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News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 43rd year in the gold business

November, 2016
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USAGOLD's NEWS & VIEWS newsletter
mk Michael J. Kosares
Editor

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose." - John Maynard Keynes


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WHY GOLD, WHY NOW

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The China Syndrome
The groundbreaking series on China's pivotal role in the gold market

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BlackSwans YellowGold
The standard reference on how gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation

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Gold Chartography 101
The case for gold ownership in ten charts you will never see on CNBC

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Gold at the zero bound
Something happened on the way to negative interest rates. Something unexpected. Gold and silver demand went through the roof.

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Big banks, hedge funds key factors
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A tale of two gold markets – the one ending December, 2015 and the one beginning January, 2016

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How would you invest money you didn't need for ten years?
"Perhaps we spend too much energy trying to foretell the future, and too little trying to be resilient whatever happens."

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Keynes on the menace
of printing money

How the celebrated economist might have structured his investment portfolio today.

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mkMichael J. Kosares, the author of these articles, has more than 40 years experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News & Views, Forecasts, Commentary & Analysis on the Economy and Precious Metals," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.

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"I keep six honest serving men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who."

– Rudyard Kipling –

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USAGOLD's News & Views newsletter has provided cutting-edge coverage of the gold and silver markets for over 25 years. Its content is widely quoted, re-circulated and sourced at websites all over the world.

Its principal objectives have always been the same – to keep our clients informed on important developments in the gold market, condense the available gold-based news and opinion into a brief, readable digest, and, most importantly, to counter the traditional anti-gold bias in the mainstream media. That formula has won it a loyal five-figure subscription base.

If you would like to become a subscriber, we invite you to sign-up at our registration page. There is no charge for the service and your participation is welcome.

The Great Silver Rush of 2016
Gold's sister metal graduates from commodity to asset of last resort

Silver demand is running at record levels and the price is up over 30% on the year.  Volume for the physical metal among USAGOLD's clientele, mostly in the form of one-ounce silver bullion coins and 100 troy ounce bars,  is running at levels apace the strong global trend. This series of charts  provides an overview of the Great Silver Rush of 2016.

Global investors snapped up a record 89.6 million one ounce silver coins in 2015, according to USAGOLD's annual survey of global bullion coin sales, and the strong demand has continued at a comparable pace in 2016. The U.S. Mint reports sales of just over 30 million one-ounce silver American Eagles thus far this year with another big demand pick-up in October.  American Eagle sales are just one component of our four coin annual grouping and a bellwether for the rest of the global market. We suspect that once we compile the statistics from the four top mints for 2016, the chart will show volumes approaching the record performance of last year.

silvercoinsales_graph

As you can see from the chart, demand for silver bullion coins grew significantly after the 2008 financial crisis and never returned to pre-crisis levels. The persistent demand over the period indicates lingering concerns among investors about the economy and continuing worry about the potential for a similar crisis at some future date.

Coin demand is only one segment of the burgeoning market for silver. Demand through silver ETFs is also running at record levels with a total of 938 million ounces now in aggregate holdings.  ETFs are a favorite among major investment funds and institutions.

TETFSAACF02
Chart courtesy of goldchartsrus.com/Nick Laird

As you can see by the chart immediately below, China has put its foot on the accelerator with respect to its silver purchases – a development widely neglected by the financial media. Take a look at the ramp-up of physical demand in China over the past two years (bottom bar chart). China's quiet, nascent interest gives credence to silver's graduation from commodity status to a monetary metal utilized by many investors as an asset of last resort, i.e., the other metal, besides gold, that separates itself from the pack as an asset that is not someone else's liability. China, the largest single source of silver demand in Asia, is buying silver as a means to augmenting its attention-grabbing gold acquisition program.

SGEAGDeliveryw02
Chart courtesy of goldchartsrus.com/Nick Laird

Past supply disruptions for silver Eagle coins signal more of same for future

The U.S. Mint reports sales for the silver Eagle would have been much higher in 2015 if it could have secured more coin planchets. Planchet manufacturers have consistently been unable to supply enough blanks to meet the extraordinary demand over the past several years. The mint suspended silver Eagle sales this past July when a sharp price decline generated huge demand among investors. It did not begin delivering wholesaler orders again until mid-August.

