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NEWS &VIEWS
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Celebrating our 45th year in the gold business

April, 2018
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News & Views is the contemporary, web-based version of our client letter which traces its beginnings to the early 1990s as a hard-copy newsletter mailed to our clientele. The "Big Breakout of 1999" headlined in the November, 1999 issue of our newsletter moved the gold price from $250 to $325 per ounce. It was a major event.

The times have changed, but our mission has not. Simply put, it is to deliver value to our readers in the form of cutting-edge Forecasts, Commentary and Analysis on the Economy and Precious Metals. The very same mission that has been displayed in our banner for over twenty-five years.

MK Editor: Michael J. Kosares, founder of USAGOLD and author of The ABCs of Gold Investing - How to Protect and Build Your Wealth With Gold.

 

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The new petroyuan and gold
'This is the single biggest change in capital markets, maybe of all time'
– Union Bank Switzerland –

"China's launch on Monday of its crude futures exchange will improve the clout of the yuan in financial markets and could threaten the international primacy of the dollar, argues a new report by Hayden Briscoe, APAC head of fixed income at UBS Asset Management. 'This is the single biggest change in capital markets, maybe of all time,' Briscoe said in a follow-up telephone interview." – Kate Duguid, Reuters, 3-26-2018

Let's just assume for a moment that an oil contract denominated and settled in Chinese yuan, for whatever reasons, becomes more attractive to oil traders than one denominated and settled in U.S. dollars. To the degree that decision is shared among market participants, demand will lessen for dollars and will increase for yuan – strengthening one and weakening the other. Instead of all oil purchases being routed through the dollar, some level of the international oil trade will be routed through the yuan, including some American companies. "This," says UBS' Hayden Briscoe, "helps cement the exchange's viability and challenges the petro-dollar system, in which oil deals are executed in dollars. This would decrease demand for the greenback and boost U.S. inflation."

At this time, it is impossible to gauge the impact except to say that such a change in oil market dynamics goes far beyond ordinary commerce to the very heart of the monetary and financial system simply because oil is such a huge chunk of the daily international commerce. That is why Briscoe says it is "the biggest single change in capital markets, maybe of all time."

In order for the yuan to openly challenge the U.S. dollar, petroyuan volumes will need to be large enough to attract the attention of speculators and investors globally. OilPrice.com reports that on the first day of trading, a respectable 15.4 million barrels of crude (about $1 billion worth) were traded in the September contract with Glencore, Trafigura and Freepoint Commodities among the first to take positions. Jeff Brown, president of FGE, an energy consultant, told Reuters that "the government (in Beijing) seems determined to support it, and I hear a number of firms are being asked or pressured to trade on it, which could help."

One day does not a market make, but it is interesting to note that on March 26th, the yuan appreciated sharply against the U.S. dollar reaching its highest level in 31 months. Gold, it is worth noting, followed it higher along the exact same timeline. Whether or not the petroyuan establishes itself as a tour de force that openly and effectively challenges the petrodollar, its journey is something that warrants our close attention. Needless to say with everything else that is going on in the financial markets these days, the petroyuan is one component that has not been even modestly factored into the equation.

The Reuters article by Kate Duguid titled, "China Oil Futures Launch May Threaten Primacy of U.S. Dollar," quoted at the top of this post, is an excellent starting point – a must read. Though the word "gold" is never mentioned, it offers one of the most persuasive arguments in favor of acquiring the precious metal to surface in a very long time.

Will the real king please step forward?

One of the first statements Larry Kudlow made upon assuming the mantle of economic advisor to the president was to reiterate the decades-old strong dollar mantra. He even went so far as to say he would "Buy king dollar and sell gold." The chart shown above illustrates where that "trade" would have gotten the investor since 1971 when the United States severed the link between the dollar and gold and allowed each to float free of each other in the open market.

