end of last year when Beijing was struggling to defend the yuan and incoming US President Donald Trump was casting grave doubts about Sino-US economic ties. The Swiss Federal Customs Administration said in January that its gold bullion exports to China rose to 158 tonnes in December from 30.6 tonnes in November, according to GoldSeek.com, a website for gold investors.”

MK note:  Contrary to reports towards the end of last year, flows through the  London-Zurich-Hong Kong-Shanghai gold pipeline are strong and steady.  This article tells why. . . . .

Posted in all posts, Author, MK |

A Trump devaluation and global currency war?

What it could mean for gold.

by Michael J. Kosares

“But the chaotic start to the administration and what many see as its protectionist agenda have amplified fears of not only currency wars but a fully fledged trade confrontation that could be disastrous for the world economy.” Financial Times 2/2/2016

MK note:  [OPINION] President Trump and National Trade Council head Peter Navarro have launched verbal assaults on the Japanese yen, Chinese yuan and the euro labeling all three undervalued the result of deliberate currency policies in the three countries.  “With his statement [Mr Navarro] has in fact fired the next salvo in the currency war the US administration is currently conducting against the rest of the world,” says Ulrich Leuchtmann of Germany’s Commerzbank.

The fact of the matter is that the United States can no longer devalue the dollar as effortlessly (with the stroke of pen) as if the world were still on a dollar-based gold standard.  In such a system, the United States could, and did, devalue the dollar by simply raising the official benchmark price of gold (1971,1973).

Now to carry out a true devaluation of the dollar against other currencies, it needs co-operation from the issuers of those currencies.  Since that is not about to happen without considerable persuasion, the Trump administration will be left with tariffs and import taxes of one kind or another in order to achieve its goals with respect to U.S. trade imbalances.  The end result will be a de facto devaluation of the dollar within the United States against goods and services, not necessarily against other currencies (as discussed here last week).

Since so many commodities are bought and sold in dollar terms, the price inflation will be exported to nations around the globe and injected into their economies.  As noted in our clipped quote, there is considerable concern about the global trading system, but what that translates to in each of these nation states is a potential economic slowdown coupled with possible inflation.  When you start thinking about the situation along these lines, it is not difficult to understand how Alan Greenspan came to the conclusion that we are headed for another period of stagflation, perhaps even runaway stagflation, reminiscent of the 1970s (when Ronald Reagan made famous the Misery Index, the combination of inflation and unemployment). Needless to say, under such inflation-driven circumstances, both gold demand and gold prices are likely to rise, both here and abroad, as they did in the 1970s.

Markets move on sentiment and expectations. At the moment, the sentiment is confused as most are having a hard time getting a clear read, but those who understand the power of market expectations have begun to load up on gold. You see the evidence in revived ETF demand (up roughly 1.2 million ounces in January) as well as demand from Asia, particularly China.   Much of the market action and movement over the past several days has occurred during Chinese and European market hours, including last night. Today’s London morning benchmark was posted at $1224.05 – up about $12 from the trading level just before the posting.


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Previous posts on this subject (for those who would like to delve a little deeper):

Post series: The myth of the strong dollar policy, Part One

Post series: The myth of the strong dollar policy, Part Two

Some initial thoughts on the new ghosts of inflation past

Trump is waving adios to the longstanding ‘strong dollar policy’

 

 

Posted in all posts, Author, MK |

Post series: The myth of the strong dollar policy, Part Two

Myth: The strong dollar policy means that the U.S government will do everything in its power to make the U.S. currency as good as gold.

Reality (as defined at Wikipedia):  “The strong dollar policy is the United States economic policy based on the assumption that a strong exchange rate of the United States dollar is in the interests of the United States and the whole world. It is said to be also driven by a desire to encourage foreign bondholders to buy more Treasury securities. The United States Secretary of the Treasury occasionally states that the US supports a strong dollar. Since the implementation of this policy, the dollar has declined substantially. Despite this, the policy keeps inflation low, encourages foreign investment, and maintains the currency’s role in the global financial system.”


