(Chart courtesy of goldchartsrus.com)
We are now wrapping up one of the stronger summers in memory at USAGOLD and heading into the strongest time of year seasonally for gold and silver – September through February. Normally the summer months are the quiet part of the year, but 2016 has been an exception. The price of gold is up 9% since the beginning of June and silver nearly 18%. ETF gold inventories reached highs in July and August not seen since 2009, the year after the collapse of Lehman Brothers and the launch of the so-called credit crisis.
Some see the stronger than usual summer showing for the precious metals markets as a harbinger of things to come. Credit Suisse, for example, forecasts gold will be trading in the $1475 range in the fourth quarter of 2016, and see $1500 in the early part of 2017. Similarly, Deutsche Bank's commodity desk believes gold should be trading now in the $1700 range based on the top four central banks' aggregate balance sheet expansion – some 300% since 2005.
A large grouping of analysts compare stocks now with the market in the 2007-2008 time frame. The primary reason for the deja vu is that all the major indices once again appear to have been elevated in a Fed-induced price bubble. The list of famous names warning of a severe correction is long and grows by the day and with each new record high. It includes Bill Gross (Janus Funds), Carl Icahn (Icahn Enterprises), Paul Singer (Elliot Management), Robert Schiller (Yale University), Russ Kostereich (Black Rock), Ray Dalio (Bridgewater Associates), Jeff Gundlach (Doubleline Capital), Jim Cramer (CNBC), David Stockman (former Budget Director), Stanley Druckenmiller (Duquesne Capital) and Jacob Rothschild (RIT Partners) – just to name a few. Even presidential candidate Donald Trump has joined the chorus of naysayers warning of a financial bubble.
Paul Singer, who was awarded this year's Manager Lifetime Achievement Award by the Institutional Investor magazine in New York, is one among a good many in the group just listed who advocate investing in gold. He warns that "the ultimate breakdown (or series of breakdowns) from this environment is likely to be surprising, sudden, intense, and large." Earlier this summer, he announced "we’re very bullish on gold, which is the anti–paper money, of course, and is under owned by investors around the world."
Similarly RIT Partners, run by Lord Jacob Rothschild, has raised its exposure to "other currencies [not the dollar], gold and precious metals." Said Rothschild, "The geopolitical situation has deteriorated and the slowing down of economic growth will surely lead to problems. Conflict in the Middle East continues and growth remains anaemic, with weak demand deflation in many parts of the developed world. In times like these, preservation of capital in real terms continues to be as important an objective as any." The connection between the legendary Rothschild name and gold ownership runs deep in European history. It will not go unnoticed in the financial community that a prominent branch of the family has once again turned to gold for defensive purposes.
The 2007-2008 financial meltdown provides a good case study on diversification as a means to wealth preservation. $100,000 invested in stocks and stocks only in November 2008 would have been worth $68,000 by February of 2009. A $100,000 portfolio diversified with 30% gold (our top end recommendation) would have been worth $91,000 and that was at the $925 gold price in February 2009. As we all know, gold went substantially higher from there – all under continuing crisis conditions.
Gold Nuggets____________________________________________________________________SEPTEMBER 2016
Gunboat diplomacy French-style
“For all its problems, the current dollar-based non-system has been far more resilient than the Bretton Woods gold-exchange standard, which never operated as [Harry Dexter] White intended. And the real alternatives — a classical gold standard, in which interest rates are driven by cross-border gold flows; or a supranational currency, like [John Maynard] Keynes advocated at Bretton Woods — are likely to remain too radical politically. We are, therefore, almost surely stuck in a fiat dollar world for some time to come.” – Benn Steil, The Council on Foreign Relations
Editor's note: In the essay from which the quote above was taken, Benn Steil tells the story of France sending a battleship into New York harbor in the early 1970s to secure French gold stored at the New York Federal Reserve. Charles DeGaulle, France's president at the time, knew that Washington had mobilized a considerable amount of gold to defend the dollar under the Bretton Woods system – a circumstance he felt could put U.S.-based French gold deposits at risk.
