Monthly Archives: August 2019
(USAGOLD – 8/21/2019) – Gold dropped marginally in today’s early going and is now hovering again near the $1500 mark – down $5.50 on the day. Silver is down 2¢ at $17.10. The markets in general might take a breather for the next couple of days in anticipation of Fed chairman Powell’s address to open the central bank’s Jackson Hole conclave on Friday. Some see the speech as an opportunity for the chairman to make amends for his ‘midcycle adjustment’ statement at the end of July and perhaps open the door for a series of rate reductions. President Trump elevated pressure on the Fed to reduce rates likening the Fed chairman to “a golfer who can’t putt.”
A CNBC article by Patti Domm published this morning examines some of the problems associated with declining yields and the possibility of negative interest rates in the United States. “It’s very depressing. . .Just think about it as a saver or investor,” says Michael Schumacher, director of rates at Wells Fargo. “It’s very hard to wrap your arms around the idea of negative yields. It doesn’t really sit well…It’s terrible for the financial system. Look how European banks have done for the last six, seven years—very poorly.”
Declining and negative rates have reignited gold demand around the world. ETFs, the favored gold ownership vehicle for funds and institutions, have seen their stockpiles grow by nearly 20% just since June. Private investors, many of whom favor more direct ownership in the form of coins and bullion, have lagged their institutional brethren. That tardiness, though, seems to be in the process of turning around. Over the past few weeks, demand has picked up considerably at USAGOLD and website traffic has increased 40% over the past 90 days.
Chart courtesy of GoldChartsRUs/Nick Laird
Quote of the Day
“I have a theory that computers started to suck when dumb people started to use them. The same is also true of precious metals, which turned into a speculative football in 2011. Those geeks are gone, and only the die-hards are left — the shiny rocks passed from weak hands to strong hands.” – Jared Dillian, NewsMax Finance
Chart of the Day
Chart note: When the yield curve temporarily inverted last Wednesday, the Dow Jones Industrial Average plunged 800 points. Peter Fisher, formerly head of fixed income at BlackRock and currently a professor at Tuck School of Business at Dartmouth, put it succinctly in a Financial Times editorial July of this year. “The mistake,” he says, “is to think it [an inverted yield curve] is a predictor of recessions. I think it causes recessions.”
“Based on its latest regulatory filings, Sandler increased its stake in the SPDR Gold Trust by nearly 180% to $38 million by the end of the second quarter, making it the biggest position the fund holds. The ramped-up wager could be a defensive play against more market turbulence ahead.”
USAGOLD note: Sandler joins a long list of top funds taking a strong position in the yellow metal – and most are in it for defensive purposes. There are many ways to generate investment gains, but few to protect those gains through times of economic uncertainty and financial risk.
Financial Times/Sebastian Payne, Guy Chazan, Mehreen Kahn and Arthur Beesley/8-20-2019
“The stand-off fuelled rising expectations that the UK will leave the EU on October 31 without an exit deal, souring relations between the two sides and threatening severe economic disruption.”
USAGOLD note: Demand for gold has been running strong for the past several months on both sides of the English Channel. This could touch off another wave of buying among an increasingly nervous citizenry.
USAGOLD note: “The long-term prospect for gold,” says Mobius, “is up, up and up. And the reason why I say that is money supply is up, up, and up. You know with the efforts by the central banks to lower interest rates they’re going to be printing like crazy.” He thinks a typical portfolio should have about 10% in physical gold.
“Therefore, we believe that China’s strong economic growth is not conducive to the price of gold. On the contrary, if the downward pressure on the Chinese economy is greater, it will be conducive to the price of gold. From the perspective of historical data, the disappearance of the M1-M2 scissors gap in 2008 means that the decline in business vitality has a drag effect on the economy. In November of the same year, the social finance-M2 growth gap began to turn negative, and the central bank cut interest rates four times in 2008, while the corresponding gold price began to rebound gradually from the lowest point of 138.89 yuan / g in more than a decade.”
USAGOLD note: Some interesting points on Chinese gold demand and future pricing are made in this report originating in Shanghai.