Whenever a U.S. secretary of Treasury utters the words “strong dollar policy,” the question immediately should be asked: “Strong against what?” As outlined in the Wikipedia definition immediately above, the intent of the policy is to make the dollar strong in terms of other currencies, not against goods and services, and for that reason, it is generally misunderstood.

In terms of purchasing power, the dollar is by far worse off today than it was 21 years ago when Robert Rubin first uttered those words as Treasury Secretary (and taken thereafter as self-explanatory). For certain, there have been periods when the dollar has strengthened against a broad basket of currencies, but to apply former senator Alan Simpson’s famous description of the U.S. economy to the dollar: “It is the healthiest horse in the glue factory.”

To illustrate the point I have three charts for you.

The first tells the long-term story on the U.S. dollar since 1913 and passage of the Federal Reserve Act which established the Federal Reserve System as the central bank of the United States and Federal Reserve notes, i.e., the dollar, as the national currency. The results in terms of the dollar’s purchasing power are worth noting. Since 1913, the U.S. dollar has lost 96% of its purchasing power when measured against the Consumer Price Index.


The second tells the long-term story on the U.S. dollar since 1971, the year the United States went off the gold standard, freed the dollar to float against other national currencies and ushered in the fiat dollar international monetary system. Since 1971, the U.S. dollar has lost 83.6% of its purchasing power when measured against the Consumer Price Index. Simultaneously, gold has appreciated 3428%. (at $1200/oz)

The third tells the story on the U.S. dollar since 1995, the year then Treasury Secretary Robert Rubin first used the phrase “strong dollar policy.” Since 1995, the U.S. dollar has lost almost 40% of its purchasing power when measured against the Consumer Price Index – a period by most accounts of generally benign inflation.  Simultaneously, gold has appreciated 317%. (at $1200/oz)

Posted in all posts, Author, MK |

Post series: The myth of the strong dollar policy, Part One

Myth:  The strong dollar policy means that the U.S government will do everything in its power to make the U.S. currency as good as gold.

Reality:  The strong dollar policy is a rhetorical device used by Secretaries of the Treasury historically to keep the markets guessing about U.S. policies that will affect its relative value to other currencies and thereby encourage the flow of foreign capital into U.S. Treasuries (and finance U.S. deficits).


Here is the definition of the strong dollar policy per Wikipedia (emphasis added):

“The strong dollar policy is the United States economic policy based on the assumption that a strong exchange rate of the United States dollar is in the interests of the United States and the whole world. It is said to be also driven by a desire to encourage foreign bondholders to buy more Treasury securities. The United States Secretary of the Treasury occasionally states that the US supports a strong dollar. Since the implementation of this policy, the dollar has declined substantially. Despite this, the policy keeps inflation low, encourages foreign investment, and maintains the currency’s role in the global financial system.”

Note that the strong dollar policy is not based on the purchasing power of the dollar with respect to goods and services, the criteria by which most ordinary Americans judge the strength and stability of the dollar.  So when incoming secretary of the Treasury Steven Mnuchin says he is (or is not) in favor of the strong dollar policy, he is talking about a world of relative, not absolute, values.  Most of the major currencies are depreciating against goods and services and that could be documented by anyone who took the time to do so, but since 2011 it has appreciated against other major currencies.

Wikipedia is correct in explaining that a truly strong dollar would encourage dollar-denominated bond purchases, but that is only within the realm of relative currency values. Even then, the dollar is not always strong against all currencies all the time – another fact of economic life that can be easily documented if one were to take the time to do so.  As a matter of fact, as we have shown on numerous occasions, the dollar, when measured by the Dollar Index, is in general long-term decline, which is another way of saying it is in long-term decline against other major currencies.

