Category: MK

Past few days a fractal event for the gold market. . . .

OPINION

by Michael J. Kosares

“In the absence of a credible monetary standard, we expect no escape from the treadmill of rising debt, both US and globally, that outpaces economic growth. Income inequality, wage stagnation, overvaluation of financial assets, and speculation instead of productive investment are likely to be prolonged under the current monetary regime. Whether or not policy makers take a proactive approach to address monetary reform, the fact remains that gold is massively underpriced in all paper currencies. It would be preferable if the necessary adjustments could occur without a repeat of a 2008-like financial crisis. We give this possibility a chance, albeit slim. In any event, we expect a significant repricing of gold higher during the current administration, either by design or because of market events. Whenever a repricing happens, we expect broad grassroots support for that outcome.” – John Hathaway, Tocqueville Funds
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The past few days illustrate an important event in the gold market that both beginning and accomplished investors should try to understand thoroughly. I say that because by such an understanding you will become a more educated, patient and successful gold owner.

On April 19th, over $3 billion in paper gold was sold in the London over-the-counter market dropping the gold price by $14 per ounce in a matter of minutes. Just as quickly, the cries of foul play rose among gold punditry across the internet. Just before the “hit,” gold was trading in the $1286 range. It plunged to $1272. Since this morning’s AM London Fix, gold has been in recovery mode and it is now trading again in the $1286 range. Except for those who took the drop as a buying opportunity, these events will be seen essentially as a sound and fury signifying nothing.  At the same time, quietly the notion of gold’s indestructibility has been reinforced – not so much with respect to its physical qualities, but with the place it occupies in the minds of investors across the globe. The recovery today in a certain sense is a fractal event in both amplitude and duration – a hint of a greater manifestation that might be coming down the road in the not too distant future.

More. . . . .

The gold price is determined in the futures markets, but the effects of that determination are in the physical market, i.e., the price for bullion, coins, jewellery, etc. Those who feel that the gold market price is controlled solely by forces within the paper market do not fully understand the constraints on paper imposed by physical supply and demand.

In a nutshell, if the paper market is successful in suppressing the price for too long and at too low a rate, the physical demand globally will eat up the physical supply and threaten the existence of the primary source of the metal – the mines. That is why top-level analysts like John Hathaway (Tocqueville Funds) often talk about the inevitability of one-off repricing events. As long as gold can be freely owned, the market at some point finds the real price of gold, reconciles the books and exposes the power of price manipulators for what it is – a temporary, staying action rather than a successful long-term program. It is the time period before that happens which presents the best buying opportunities – times like the present. The events of April 19th through today illustrate the point in a microcosm.

As it is, annual mine production has leveled out over the past several years and there has not been a major gold find anywhere in the world for decades. Meanwhile global demand for the physical metal has not only sustained itself in recent years, it has grown rapidly, and clearly at a rate that far exceeds the rate of growth in mine production. Just this past week, we have seen reports of renewed strong demand in China and India – two traditional powerhouses when it comes to physical ownership of the precious metals. Generally speaking, the East buys on price while the West buys on momentum, thus one might conclude that anecdotal evidence shows that the price has been “right” in recent months. This time around, as reported here previously, professional money managers have positioned themselves as buyers in concert with the East, something that happens only on occasion. The two together though are currently an imposing presence in the global gold marketplace.


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The only way the gap between mine production and physical demand can be made-up is from above-ground sources, or by trading paper to the extent that it masks the wide gap between physical demand and physical supply. At some point, the paper price will succumb to reality of shortages as it always does. Those short the metal will need to find it and deliver on the price promises made previously, a process that usually excites the price discovery mechanisms in the paper market. If the pressure exerted by the traders of gold paper were powerful enough to overcome these realities in the physical gold market, the price never would have traversed the enormous gap between $250 per ounce in 2000 and $1850 per ounce in 2011, and roughly $1300 per ounce at present.

So no matter how much we lament the impositions of paper traders, i.e., their corruptions of the market and restraints to the upside, gold’s opponents can only win the occasional battle; they will never win the war. As I have said before, the paper traders must equally curse the ever-present power wielded by physical buyers of the metal, and over the years, the true believers in the precious metals, have only viewed episodes of price suppression as buying opportunities.

