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News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 44th year in the gold business and 20th year on the world wide web

December, 2017

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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 Gift of Gold – A simple thought for the holiday season

Gold has a past. I suspect it has a future.

We live in a time when currencies and financial markets have become political enterprises – creations of the world's governments and central banks. Since we have never seen times like these, when so much depends on the monetary largesse of the policy-makers, no one really knows where the future might lead us. Uncertainty reigns and, when that is the case, history teaches us that gold demand rises proportionally and at times impressively so.

Uncertainty reached a whole new level, though, toward the end of November when minutes of a recent Federal Reserve Open Market Committee meeting revealed a level of concern within the central bank not often expressed in the public venue. "In light of elevated asset valuations and low financial market volatility," read the minutes, "several participants expressed concerns about a potential buildup of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy." Blunt as it was, a good many took those words as a warning from on high about the prospects for 2018.

The gift of gold – the one passed from generation to generation in ancient times to present – is the protection it offers against an unpredictable economy. The gift of gold, in short, is peace of mind.

Wishing you and yours the very best for the holiday season and a prosperous New Year from all of us at USAGOLD.

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GOLD NUGGETS

On the ghosts of Decembers past

December, as it turns out, has been a humbug month for gold the past four years. In each of those years (2013 through 2016) December began poorly, but appropriately by Christmas-time things began to look brighter. By the end of January in the following year, the star over the gold market shone still more brightly. . .

–– On December 1, 2013 gold finished the day at $1220 per ounce. The low for the month came on the 19th at $1188, but by January 31, 2014, it traded at $1244 – up 4.7% from the December low.

–– On December 1, 2014 gold finished the day at $1212 per ounce. The low for the month came on the 24th at $1174, but by January 30, 2015, it traded at $1283 – up 9.3% from the December low.

–– On December 1, 2015 gold finished the day at $1069 per ounce. The low for the month came on the 17th at $1051, but by January 31, 2016, it traded at $1118 – up 6.4% from the December low.

–– On December 1, 2016 gold finished the day at $1171 per ounce. The low for the month came on the 22nd at $1128, but by January 31, 2017, it traded at $1210 – up 7.3% from the December low.

So the lesson imparted is to buy in December and enjoy the holidays. January is the start to a wholly new year.

Performances of major investments in 2017

With year-end looming on the horizon, we thought it would be a good time to review how the top investments have performed thus far this year. The results were somewhat surprising given the amount of the press coverage the stock market has received in recent months. The broad S&P 500 Index for stocks has done well rising 16.2% so far this year, but gold is not that far behind at a 12% increase. (And we still have a month to go.)

We were also surprised that at 6.9% silver had not kept pace with gold. Its lagging performance is most readily explained by taking a step back and realizing that this chart reflects the overall disinflationary bias under which investment markets have operated this year. Though investor attitudes toward silver have changed markedly in recent years, gold is still the dominant safe-haven attraction during disinflationary and deflationary times. Stocks have surprised under the circumstances, but gold has been the quietly optimistic story of the year, and one that has not drawn a great deal of attention from the mainstream media. When you add to the analysis that gold and silver are coming off cyclical lows and stocks are approaching cyclical highs, it makes for interesting possibilities in 2018.



(Click to enlarge)

End-of-year gold, silver price predictions

A number of analysts have come out with gold and silver price predictions for the coming year and beyond in the past few weeks. Here are a few of the more notable along with the accompanying rationale.

• Citibank predicts prices will "push north of $1400" over the next two years. "The geopolitical case for gold investment has been emboldened in recent months and it seems as strong today than at any point over the last four decades . . . Event-driven bids for gold seem to be occurring more frequently and may be the new normal… In short, even as the rates and forex channel dominate the outlook for gold pricing, the yellow metal is increasingly being used by investors as a policy and tail risk hedge," Citi said.