The U.S. Mint has suspended wholesale allocations for one or both metals in 2009, 2011, 2013, 2014 and 2015. Since the 2008 crisis, there have been numerous stoppages at other national mints in the face of strong, unprecedented investor demand for both gold and silver bullion coins that depleted stocks. As a result, worries about potential supply disruptions consistently haunt the bullion coin market.

Bill Bonner, the long-time market analyst who founded the Agora publishing empire, recently warned investors about the potential for further disruptions.  Bonner focuses on gold but his warning could just as easily apply to silver:

"[T]here will be one important difference between the new super spike and what happened in 1980. Back then, you could buy gold at $100, $200, or $500 per ounce and enjoy the ride. In the new super spike, you may not be able to get any gold at all. You'll be watching the price go up on TV but unable to buy any for yourself. Gold will be in such short supply that only the central banks, giant hedge funds, and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super spike even more extreme than in 1980. The time to buy gold is now, before the price spikes and before supplies dry up."

If you are planning to buy silver – particularly if you are buying for a longer-term retirement plan – it might make sense to secure the metal now, while it can still be purchased at favorable prices and the market is functioning normally. If we do encounter another shortage, in all likelihood buyers will faced with three problems – rising prices, increased premiums and lack of availability.

There is an old truism about the precious metals market that applies to the current environment:

The time to buy gold and silver is when the markets are quiet. Apparently, as seen in these charts, a good many silver investors around the world (including some major hedge funds and financial institutions) have already taken that advice to heart.

Gold Nuggets______________________________________________________________________________NOVEMBER, 2016

A sneak peak at what might be in store for gold in 2017

It might be a bit early, but we thought this outlook for 2017 might interest you. In December, 2015 Eric S. Hadik, the widlely-followed cycle theorist, presicently predicted "an initial price advance in 1Q 2016 in both gold and silver" leading to a multi-month peak in mid-2016. He also said that "If gold & silver fulfill this outlook, it would set the stage for a substantial pullback in 3Q 2016 and a subsequent, secondary low during a DECISIVE period in the final 1/3 of 2016.  An uncanny cycle dates back over 200 years and pinpoints 2017 as the most likely time for a full-blown ‘Gold Rush’ to take hold."

Given Hadik's prescience thus far on the price of gold, his predictions for 2017 are worth taking into consideration. As a follow-up, he recently told Sinclair & Co.'s Erico Tavares, that the period 2017-2021 will be a time when "the debt bubble bursts and the bond markets begin to crash". He thinks we will be moving into the "parabolic phase" of his 40-year cycle featuring "an intensified battle between hard money and fiat currency (which is rapidly deteriorating in value, due to this governmental debt orgy)." It will also be a time of extreme market volatility – one "pinpointed as the time when the Dollar's remaining foundation was decimated. . .right in plain sight. . .and right when the 40-Year Cycle was screaming for this to occur."

When gold was $35, the naysayers were telling the public it would go to $10

The more things change, the more they stay the same. Take note of this quote from Austrian economist Murray Rothbard that made its first appearance in his early 1970s tract intriguingly titled What Has Government Done to Our Money:

“All pro-paper economists, from Keynesians to Friedmanites, were now confident that gold would disappear from the international monetary system; cut off from its ‘support’ by the dollar, these economists all confidently predicted, the free-market gold price would soon fall below $35 an ounce, and even down to the estimated ‘industrial’ nonmonetary gold price of $10 an ounce. Instead, the free price of gold, never $35, had been steadily above $35, and by early 1973 had climbed to around $125 an ounce, a figure that no pro-paper economist would have thought possible as recently as a year earlier.”

As you can see, even when gold was trading at $35, its adversaries were predicting lower prices ($10 per ounce), and even then under the flimsiest of arguments. Instead of going to $10 per ounce, gold ultimately moved into the first leg of a long term bull market that peaked at well over  $800 per ounce – a far (very far) cry from $10!