The dollar over that period, indexed to 100 in 1970, lost 84.3% of its purchasing while gold simultaneously gained in value by 3775% (from $35 in 1970 to yesterday's FOREX close of $1331.00). Since 1995, the year President Bill Clinton's Treasury Secretary, Robert Rubin, first publicly expressed the concept of a strong dollar policy, the greenback has lost 39.2% of its purchasing power. And that occurred during a period of relatively benign price inflation. Gold over the same period gained 377.5% based on yesterday's close (from $374.90 in 1995). Rhetoric aside, for the long-term value-oriented investor, the real winning trade has been to buy king gold and sell the dollar.

Think short-term and become cannon fodder for high-frequency traders

"High-frequency traders and day traders love high market volatility because it gives them more opportunities to place trades, while wild market swings that happen out of the blue can lead to massive losses—but even bigger windfalls. But often this is accomplished through market manipulation, the act of illegally inflating or deflating stock prices. It's been an art for about as long as markets have existed, but today's increasingly complex electronic markets have ushered in a new-breed of manipulators that can do incredible damage and go undetected for years." – Josh Owens, SafeHaven

Those who succumb to short-term thinking are easy pickings for the high-frequency traders. Keep in mind the message Bridgewater's Ray Dalio recently conveyed to the wider world beyond Wall Street insiders:

"The best thing is, don't play the game, because it is pros against you. We spend hundreds of millions of dollars a year to get an edge, and others do that too. So it's very difficult for the individual investor to assume that he [or she] can pick something better. The best thing you can do is know how to have a balanced portfolio … because you ain't going to win that game."

Buy that in which you believe, hold for the medium to long term and do not allow yourself to be whipsawed in these crazy, see-saw markets. Last, but not least, hedge your portfolio with gold in the event that one of these individuals or groups manages to blow up the markets. It can happen. . . . . .In fact, we have come very close on a number of occasions. An argument can be made that the whole computer-driven mania has spun out of control – so much so that the next breakdown might be far beyond what a central bank or government can effectively bail out.

Hot money flees major U.S. equity ETF at pace never seen before

"Hot money fled a major U.S. equity exchange-traded fund last week at a pace never seen before. Investors yanked nearly $11 billion from BlackRock Inc.'s iShares Core S&P 500 ETF, ticker IVV, last week, its largest weekly outflow since its inception in 2000, according to data compiled by Bloomberg. That's about three-and-a-half times the biggest prior outflow, which occurred in 2014." – Recent Bloomberg report

Bernard Baruch, the famous early 20th century stock speculator, in explaining the behavior of markets:

"Have you ever seen in some wood, 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."

This is the same Bernard Baruch, who just before the stock market crash of 1929 liquidated his stock holdings and put his money into bonds and cash, and then later, after the crash, dumped a good portion of his fortune into gold. When asked why he would do such a thing by the Secretary of the Treasury, Baruch replied that he was "commencing to have doubts about the currency."

Common IRA rollover mistakes

"Have you thought about rolling your traditional IRAs from one financial institution to another? Maybe you're looking for higher returns, more investment selections or better service. If you roll over your traditional IRA, there are some common mistakes you should avoid. 'IRA rules can be tricky and some have even changed over the years, so you need to be careful, otherwise you could pay income tax and penalties,' says Dan Stewart, CFA, president, Revere Asset Management, Inc., in Dallas, Texas. In this article, we'll give you an overview of IRA rollover rules and discuss how to avoid breaking them." – Mary Hall, Investopedia

Editor's note 1: We have a steady stream of new clients who come to us for help with rollovers from existing retirement plans, and who want to put gold and silver into IRAs. The rules can be confusing and somewhat cumbersome, but they are not difficult to manage. The link above will guide you through the most common, out-of-the-gate stumbling blocks.

Editor's note 2: Beyond the mistakes investors make with the mechanics, we continue to receive inquiries from investors, who have included graded modern gold and silver bullion coins in their plans at hefty premiums. They want to know if we can help them with what turned out to be a bad situation. At about the time that these investors receive their first evaluation from a trust company, they discover too late that they paid far more for their gold and/or silver than they should have. Don't let that happen to you. For the best results, we continue to strongly advise IRA investors to stick with the ungraded, ordinary gold and silver bullion coins (pictured above) that sell at standard market prices. You will be glad that you did.