• Rob McEwen (McEwen Mining) believes gold will top $5000 in the next five years "as investors seek returns amid a prolonged period of cheap money and use the metal as a haven from geopolitical and financial risk." He sees bubbles in stocks, real estate and art and says money will move to gold as markets recalibrate. Gold, he points out, is performing well against almost all the currencies. The ingredients are in place, he says, for the next stage of gold's bull market.

• Moe Zulifiqar (Lombardi Letter) says silver mining companies are now producing at a loss because of rising production costs. As a result, he believes that miners will be forced to halt production if prices do not rise. "It’s basic economics at play," he says. "It would be a very bad business decision by miners to keep on producing at a loss. Losses are fine in the short term, but over the long term, they are deadly. With all this in mind, rising costs could be a positive thing for silver prices. I continue to see silver at $50.00 in the next few years."

• [Phil Flynn, senior analyst with Price Futures Group] looks for gold to average somewhere around $1,400 an ounce next year and perhaps hit $1,500. Macquarie, in a recent report, said it envisions gold hitting $1,400 in 2018 for the first time in five years on "the end of U.S. economic outperformance," meaning a headwind for the U.S. dollar.

• Metals expert Michael Dudas of Vertical Research believes gold can rally again next year. "His 2018 year-end target calls for gold to hit $1400, an 8 percent gain from current levels. According to Dudas, higher inflation expectations in 2018 should be strong enough to push gold prices even higher," reports CNBC.

U.S. Mint makes a mint selling gold coins at a 25% markup

Because of the high mark-ups and wide buy-sell spreads, USAGOLD has always considered the purchase of the graded, contemporary proof coins a bad investment. In fact, the gold dealers offering these items usually take an additional hefty mark-up over the Mint's, once the coins have been graded by one of the independent grading services. We first published our concerns about this practice as far back as 2013 in the form of a blog post which subsequently became a widely circulated item on the internet. Long before that, we were privately warning our clients to be careful in this area of the gold market.

Here is an important excerpt from that 2013 blog post:

"At USAGOLD, we could not be more emphatic in our warning against paying significant premiums above the metal content for these products. This includes common contemporary items sold as 'first-strike', 'early issue', 'first release', Mint State 69, Mint State 70, Proof 69 and Proof 70, as graded by the independent grading services including the Professional Coin Grading Service (PCGS) and the Numismatic Guaranty Corporation (NGC)."

For the full article, please see Beware MS70, MS69, PF70 “Perfect” + “Certified” Gold & Silver American Eagles & American Buffalos

In late November (2017), the Wall Street Journal published a similar investor warning under the headline U.S. Mint Makes a Mint Selling Coins at a 25% Markup – 'Proof Condition' collectibles don't shine as investments in retirement. In it, USAGOLD's George Cooper is quoted as calling these items a "heads-I-win-tails-you-lose deal," and added that he does not sell the proof coins "without reciting an extensive disclaimer." That comment though was a trimmed-down version of a more extensive interview in which he elaborated on the excessive losses some investors have taken on these coins, and our standard recommendation to avoid these items at all costs – particularly in IRAs and other retirement plans.

We invite you to visit the link above particularly if you are being hounded to purchase graded, contemporary proof coins and other coins produced by the U.S. Mint. Keep in mind that we do not include the standard American Eagle gold and silver bullion coinage in our warnings in that they can be purchased at normal mark-ups.

Gold's mysterious waterfall drops. . .and recoveries

Over the past several months, gold has experienced a number of mysterious, unexplained waterfall drops like the one shown in the chart above for November 29, 2017. In each instance, the drop is accompanied by huge volumes that seem to come out of nowhere. These, from what we can observe, are not the result of natural market action, i.e., a decision by thousands, perhaps millions of investors, to suddenly sell gold. Instead, they look to be the work of computer traders, or perhaps even a single computer trader who dumps millions of ounces of paper (notional) gold on the market in a matter of seconds. It is difficult to assign a rationale or responsibility to the trades, as they do not seem to be attached to any particular news or event.

