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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

October, 2017


This issue includes a CLIENT SPECIAL ADVISORY.

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Gold is up this year not just in dollars but in every major currency
Why it's important to the typical gold investor

Currency Gold Charts 2017
(as of 927/2017)

eurogoldyengoldswissAU
Aus$CanGold

With special thanks
to Nick Laird and GoldChartsRUs.com
which provided the background research
for this edition of News & Views


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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.

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



"Even those of us who have been tracking gold's progress for decades frequently give in to the ease of quoting gold's value in terms of fiat currency – most commonly in US dollars. And yet, we have it the wrong way round. Gold is in fact the centre of the economic universe, and all the fiat currencies (including cryptocurrencies) revolve around gold." – Jeff Thomas, InternationalMan.com

Most gold investors are aware that major national currencies have been in an uptrend against the dollar since the beginning of the year. What might be surprising is the degree they are up against the dollar. Here is the scorecard:

Euro +10.3%
Japanese yen + 4.2%
Chinese yuan + 4.5%
Swiss franc + 5.1%
British pound + 8.9%
Australian dollar + 9.0%
Canadian dollar + 7.2%
Local currency appreciation vs
US dollar as of 9/27/2017

Even more surprising is the degree to which gold has strengthened against those same currencies. Here is that scorecard:

Euro + 1.1%
Japanese yen + 8.0%
Chinese yuan + 6.5%
Swiss franc + 6.1%
British pound + 3.4%
Australian dollar + 2.1%
Canadian dollar + 3.2%
U.S. dollar + 11.5%
Gold price appreciation in local currencies as of 9/27/2017

Gold and the dollar are often referred to as safe havens in the same breath, but what these numbers tell us is that – at least for now – gold increasingly has become the safe haven of choice. It is too early to know whether or not the across-the-board uptrend in gold will continue, but it is worth noting and monitoring. Clearly, significant capital is finding its way to the gold market globally and we suspect, as discussed in the following article, that institutional investors and funds have played the dominant role.

Why is gold's appreciation against domestic national currencies important to the individual American gold investor?

It identifies an important trend in gold ownership taking hold in the top economies around the world – a developing investor mindset and response to host country monetary policies that could be of immense importance going forward. It is revealing that the same phenomenon has taken root concurrently in all eight of the countries represented by the currencies listed above.

The pattern reflects concern about central banks' ability to lift local economies out of a persistent disinflationary malaise. It also suggests that for many investors gold, not the U.S. dollar, looks to be the safer and more productive alternative should things take a turn for the worse.

As long as the low interest rate environment and concerns about overvaluation in the stock and bond markets persist, asset managers and investors are likely to continue shifting resources to underpriced gold (and silver). Given forward guidance provided by the central banks, it appears those policies and concerns will be with us for years to come.

Thus far, gold's performance against major currencies has flown under the radar in financial circles and outside the notice of the mainstream media. That is not likely to remain the case for long.

How professional investors radically altered the gold market

Funds and institutions, so-called professional investors, are pouring large amounts of capital into gold through ETFs, straight-up physical ownership in the form of bullion, and paper ownership in the form of futures and options. In fact, institutional involvement may be unprecedented at this juncture and it is not just the high-profile gold advocates like Ray Dalio, Stanley Druckenmiller and David Einhorn pumping capital into the market, but hundreds of funds and institutions from one end to the globe to the other.

It came to light this past month, for example, that almost 3000 tonnes* of gold in physical form sit on the balance sheets of Chinese commercial banks and financial institutions – a surprising revelation. In the West, inventories at gold ETFs, the favored gold ownership vehicle for professional investors, have gone from 2050 tonnes in late 2015 to just under 2770 tonnes now – a gain of 720 tonnes or 35%. Last month, the World Gold Council (WGC) published a report showing that European funds accounted for 79% of the overall growth in gold ETFs in 2017 with German funds and institutions accounting for half of those inflows.