Thus, the Wikipedia definition is correct on that score as well.  Once again, here is that chart, with apologies to those who have seen it before.  Note too that gold by comparison is in a long term uptrend against the dollar (and most other currencies as well), making it a productive hedge and long-term alternative for private portfolio managers without a political or economic bias.  If you are interested in long-term wealth preservation, you should simultaneously be interested in gold.  The strong gold reality counteracts the strong dollar rhetoric, and that fact by itself, explains why historically American central bankers with few exceptions dislike gold.  As the economic philosopher Joseph Schumpeter put it, “The modern mind dislikes gold because it blurts out unpleasant truths.”

Stay tuned.  Part Two to follow. . . . . .

Posted in all posts, Author, MK |

Trump is waving adios to the longstanding ‘strong dollar policy’

by Michael J. Kosares

IMPORTANT POST FOR LONG-TERM PORTFOLIO PLANNING

Marketwatch/William Watts/1-18-2016

“Douglas Borthwick, managing director of Chapdelaine Foreign Exchange, argued in a note earlier this month that an incoming Trump administration, by throwing out the strong dollar policy, could use the currency as a linchpin in implementing its economic agenda: ‘With a removal of the Strong USD Policy, the US Dollar will weaken against its global counterparts. This will give the FED the ability to normalize US interest rates, as they can use the weaker USD and the resulting inflation as an excuse for raising rates. . .'”

MK note:  We have come to an interesting crossroads for the gold market. Yesterday, vice-president elect Pence told Fox News that we now have a president who understands business and that a strong dollar hurts our exports.  He made the inference that Trump would likely comment on the dollar regularly as president, something past presidents traditionally have shied away from doing.

Markets, as most of us know, move on sentiment as much as they do hard realities. Thus someone the stature of the U.S. president talking down the dollar is very important to market psychology – not just for gold but all markets.  The Trump administration’s position has already had an effect on the gold market.  Though gold has reacted rather modestly to Janet Yellen’s announcement two days ago of more interest rate hikes this year, it is nothing when compared to the waterfall drops following past announcements on the subject of higher rates.

Things have changed. . . . . .

MK note 2:  As for the Fed using weak dollar sentiment as cover to boost rates, such increases are likely to stay behind the inflation curve.  The quickest way to undermine, and in fact eliminate, a weak dollar policy would be to put rates high enough to create a positive real rate of return on dollar-based financial instruments.   Real interest rates is what real money managers watch in terms of positioning their clients’ portfolios.  I think, too, the Fed understands that such a policy would undermine the Trump administration’s economic program.  The fact of the matter is that it would also undermine the Fed’s attempt to “normalize” interest rates.

Below are charts covering the historical real rate of return on gold and the dollar.  With respect to the real of return, gold has done spectacularly well over the past decade and a half and probably a key reason why gold investment demand has continued to grow over the past several years despite the lower price.

Now the question becomes:
Has the Trump administration inadvertently conferred its blessing on the gold market?

Real rate of return on One Year Treasury, 1970 to present

Chart note: The extensions in the financial instruments’ bars above the CPI represent a positive real rate of return. When the CPI extends above the financial instrument, it represents a negative real rate of return.  As you can see, at times gold’s real rate of return has been spectacular, as mentioned in the text above.

Real rate of return on gold. 1970 to present

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Here’s how David Einhorn is trading the Donald Trump agenda

CNBC/Tae Kim/1-17-2016

“Long gold: ‘Our sense is that Mr. Trump doesn’t hold any core policy beliefs and is apt to change his mind as he sees fit. This will lead to more political and economy uncertainty,’ which is positive for gold, according to Einhorn.”

MK note: The “Long gold” is wedged-in among the ever-present list of stocks and sector plays. Einhorn is a long-time gold advocate owing to discussions he had with his grandfather when he was a youngster – discussions that stuck even after he became a fabled money manager.