Image: Chinese symbol for prosperity
“Gold is likely to be a beneficiary in a deflationary environment. One reason for this, [Wolf Research’s John] Roque noted, is that gold doesn’t cost anything to hold if rates are very low or negative. If this deflationary cycle plays out, Roque believes gold will make a new all-time high during this cycle.”
USAGOLD note: Gold as a deflation hedge – prices decline and gold goes to an all-time high, according to John Roque. Deflation is not what the Federal Reserve wants, and certainly not what the White House wants. Yet, for the moment, the signs point in the direction of disinflation, at least, if not outright deflation. Of course, that could change in a heartbeat. It has in the past. In the early 1920s, for example, Germany went through a deflationary period just before hyperinflation suddenly bubbled to the surface.
Image courtesy of the Visual Capitalist
“More than two decades since the Asia debt crisis gripped the region, global consulting firm McKinsey & Co. is warning that signs of a rerun are ‘ominous.’ Increased indebtedness, stresses in repaying borrowing, lender vulnerabilities and shadow banking practices are some of the concerns cited by McKinsey in an August report.”
USAGOLD note: Physical gold demand in Asia under these circumstances is stronger than ever.
Should I buy a gold ETF?
Are you looking for a price bet or the real thing?
For safe-haven, asset-preservation purposes, the best alternative is not futures, options, mining stocks or even ETFs, but delivery of the metal itself in the form of gold coins or bullion. Some think that owning an ETF is akin to owning real gold, but it is not. It is essentially a price bet simply because only owners of 10,000 ounces or more (with most trusts) can take delivery of the metal represented by the shares. Then there is the problem of counterparty risk. “Unlike physical gold bullion – which is a tangible asset,” says Mauldin Economics’ Olivier Garret, “ETFs are a financial product that have counterparty risk. Counterparty risk is present when there’s a possibility the other party in an agreement will default or fail to live up to their obligations. . .[O]ne of gold’s primary benefits is being the only financial asset that is not simultaneously somebody else’s liability. Therefore, these ETFs are a poor substitute.” In short, by owning an ETF instead of the real thing, investors expose themselves to one of the primary risks they hope to avoid through gold ownership.
The USAGOLD storage option – strong competition for the ETF
One of the advantages of a gold or silver ETF is that the trustee stores the metal for you and makes it easy to buy and sell. We can open a fully-allocated storage account for you that offers the same advantages. In fact, the annual cost of storage and insurance is actually lower than most ETF fees. You can buy and sell with a phone call. Most importantly, because specific coins and/or bullion are stored in your account, you can still take delivery in part or full whenever you so wish – something, as mentioned above, that the ETFs offer only to their largest institutional clients.
“China has severely restricted imports of gold since May, bullion industry sources with direct knowledge of the matter told Reuters, in a move that could be aimed at curbing outflows of dollars and bolstering its yuan currency as economic growth slows.”
USAGOLD note: Reuters goes on to say that China has cut incoming shipments by 300 to 500 tonnes. This could lead to higher yuan-based prices within China for the gold already on hand. How that will affect the international dollar-based price of gold will be an interesting situation to monitor. There will be plenty of opinion generated in the gold space on this news. This article is a lengthy treatment of the subject and highly recommended.
Repost from 8-14-2019
“In a world full of negative yielding debt, hard assets like gold could become even more attractive, and some strategists say a case could be made for a $2,000 per ounce price tag on the precious metal.”
USAGOLD note: TD Securities’ Daniel Ghali thinks we may be on the brink of a years-long bull market for gold.
Repost from 8-15-2019
A very old yet very new thought
from Mr. Charles Dickens
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” – Charles Dickens, A Tale of Two Cities (1859)
Things change little. Things change a great deal. The opening passage to A Tale of Two Cities – a very old yet very new thought.
“For Goldman Sachs Group Inc. analysts, gold’s rally above $1,500 is just the beginning. Analysts at the bank predict that prices already at six-year highs will climb to $1,600 an ounce over the next six months as investors seek havens. The dimming global economic outlook, fueled by heightening trade tensions between the U.S. and China are boosting gold’s appeal as a hedge against financial turmoil.”
