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NEWS &VIEWS
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 45th year in the gold business

January, 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 Gold Owner's Guide to 2018
2017 was a good year. 2018 could prove to be even better.

Star over the gold market shone brightly at year end

In the December issue of News & Views, we pointed to the ghosts of Decembers past. "In each of those years (2013 through 2016) December began poorly," we wrote, "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. . . "

Gold and silver in fact bottomed on December 11th at respectively $1242 and $15.70. By Christmas day, gold was trading in the $1275 range and silver at $16.37. On December 29th, the last day of the business year, gold finished the day, the week, the month and the year solidly in positive territory.

On the day, it was up $8.12 or 0.6%
On the week, it was up $28.35 or 1.02 %
On the month, it was up $28.16 or 1.02%
And. . . last but not least, on the year it was up $152.00 or 13.2%.

Closing price: $1302.90

Silver also finished the day, the week, the month and the year in positive territory, but not quite as spectacularly as did gold.

On the day, it was up 7¢ or 0.4%
On the week, it was up 55¢ or 3.4%
On the month, it was up 54¢ or 3.2%
And. . . on the year, it was up $1.08 or 6.4%.

Closing price: $16.92

For gold, 2017 was the best year since 2011, the second straight year of posting gains and one that evolved despite a strong stock market, the constant threat of rising interest rates and an optimistic start to the Trump administration in terms of business and finance. As you can see in the chart below, it was a see-saw year that tested our collective patience, but at the same time demonstrated gold's resolve in the face of adversity and an underlying strength. And so, it is, or should I say 'was.' Onward to 2018. . .

Gold-Silver 2017

Revisiting gold's secular bull market – 2018 could be a critical year

A secular bull market, according to Investopedia, is one "driven by forces that could be in place for many years, causing the price of a particular investment or asset class to rise or fall over a long period of time. In a secular bull market, strong investor sentiment drives prices higher, as there are more net buyers than sellers. . . Secular markets are typically driven by large-scale national and worldwide events, which occur in combination. For example, wars, demographic/population shifts and governmental/political policies are all events that could drive secular markets. A secular bull market will have bear market periods within it, but it will not reverse the overlying trend of upward asset values. For example, most economists agree that U.S. equities were in a secular bull market from about 1980 to 2000, even though the stock market crash of 1987 occurred within the same time period."

That definition applies to stocks from 1980 to 2000 and it certainly applies to gold since 2002 right down to the bear market correction (2013-2015). In 2018, gold's secular bull market will enter its sixteenth year. In order to get an inkling for where gold might be going in the years to come, we thought it would be interesting to update a chart (below) we created a few years ago showing the relationship between the two bull markets. As you can see, gold's current path pretty much follows along the same route taken earlier by the Dow Jones Industrial Average.

An historical comparison

Fifteen years into the stock market's run, it was up six times; gold at the same juncture is up 4.6 times. Those multiples are not exactly in sync but then again gold's rapid ascent following the 2008 financial crisis invited a sharp correction, and that is exactly what it got. Gold is now in recovery mode having posted two straight years of positive returns in 2016 and 2017.

The Dow Jones Industrial Average began its secular bull market at 760 and topped at 11,723 – rising roughly 15.5 times. Gold began its secular bull market in 2002 at $280 per ounce. If gold were to match the Dow's performance, it would rise to $4300 per ounce by 2022 – a 15.5 times gain. In gold's secular bull market of the 1970s, it rose 24 times – from $35 per ounce to $850 per ounce. If it were to match that performance, it would be priced at $6500 per ounce.

Mapping and comparing secular bull markets is a risky business. No two are exactly the same, but at the same time they do follow a general outline. Returning to Investopedia, we find that, according to Dow Theory, secular bull markets move through three stages – accumulation, public participation and excess (mania). The accumulation stage starts the up trend and usually comes at the end of a down trend, when the psychology is overly negative. Gold reached that first turning point in 2002. True believers capitalized on the negative sentiment by buying gold at what turned out to be bargain-basement prices.