 

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Gold in five easy lessons

by Michael J. Kosares

1. Don’t buy it because you need to make money; buy it because you need to protect the money you already have.

2. Don’t look at price as a barrier; look at it as an incentive.

3. Don’t buy its paper pretenders; buy the real thing in the form of coins and bullion.

4. Don’t fall prey to glitzy TV ads; do your due diligence instead.

5. Don’t allow naysayers to divert your interest; allow yourself the right to protect your interests as you see fit.


Mr. Kosares is the author of The ABCs of Gold Investing – How To Protect and Build Your Wealth with Gold, the widely-read introduction to gold ownership.

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Stock are getting crushed by gold in 2017

MarketWatch/Mark DeCambre/1-12-2017

“Perhaps one of the clearest signs that a rally inspired by President-elect Donald Trump is starting to stall is shiny and yellow and is outperforming other assets by a healthy margin.”

MK note:  Much of the gain thus far has been the result, in my opinion, of short covering, thus the direct effect on the price as determined on the COMEX and in the London over-the-counter market.  Meanwhile, demand is building again in both the West and East.  China is trying to contain imports but all that has done is to attach a high premium to the gold that is coming into the country.  Over the past several days, the steadily rising price in the West has carried over to the East during overnight trading hours – a sign that demand has been strong at the Shanghai Fix.  Shanghai demand is actual, physical demand as explained in detail here.  In the United States, as reported here a couple of days ago, demand as reflected in U.S. Mint bullion coin sales (a bellwether for the overall market) is strong.

Gold is up 4.5% thus far this year and 6.6% from the $1128 December bottom (12/15/16).

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The economic risk of ignoring arithmetic

Advisor Perspectives/John Hussman-Hussman Funds/1-9-2017

For now, the stock market is now much like Wile E. Coyote temporarily hovering just past the edge of a cliff. The moment of descent isn’t clear, but I believe it would be a mistake to climb onto his shoulders.

MK note: Hussman says the markets are fully confined within another episode of speculative madness similar to past episodes of the same.  It will likely produce the same destructive results.  “As we enter 2017, the great risk for investors,” he says, “is not in missing out in an exhausted run that already rivals the 1929 and 2000 extremes, but in failing to contemplate a 50-60% market retreat over the completion of the current cycle.” I thought the metaphor he employs above particularly apt.

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Black magic fraud to be exposed in 2017 – Gold up 300x

Matterhorn Asset Management/Egon von Greyerz/1-9-2017

“So stocks and bonds have been a terrific investment. But what about the barbarous relic called gold. This is the investment that most people don’t understand and that banks and investment advisors avoid at any cost. Well this most hated investment has gone up 30 X in value between 1971 and today. And remember as opposed to the stock market, gold is far from the high which was $1,920 in 2011. At that point gold had multiplied 55 X. Since 1999, the Dow is down 62% against gold. Very few investors and no investment advisors know this. Nor do they realise that stock markets are in a long term secular downtrend against gold. This trend will not stop until stocks fall by another 90% against gold in the next few years. That will take the Dow/Gold ratio down to 1 to 1 where it was in 1980.

But more importantly, before the next gold bull market is over, gold will be up over 300 times since 1971, in today’s money. That will give a gold price of $10,000+ and a lot more in hyperinflationary money.”

MK note:  Some will blanch at the prospect of $10,000 gold, even think it farfetched, but it is that word “hyperinflationary” that drives the big number von Greyerz attaches to a troy ounce of gold.  One wonders how many in post-World War I Germany would have believed that a precious metal selling for about 87 marks per ounce in 1918, would sell five years later for over 118 billion marks per ounce.  But it did.  The investor who thought that he beat the system sufficiently and cashed-out of gold at 10,000 marks per ounce would have seen that money evaporate overnight under the harsh effects of the hyperinflation.  Greyerz’ number might seem far-fetched, but not in a pricing framework when you are paying $50 for a coffee at Starbucks and $10,000 for a new suit at Jos. A Banks.

Here’s a graph we put together for our Gold Chartography 101 page on the gold’s performance during the Weimar Inflation in Germany.  The numbers in left axis are not a misprint.

