“It is not just in Trump’s case that conventional rules no longer apply, they also appear to have been thrown out the window for precious metals in these first few weeks of 2017, namely that a strong US stock market means weak gold. Instead apparently strong economies, a record breaking stock market and recent highs for gold all seem to be able to exist in one realm of reality.”
MK note: Though the point is well-taken, that was a quick honeymoon.
A good deal of the buying, as reflected in the strong uptick in ETF volume, is among knowledgeable fund managers. Pushing that concern, in my opinion, is a growing belief that a coordinated devaluation of the dollar along the lines of the 1985 Plaza Accord might be in our collective futures. Many of the same circumstances that prevailed then are in place now, i.e., concern in both the U.S. and overseas about an overly strong dollar (including on the part of the Trump administration) and major capital flight in places like China and parts of Europe.
David Marsh, the highly respected advisor on foreign exchange to asset management firms, recently told CNBC that there will be a new “accord” in the next 12 to 24 months. The dollar, he says, is mid-stride in one of its strongest showings since the end of World War II, up 10% or more in each of the past three years. It is doing, he says, “exactly the opposite of what (President Donald) Trump says he wants.” He concludes, “I foresee it will carry on getting stronger for a year or so and then we will have a dollar collapse, just like we did in the early 1980s.”
The next G-7 meeting is scheduled for May in Italy, and with the Trump administration’s penchant for negotiating in full public view, I would suspect that any attempt at a new accord will be front and center with accompanying fireworks in the investment markets rather than something that evolves behind closed doors. We suspect in the meantime that a good many will follow the lead of analysts like David Marsh and get ahead of the potential dollar devaluation. An argument could be made that the recent increases in the gold price and ETF demand are a direct reaction to the possibility of a devaluation.
“China’s gold imports from Switzerland soared at the end of last year when Beijing was struggling to defend the yuan and incoming US President Donald Trump was casting grave doubts about Sino-US economic ties. The Swiss Federal Customs Administration said in January that its gold bullion exports to China rose to 158 tonnes in December from 30.6 tonnes in November, according to GoldSeek.com, a website for gold investors.”
MK note: Contrary to reports towards the end of last year, flows through the London-Zurich-Hong Kong-Shanghai gold pipeline are strong and steady. This article tells why. . . . .
What it could mean for gold.
by Michael J. Kosares
“But the chaotic start to the administration and what many see as its protectionist agenda have amplified fears of not only currency wars but a fully fledged trade confrontation that could be disastrous for the world economy.” Financial Times 2/2/2016
MK note: [OPINION] President Trump and National Trade Council head Peter Navarro have launched verbal assaults on the Japanese yen, Chinese yuan and the euro labeling all three undervalued the result of deliberate currency policies in the three countries. “With his statement [Mr Navarro] has in fact fired the next salvo in the currency war the US administration is currently conducting against the rest of the world,” says Ulrich Leuchtmann of Germany’s Commerzbank.
The fact of the matter is that the United States can no longer devalue the dollar as effortlessly (with the stroke of pen) as if the world were still on a dollar-based gold standard. In such a system, the United States could, and did, devalue the dollar by simply raising the official benchmark price of gold (1971,1973).
Now to carry out a true devaluation of the dollar against other currencies, it needs co-operation from the issuers of those currencies. Since that is not about to happen without considerable persuasion, the Trump administration will be left with tariffs and import taxes of one kind or another in order to achieve its goals with respect to U.S. trade imbalances. The end result will be a de facto devaluation of the dollar within the United States against goods and services, not necessarily against other currencies (as discussed here last week).
Since so many commodities are bought and sold in dollar terms, the price inflation will be exported to nations around the globe and injected into their economies. As noted in our clipped quote, there is considerable concern about the global trading system, but what that translates to in each of these nation states is a potential economic slowdown coupled with possible inflation. When you start thinking about the situation along these lines, it is not difficult to understand how Alan Greenspan came to the conclusion that we are headed for another period of stagflation, perhaps even runaway stagflation, reminiscent of the 1970s (when Ronald Reagan made famous the Misery Index, the combination of inflation and unemployment). Needless to say, under such inflation-driven circumstances, both gold demand and gold prices are likely to rise, both here and abroad, as they did in the 1970s.