Investor sentiment slowly building in gold's favor

In my out-on-the-limb 2018 gold price prediction, I highlighted a shift in overall market sentiment as the chief determinant that would push gold and silver to higher ground. That shifting sentiment has begun to materialize. It is reflected in the stock market's performance thus far this year – down about 6% It also underlies gold's performance thus far this year – up about 3%. This Sentiment Trader chart maps the direction of sentiment in the gold market. Note the general uptrend and firming since early 2016 along with the corresponding rise in prices. Sentiment is now in a new upswing after a soft February.

In a nutshell, why higher interest rates might not be such a good idea

"The risk of panic-selling remains. Economic statistics are almost as unclear as the president's intentions—no doubt a strategy that's worked for him in business. That's why the risk of panic selling is high and why a stock market crash is always within reach. In early February, the flash-crash that resized investors' ambitions was explained as a response to inflation. The media was bustling with reports of how great the latest job numbers were and how these would drive inflation higher. But few bothered to consider the kinds of jobs that accounted for these 'great numbers.' The growth came from low-paying jobs—not the kind that is going to drive up inflation." – Allessandro Bruni, Lombardi Letter

We are approaching full employment. That's the good news. The bad news is that income is static. As a result, inflation remains subdued and still below the Fed's target level. It used to be that strong employment numbers translated into inflation. That's not the case anymore. Janet Yellen proclaimed she and the Fed were mystified by this disconnect, but that should not have been the case. To admit the problem, though, would be to plant the seed that higher interest rates would not be such a good idea. It will be interesting to see how Jerome Powell and the new Fed handles their professional inheritance. Since 2000, personal income is up a paltry 24%, or 1.4% per year, from $31,525 per year to $39,150. Since the 2008 financial crisis, it is up 8.7% – less than 1% per year.

Gold excels in rising rate environment

Gold gets its share of press, not all of it good. In recent months, the financial media have hammered away at the mistaken notion that gold does not do well in a rising interest rate environment. Nothing could be further from the truth, as revealed in the chart above. Since the Fed started raising interest rates in late 2015, gold has been in a strong, sustained uptrend. The Fed funds rate has gone from .12% in November, 2015 to 1.42% today in concert with the highly-publicized FOMC rate increases. Gold simultaneously has gone from $1062 to $1325 as of last week's close for a gain of 25% during the initial stages of this rate-raising period.

Notable Quotable

"By way of confession and truth to podcast – let's see, I confessed I was born in 1946 and that makes me, like, 37? Okay, I was born in 1946 and I was bullish on gold in 1945. I hope that puts my view on this into context. I'm chronically, sometimes profitably, but certainly very nearly continuously, well-disposed to the legacy monetary asset. I think that so many arrows point to it in the present day. I think it will become the beneficiary of – I'm talking about gold now – gold will become the beneficiary of so many trends. From the tinkering and the unprecedented experimentation of our central bankers' fiscal profligacy – I'm starting to sound moralistic – I think that paper money is in a secular bear market and that the institution of managed currency will be seen to be a species of pretense, if not outright intellectual fraud. And I use that word advisedly. And I think that come the dropping of the scales from the eyes of the money holders of the world, gold will do better against almost every currency." – James Grant/Interest Rate Observer

Editor's note: The full MacroVoices interview of James Grant is well worth your time. It covers a lot of territory. "[S]omething to bear in mind," says Grant, "is that nobody issues a press release at the start of an inflationary cycle."

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"A common feature of all these earlier troubles was that, having happened, they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a record 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable." – John Kenneth Galbraith, The Great Crash: 1929

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"Imagine if the world's metre sticks all grew or shrunk a bit each year. That would make for a confusing system of weights and measures, wouldn't it? Well, that is exactly what happens with money. We have been measuring the world around us for thousands of years. Units like feet and cubits have been used for distances, pounds and kilograms to measure weight, and dollars and yen to measure economic value. Measuring value, however, is by far the most complicated of the measurements that must be taken. This is because – unlike the other units – the various items that have been used to represent dollars and yen are constantly fluctuating in value.