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Some initial thoughts on the new ghosts of inflation past

In order to fully understand the origins of the ghostly inflation apparition now haunting the financial markets, we need to go back to Alan Greenspan’s chairmanship of the Fed and the effects of globalization on prices.  Let me post a quote from the economist James Galbraith from his book The Predator State chosen because it makes the point quickly and clearly and without a lot of unnecessary verbiage.

“After eighteen years at the helm of the Federal Reserve, during which time Greenspan was amply praised for keeping inflation under control, in retirement he writes that his accomplishment was not his doing.  Rather he benefited from the collapse of the Soviet Union and the rise of China.  And Greenspan is right.  The collapse of the Soviet Union dumped huge supplies of industrial materials and of fuel – oil and natural gas – onto world markets, which depressed commodity prices.  The rise of China, for its part, created a labor reserve at low dollar wages, against which no other low-skilled labor pool could effectively compete.  With global commodity prices held down by one phenomenon and global labor costs by the other, global inflation was doomed.”

Greenspan himself mentioned his good fortune in this respect in Congressional testimony and various writings after his tenure at the Federal Reserve.

Now with the president-elect promising to introduce measures to essentially de-globalize the U.S. economy through various import restrictions, we could get an equal and opposite reaction. To what degree, remains to be determined though Ford’s decision to locate a manufacturing plant originally planned for Mexico in Michigan instead is an early and important example of what could become a wider trend.  Keep in mind, too, that we do not know how this situation will affect the huge pool of money (quantitative easing) created during the post-crisis bailout of the banking industry.  In short, Mr. Trump, knowingly or not, is in the early stages of standing a 20-year economic paradigm on its head.  What forces it might unleash will be a huge X-factor in the weeks and months ahead.

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Gold zig-zag trading pattern UPDATED

With the New Year upside in gold looking pretty solid, we hearken back to a post made here December 10 featuring the following chart (with comments):

observationgoldtrading2016Click to enlarge

Here is what that chart looks like now with the December low in place at $1121/oz and the January turnaround – kicked off, I would guess, by aggressive short-covering, but likely now also driven by currency and longer-term inflation concerns. . . . .With gold currently trading in the vicinity of $1183, it is already up 5.5% from the December low.

We caution that just because gold has displayed a pattern in the past, it does not mean that same pattern or tendency will repeat itself in the future, so exercise due caution with this information.

 

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After all is said and done. . .

. . .and after everything’s been stacked and counted, here is the final tally for 2016 on the primary investment markets:

1. Crude Oil –– +31%
2. Silver –– +15.2%
3. Commodities –– +11.6%
4. Dow Jones Industrial Average –– +11.5%
5. Gold –– +8.7%
6. Home Values –– +6.5%
7. U.S. Dollar –– +3.6%

After a solid year of the financial media pumping up stocks and the dollar and talking down gold and silver, stocks did only marginally better than gold and worse than silver, and the dollar didn’t even come close.

(Data sources: Bloomberg Commodities Index, Zillow Home Value Index, U.S. Dollar Index, Brent Crude Oil, Dow Jones Industrial Average, Gold Spot Forex, Silver Spot Forex)

 

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Short & Sweet

Golden notable quotables for 12/29/2016. . .

“First, ‘record levels’ of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution.” – Lance Roberts, Real Investment Advice (Article: Records are records for a reason)


“During November, the UK (London) re-emerged as the main provider of gold to Switzerland, with the Swiss importing 48 tonnes of gold from London. This is the highest monthly gold import flow from the UK to Switzerland since last January. The second largest source of gold flowing into Switzerland during November was Hong Kong which provided 35 tonnes, with the UAE (Dubai) a distant third providing 16 tonnes, and the US sending  just under 12 tonnes to the Swiss.” – Bullion Star

MK note:  An old story. The ETFs are selling.  The Chinese are buying.  The gold is flowing East through the London–Switzerland–HongKong-Shanghai pipeline.  The Chinese buy gold when the dollar price is falling.