Ultimately, the end result might be another unprecedented price explosion, as Mr. Hathaway suggests, when the impotence of the controls becomes apparent on a far larger scale than what occurred in the gold market over the past few days. At a time, as has been the case since 1971, when the production of fiat money rules the roost, gold’s natural inclination will always be to rise in price in terms of that currency. In fact, if that were not the case, it would be unnecessary for anyone to attempt controlling the price. That affinity to rise is only compounded in the end by attempts to restrict the natural price level.

USAGOLD –  Celebrating our 43rd year in the gold business and 20th on the world wide web

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Evidence of big ETF inflows in London

ETF Strategy/George Watson/4-11-2017

“Source has reported that its Source Physical Gold ETP (LON: SGLD) has recorded over $500m of net new assets year to date (5 April), as the gold price has risen 9% during the same period. According to the ETF issuer, the figures show investors are returning “aggressively” to gold. . .

ETF Securities also reported strong flows into gold, with its gold ETPs seeing a combined $42m of inflows in the week beginning 3 April. The largest of these is ETFS Physical Gold (LON: PHAU) which has AUM of $5.9bn and fees of 0.39%.”

MK note:  We have reported consistently over the past several weeks that while retail private investors seem to be either enamored with the stock market or in a quandary as to what they should do next, professional investors, for reasons of their own, are anteing-up decisively in this gold market.  My thinking is that professional investors, i.e., hedge funds, institutional investors, money managers, etc.,  know full well what the impact of Fed policy will be on the gold market (as outlined in my previous post and more extensively in the March issue of our News & Views newsletter). They also understand the growing market risks associated with the build-up of potentially implacable geopolitical tensions since the beginning of the year.  As shown in the chart immediately below, gold and silver, in fact, have already amply rewarded professional investors who have been in this market since January (as well as their equally astute counterparts among private investors).  At this writing, gold is up 10.5% on the year and silver is up a cool 15%.

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Quick observation on gold being up sharply this morning

Many who offer up their analysis on the gold market will attribute today’s sharp rise to the geopolitical environment, which is fraught with danger to say the least and certainly a contributor.  But that’s not the whole of what is driving the gold market in recent days.  A second, and not-to-be-underplayed, factor is the prevailing and publicly well-cultivated policy of the Federal Reserve toward interest rates, up to and including Janet Yellen’s most recent comments.* The first provides momentum to the second – license.

* “Looking forward, I think the economy is going to continue to grow at a moderate pace.  Our job is going to be to try to set monetary policy to sustain what we have achieved.”  Janet Yellen as quoted in New York Times/4-10-2017

The markets will read “accommodation” in those words meaning the Fed will do what it can to make sure the interest rate tracks behind the inflation rate and creates a negative real rate of return on yield bearing assets.  That latter, a negative real rate of return, has underscored, driven and sustained  bull markets for gold in the past.

MK

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Hussman posts pension system tsunami warning

Stalling engines: The outlook for U.S. cconomic growth your long-term investment portfolio

Advisor Perspectives/John Hussman/4-3-2017

“I’ve detailed this dynamic extensively in the financial markets. Given present valuation extremes, the skateboard is so far ahead of the car that we expect S&P 500 annual nominal total returns to average just 0.6% over the coming 12-year period, even if underlying economic growth accelerates to historically normal rates. Combine that with depressed interest rates, where poor 10-12 year total returns are baked-in-the-cake, and our estimate of the prospective total return on a conventional portfolio mix of 60% stocks, 30% bonds, and 10% T-bills has never been lower.

Given that typical pension fund return assumptions are vastly above our current estimates, it follows that we expect a rather severe pension funding crisis in the coming years. If the resolution of the present valuation extremes is anything like what has followed other speculative peaks like 2000 and 2007, investors will likely face a substantially different (and better) menu of investment opportunities within a small number of years. Dry powder has considerable option value.”

MK note:  In this month’s edition of News & Views we talk about pension fund instability as a possible unforeseen negative “left field” event that could deliver the next systemic crisis to financial markets’ doorstep.  Mr. Hussman communicates that same concern along with additional concerns about the economy itself wherein he cites “challenging arithmetic already baked into the cake.”

WARNING!  Do not read the article linked above if you believe that the stock and bond markets are perpetually solid long-term investments without periods of regression, losses and stalled wealth building.  Do not read this article if you do not want your media-oiled assumptions about the markets and your portfolio challenged.