The Gold Currency Index (GCI), which reflects the price of gold in a basket of twenty national currencies, usually tracks the US dollar price of gold. Since early 2015, however, an interesting divergence has emerged between the dollar price of gold and the index, and has steadily expanded until the present. (Please see chart below.) Gold, in short, is rising in global currencies and the US dollar for the first time in the index's history.

GCI

Though it is difficult to trace the source of this divergence directly to international funds and institutions, we can see their footprints in the sand – the circumstantial evidence as reflected in the strong growth of bellwether ETF inventories. "Investment demand," says ETF Trends in a recent report titled, An In-Depth Look into Gold ETF's Resurgence and Sustainability, "remains robust as an increasing number of institutional investors, sovereign wealth funds and central banks seek gold as a potential source of return and diversification to traditional stock and bond portfolios."

Why is strong fund and institution involvement in the gold market important to the individual American gold investor?

At each stage of gold's secular bull market, key events have acted as catalysts or triggers for the price action that followed. In the early 2000s, the Washington Agreement limiting the sale and leasing of gold by central banks triggered the price move from $250 to $800 by 2006. In 2009-2010, quantitative easing coupled with Chinese gold demand underlaid the price move from the $700 to nearly $1900 in 2011.

Now, after a significant correction from those levels, demand from global funds and institutions might very well be seen years from now as the catalyst that launched a new round of gold price appreciation. Since December 2015, gold has risen from $1050 to the present $1275 level, a nearly 21% gain over a 21 month period.

* Source: Macquarie Bank, Bullion Star 9/17/2017 (Please see "A big piece to the China puzzle falls into place.)

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Special client advisory on the twentieth anniversary of
The ABCs of Gold Investing

ABCs3covers

We celebrate two special twenty-year anniversaries at USAGOLD this year. One marks the launch of the USAGOLD website and the other the publication date for the first edition of the The ABCs of Gold Investing. I will leave raising a toast to the website for another time, but would like to say a few words about the book.

I have written three editions of the book and the publication dates are worth noting – 1997 (First Edition), 2004 (Second Edition ) and 2012 (Third Edition).

–– Within five years of the first edition, gold entered into the first leg of its secular bull market.

–– Within five years of the second edition, gold entered into the second leg of its bull market in the aftermath of the 2007-2008 financial crisis.

–– Now, five years from publication of the third edition, gold has spent the past two years building a new base in a pattern similar to the market action of the late 1990s and the late 2000s.

The point of the book has never been to make a speculative killing in the gold market. Rather, it has been to accomplish what the subtitle suggests – protect and build one's wealth through the ownership of gold coins and bullion. If, as a side benefit, the price happens to improve, so much the better.

Throughout the 20-year life of the book, thousands have read it and applied the principle of a truly diversified portfolio. For most of those readers, gold has delivered the goods as a safe haven through what can only be described as a tumultuous twenty-year period.

Gold annual returns

Now, a good many believe we are at a another major turning point in the economy. Among that group perhaps the most influential is William White, the former head economist for the Bank for International Settlements and current chief economist for the Organisation for Economic Co-operation and Development (OECD). In a recent Bloomberg interview, he raised a red flag warning that the situation today looks "very similar to the way it did in 2008." I strongly encourage you to watch this short video. [LINK]

Now would be a good time for a portfolio review

Now would be a good time for you to review your current portfolio and make certain it is structured properly for the times ahead.

1. If your primary objective is to defend your wealth, you will want to make certain that you own the right mix of contemporary bullion and bullion-related historic gold coins.

2. If you do not own gold, now would be a good time to tap the accelerator on the acquisition process. An old saying applies: The best time to buy gold is when everything is quiet. The ABCs of Gold Investing is still a solid primer on gold ownership even though it's five years old. The book photo above will take you to our order form.

3. If you are a long-time client who owns gold but never got around to adding silver, you might want to consider the possibility. We have noted a strong affinity for gold's companion metal among clients who were previously gold owners only. Silver has a history of outperforming gold in bull markets.

4. Most importantly, you will want to be certain that your percentage allocation is sufficient to carry you through another financial crisis. There is no point in owning gold if the allocation does not measure up adequately to your total net worth.