Take two and call me in the morning
You read everywhere how the United States is going down the same path as Japan – perpetual disinflation verging on deflation, demographics skewed toward declining demand across the boards, and eventually more quantitative easing, low-to-negative interest rates and, in general, an economy that never answers the central bank's wake-up call. Along comes Leo Lewis to write an intriguing article in Financial Times about Japan's burgeoning gold market.
"[G]old has emerged as a kind of shiny financial aspirin," he says, "for a new generation of gold bugs: a natural-sounding painkiller for unnatural times." The World Gold Council calls Japan "the region's star performer" which might be a bit of an overstatement in a geographic area that includes China. "Chie Igarashi, the grandmother from Tokyo," says Lewis, "is part of a growing band of people aged 50-70 who have decided to express their scepticism over Mr Abe’s economic vision not at the ballot box (where the prime minister received resounding support at last month’s upper house election) but at their nearest bullion dealer." The United States might not be far behind Japan in that respect. Take two and call me in the morning.
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The PhD standard and what to make of it
"I’m very bullish on gold and I’m very bullish on gold mining shares. That’s because I think that the world will lose faith in the PhD standard in monetary management. Gold is by no means the best investment. Gold is money and money is sterile, as Aristotle would remind us. It does not pay dividends or earn income. So keep in mind that gold is not a conventional investment. That’s why I don’t want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder." – James Grant, Grant's Interest Rate Observer
Editor's note: Gold is the pro-money and it is simultaneously the anti-money, depending on how you understand things combined with your perception of where we now find ourselves in financial history. Grant cleverly says, "Interest rates may be almost invisible but there is still plenty to observe. I observe that they are shrinking and that the shrinkage is causing a lot of turmoil because people in need of income are in full hot pursuit of what little of yields remains." All of which brings to mind the 2008 financial crisis and the preponderance of pundits and analysts who proclaimed loudly in its aftermath that they did not see it coming . . . . . .Quite a different story now when the warnings come at every turn.
Icahn says the stock market is way overvalued, day of reckoning coming
As noted earlier, many of the top minds in finance are concerned with the distortions created by the debasement of currencies, asset bubbles being the most common in the current era. Carl Icahn is one prominent financier preparing for the negative event.
"I have hedges on, I'm more hedged than I ever was," says Icahn. "[The market] is way overvalued at 20 times the S&P and I'll tell you why: a lot of it is a result of zero interest rates. It's just what I said. You have zero interest and a lot of buy backs. Money is not going into capital. . .There's going to be a day of reckoning here. I've seen it many times in my life. When things look good, they look great. You go into the sky. But that's when you have to really pull down and really stop buying [stocks]. That being said, I'm not going to tell you it's going to happen tomorrow, next week, even next month, even next year possibly. But it's going to happen and you have to change the direction of the economy. I can't say it plainer than that."
Though Icahn never mentions gold and his concerns at the moment seem to be confined to a stock market crash, one is reminded of the story told by James Grant of another famous financier, but from a bygone era, named Bernard Baruch. "Baruch," says Grant, "forehandedly bought gold and gold shares after the 1929 Crash. Years later a suspicious Treasury Secretary asked him why. Because, Baruch replied, he was 'commencing to have doubts about the currency.' Seems Icahn and the long list in the lead article have similar doubts. . . . .
CHART OF THE MONTH
In this month's lead article, we touch on Deutsche Bank's assertion that gold should be trading at $1700 per ounce based upon the big-four central bank's balance sheet growth. Morgan Stanley recently made a similar call with the same target of $1700 per ounce. September's CHART OF THE MONTH focuses on the growth in the Federal Reserve's balance sheet (stated as the St. Louis Adjusted Monetary Base) and the price of gold. We have published this chart several times in the past and display an auto-updated version at our Gold trends and indicators in chart form
page. Please note that the current convergence point, as Deutsche and Morgan Stanley point out, is at the $1700 per ounce level.