USAGOLD note: Goldman is off-again, on-again when it comes to gold. . .It is now on-again and on the record with one of the more bullish numbers among Wall Street firms.
Re-post from 8-8-2019
“Based on investor anxiety, why not take a look at gold? Here’s what Cramer had to say about it. ‘So why not own something that yields nothing that holds its value than something that yields negative that doesn’t hold its value. So it is ridiculous not to own gold if you’re from any country on earth except for maybe the United States,’ said Cramer.”
USAGOLD note: And the United States is not far behind the rest of the negative-yielding world.
Repost from 8-14-2019
(USAGOLD – 8/20/2019) – Traders and speculators bought the dip overnight sending both gold and silver higher in overseas markets. That momentum carried over to the open in New York where the yellow metal is now trading at $1504 – up $8 on the day. Silver is up 14¢ at $17.03. Both metals seem to be gathering support at key levels, i.e., the $1500 and $17 marks respectively. Four pressing concerns are driving demand for the metals in both paper and physical forms at the present – recession fears, plunging interest rates, the U.S.-China trade war, and competitive currency devaluations.
“What comes next?” asks Financial Times’ Rana Foroohar in a recent opinion piece. “The answer, I believe, is very likely to be a synchronised global recession, punctuated by a step-by-step market downturn — one in which there may be the odd rally, but the general direction is down. This could last for some years. In the next few weeks, I would expect new lows in bond yields, a deepening of the yield curve inversion, higher prices for ‘safety’ assets like the yen and swiss franc, and a continued bull market in gold.”
Quote of the Day
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” – Ernest Hemingway
Chart of the Day
Chart courtesy of TradingEconomics.com
Chart note: Sudden devaluations can wreak havoc on economies and financial markets. Financial Times reports that, because of the recent plunge in the Argentina peso last Monday, prices on Volkswagons would rise 15% by the following Friday. An Argentinian who owns a bakery in Buenos Aires is quoted as saying: “We may be used to these blows, but we are never ready for them.”
“There is this humorous saying: ‘It walks like a duck, it sounds like a duck, and it walks like a duck. Maybe it is a duck?’ The prices of gold and silver have gone up quite substantially since June, with gold for the first time since 2013 trading at around 1,500 USD/oz; silver trades close to 17 USD/oz. Where do we go from here? The rise in the price of gold appears to be a ‘catch up’ price movement. Gold has been trading at what appears to be a discount for quite a while. As we pointed out in our Degussa Market Report on 25 April 2019, at that time, the fair price of gold would have been around 1,500 USD/oz. We now consider it necessary to raise this estimate.”
USAGOLD note: Degussa goes on from there to give a bullish price estimate for the future. . .at the link above.
“I’ve never been a ‘gold bug’ per se – which Keynes called a ‘barbarous relic’ – but the reality is gold is one of the few asset classes that does well in this scenario. The gold price in the last year is certainly trading like it’s anticipating something in the air as interest rates head below zero. Ray Dalio, the godfather of macro hedge funds, certainly thinks so.”
USAGOLD note: Did the president signal yesterday that he is a proponent of MMT? Maybe. A recent Reuters headline says it all: MMT may be Democrats’ economic cure, but only Trump got the memo. This editorial linked above includes a solid intro to Modern Monetary Theory – print money; drop it from helicopters on every city and town in the land.
“Gold ETFs have been a shining through a gloomy market as investors poured billions of dollars into this asset category in face of rising uncertainty. According to the World Gold Council, investors funneled $2.6 billion into gold bullion-backed ETFs in July, raising their collective holdings to 2,600 tons, or the highest level since March 2013, the Wall Street Journal reports.”
USAGOLD note: Most of that flow came from funds and institutions . . . There is considerable capital afloat looking for a safe place to dock which should auger well for the precious metals as we move into the Fall investment season. That 2600 tonnes, by the way, is the fourth largest stockpile on the planet behind the United States, Germany and the International Monetary Fund.