Almost 41,000 gold contracts valued at $5.4 billion were suddenly dumped on the market precisely at 8am on 11/29 (as shown on the chart) in what looks like a single trade. That amounts to over four million ounces of paper gold, or 127.5 tonnes on what was a relatively quiet morning in the marketplace both in terms of news and general public interest. Obviously, a sale of that magnitude is going to push the market lower and the price responded by dropping over $10 in a matter of minutes. The out-of-the-box volume at the bottom of the chart is a glaring presence.

Bloomberg's Luzi-Ann Javier drew attention to similarly large recent sales (11/14/17) on the COMEX and then reported similar-sized purchases further on. "Gold traders," she reported, "are having to grow more accustomed to surges in trading volume as spikes that began surfacing around mid-year become more frequent. In the 10 minutes ended 3:10 a.m. in New York on Tuesday (11/14), when most North American traders were probably still asleep, contracts representing more than 2 million ounces of the metal changed hands on the Comex, sending prices down as much as 0.7 percent. The bulls responded hours later, with trades covering more than 3.5 million ounces at around 10 a.m., helping to push the price higher."

Those purchases might very well have been the same entity that sold contracts earlier. For speculators who short the market, a compensating purchase must be made at some point along the way in order to capture profits. Those trades can initiate a price rebound.

For the patient accumulator of physical metal who has his or her eye on the future, these waterfall drops, no matter the source, have proven to be solid short-term buying opportunities – way stations on the road to higher prices. Gold is still up 12% on the year as shown in our lead article, and it was up almost 8% in 2016.

Final Note: One thing we should keep in mind is that if the gold market is being manipulated, as a good many contend, it implies that the natural inclination of the market is to rise. If that were not the case, the manipulation would not be necessary. The long history of official and unofficial attempts to control the price of gold over any extended period during the fiat money era is a record of failure. Were it otherwise, gold would not have gone from $35 in the early 1970s to almost $1300 today with an interim stop near $1900 along the way. When the breakouts – the equal and opposite reactions – occur, they are swift and decisive. As an old friend, gold owner and client used to say: "With gold, it is not a question of if but when."

The gold/quality man's suit ratio

There are many correlations to gold in the form of rations used by analysts every day to determine gold's historical valuation – gold/oil, gold/silver, gold/dollar, etc. None, though, has withstood the test of time better than gold/man's quality suit ratio. "The price of a fine suit of men's clothes," says the U.S. Geological Survey, "can be used to show anyone who is not familiar with the price history of gold just how very cheap gold is today. With an ounce of gold, a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, and in the depression of the 1930s." Such was not the case in the late 1990s and subsequently the price of gold rose substantially.

So where do we stand in 2017 with respect to The Quality Man's Attire-Gold Ratio? At Brooks Brothers a top quality, off-the-rack suit ranges between $2100 and $2500 without a vest. Brooks Brothers does carry a less expensive suit at about $1200, but the ratio requires a top (not lower or middle) quality man's suit. On London's Saville Row – the standard for quality men's attire – a hand-tailored men's suit ranges in price from £2300 ($3105) at Kent & Haste to between £3400 ($4590) and £4400 ($5940) at Steven Hitchcock. By any of those measures, gold at $1300 per ounce is suitably undervalued.

Notable Quotable

"For bitcoin, there is regulation and confidence. For all there is the lesson of history: value is a function of taste and fashion, both fickle things. And for every bond on a negative real yield there is inflation and the fact that the rate cycle is surely turning. As the analysts at Gavekal note, most inflation indicators are rising not falling – and everything from the oil price to copper and freight is 'breaking to the upside.' That means there is more risk to interest rates than the bizarre sight of four investors fighting for each euro of negative-yielding bonds from a triple B-rated company (Veolia) might suggest. At some point today's investors are going to suddenly see all this. It won't end well – it never does." – Merryn Somerset Webb, Financial Times opinion columnist