CompChart

Public participation phase has four drivers that have become constants

The second turning point for gold, the public participation phase, began in 2009, as the full extent of the credit crisis began to be felt in the financial markets, and it is the stage in which gold finds itself today. According to Investopedia, this part of the cycle is characterized by good news and strong supporting data, and is the longest lasting of three phases. Since 2009, there have been any number of lesser events that could be categorized as important to the gold market, but four stand out as constants that have lent themselves to consistently positive data:

1. A global upsurge in private investor gold demand (2009 inception)

2. China becoming a consistent, massive importer of the metal (2011 inception)

3. Central banks' reversal of their position as net sellers of gold reserves to net buyers (2012 inception)

4. Strong institutional and hedge fund gold demand through ETFs (2016 inception)

All four are firmly rooted in the philosophy that gold is not simply an investment vehicle, like stocks, but also a dependable savings instrument and form of wealth insurance. (Germany's decision to repatriate a significant portion of its foreign-held gold is a notable manifestation of this trend.) The public participation phase of gold's secular bull market is likely to continue until such time that the economic problems fueling investor demand are resolved.

Are we at an inflection point?

In studying the chart, it is difficult to ignore the possibility that we may have come to an inflection point for gold. As you can see, the DJIA price line went vertical in the last five years of the cycle beginning in the sixteenth year. As mentioned earlier, gold's secular bull market is now going into its 16th year. There is a possibility, given a convergence of dynamic events, that gold's price line could follow the DJIA template – a turn of events that could make 2018 a critical year for the gold market. At the same time, it could turn out that gold's cycle will be more protracted and the entire time line stretched. If the market does roll into the mania phase, the verticality, as suggested by our chart, will take a good many by surprise. In either case, at the very least we are likely to be in for a very interesting five-year period.

Prediction 2018
A major shift in sentiment will drive gold and silver prices in the new year

crystalball2018With such a solid end to 2017, it prompts the question what we might expect of gold in 2018. The most immediate question is whether or not it will pick up where it left off 2017 and continue its climb into the New Year, or fizzle and spend the year going sideways or worse, down. I have refrained from the perennial turn-of-the-year prediction sweepstakes for a number years, but I will venture out on the limb this year to say a price in the mid-$1500s looks achievable in 2018.

Coming off two successive positive years, gold seems to be building toward something. Fizzling or dropping seem unlikely given 2017's surprise performance and the general state of global equity markets – most of which seem to be overpriced, overloved and over the top. 2017 will be recorded as a transition year for gold; 2018, in my opinion, will go down as the year gold reasserted itself as a primal force in the global financial marketplace.

I base that opinion not so much on the fundamentals or a technical reading of the charts – or anything overly scientific for that matter - but rather on a gut feeling that comes with being in the gold business for 45 years. When all is said and done for 2018, after all the factors have been weighed and measured, I see sentiment – a thing that cannot be measured or weighed – emerging as the principal determinant for gold in 2018.

Investment capital is forever rummaging around for an opportunity and smart money will always find what is undervalued. That in a nutshell is what gold has going for it as we enter the new year. In 2017, we saw the first signs of a sentiment-driven, smart-money migration to gold – a vanguard led by professional investors who govern institutional trading desks and manage multi-billion dollar hedge funds. In 2018, cash-flush private investors, absent the past year, will join with professional money in the pursuit of gold both in physical and paper forms. That should be enough, in my view, to generate a 20% improvement from December's closing number and put the price in the $1550-$1560 range.

As for silver, I would not be surprised to see it trading over $22 at some point during the course of the new year – the equivalent of a 30% price increase. It has a history of outperforming gold on both the upside and the downside, and this time around is unlikely to be an exception. Silver will also continue to benefit from its new role as a safe-haven asset and junior partner to gold in the asset preservation business.

goldannualreturns

What to watch for in 2018
Musings from some of the financial world's top thinkers

Disinflation-Deflation

"While I have great respect for the forecasting community and the collective wisdom of financial markets, I suspect that today's consensus of complacency will be seriously tested in 2018. The test might come from a shock – especially in view of the rising risk of a hot war (with North Korea) or a trade war (between the US and China) or a collapsing asset bubble (think Bitcoin). But I have a hunch it will turn out to be something far more systemic…At risk are the very fundamentals that underpin current optimism. One or more of these pillars of complacency will, I suspect, crumble in 2018." – Stephen Roach, Yale University