“‘Some clients are afraid of PLA intervention in Hong Kong, or of another closure of the airport, which will make it difficult to move their gold out of the city, as gold is shipped on commercial flights,’ said J. Rotbart & Co.”
USAGOLD note: The safe haven seeks safe haven.
“Paradigm shifts tend to happen slowly, and then all at once. That’s the lesson I’ve taken away from the recent market turmoil. As I wrote last week, the surprise is only that the upset didn’t come sooner.”
USAGOLD note: In this overview of rapidly changing financial market dynamics and signals blinking red, Fooroohar gives gold a green light saying that she expects a “continued bull market” in the coming weeks.
“President Donald Trump raised his demands Monday on the Federal Reserve, calling for the central bank to cut interest rates by a full percentage point and to restart its crisis-era money-printing program.”
USAGOLD note: There is no question where the president stands. The obvious question though is “Where does the Fed stand in all of this?” We may not see it all at once, but we might see it in pieces – including a new round of quantitative easing.
The Exter Inverted Pyramid of Global Liquidity
“[Exter’s Inverted] Pyramid stands upon its apex of gold, which has no counter-party risk nor credit risk and is very liquid. As you work higher into the pyramid, the assets get progressively less creditworthy and less liquid. . .[In a financial crisis] this bloated structure pancakes back down upon itself in a flight to safety. The riskier, upper parts of the inverted pyramid become less liquid (harder to sell), and – if they can be sold at all – change hands at markedly lower prices as the once continuous flow of credit that had levitated those prices dries up.” – Lewis Johnson, Capital Wealth Advisor’s Lewis Johnson
In short, what Lewis Johnson outlines is the bottom-line rationale for diversifying one’s portfolio with gold. For a more detailed analysis of Exter’s Inverted Pyramid, we invite you to visit the May edition of News & Views, our monthly newsletter.
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“Meanwhile, Morningstar data on more than 1,000 funds shows that net cash allocation has hovered around three percent since late last year compared to a historical average of 2.7 percent. Wealthy investors are guilty of hoarding more than everybody else, with high net-worth individuals having more than a third of their portfolios in cash during the first three months of the year compared to less than a quarter by the end of last year.”
USAGOLD note: There could be multiple reasons for this developing trend. One, as reported in this article, is a quick big swing – in the space of a month – from greed to fear as registered on CNN’s Fear & Greed Index. Another could be the persistence of disinflation as the governing trend in the economy despite the Fed’s efforts to ignite inflation.
Repost from 5-29-2019
“‘There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,’ Greenspan said in a phone interview. ‘There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, beside being a certain level.’”
USAGOLD note: Below zero has a great deal of meaning to savers who saved all their lives for retirement and now find themselves essentially deprived of any income for their efforts. I am sure Alan Greenspan knows and understands the problem since he is probably experiencing it just like everyone else. Just as accumulating gold works for hedge funds in a zero yield environment, so it works for ordinary individuals. With gold you get both the prospect for upside potential and a safe haven against the very forces creating below-zero yields in the first place.
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“There has been a tendency since the financial crisis to label any market that is rallying or deemed overvalued to be in a “bubble.” The word has become overused and debased. But if we treat it rigorously, the bubble concept is still vital in navigating financial markets. And the rigorous treatment reveals that bonds really are in a bubble.”
USAGOLD note: Authers reviews the work of Longview Economics’ Chris Watling who uses Charles Kindberger’s criteria as outlined in “Manias, Panics and Crashes” to determine if the bond market is in bubble. Watling concludes that bonds are in a bubble. Authers agrees. An interesting read at the link above. . . . . .
Re-post from 8-14-2019
“There’s nothing magical about gold. It’s just uniquely well-suited among the 92 naturally occurring elements for use as money… in the same way aluminum is good for airplanes or uranium is good for nuclear power. There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the 4th century BCE (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then.”