Markets move on sentiment and expectations. At the moment, the sentiment is confused as most are having a hard time getting a clear read, but those who understand the power of market expectations have begun to load up on gold. You see the evidence in revived ETF demand (up roughly 1.2 million ounces in January) as well as demand from Asia, particularly China. Much of the market action and movement over the past several days has occurred during Chinese and European market hours, including last night. Today’s London morning benchmark was posted at $1224.05 – up about $12 from the trading level just before the posting.
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Previous posts on this subject (for those who would like to delve a little deeper):
Myth: The strong dollar policy means that the U.S government will do everything in its power to make the U.S. currency as good as gold.
Reality (as defined at Wikipedia): “The strong dollar policy is the United States economic policy based on the assumption that a strong exchange rate of the United States dollar is in the interests of the United States and the whole world. It is said to be also driven by a desire to encourage foreign bondholders to buy more Treasury securities. The United States Secretary of the Treasury occasionally states that the US supports a strong dollar. Since the implementation of this policy, the dollar has declined substantially. Despite this, the policy keeps inflation low, encourages foreign investment, and maintains the currency’s role in the global financial system.”
Whenever a U.S. secretary of Treasury utters the words “strong dollar policy,” the question immediately should be asked: “Strong against what?” As outlined in the Wikipedia definition immediately above, the intent of the policy is to make the dollar strong in terms of other currencies, not against goods and services, and for that reason, it is generally misunderstood.
In terms of purchasing power, the dollar is by far worse off today than it was 21 years ago when Robert Rubin first uttered those words as Treasury Secretary (and taken thereafter as self-explanatory). For certain, there have been periods when the dollar has strengthened against a broad basket of currencies, but to apply former senator Alan Simpson’s famous description of the U.S. economy to the dollar: “It is the healthiest horse in the glue factory.”
To illustrate the point I have three charts for you.
The first tells the long-term story on the U.S. dollar since 1913 and passage of the Federal Reserve Act which established the Federal Reserve System as the central bank of the United States and Federal Reserve notes, i.e., the dollar, as the national currency. The results in terms of the dollar’s purchasing power are worth noting. Since 1913, the U.S. dollar has lost 96% of its purchasing power when measured against the Consumer Price Index.
The second tells the long-term story on the U.S. dollar since 1971, the year the United States went off the gold standard, freed the dollar to float against other national currencies and ushered in the fiat dollar international monetary system. Since 1971, the U.S. dollar has lost 83.6% of its purchasing power when measured against the Consumer Price Index. Simultaneously, gold has appreciated 3428%. (at $1200/oz)
The third tells the story on the U.S. dollar since 1995, the year then Treasury Secretary Robert Rubin first used the phrase “strong dollar policy.” Since 1995, the U.S. dollar has lost almost 40% of its purchasing power when measured against the Consumer Price Index – a period by most accounts of generally benign inflation. Simultaneously, gold has appreciated 317%. (at $1200/oz)
Myth: The strong dollar policy means that the U.S government will do everything in its power to make the U.S. currency as good as gold.
Reality: The strong dollar policy is a rhetorical device used by Secretaries of the Treasury historically to keep the markets guessing about U.S. policies that will affect its relative value to other currencies and thereby encourage the flow of foreign capital into U.S. Treasuries (and finance U.S. deficits).
Here is the definition of the strong dollar policy per Wikipedia (emphasis added):
“The strong dollar policy is the United States economic policy based on the assumption that a strong exchange rate of the United States dollar is in the interests of the United States and the whole world. It is said to be also driven by a desire to encourage foreign bondholders to buy more Treasury securities. The United States Secretary of the Treasury occasionally states that the US supports a strong dollar. Since the implementation of this policy, the dollar has declined substantially. Despite this, the policy keeps inflation low, encourages foreign investment, and maintains the currency’s role in the global financial system.”
Note that the strong dollar policy is not based on the purchasing power of the dollar with respect to goods and services, the criteria by which most ordinary Americans judge the strength and stability of the dollar. So when incoming secretary of the Treasury Steven Mnuchin says he is (or is not) in favor of the strong dollar policy, he is talking about a world of relative, not absolute, values. Most of the major currencies are depreciating against goods and services and that could be documented by anyone who took the time to do so, but since 2011 it has appreciated against other major currencies.
Wikipedia is correct in explaining that a truly strong dollar would encourage dollar-denominated bond purchases, but that is only within the realm of relative currency values. Even then, the dollar is not always strong against all currencies all the time – another fact of economic life that can be easily documented if one were to take the time to do so. As a matter of fact, as we have shown on numerous occasions, the dollar, when measured by the Dollar Index, is in general long-term decline, which is another way of saying it is in long-term decline against other major currencies.