"Yellen sees inflation under every rock despite the lack of empirical evidence. In fact, the evidence as revealed in the time series of PCE data above points toward disinflation and deflation. . .As market probabilities catch up with reality, the dollar will sink, the euro and gold will rally, and interest rates will resume their long downward slide." – James Rickards, Strategic Intelligence

"The Bank for International Settlements (BIS) said the situation in the global economy was similar to the pre-2008 crash era when investors, seeking high returns, borrowed heavily to invest in risky assets, despite moves by central banks to tighten access to credit. The BIS, known as the central bankers' bank, said attempts by the US Federal Reserve and the Bank of England to choke off risky behaviour by raising interest rates had failed so far and unstable financial bubbles were continuing to grow." – Phillip Inman, The Guardian

"If you look at all the obvious problems from the financial crisis, we really kind of solved none of them. And we went on a different way, and we basically, went the bailout route. And said we are going to create a whole lot of moral hazard, and we're going to sweep as much of this stuff as in the rough under the rug as we can, and we are going to move on as quickly as we can. And so, that solved some things in some ways, but I think it is left the basic structure, more or less, as it was. And I think that it is susceptible to the same type of events or series of events sometime in the future." – David Einhhorn, Greenlight Capital

Inflation-Stagflation

"Put simply, when inflation spikes higher, so do Treasury bond yields. When bond yields rise, bond prices fall. When bond prices fall, the Bond Bubble bursts. When the Bond Bubble bursts, the EVERYTHING bubble follows. Well, guess what? The yield on 10-Year US Treasuries is spiking, having broken above its 20-year trendline. What's coming will take time for this to unfold, but as I recently told clients, we're currently in 'late 200' for the coming crisis. The time to prepare for this is NOW before the carnage hits." – Graham Summers, Phoenix Capital Research

"We expect there is more upside risk in gold next year because we think we're going to start seeing inflation start to creep back into the equation. There is an expectation that we will see the Fed maybe get behind the curve [fighting inflation]. We are looking for higher commodity prices across the board, and that will get us [the gold market] to the next level." – Phil Flynn, Price Futures Group

"We're in a stage where if nothing is changed, we're about to go from stagnation to stagflation, with a significant rise in inflation and a wholly significant imbalance in the economy, which is very difficult to anticipate at this stage. But the outlook is not exactly terrific." – Alan Greenspan, former chairman of the Federal Reserve

Editor's note: The running debate continues on what might be next for the economy in the form of the various 'flations. As we have pointed many times in these reports, it matters not which becomes the economic reality. Gold protects against any and all and no matter in which order they arrive. The well and truly diversified investment portfolio renders the on-going 'flations debate academic.

The U.S. Dollar

"The US dollar just had its worst year in more than a decade, and 2018 will bring more of the same." – Eshe Nelson, Quartz Media

"The dollar is heading for its worst year in more than a decade, and bearish projections are still piling up. Analysts say the steady unraveling of the greenback's post-crisis bull run will be confirmed next year as global growth gathers pace and central banks converge on a more hawkish tone. 'Beware of sleeping volcanoes and seriously undervalued currencies,' Kit Juckes, global fixed-income strategist at Societe Generale SA, wrote in a [recent] report 'With global 'growth becoming more balanced and more synchronized, the dollar looks expensive.'" – Sid Verma, Bloomberg

"Our original estimate was that half of these legacy unrepatriated profits are already in USD. However, a survey carried out by the Brookings Institute found that the largest U.S. multinational corporations already have 95% of their undistributed foreign earnings in USD." – Richard Grace, Commonwealth Bank of Australia/Pound Sterling Live

Editor's Note: The consensus opinion is that the dollar will experience another year of declines, and that likely will have a positive affect on the price of gold. Few investors realize, though, that the dollar, as shown in the chart above, is in long-term decline against other currencies. Simultaneously gold has been in long-term ascendancy. In 2017, as reported here in October, most of the major currencies appreciated against the U.S. dollar, but they also depreciated against gold, making gold king of the international currency trading game. As Alan Greenspan once pointed out, "Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it." (Chart drawn in log scale.)