Jeffrey Christian, the well-known analyst who heads the CPM Group, recently altered his notion of the "ideal allocation" of gold within investment portfolios. Here is what he had to say as explained by KitcoNews:

"A long time neutral voice in the gold industry has turned noticeably bullish. Jeff Christian, managing director for New York based research consultancy CPM Group says gold is headed much higher in the next three years. 'We thought gold would find a bottom in 2015 and that by 2020 we could see gold set a new record gold price in nominal terms, above $1,700 an ounce.' Christian adds that his firm conducted extensive research around the ideal gold allocation in today's world. Since the early 1980s, most portfolio managers allocated a 5-10% holding in gold. This model, Christian says, had not been updated in years. 'Given everything that is happening, in terms of risk reward, it is now 27-30%.'"

I stand by my long-standing recommendation that you diversify your portfolio 10% to 30% with precious metals. The level of commitment between those two percentages depends solely upon your interpretation of the present dangers, uncertainties and opportunities. I agree with Jeffery Christian, an old friend by the way, that now would be a good time to ramp up that commitment if you find yourself at the low end of that range.

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If you would like to schedule a portfolio review, please contact our ORDER DESK at your earliest convenience, or your broker directly.

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The $34 trillion in central bank stimulus that got us nowhere

John Authers, the Financial Times columnist, is not one to sound the alarm bell on the global economy, so his foray into uncharted territory in a recent weekend edition of the pink pages came as a surprise. "[T]he era we live in," wrote Authers, "does indeed have more financial crises than those that went before. This is true globally, demonstrated with a welter of statistics, and there is a clear point at which the crises began to accumulate – August 1971, when President Richard Nixon brought the Bretton Woods agreement to an end*, ending the tie of the dollar, and ultimately most other currencies, to the price of gold."

"Meanwhile," Authers goes on, "the authors** hold that the move to currencies backed by governmental fiat rather than the supply of gold being extracted from the ground has enabled a build-up of debt without parallel. Their global estimate for the total amount of stimulus in the decade since the crisis, which combines extra money printed plus widening of government budget deficits, is $34 trillion."

At the heart of what troubles financial markets these days is the inability of central banks, despite the issuance of that $34 trillion in stimulus, to correct the stubborn disinflation entrenched in the global economy. That failure leaves an aura of crisis, even impending doom, that has been voiced by a large number of market commentators in recent months. All else, including the potential for a geopolitical crisis, superimposes itself over this economic matrix of uncertainty and economic malaise.

Authers goes on to mention gold as an alternative for investors, but then dismisses it as "hard to trade and would do badly under deflation." Here the columnist shows his lack of direct knowledge about the gold market.

Gold is not only easy to trade, it may be among the most liquid of all the top asset classes and certainly more liquid that any other hard asset. It can be bought or sold usually with a phone call to a trusted broker and anywhere in the world. The same gold American Eagle or British sovereign that trades easily in Chicago can be liquidated just as easily in London or Hong Kong.

As for the opinion that gold "would do badly under deflation," Authers forgets how well gold performed during the largely disinflationary crisis period of 2007-2011. Deflation is a close cousin to disinflation so much can be learned from that experience.

* (Please see Historical Inevitability and Gold and Silver Ownership: In the end it is the times that need to be hedged)

** Report issued by Deutsche Bank market research team, "The Next Financial Crisis

(Please see Financial Times, John Authers, Time spent thinking about the next financial crisis is not wasted, 9/22/2017)

The "Old Guard" is back in the market, eyeing silver

We note an interesting phenomenon of late.  The old guard is back in the market at these prices and one of their interests is to balance their gold holdings with silver.  In the past most of these investors were purely gold buyers and had never owned silver before.  Now, they want to own silver for the upside potential, but they also see it as a safe-haven.  This group tends to stick with the American Eagle one-once silver bullion coin pictured above.

