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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

June, 2017
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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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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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The story behind continuing strong bullion coin demand
2016 was a very good year for both gold and silver in aggregate global mint sales

I have always considered sales of modern gold and silver bullion coins a bellwether on the general health of the global precious metals market. In reality, though, bullion coin sales comprise only a very small portion of the physical gold and silver markets. According to the World Gold Council, modern gold coins make up only about 13% of investment demand and a little less than 5% of overall demand.* Yet, as is often the case in statistical inquiry, it is the small and often unobserved, sometimes even ignored, that can accurately tell the larger story – particularly when it reflects the net effect of human action within the greater economy and financial markets.

So how is it that such a small aspect of the global gold market in terms of the overall volume can at the same time be so important?

In a nutshell, it is because the demand among ordinary private investors is telling us something very important: The level of confidence people have in the economy and the plan being carried out by the central planners in charge. Twentieth-century economist Joseph Schumpeter (1883-1950), most famous for his theory of creative destruction in capitalist economies, said it best: "The modern mind dislikes gold because it blurts out unpleasant truths." I am quite certain that the "modern mind" to which Schumpeter referred was a collective term for the social and economic planners responsible to this day for the construction and maintenance of the fiat money economy.**

With that for initial spade work, let's take a look at the demand for modern gold and silver bullion coins to see what they might be "blurting out" at this juncture in economic history. First and foremost, the numbers tell us that though Washington and the mainstream media may have recovered psychologically from the 2007-2008 crisis, the investing public has not. In fact, by implication the numbers tell us that concerns about a repeat, or better put, an extension, of that crisis still run high among investors.

The charts depict two different eras for gold and silver bullion coins – the one before the crisis and the one after. The strong consumption in 2016, in that respect, is decidedly a continuation of a well-established trend that began in 2008. For gold, 2016 was the fifth best year on record in terms of sales and in a virtual dead heat with 2015. For silver, 2016 was the fifth best year on record coming after last year's record sales. Since 2016 was a relatively calm year in financial markets, the question arises how high demand might go if another crisis were to suddenly ignite.

Another lesson in these charts, and one that should not be overlooked, is that the record performances in both precious metals since 2008 did not occur in an inflationary environment, but in a distinctly disinflationary one. The strong and continuing post-crisis demand, running consistently at five to nine times pre-2007 levels, belies the mainstream media's unremitting mantra that the precious metals are an inflation hedge and inflation hedge only. In that regard, silver is the big surprise. Prior to the current period, silver was generally viewed as an industrial metal with some investment potential and rarely a safe-haven or crisis hedge. Now investors give silver nearly the same credence they do gold for asset preservation purposes.

* These totals include only current year bullion coins and does not include the large volume in previous mintages traded in the secondary market globally. There is no accurate accounting available for the secondary market, but it would add significantly to the annual turnover demand if it were tracked.

** Complete quote: "In the first place, the 'classic' writers, without neglecting other cases, reasoned primarily in terms of an unfettered international gold standard. There were several reasons for this but one of them merits our attention in particular. An unfettered international gold standard will keep (normally) foreign-exchange rates within specie points and impose an 'automatic' link between national price levels and interest rates. The modern mind dislikes the this automatism, as much for political as for economic reasons: it dislikes the fetters this automatism clasps on government management of the economic process – dislikes gold, the naughty boy who blurts out unpleasant truths. But most of the economists of the period under survey liked it for precisely the same reasons. Though they compromised in practice as in theory and though they admitted central-bank management, the automatism – a phrase beloved by Lord Overstone [Samuel Jones Loyd, 1st Baron Overstone] – was for them, who are neither nationalists nor etatistes, a moral as well as an economic ideal." –– Joseph Schumpeter, History of Economic Analysis (1954) Published posthumously

Charts compiled and designed by USAGOLD's Jen Dentry with the assistance of the mints surveyed.

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GoldNotes

• As the month of May came to a conclusion, gold and silver pretty much ended the month where they started. Gold started at $1270, hit a low of $1220 May 10th then worked its way back to the $1270 level by publication date. Silver charted a similar course. Physical gold demand globally is being pushed by political uncertainties, moreso now than usual. There have been reports of strong physical demand from both China and India, the world's two largest markets for gold. In the case of India, that strength comes after two years of restrained offtake. Late in May signs of increased demand began to surface in Europe where concerns are mounting about the euro-dollar relationship. In the United States, we suspect that there will be further uncertainties raised by interest rate policies, the upcoming battle of the budget, an increase in the national debt limit, and the unwinding of the Fed's massive post-2008 stimulus program. Those uncertainties are likely to have a direct effect on precious metals trading and pricing going into the summer months. Some of these issues are covered in more detail below.