The stock and bond markets

"We think there is way too much complacency regarding what is a notable and growing shift in central bank policy globally. Markets expect a seamless unwind [of quantitative easing]. We don't." – Adam Richmond, Morgan Stanley credit strategist/Barrons

"My studies of the 17 major financial crises since the founding of the Republic reveal that over-optimism is an important driver of the bubbles that eventually become busts. As the legendary investor, Sir John Templeton, once said, 'The four most dangerous words in investing are 'This time is different.' Such was the mind-set that real estate prices could only rise (2008), dot-com companies would forever grow and be profitable (2001), or that the Russian government would never default (1998). " – Robert F. Bruner, The Hill

"The bottom line is today's euphoric record stock markets are hyper-risky. They are trading up at bubble valuations thanks to 2017's stunning post-election rally. Such lofty stock prices are risky any time, but exceedingly dangerous late in an enormous bull market artificially extended by the Fed. A major new bear market is long overdue that will at least cut stock prices in half. Don't be fooled by the extreme complacency! Prudent investors have to overcome this groupthink herd euphoria and protect themselves from what's coming. That means lightening up on overvalued stocks, building cash, and buying gold. Central banks have a long history of trying and failing to eliminate stock-market cycles. The longer they are artificially suppressed, the worse the inevitable reckoning as these inexorable market cycles resume with a vengeance." – Adam Hamilton, Zeal LLC

"If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?" – Sam Stovall, Standard & Poors

The deficits and national debt

"Investors are giving gold another look as 2017 winds down. . . With the new tax plan fanning fears of inflation and exploding U.S. government debt, the gold bugs have resurfaced." – Brian Sozzi, The Street

"2018 could be the year the dam bursts on the federal deficit. Back in June, the Congressional Budget Office projected that the budget deficit — government expenses exceeding revenues — would drop to $563 billion in 2018 from the $666 billion shortfall the Treasury Department declared in the 2017 fiscal year, which ended Sept. 30. Now budget experts outside government say the 2018 total could exceed $1 trillion because of series of bills being passed in quick succession, and decisions to scrap what were already weak limits on spending." – Herb Jackson, USATODAY



Editor's Note: I thought this chart painted a compelling picture about annual growth in the national debt and the price of gold. The left axis, keep in mind, is the change in the debt in dollars from a year earlier. As the reality sinks in that deficits are rapidly increasing, gold rises. There is a lag, but the relationship is evident. Now that the new tax plan is concrete, analysts will begin to weigh its effects. Early on, it seems there is concern about impending deficits. This chart gives us an inkling, should they occur, of their potential effect on the price of gold. Also keep in mind that this is not the era simply of deficits; it is the era of mega-deficits.

Monetary policy

"Investors trying to protect their capital in 2018 would be wise to ignore economic forecasts as a basis for their decisions. Not only do economists exhibit an appalling track record, but for decisions with a time-horizon of a year to eighteen months, capital flows between financial and non-financial sectors are far more important. Logically, when money flows from financials to non-financials, fundamentals for equities should improve. But all economic factors leading to improving fundamentals for corporations are typically more than negated by rising bond yields. On this credit cycle, the forces at work are likely to be considerably more violent than seen in living memory, given record levels of debt everywhere, the mistaken attempts to synchronise all the G20 economies into the same credit cycle, and the wholly wrong-footed Eurozone and Japanese financial systems." – Alisdair Macleod, GoldMoney

"The current combination of monetary debasement, populism and social unrest is neither a new phenomenon nor a coincidence. The late Roman empire shaved silver coins as it disintegrated; Henry VIII replaced silver coins with copper to pay for wars against France and Scotland; the British empire allowed double-digit inflation to erode bondholders' wealth following the War of Independence; the Weimar Republic precipitated an inflation spiral. Comparing these examples to QE may sound extreme. Yet the biggest debasement in history may be the one we are experiencing now under the form of a $20tn central bank experiment, which is de facto depreciating money by boosting the price of all assets it can buy." – Alberto Gallo, Algebris Investments

"This isn't just a case of the yield curve now being only two more rate hikes shy of being inverted, with the usual legions of economists typically explaining this away as they did in 2000 and again in 2007. Go back and count the number of economists who helped keep you out of danger near the peak of the last cycle — you won't need many fingers. . .Don't be knocked around next year by focusing on the wrong thing. The elephant in the room in 2018 is Fed policy, not fiscal policy." – David Rosenberg, Financial Post