Thus, the Wikipedia definition is correct on that score as well. Once again, here is that chart, with apologies to those who have seen it before. Note too that gold by comparison is in a long term uptrend against the dollar (and most other currencies as well), making it a productive hedge and long-term alternative for private portfolio managers without a political or economic bias. If you are interested in long-term wealth preservation, you should simultaneously be interested in gold. The strong gold reality counteracts the strong dollar rhetoric, and that fact by itself, explains why historically American central bankers with few exceptions dislike gold. As the economic philosopher Joseph Schumpeter put it, “The modern mind dislikes gold because it blurts out unpleasant truths.”
Stay tuned. Part Two to follow. . . . . .
by Michael J. Kosares
IMPORTANT POST FOR LONG-TERM PORTFOLIO PLANNING
“Douglas Borthwick, managing director of Chapdelaine Foreign Exchange, argued in a note earlier this month that an incoming Trump administration, by throwing out the strong dollar policy, could use the currency as a linchpin in implementing its economic agenda: ‘With a removal of the Strong USD Policy, the US Dollar will weaken against its global counterparts. This will give the FED the ability to normalize US interest rates, as they can use the weaker USD and the resulting inflation as an excuse for raising rates. . .'”
MK note: We have come to an interesting crossroads for the gold market. Yesterday, vice-president elect Pence told Fox News that we now have a president who understands business and that a strong dollar hurts our exports. He made the inference that Trump would likely comment on the dollar regularly as president, something past presidents traditionally have shied away from doing.
Markets, as most of us know, move on sentiment as much as they do hard realities. Thus someone the stature of the U.S. president talking down the dollar is very important to market psychology – not just for gold but all markets. The Trump administration’s position has already had an effect on the gold market. Though gold has reacted rather modestly to Janet Yellen’s announcement two days ago of more interest rate hikes this year, it is nothing when compared to the waterfall drops following past announcements on the subject of higher rates.
Things have changed. . . . . .
MK note 2: As for the Fed using weak dollar sentiment as cover to boost rates, such increases are likely to stay behind the inflation curve. The quickest way to undermine, and in fact eliminate, a weak dollar policy would be to put rates high enough to create a positive real rate of return on dollar-based financial instruments. Real interest rates is what real money managers watch in terms of positioning their clients’ portfolios. I think, too, the Fed understands that such a policy would undermine the Trump administration’s economic program. The fact of the matter is that it would also undermine the Fed’s attempt to “normalize” interest rates.
Below are charts covering the historical real rate of return on gold and the dollar. With respect to the real of return, gold has done spectacularly well over the past decade and a half and probably a key reason why gold investment demand has continued to grow over the past several years despite the lower price.
Now the question becomes:
Has the Trump administration inadvertently conferred its blessing on the gold market?
Chart note: The extensions in the financial instruments’ bars above the CPI represent a positive real rate of return. When the CPI extends above the financial instrument, it represents a negative real rate of return. As you can see, at times gold’s real rate of return has been spectacular, as mentioned in the text above.
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“Long gold: ‘Our sense is that Mr. Trump doesn’t hold any core policy beliefs and is apt to change his mind as he sees fit. This will lead to more political and economy uncertainty,’ which is positive for gold, according to Einhorn.”
MK note: The “Long gold” is wedged-in among the ever-present list of stocks and sector plays. Einhorn is a long-time gold advocate owing to discussions he had with his grandfather when he was a youngster – discussions that stuck even after he became a fabled money manager.
by Michael J. Kosares
1. Don’t buy it because you need to make money; buy it because you need to protect the money you already have.
2. Don’t look at price as a barrier; look at it as an incentive.
3. Don’t buy its paper pretenders; buy the real thing in the form of coins and bullion.
4. Don’t fall prey to glitzy TV ads; do your due diligence instead.
5. Don’t allow naysayers to divert your interest; allow yourself the right to protect your interests as you see fit.
Mr. Kosares is the author of The ABCs of Gold Investing – How To Protect and Build Your Wealth with Gold, the widely-read introduction to gold ownership.
“Perhaps one of the clearest signs that a rally inspired by President-elect Donald Trump is starting to stall is shiny and yellow and is outperforming other assets by a healthy margin.”