• "Market participants believe the Fed and Treasury will have to communicate carefully over the debt issuance outlook. If the central bank is stepping back from the US sovereign debt market it presents challenges for the Treasury given a large amount of government debt is maturing over the next couple of years. It is also possible that the Trump administration and Congress will sharply expand the fiscal deficit via steep tax cuts, which in turn could mean further debt issuance. Complicating matters further, the Treasury is considering whether to issue longer-dated, 50- or 100-year bonds and preparing for another showdown in Congress over whether it can raise the debt ceiling." – Financial Times

Editor's Note: In a recent editorial, the Wall Street Journal tells us that the Fed, according to Phil Gramm and Thomas Saving, "bought over half of the Obama Treasury debt" issuance. If the two newspapers' assumptions are correct, one wonders how a new flood of U.S. government debt can be absorbed through normal channels. Rather than shedding the assets on its balance sheet, the Fed may be forced into the exact opposite: A new round of quantitative easing.

That potential scenario is only one of the many potential problems associated with the burgeoning U.S. sovereign debt problems. The interest payment category in the federal government's budget too is likely to soar to new levels, even if the Fed delays interest rate increases. Already the U.S. pays just over $438 billion annually in interest. To put that number into perspective, the newly proposed military spending figure in the Trump administration's budget proposal is $574 billion. In the end, whether or not the Fed steps in, over the medium to longer run the U.S. sovereign debt problem is likely to have a decidedly negative effect on the purchasing power of the dollar and a positive effect on the purchasing power of gold.

Below are a couple of supporting charts. Value buyers, please note in the second chart that gold appears to have some catching up to do.

• “In recent decades, mainstream economists insisted that markets are highly efficient, and do a near perfect job of digesting available information and correctly pricing assets today to take account of future events based on that information. In fact, nothing could be further from the truth. Markets do offer valuable information to analysts, but they are far from efficient. Markets can be rational or irrational. Markets can be volatile, irrationally exuberant, or in a complete state of panic depending upon the emotions of investors, herd behavior, and the specific array of preferences when a new shock emerges.” – James Rickards

• Volatility, irrationality and potential panic when applied to the markets extends beyond humanity itself to machine-driven algos as well – something every prudent and knowledgeable investors will want to work into the analysis. Computer algorithms mimic human behavior by design, and therein lies their Achilles heel. Algo-driven quantitative funds (or quants) now comprise a formidable 29% of stock trading volume. Thus far most of the direction has been to the upside, but what happens when the algos dictate selling those positions? Will 29% of the market race for the exit at the same time. Probably. The same programming that drives one fund, drives most of the rest and most of that is heavily leveraged. In short, vulnerability abounds, and the high volatility is hidden from the view of the general public. The quants, in short, could create a panic much worse than anything that has happened in the past, and likely it will come with little or no warning.

• “This crowd couldn’t sell gold bars to inflationists,” lamented the Wall Street Journal editorial with reference to the Trump administration’s handling of FBI Director James Comey’s termination. Though the Wall Street Journal confuses use of the term “inflationist, I appreciate the allusion to the metal of kings and the king of metals.  At the same time, It is rarely the perpetrator of inflation (the inflationist) who seeks the safety of gold in most cases, but its victims, i.e. ordinary citizens. As a firm that has placed millions in gold coins and bars over the years with investors hedging an assortment of potential disasters including inflation, we can say with confidence that USAGOLD can and does sell gold to “inflationists” under the WSJ definition. . . . . and plenty of it.  If anything, the level of confusion, angst and partisan politics on the loose in the nation's capital these days only adds one more reason to own gold.  The swamp, in short, requires hedging.

• After all is said and done, the chart you see immediately is my all-time favorite. I could write many paragraphs about what I see here, but I think the chart speaks for itself. It explains at a glance why gold in the fiat money era, in which we are still firmly ensconced, is a good thing to make a permanent aspect of the investment portfolio. During the gold standard era, the chart is a flatline.  The day the United States severed the dollar’s tie to gold, it began to register a pulse. The day the United States goes back on the gold standard (highly unlikely anytime soon), it will flatline again, but probably at a much higher price levels than anything we have seen thus far.

• “After the dollar and stock market euphoria of late 2016 and early 2017, there are already signs that the Trump reflation trade may be more an expression of hopeful sentiment rather than a new paradigm of actual higher economic growth and inflation. Treasury yields, the dollar, equity valuations and inflation expectations are all reversing their previous gains, to the benefit of gold. Though it remains too early to say with any certainty, bullion may even end up benefiting further from the Trump administration’s changes to the regulatory environment and the promotion of US manufacturing. As Trumponomics, in whatever form it ultimately takes, brings a new set of political, economic and trade uncertainties over the coming four years, gold should have plenty of opportunities to shine as a safe-haven asset and portfolio diversifier.” – Jonathan Butler, Mitsubishi, as reported in the LBMA magazine, The Alchemist

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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 of 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.