Monetary units have always been closely tied up with units of weight. For instance, the word 'pound' has been used to describe both the British monetary unit (£) and the weight (lb). The pound weight was originally based on wheat. In 1266, King Henry III decreed that the British unit referred to as the grain should be defined as the weight of a corn of wheat 'well dried, and gathered out of the middle of the ear.' Thirty-two grains were to be equal to a pennyweight, twenty pennyweights equal to an ounce, and twelve ounces added up to a pound. So the early English pound, otherwise known as the Tower pound, was comprised of 7,680 'well-dried' grains from the middle of an ear of wheat." – JP Koning, Bullion Star

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"Debasement was limited at first to one's own territory. It was then found that one could do better by taking bad coins across the border of neighboring municipalities and exchanging them for good with ignorant common people, bringing back the good coins and debasing them again. More and more mints were established. Debasement accelerated in hyper-fashion until a halt was called after the subsidiary coins became practically worthless, and children played with them in the street, much as recounted in Leo Tolstoy's short story, Ivan the Fool." – Charles P. Kindleberger, Manias, Panics and Crashes

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"Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette – and calling it by some alternative 'low risk' game." ― Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

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"But any gold drawdown in such circumstances is decidedly temporary. Once the weak hands have disgorged gold for cash, the strong hands emerge to buy the dips and start a new rally. That happened in 2009 when gold rallied 25% in the year after the 2008 liquidity crisis when the panic had passed. It happened again on a smaller scale beginning Feb. 8 when gold prices rallied 4% in nine days, from $1,308 to $1,360 per ounce, as the stock market stabilized and regained some lost ground. That part of the gold trading pattern is clear. Gold falls in the earliest stage of financial distress before bouncing back and rallying once the weak hands have their cash and the strong hands start buying the safe-haven trade."

Editor's note: To CommodityTradeMantra's explanation – one with which I agree – I will add something perhaps more basic than needs to be mentioned. Mass migrations to the gold market – the type that cause a rapid increase in the price – usually occur as the result of system-wide crises that threaten the asset structures of individuals and institutions. Not every stock market rally qualifies as a life-changing event. Nor does every gold market sell-off signal a failure of its safe-haven portfolio role.

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"We now face a potential economic catastrophe as the long period of very low interest rates comes to an end. The recent stock market meltdown has been attributed to rising rates. That is correct, but for the wrong reasons. True, the long march of rising rates beginning now will be a dramatic change from the long trend of declining interest rates that started nearly 40 years ago. The new upward trend is likely the beginning of a return to historic rates. . .Who will tell the American people that in a couple of years, almost half their income tax payments will go to pay interest on the debt to Japan, China and all the others who buy American bonds? Who will tell the American people that the debt service we pay will be greater than our expenditures for the military? – Peter J. Tanous, CNBC

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"There's a general complacency deeply embedded in U.S. financial markets. No toxic securities Bubble at the brink. There is no Lehman vulnerable to a run and swift collapse. Interestingly, however, from the global financial markets Bubble perspective, there is Deutsche Bank and its double-digit stock decline this week. It seems to be the first place global players look when risk begins to be an issue, financial conditions start to tighten and risk premiums escalate. DB operates, after all, in the core of global derivatives markets and securities finance.

Derivatives lurk at the epicenter of global financial crisis risk. It's right here where global central bank policies have fomented the greatest distortions and associated fragilities: The perception – the implied guarantees – of liquid and continuous markets. And when DB's stock is sinking (down 13%) and its CDS is blowing out (33bps this week!), then the issue of counterparty risk and derivative market dislocation begins to creep into market psychology (and positioning)." Doug Noland, Credit Bulletin

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Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset-preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes and, as such, USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here. (Please see our Risk Disclosure here.)


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