Hedge fund stalwart Daliio sees end to long-term debt cycle, prefers gold

“[Ray] Dalio," says Bloomberg, "has warned for some time that the economy is at the end of a long-term debt cycle, characterized by a lack of spending despite interest rates near zero or even negative. He said at a seminar last week at the Federal Reserve Bank of New York that while central banks around the world will probably extend bond-buying programs, making higher-yielding assets seem attractive relative to bonds and cash, those investments are still expensive relative to their inherent risk. If that persists, betting on gold could prove preferable."

One big factor that might force the Federal Reserve to restart its bond buying program (aka quantitative easing) is the lack of demand for Treasury paper from overseas investors and central banks as summarized in this chart:

foreignhelddebtANNUAL

Lindsay Group’s Peter Boockvar recently pointed out in a CNBC interview that foreigners have not only refrained from buying U.S. Treasury paper, they are net sellers to the tune of an unprecedented $156 billion thus far in 2016. “Foreign flows were a big part of Treasury bond buying," he says. "Take that away and central banks take away the stimulus that was affecting long-term interest rates. Deficits are expected to head higher. This is a process that takes time to see these things play out."

As long as domestic demand fills the gap left by the departure of former debt buying stalwarts like China and Japan, QE can remain on the back burner.  Should that demand dry up, the U.S. might be left with no choice but to print money to cover the deficits.

Dalio and a good many other hedge funders prefer gold under such circumstances as a defensive measure, as well as an asset that offers some upside potential in a dangerous low-to-negative yield environment. In short, the confluence of disinflationary factors that drove gold higher from the beginning of the year remain in place. 

U.S. government's ends fiscal year with fourth largest debt addition on record

Meanwhile, the United States federal government added $1.422 trillion to the national debt in fiscal year 2016 just ended in September – the fourth largest such addition in history. No matter who buys the debt, interest as a line item in the national budget is likely to increase. At current rates, that bill runs in the neighborhood of $450 billion per year. Military expenditures by comparison run about $600 billion per year. 

Even if a growing economy allowed for interest rate increases, the Fed would need to be careful. A return to the historical norm of 6.63%, as we pointed out this past June, would put interest payments at $1.277 trillion – nearly 40% of revenue and double what the United States spends on the military.  The average interest rate now runs roughly 2.3%, according to the Treasury Department.

Gold ETF second largest holding among hedge funds after S&P tracking fund

According to Insider Monkey, a service that tracks where hedge funds are putting their money, SPDR, the largest gold ETF, is the second largest single holding among hedge funds.  The largest ETF commitment unsruprisingly is with SPY, a fund that tracks the S&P 500 Index.  At the end of June, ninety-four funds had invested $24.89 billion in SPY and 72 funds had invested $8.9 billion in the SPDR.

What I find fascinating about those numbers is that so many in the mainstream financial press like to speak of gold as an investment pariah appealing only to America's fringe elements.  NOTHING COULD BE FURTHER FROM THE TRUTH.  A  Gallup poll taken a few years back found that 34% of American investors rated gold the best investment "regardless of gender, age, income or party ID. . ."  In that survey, gold was rated higher than stocks, bonds, real estate and bank savings.  Also, according to a recently published Bankrate survey, one in six investors chose gold as the best place to park money they wouldn't need for more than ten years – the same number that chose stocks.

Chart of the Month

This chart appears simplistic at first glance, but it tells an interesting story with respect to current circumstances. It shows changes, usually increases, in the national debt superimposed over the gold price. The chart's most telling feature is that gold appears to lag the increases in red ink. The reason why that is important now is because, as reported above, the U.S. federal government just ended its fiscal year in September adding $1.4 trillion to the total national debt, the fourth largest increase on record, and a break from the on-going trend since 2010. That increase is not recorded statistically as yet at the St. Louis Federal Reserve's site and as a result it is not shown on this chart. It will be though in the near future. If this chart remains consistent, we could see gold play catch-up in the months and years ahead as the lag plays out, particularly if this year's huge debt increase turns out to be more than a one-off event.

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Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.

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.