USAGOLD note: Casey goes on to list those five attributes in this well-written exploration of gold as the best form of money. . . . .The ‘gold as money’ argument is fundamental to understanding its importance as a long-term portfolio holding.
Image: Aristotle/Johann Jakob Dorner the Elder (1741-1813)
Re-post from 8-13-2019
(USAGOLD – 8/19/2019) – Gold’s descent began during European trading hours as yields on U.S. Treasury paper firmed – a sign that recession worries are on the wane at least for the moment. It is down $15 at $1498. Silver is down 16¢ at $16.96. Market attention will shift this week to the Federal Reserve’s annual conclave in Jackson Hole with chairman Powell scheduled to speak on Friday. “Fed watchers,” reports Bloomberg, “expect Powell to do nothing on Friday to disabuse investors of the widespread perception that the central bank will reduce interest rates by another quarter of a percentage point next month. But whether he’ll open the door to a half-point cut, which some traders are looking for, is unclear.”
Deutsche Bank was out with a longer-term positive forecast for gold over the weekend. “We have increased our gold and silver price forecasts,” it said in a research report released yesterday, “for the next six quarters to reach a level of $1,575/ounce based on our updated view of the macro, including what we see as the primary drivers of gold: real interest rates, the equity risk premium, the US dollar, and central bank purchases. We have shown macro scenarios that could result in gold going above $1,700/ounce.”
Quote of the Day
“So why not own something that yields nothing that holds its value than something that yields negative that doesn’t hold its value. So it is ridiculous not to own gold if you’re from any country on earth except for maybe the United States.” – Jim Cramer, CNBC
Chart of the Day
Chart courtesy of HowMuch.net
Chart note: “The United States,” says HowMuch, “is still the world’s largest economy, contributing 23.9% to GDP. China, the world’s second largest economy, had its slowest quarterly GDP growth in nearly 30 years. Half of economists in a recent poll have predicted an economic slowdown in the U.S. within the next year. Unresolved trade tensions between the U.S. and China have investors on edge about global economic growth.”
The World’s 10 Largest Economies by GDP
Unted States – $20.49 trillion (23.89%)
China – $13.61 trillion (15.86%)
Japan – $4.97 trillion (5.79%)
Germany – $4 trillion (4.66%)
United Kingdom – $2.83 trillion (3.29%)
France – $2.78 trillion (3.24%)
India – $2.73 trillion (3.18%)
Italy – $2.07 trillion (2.42%)
Brazil – $1.87 trillion (2.18%)
Canada – $1.71 trillion (1.99%)
“The nearest thing the global economy has to a doomsday clock ticked a little closer to midnight this week, triggering fear across financial markets.”
USAGOLD note: This FT ‘Big Read’ delves into the intricasies of the inverted yield curve covering those who support the notion that it is a reliable indicator of recession and those who do not. But for those who frequent our Live Daily Newsletter, the ultimate question might be: Does it predict anything about the gold price? To answer that question, we will put up the chart and let those with a sharp eye and persistence determine for themselves. Gold is presented in log scale.
“But even as high-probability risks — like the U.S.-China trade conflict — capture the minds of investors, there is a growing combination of lower-probability risks, so-called grey swan events, that could individually or in combination create even more heartburn for investors as the third quarter draws to a close.”
USAGOLD note: Ten grey swans. Ten good reasons to hedge your holdings with gold and silver. A wake-up call worth a quick review.
“. . . I’ve never wavered from the view that this would end badly. Never have I believed that manipulating and distorting markets would achieve anything but epic Bubbles and inevitable terrible hardship. I’ve not seen evidence to counter the view that the longer the global Bubble inflates the greater the downside risk (moreover, such risk grows exponentially over time). And not for one minute did I believe zero rates and QE would resolve deep financial and economic structural issues. Indeed, I have fully expected reckless monetary mismanagement to ensure a global crisis much beyond 2008. From my analytical perspective, the global Bubble has followed the worst-case scenario.”
USAGOLD note: In other words, we have yet to see the worst-case results from the worst-case scenario. Another highly recommended piece of analysis from Doug Noland.