With Bloomberg reporting that U.S. demands in NAFTA negotiations risk "scuttling" the agreement, it might be interesting to review how much of the silver consumed in the United States annually comes from Mexico and Canada.  According to the U.S. Geological Survey, of the 8100 tonnes consumed by the United States during 2015, 6700 tonnes were imported.  Of that, 54% came from Mexico and 26% from Canada.  Those percentages translate to 3600 tonnes from Mexico and 2100 tonnes from Canada, or over 70% of the silver consumed (5700 tonnes). The U.S. Treasury strategic stockpile, by the way, is less than 500 tonnes.

In short, if there is a breakdown in those negotiations, it could imperil the flow of silver into the United States and affect pricing and premiums on popular silver bullion coins, including the American Eagle. It has been our experience at USAGOLD over the years that a run on silver can be even more intense than a run on gold.

Such concerns aside, Sharps Pixley's Lawrie Williams sums up silver's prospects nicely:

“Our long expressed view is that the GSR [gold-silver ratio) will revert back to the 65 level or below – how soon this will happen we are not sure.  However at $1,400 gold, which we see as a possibility even this year, a GSR of 65 would mean a silver price of around $21.50 – a rise of over 20% from where it is now.  That doesn’t look to be an unreasonable target, although it may take longer than four months to get there.”

Please see U.S. Geological Survey silver statistical overview

The 300th anniversary of the gold standard: Will it ever return?

"Today, September 21, 2017," says Ralph Benko in a Forbes magazine article, "is the 300th anniversary of Sir Isaac Newton’s accidental invention of the gold standard. . .By inadvertently overvaluing gold to silver, Newton sowed the seed of the gold standard, which ramified into the world’s dominant monetary system presaging a Golden Age. The gold standard was a system that, together with other factors, helped propel England from an unimportant small island nation to the center of the world’s financial system. The true classical Newtonian gold standard also served America, and the world, very well for a long time. It could again do so."

goldstandardBenko goes on to say that Donald Trump has shown a strong affinity for gold and an intuitive grasp of the gold standard. "The president said he would like to bring back the gold standard, but that 'we don't have the gold.'" Benko counters with "Germany and the IMF together have about as much gold as the rest of the world combined and America has well more than Germany and the IMF combined." 

There are two reasons why I believe that President Trump is right about returning to the classical gold standard. First, the authorities in Washington D.C. – the politicians and economic bureaucrats of either political party – are unlikely to give up their power to run fiscal deficits and pile up the federal debt any time soon, if ever. Second, the benchmark price required to keep the U.S. Treasury from being drained of its gold reserve is so high that it approaches the absurd.

If gold were officially benchmarked against the $20 trillion national debt, for example, the troy ounce price would need to be in the vicinity of $75,000. To be valued against America's total outstanding external debt of roughly $6 trillion, gold would need to be valued at $22,500 per ounce. In short, Donald Trump is right. The United States does not have enough gold to return to the gold standard.

A more practical approach to unleashing gold's potential as an official sector asset  

A more practical scenario for utilizing gold as a reserve asset would be to value it on the Fed's balance sheet at the on-going market price like Europe has since the introduction of the euro. Instead of the Federal Reserve viewing gold as the enemy, it would suddenly become a friend. At current prices, the U.S. gold reserve of 8300 metric tonnes would become a $350 billion asset. At triple today's prices it would become a more than one trillion dollar asset on the Fed's balance sheet.

Coincident with marking the gold reserve to market, the U.S. could also do what China and Russia are doing now and channel a portion of U.S.-based mine production into reserves. Though some believe that the likelihood of discovering, developing and actually mining major deposits anytime soon is fleeting, it is amazing what industry can accomplish once free market forces are fully unleashed. If you quarrel with that assumption just look at what has happened in the oil and gas industry over the past few years. The United States is still the fourth largest gold producer in the world behind China, Australia and Russia, and with the proper incentives it could move up the production ladder.

Taking a course of action like what I just outlined would not be an economic panacea, but the psychological effects would be enormous. As for gold owners, it would carry with it a much more lucrative outcome than returning to the gold standard. That said, it is unlikely that we will see either scenario in play anytime soon.

Forbes/Ralph Benko/9-21-2017

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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.