"Just as there are concerns about 'fake news' dominating social media, there is a risk of 'fake', or at least poor quality, statistics driving out better quality ones in public discourse. . .Actions by economic agents could become less anchored to actual activity and more prone to manias and panics, with obvious implications for economic and financial stability. . .We may one day be tempted to draft our monetary policy statements and speeches in the light of how they will be comprehended and interpreted by artificial intelligence algorithms." – Benoit Coeure, European Central Bank

"In a matter of only 2 quarters, Bridgewater has accumulated 3.894 million shares of GLD, which are worth $473M today and 11.3 million IAU shares, which are worth $140M today. Put together, Bridgewater is betting $613M of clients' money that gold will perform well, and we know the benchmark is 21%, so Mr. Dalio has a conservative outlook that gold prices will reach $1,556 by the end of 2018. . .Gold has weathered through huge paper smashes that have proven to bears that demand is too strong right now. . . Gold held above its 200-DMA. It’s now trading above its 100-DMA and is on the brink of moving higher than the 50-DMA. " – Wealth Research Group

"The changing of the guard at the US Federal Reserve raises questions over future policy and casts a shadow over the dollar in 2018. With the departure of prominent Fed members Stanley Fischer and Daniel Tarullo earlier this year, and the announcement that chair Janet Yellen will step down in February, analysts say the US is poised for its least experienced board of governors in three decades. The sweeping changes at board level might discount what analysts at Danske Bank are calling the 'Fed experience premium' baked into the dollar since 1973." – Emma Dunkley, Financial Times

"While the gold price is slowly crawling upward in the shadow of the current cryptocurrency boom, China continues to import huge tonnages of yellow metal. As usual, Chinese investors bought on the price dips in the past quarters, steadfastly accumulating for a rainy day. The Chinese appear to be price sensitive regarding gold, as was mentioned in the most recent World Gold Council Demand Trends report, and can also be observed by Shanghai Gold Exchange (SGE) premiums – going up when the gold price goes down – and by withdrawals from the vaults of the SGE which are often increasing when the price declines. Net inflow into China accounted for an estimated 777 tonnes in the first three quarters of 2017, annualized that’s 1,036 tonnes. . .Until new evidence shows up my best guess is that China net imported 777 tonnes in the first nine months of 2017, sourced from all corners of the world: the UK, South-Africa, Australia, Switzerland, the US, Middle-East and Philippines. It seems Chinese banks are active all over the world looking to buy gold on the dips. Snapping up physical metal when the time is right." – Koos Jansen, Bullion Star

"We're the most transparent of all the central banks about our holdings of gold and there are still more questions. With gold there are always more questions."– Carl-Ludwig Thiele, Bundesbank board member

"It is beyond belief that we know so little about how people get rich or poor, about how it is they come to dwell in comfort and health or die in penury and disease. Financial markets are the machines in which much of human welfare is decided; yet we know more about how our car engines work than about how our global financial system functions. We lurch from crisis to crisis; so little is our knowledge that we resort not to science but to shamans." – Benoit Mandelbrot

“Global gold-backed ETFs collectively held 2,347.6t at the end of October. Funds added 182.2t of gold year-to-date, equivalent to $7.8bn, which represents an increase of 8% of global AUM from December 2016,” according to the WGC. “Gold ETFs account for a significant part of the gold market, with institutional and individual investors using them to implement many of their investment strategies.” – ETF TRENDS

"The 'zombie apocalypse' of the title (Come a 'zombie apocalypse' I'd rather rely on gold bullion – Graham Birch) was a tongue-in-cheek reference applicable to any major financial system crash or war devastation and is perhaps an obvious one. Which would you rather hold in such a crisis if the economic world around you collapses? Paper gold in the form of ETFs, gold buried in a commercial vault perhaps in some other country, bitcoin, gold stocks or gold bullion buried in your back garden or held elsewhere safely in your home and thus readily accessible? The odds are on the latter – not that Birch doesn't rate the other options as a part of an investment portfolio accessible under normal economic conditions." – Lawrie Williams, Sharps Pixley (London)

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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.


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