“President-elect Donald Trump’s pick for budget chief, Mick Mulvaney, has been an active investor in gold and gold-mining stocks, often seen as a hedge against collapsing currency.The South Carolina Republican congressman has accused the Federal Reserve of debasing the value of the greenback and has praised bitcoin, an alternative currency. He held between $50,000 and $100,000 in precious metals as of the end of 2015, filings show.” – Noah Buhayer/Bloomberg


“Since the rate hike, gold prices have already risen a bit. This trend is on track to continue in the coming year, for a variety of reasons. For one thing, many experts believe as Donald Trump takes office it will strengthen the gold market.His proposed policies are likely to raise the national debt and increase inflation, which historically leads to a rise in precious metal values. There has also been an influx of commodities investments from China, which have driven copper and zinc up in the last few months, and stand poised to do the same for gold.” – Trevor Gerszt, NewsMax Finance


“[G]old has been a better investment than equities in recent times. Since the turn of the millennium, gold has returned over 300%, while the S&P 500 has returned 55.09%. In addition, the MSCI EAFE index, which represents the performance of large-cap and mid-cap stocks across 21 countries consisting of countries in Europe, the Pacific and the Middle East, has lost 5.21% since the turn of the millennium. If anything, the potential slump in gold should be seen an opportunity to add more gold to your portfolio for the long-term.” – Sam Alcock, The London Economic (Article: Why the potential gold slump will be temporary, hence presenting a buying opportunity)

MK note:  The one thing about “potential slumps” is you don’t know when they are going to suddenly end – particularly in the gold market.

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Silver could be new gold; prices may rise 20% in 2017

Economic Times/12-27-2016

“Commodity experts and bullion traders feel that silver can trump gold in coming months as demand for the metal is increasing for solar panels and electronics sector. Demand for silver is increasing in the home décor and fashionable jewellery categories in the country which may push the price of the metal by almost 15-20% in 2017, feel the traders and analysts.”

MK note:  Silver is up 14.5% in 2016 even after the sharp year-end correction.  It has clearly outperformed gold which gained 7% this year as reported further down the page.  Silver investors, we know from direct experience working with our clientele, view silver as a safe-haven alternative to gold with the added bonus of stronger upside potential (Experience also tells us it also has stronger downside potential.) I should add that silver also outperformed the stock market in 2016.

Silver sales at USAGOLD have steadily and markedly climbed year over year the past few years and we suspect that sales will be strong at the start of 2017 due to the currently low price level at around $16 per ounce.  Last summer we experienced a strong increase in investor interest at the $16 to $18 price level.  Then prices jumped to near $21 before correcting into the end of the year.

One of the more interesting points made toward the end of the linked article is that silver demand in India is likely to increase due to investor concerns that the government there will continue its war against gold ownership, and could attempt to curtail or stop imports. That war, we feel, is doomed to failure.  India’s government is fighting thousands of years of  culturally ingrained, deep attachment to gold.  In the interim, however, practicality may carry the day and silver at some level would become, as the headline at the top suggests, the new gold in India.

If even a small amount of India’s massive gold interest were to migrate to silver, it could cause supply disruptions and premium increases here in the United States.  We have seen before the hair trigger relationship between ramped up physical demand and premium increases. The physical silver market globally in terms of availability is not nearly as deep and liquid as gold, and a heavy source of new demand could become problematic.   At the moment, premiums are higher toward the end of the year, but modestly so.

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Gold’s year in a nutshell

MK note:  If 2016 was such a bad year for gold (which is what the financial press has been telling us for three months now), how is it that through the third quarter, physical gold investment demand posted its fourth best year in the past decade? (Top chart)  How is it, too, that demand at the gold ETFs and mutual funds, a favorite measuring stick for the mainstream media, was up a solid 11 million ounces, or 15%+ on the year even after the strong third and fourth quarter draw downs?  (Bottom chart)

As of this posting, gold is up 7% on the year despite the late year sell-off.  The Dow Jones Industrial Average, amidst a media frenzy, is up 12.5%.