Precious metals

"Gold and silver are today as unloved and undervalued as they were in 2000. It is very likely that the precious metals cycle bottomed in December for the third year running. Importantly every bottom has been higher. At $1265 we are today $220 above the Dec 2015 and $130 above the Dec 2016 bottoms. A new currency would only be a temporary phenomenon whilst gold will continue to be the only constant money in history. The very strong up-move of gold and silver in 2018 will take the investment world by surprise. Investors must pay heed and not be left behind." – Egon von Greyerz, Matterhorn Asset Management, AG

"Sadly financial tipping points rarely come from the obvious culprits. Often the catalyst is a seemingly innocuous event, one which in scenario planning is barely considered. This is why investors and savers must prepare their portfolios for both the unknown and inevitable. This is where gold comes in. The safe haven has stood strong and held its own in the face of pumped up asset classes, low interest rates and increased risk. This is largely thanks to its sovereignty in the marketplace." – Mark O'Byrne, Gold Core

"Large speculators have made a record shift in their positioning for the last two weeks. In the latest week, they reduced their net longs by 66,000 contracts after a reduction of ~51,000 contracts the previous week. This group of traders is usually considered trend-followers. The extreme positing by this group may provide a clue to a changing trend. In contrast to speculators, commercial traders and bullion banks have reduced their net short positions in gold. This group of traders is usually referred to as smart money. When this category hits the bottom in short interest, prices usually rise. It has been hailed as an indicator that gold prices could have an advantage as we enter 2018." – Annie Gilroy, Market Realist

"…[G]old is not being supplanted by bitcoin as the go-to alternative to actual currency, and the charts, as interpreted by Carley Garner, suggest that gold might be ready to make a comeback. And while I won't discourage anyone from buying bitcoin – just know the risks, know your limitations — I'm with Carley when it comes to the precious metal, not the precious keystroke." – Jim Cramer, CNBC

Editor's note: During 2017, it was erroneously reported that the drop in gold and silver bullion coin production and sales at national mints was the result of a collapse in investor demand. Though demand from the private sector did retreat in 2017, it was much stronger than the investment public was led to believe. Much of that demand, however, was met from existing wholesale inventories accumulated from private investors exiting the market, reducing the need to buy from the mints. Gold and silver bullion coins, in the process, were working their way from weak to strong hands. We suspect that in 2018, as investor sell-backs wane, mint sales will pick up once again and the physical market for coins and bullion will return to some semblance of normalcy. In December, perhaps in a sign of things to come, the U.S. Mint reported a strong increase in gold bullion coin sales from 12,000 ounces in November to 43,000 in December. It was the second strongest month in the year after January, a normally strong month for U.S. Mint sales.

"On its 10-year chart we see that gold is in the late stages of a large Head-and-Shoulders bottom, which it is expected to break out of not far into 2018. This is a huge base pattern that can support a major bullmarket. Points worth noting on this chart are the marked volume buildup during the last half of the year and the steady rise in volume indicators this year, especially the On-balance Volume line – these developments suggest that gold is building up to something, after being a sideshow during 2017 due to rising stockmarkets and the cryptocurrency mania. The key level to note is $1400 – a breakout above this level will signify that gold is leaving behind the base pattern to enter a new bullmarket phase." – Clive Maund, Technical Analysis

"In fact, once the GLD (Gold ETF) has confirmed it is in the heart of its 3rd wave, it will not take long until it returns to its prior all-time highs. But, again, I must stress how important it is for us to confirm the bottom has been struck before we get too excited about the impending 3rdwave rally. As you can see, there is plenty of room on the upside to garner significant profits during a 3rd wave, but it is of utmost importance to allow the market to confirm its intention before becoming too aggressive on the long side." – Avi Gilbert, Elliott Wave Trader

Politics

"U.S. political volatility will become extreme in 2018 and it will increase the volatility in all asset classes. The U.S. political institutions will get rocked to the core — The Trump administration, the GOP, the Democrats, the FBI and the Fourth Estate. They are all about to go to war." – Rauol Pal, Real Vision Group


 

 

Wishing all a happy, prosperous and healthy 2018!

–– from the staff at USAGOLD

 

 

 


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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