SOMETHING TO CONSIDER?  Given the returns Hussman forecasts, perhaps that portfolio mix cited above would be better-served with a 10%-30% diversification into gold and silver – the level USAGOLD recommends depending upon your level of concern.  If you are locked-into a government or corporate sponsored pension or retirement fund, you might want to consider a diversification on the personal side.

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King Ibn Saud’s 35,000 British sovereigns

Reading that story about the sovereigns in the piano this morning reminded me of the story of Saudi Arabia’s King Ibn Saud reproduced below as originally posted in 2015:

When Saudi Arabia’s King Ibn Saud sold oil concessions to the major oil companies in 1933, he demanded a payment of 35,000 British sovereigns — a coin many of you hold in your own sovereign wealth funds. The good king understood the difference between the value of gold and the value of a paper promise.

At the time, British sovereigns were valued at $8.24 each, or $288,365 for the 35,000 coin lot. The price of oil in 1933 was about 85¢ a barrel. A British sovereign, as a result, could buy about ten barrels of oil. Today those same sovereigns would bring a little less than $9 million at melt value ($256.50 each/$1090 per ounce gold price) and a barrel of oil is selling for about $44. Thus, a British sovereign can buy almost six barrels of oil — a statistic that gives you an inkling of gold’s current under-valuation. For gold to buy the same amount of oil now that it did in 1933, the price would have to go to $1880 per ounce.

MK 2017 note: Prices have changed but the point remains.  Gold is undervalued at current prices when weighed against the price of oil – even at the current reduced price ranges.


History buffs will appreciate this additional quote and comment from the September 2000 edition of News & Views:

“The only remaining problem was how to obtain that much gold. Because America had just gone off the gold standard, Socal’s efforts to dispatch the gold directly from the United States were turned down by Assistant Secretary of the Treasury Dean Acheson. But finally, the Guaranty Trust’s London office, acting on behalf of Socal, obtained thirty-five thousand sovereigns from the Royal Mint, and they were transported on a ship belonging to the P&O line. Care had been taken that all the coins bore the likeness of a male English monarch, and not Queen Victoria, which it was feared, would have devalued them in the male-dominated society of Saudi Arabia.” – Daniel Yergin, “The Prize”, on the signing of the first oil exploration concession with Saudi Arabia in 1933

The good King Ibn Saud, back in 1933, demanded 35,000 gold British Sovereigns in payment for oil exploration rights in his country. Had he known that he was sitting on a massive pool of oil that would make Saudi Arabia the most important piece of real estate in the world, he might have asked for more. Ibn Saud did however understand the ultimate value of a paper promise, hence the payment in hard, yellow metal. To this day, the Gulf (as it’s come to be known) becomes squeamish whenever it appears the Fed is printing too much paper currency.


Old British sovereigns, like the ones in the photo below, are a preferred acquisition among safe-haven gold IRA rollover investors. We now have a quality selection of George V sovereigns available at attractive bullion-related prices. We invite you to call the Trading Desk at 1-800-869-5115, extension #100 to learn more. British sovereigns were a guardian of wealth in 1933 and remain a guardian of wealth today.

Value+history+gold money = portfolio safety for the long run

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Authorities seek owner of gold stashed in piano

AP/3-16-2017

“British officials are trying to trace the owner of a trove of gold coins worth a ‘life-changing’ amount of money found stashed inside a piano. A coroner investigating the find on Thursday urged anyone with information to come forward. . . Anyone wanting to make a claim has until April 20, when coroner John Ellery will conclude his inquest.”

MK note:  This post is made in the public interest.

Ahem. . .

By the way, British sovereigns happen to be one of the most sought-after, accumulated and stored pre-1933 gold coins in the world.  We sell many thousands of this item annually.  Some go into safe deposit boxes.  Some get buried out on the property.  Some get stashed in the piano.  All are kept in the event of a social, political or financial breakdown, or some other unexpected catastrophe against all of which the gold British sovereign has been a direct hedge for centuries.

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“Accommodative”

Though not a new word to describe Fed policy intentions, using it in today’s statement in the context of obviously rising inflation and inflationary expectations is a new policy stance – one very favorable for gold and likely the Trump administration as well. It seems that the Fed is willing to chase the inflation rate rather than trump it (forgive the allusion), and as long as that’s the case, the markets will read inflation into the economic script for the future.

