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Discussion Topics -- December 18, 2015

Fed Raises Rates - Impact on Gold
Low Gold Price Killing Miners
Emerging Market Currency Devaluation to Buoy Gold Demand


(December 18, 2015 discussion) Well, they did it. After months of anticipation the Federal Reserve finally moved to raise their benchmark rate by a quarter point. And though it seems you can’t escape hearing about how terrible this is going to be for gold (thank you mainstream media), you don’t have to look far to see that this move may very well have the exact opposite result for the yellow metal. Gold has, at this point, virtually fully priced in both the current hike and an additional one percent hike to rates over the course of next year. But how likely is this gradual tightening cycle, really? For starters, the Fed’s decision to raise rates looks to be nothing more than a ‘preservation of credibility’ play. After so much talk of doing it, the Fed had basically painted itself into a corner, and left themselves no choice. So to think they will automatically stick to projections moving forward is suspect at best. Decisions will remain ‘data dependent’, and as we all know, the data ain’t nearly as good as they want us to think it is. So with that in mind, if the consensus is gold has fully priced in rate hikes far beyond what may actually occur, it is suggestive of gold actually shrugging off its ‘expected performance’ as we move into next year.

Buttressing this notion, emerging market economies and resource economies both have seen their currencies devalue sharply as the dollar has strengthened and commodity prices have come under pressure. China saw 10 straight days of a declining Yuan (the longest such streak to date), and on the heels of a stock market crash, Chinese citizens will surely be looking to gold to preserve and protect their savings. As would anyone who is seeing their local currency devalue rapidly. Moreover, the depressed price environment has begun to have significant impacts on the mining industry. Most mines reported losses in the third quarter (and that was at $1200 gold!) and Anglo American recently made headlines when they cut nearly 75% of their workforce. And it isn’t a situation where as soon as prices recover, they’ll just ramp back up. A lot of these operations are ceasing to exist. If any kind of economic disruption should surface that drives a massive wave of gold demand, there simply won’t be enough to go around. The damage in essence, is done. And if you’re looking for the canary in the coal mine, look no further than the high yield ‘junk’ bond market. With three major funds closing their doors due to an overwhelming demand for redemptions, it’s not surprising Carl Icahn is calling this market a “keg of dynamite that sooner or later will explode”. And it wouldn’t’ be the first time the junk bond market precipitated a broader crisis.

All told, physical demand for gold and silver at the individual investor level remains enormously strong, with the US Mint expected to announce record silver sales for the year. It would appear, and rightfully so, that our clients, and good many other buyers the world over, aren’t exactly buying the main stream press’ narrative on the gold market. 26:30 Minutes, with Jonathan Kosares, Peter Grant and George Cooper.

Note: We had some technical issues with our sound but wanted to make sure you had the content of the video to view before the end of the year. The sound will be fixed for the next video.

Figure 1
Goldprice December 2015

Figure 2
gold silver ratio

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