The 7% gain, assuming the market holds at this level,  along with the investment demand increase represents the rest of the story on gold’s year.  It wasn’t the best year on record, but, after all is said and done, it wasn’t all that bad either.  With yield instruments paying precious little, that 7% return looks pretty good from a wealth management point of view.

One final point:   Over the decade since the financial crisis began in 2007, the Dow is up 60%, and gold is up 78%.  As you can see from the chart, demand went to a whole new level post-crisis and stayed there. This year’s resurgence under comparatively benign economic circumstances is worth noting.

 

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In the end, trees don’t grow to the sky, and few things go to zero



“In the end, trees don’t grow to the sky, and few things go to zero. Rather, most phenomena turn out to be cyclical.”  ― Howard Marks, Oaktree Capital

These charts are dedicated to those who understand the wisdom imparted above. Marks’ observation resides at the philosophical core of the enlightened gold owner.  Why?  Because he or she understands the cyclical certainty (or is it uncertainty?) of markets and the economy, indeed the cyclical certainty in the grand scheme of things of which the investment markets are only a small part.

“A true cycle,” says historian Arthur Schlesinger, “is self-generating. It cannot be determined, short of catastrophe, by external events. Wars, depressions, inflations may heighten or complicate moods, but the cycle itself rolls on, self-contained, self-sufficient and autonomous. . .The roots of cyclical self sufficiency lies deep in the natural life of humanity. There is a cyclical pattern in organic nature — in the tides, in the seasons, in night and day, in the systole and diastole of the human heart.”

At no point along the historical continuum are we ever at an end, nor are we ever at a beginning, and all along the way the twists and turns of the cycle will be sudden and unpredictable. That, in a nutshell, is why people own gold.

So it is that we can see the systole and diastole of the gold and dollar markets in the top chart showing the first (OBVERSE) and second (REVERSE) halves of 2016, as well as in the longer term relationship shown in the second chart.


In the end, the enlightened gold owner might buy into the latest investment fad and run with the crowd, if he or she so chooses.  It is fundamentally better though to engage the madness of crowds with one’s safety net solidly in place.

I will leave you with a final observation from the famed investor, Bernard Baruch, one of the original Wall Street contrarians who made a fortune betting against the crowd.  In the late 1920s, he became a gold owner because he was “commencing to have doubts about the currency.”

“Have you ever seen in some wood,” he asks, “on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam? …Yes? …Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective.”

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Italy’s rebel economist hones plan to ditch the euro and restore the Medici florin

The Telegraph/Ambrose Pritchard-Evans/12-6-2016

“Europe has brought us a depression worse than 1929. It has led to entire peoples being broken and humiliated, like the Greeks, all for the sake of preserving the infernal instrument of the euro. This whole disaster has been adorned by a chain of lies, shouted ever louder because they are afraid that the colossal damage they have done will be discovered.”

–– Claudio Borghi, Catholic University of Milan

MK note:  With home-grown events over the past few months dominating Americans’ thinking, most of us have forgotten the developing problems in Europe.  These center mostly around the euro and the demanding economic matrix that goes with it.  Borghi reminds us of what is at stake in Europe.  Elements in Italy are pushing for a quick election as early as February, which no doubt will become a referendum on the euro.  Germany will also conduct an election in February and its role in a larger Europe will certainly be an issue, and Brussels just put the clamps on Greece’s bailout program to what end no one knows.  All of these events will engage nationalist sympathies and inclinations.  Europe is about to be tested.

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Why gold could bottom on or close to rate hike

Yahoo Finance/Matt Winkler/12-14-2016

“Oil has been on a tear, and gold may be next, especially once this week’s anticipated Federal Reserve rate hike is behind us.”

MK note:  Quietly, oil is up 27% since mid-November.

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