I think some were expecting “accommodative” to disappear from the Fed-speak particularly after Yellen’s speech earlier this month when she said the central bank is likely to pursue “a neutral” rates policy.  “A ‘neutral’ policy stance,” said Yellen pre-meeting,” is one where monetary policy neither has its foot on the brake nor is pressing down on the accelerator.”  Post-meeting, the word “accommodative” was still there though – like a bright and shiny gold coin sitting on the sidewalk waiting to be pocketed.  It was.  Gold and silver shot higher and so did stocks and even bonds.

All of this blends nicely with themes raised in our March newsletter:Watch movie online The Transporter Refueled (2015)

Will banks’ excess reserves fuel a new monetary crisis?
Don’t look now but inflation and a new gold rush might be in our future.
 

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Strong demand surge at the gold ETFs start of year

World Gold Council/3-10-2016

“At the end of February, total holdings in gold-backed ETFs and similar products stood at 2,246.1t (72.2 moz), up 90.6t from January. These holdings were valued at US$90.7bn, 8% higher than a month earlier.”

MK note:  We’ve been reporting on the surge in ETF purchases for several weeks now.  Following up on the previous post on a hedge fund manager’s commitment to gold, this chart is indicative of professional interest in gold.  As you can see, that interest is strong and on both sides of the Atlantic.  German interest in ETF gold, obviously a reflection of concern with the French election and future of the euro,  is particularly strong – up 16% in February.  Private investors at the moment are content to sit on the sidelines while the professionals scoop up what they see as cheap gold.  Don’t allow yourself to be mesmerized by the stock market and neglect gold. . . . . . .I will leave you with this cartoon from our old friend, Ed Stein.  It kind of says it all. . . . . .

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Why I own gold now, by investor of $2.8 billion

What investment/David Thorpe/3-10-2017

“Cutler has around 5 per cent of the fund deployed in gold. He told What Investment, ‘if you look at the different possible economic scenarios we are faced with now. The first is that we are all going to become like Japan, with no growth, and very low bond yields. Well, the number one reason not to own gold is that it pays no income, but in this scenario, bond yields are very low or negative so nothing pays an income, and that’s good for gold.’

Cutler continued, ‘The second scenario people look at right now is that we end up like in the 1970s, with stagflation, very high inflation and very little growth. Well in times of very high inflation, gold does well as a store of value. It did well the last time we had this scenario.’”

MK note:   That’s the way I see it as well.  Neat, simple and directly to the point.  Either way you are protected with an adequate diversification in gold and silver coins.

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Why ‘digital gold’ won’t ever kill off the real thing

The Conversation/Dirk Baur/3-7-2016

Piles of 20 Italian Lira

“Gold has often been referred to as a relic. But from a behavioural perspective, this may also mean it is ingrained in our subconsciousness and related actions. Put differently, as long as humans remain tangible, it is likely that they maintain a desire to hold real and tangible assets.

Very few companies on the US stock exchange, for example, are older than 50 years. By comparison, gold has existed for thousands of years and any gold coin or gold bar will most likely outlive any company and their stocks and bonds. Put together, it is unlikely that a company that sells claims on gold, such as a gold ETF, will beat physical gold’s longevity.”

MK note:  That’s the bottom line on ETFs, bitcoins and the like. . . . . . . . .Wannabes, not gonnabes.  At least in the sense what constitutes real gold ownership.  Good article for the thinking gold owner. . . . . . .The Italy 20 lira gold coins pictured above are over 120 years old, still reflect the purchasing power of gold in international markets despite their age and have survived the many turns in Italy’s history.  One hundred and twenty years from now that will not have changed. “As long as humans remain tangible, it is likely that they maintain a desire to hold real and tangible assets.”

Speaking of old and valuable gold coins. . . .

USAGOLD’s
March Special Offer

‘Proof-Like’ Schillings, Kroner ‘Mermaids’, ‘Hefty’ 50 Francs, and Deeply Discounted Angels…and a raffle!

We do not see the Austrian 100 Schillings and Mermaids often and the number offered – 50 and 165 respectively – is very low.  These items are likely to be subscribed quickly.

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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

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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.

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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%.

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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.

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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%.)

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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

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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.

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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.

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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

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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.

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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. . . . .

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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’

 

 

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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)

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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.

Posted in all posts, MK |

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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