Copernicus on the debasement of money
I recently ran into this interesting quote from Copernicus included in his "Essay on the Coinage of Money" (1526):
"Although there are countless scourges which in general debilitate kingdoms, principalities, and republics, the four most important (in my judgment) are dissension, [abnormal] mortality, barren soil, and debasement of the currency. The first three are so obvious that nobody is unaware of their existence. But the fourth, which concerns money, is taken into account by few persons and only the most perspicacious. For it undermines states, not by a single attack all at once, but gradually and in a certain covert manner."
Up until I came across this essay a few weeks ago, I was not aware that Copernicus had applied his genius to the insidious effects of currency debasement. This ground-breaking essay probably influenced both John Maynard Keynes (See quote top left) and Thomas Gresham of "bad money drives out good" fame. Ironically both Keynes and Copernicus were referencing currency debasement episodes in Germany. For what might have inspired Gresham, you will need to read the essay. Cobden Center's Ralph Benko says Copernicus' essay "has been translated into English several times yet those translations remained difficult to obtain for students of the monetary arts and sciences. It has remained mostly the property of elite historians." Above we link Edward Rousen's translation that you might keep company with the knowledgeable elite.
The Quiet Crisis
Quietly while all eyes have been on the low interest rate environment and what tools are left in the Fed's toolbox, another crisis is brewing in the financial system. "There's a misconception that companies are swimming in cash," Andrew Chang, a director at S&P Global Ratings, tell Associated Press. "They're actually drowning in debt." Ironically, in many cases the big debt can be tracked back to the issuance of corporate bonds the proceeds of which have gone into stock buybacks. "Of the $1.8 trillion in cash that’s sitting in U.S. corporate accounts," says AP, "half of it belongs to just 25 of the 2,000 companies tracked by S&P Global Ratings. . .The number of companies that have defaulted so far this year has already passed the total for all of last year, which itself had the most since the financial crisis."
Perhaps, the quiet crisis in corporate debt is what Janet Yellen was referring to when she said at the recent Jackson Hole Fed conference, "[F]uture policy makers may wish to explore the possibility of purchasing a broader range of assets." That suggestion was something of a revelation and a surprise yet to be carefully considered and digested by market pundits. We should recall that Ben Bernanke, during his Fed chairmanship, dropped the hint for both QE2 in 2010 and QE3 in 2012 in speeches at Jackson Hole. It seems quantitative easing, that essential salve to global financial excess, is back on the table.
Greenspan warns of stagflation, an inflation surprise
Alan Greenspan, whose post-Fed career we have covered with interest over the years, now believes that we are headed for a stagflationary economy – one in which unemployment and inflation register at high levels and the economy goes into high-speed malaise. He now believes interest rates will begin to rise and "surprise us with the degree of rapidity which may occur." He also warns to keep an eye out for inflation. "I would not be surprised," he says, "to see the next unexpected move to be on the inflation side. You don't have inflation now. And you don't have it until it happens." Says Greenspan, "If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we'd be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we've had in the United States, and that was a golden period of the gold standard. I'm known as a gold bug and everyone laughs at me, but why do central banks own gold now?"
Year-to-date performance leaders
Silver and gold filled two of the top five spots in Barchart.com's performance leaders through August, 2016 among the top-traded commodities. Silver is up 33.71% (#2) on the year and gold is up 23.38% (#5). The Brazilian real, as you can see, has also done well with the renewed interest in emerging country bond yields in the low-to-zero-per cent interest rate environment. The S&P 500 and Dow Jones Industrial Average which seem to get all the attention in the mainstream financial media posted much lower gains – in the 7% range. Tying this chart back into our lead article this month, we are now entering the time of year when the precious metals traditionally rally, so we will be monitoring this chart closely through the fall and winter months.
Source: Barchart.com with thanks.