MK note: Much of the gain thus far has been the result, in my opinion, of short covering, thus the direct effect on the price as determined on the COMEX and in the London over-the-counter market. Meanwhile, demand is building again in both the West and East. China is trying to contain imports but all that has done is to attach a high premium to the gold that is coming into the country. Over the past several days, the steadily rising price in the West has carried over to the East during overnight trading hours – a sign that demand has been strong at the Shanghai Fix. Shanghai demand is actual, physical demand as explained in detail here. In the United States, as reported here a couple of days ago, demand as reflected in U.S. Mint bullion coin sales (a bellwether for the overall market) is strong.
Gold is up 4.5% thus far this year and 6.6% from the $1128 December bottom (12/15/16).
“For now, the stock market is now much like Wile E. Coyote temporarily hovering just past the edge of a cliff. The moment of descent isn’t clear, but I believe it would be a mistake to climb onto his shoulders.”
MK note: Hussman says the markets are fully confined within another episode of speculative madness similar to past episodes of the same. It will likely produce the same destructive results. “As we enter 2017, the great risk for investors,” he says, “is not in missing out in an exhausted run that already rivals the 1929 and 2000 extremes, but in failing to contemplate a 50-60% market retreat over the completion of the current cycle.” I thought the metaphor he employs above particularly apt.
“So stocks and bonds have been a terrific investment. But what about the barbarous relic called gold. This is the investment that most people don’t understand and that banks and investment advisors avoid at any cost. Well this most hated investment has gone up 30 X in value between 1971 and today. And remember as opposed to the stock market, gold is far from the high which was $1,920 in 2011. At that point gold had multiplied 55 X. Since 1999, the Dow is down 62% against gold. Very few investors and no investment advisors know this. Nor do they realise that stock markets are in a long term secular downtrend against gold. This trend will not stop until stocks fall by another 90% against gold in the next few years. That will take the Dow/Gold ratio down to 1 to 1 where it was in 1980.
But more importantly, before the next gold bull market is over, gold will be up over 300 times since 1971, in today’s money. That will give a gold price of $10,000+ and a lot more in hyperinflationary money.”
MK note: Some will blanch at the prospect of $10,000 gold, even think it farfetched, but it is that word “hyperinflationary” that drives the big number von Greyerz attaches to a troy ounce of gold. One wonders how many in post-World War I Germany would have believed that a precious metal selling for about 87 marks per ounce in 1918, would sell five years later for over 118 billion marks per ounce. But it did. The investor who thought that he beat the system sufficiently and cashed-out of gold at 10,000 marks per ounce would have seen that money evaporate overnight under the harsh effects of the hyperinflation. Greyerz’ number might seem far-fetched, but not in a pricing framework when you are paying $50 for a coffee at Starbucks and $10,000 for a new suit at Jos. A Banks.
Here’s a graph we put together for our Gold Chartography 101 page on the gold’s performance during the Weimar Inflation in Germany. The numbers in left axis are not a misprint.
In order to fully understand the origins of the ghostly inflation apparition now haunting the financial markets, we need to go back to Alan Greenspan’s chairmanship of the Fed and the effects of globalization on prices. Let me post a quote from the economist James Galbraith from his book The Predator State chosen because it makes the point quickly and clearly and without a lot of unnecessary verbiage.
“After eighteen years at the helm of the Federal Reserve, during which time Greenspan was amply praised for keeping inflation under control, in retirement he writes that his accomplishment was not his doing. Rather he benefited from the collapse of the Soviet Union and the rise of China. And Greenspan is right. The collapse of the Soviet Union dumped huge supplies of industrial materials and of fuel – oil and natural gas – onto world markets, which depressed commodity prices. The rise of China, for its part, created a labor reserve at low dollar wages, against which no other low-skilled labor pool could effectively compete. With global commodity prices held down by one phenomenon and global labor costs by the other, global inflation was doomed.”
Greenspan himself mentioned his good fortune in this respect in Congressional testimony and various writings after his tenure at the Federal Reserve.
Now with the president-elect promising to introduce measures to essentially de-globalize the U.S. economy through various import restrictions, we could get an equal and opposite reaction. To what degree, remains to be determined though Ford’s decision to locate a manufacturing plant originally planned for Mexico in Michigan instead is an early and important example of what could become a wider trend. Keep in mind, too, that we do not know how this situation will affect the huge pool of money (quantitative easing) created during the post-crisis bailout of the banking industry. In short, Mr. Trump, knowingly or not, is in the early stages of standing a 20-year economic paradigm on its head. What forces it might unleash will be a huge X-factor in the weeks and months ahead.
With the New Year upside in gold looking pretty solid, we hearken back to a post made here December 10 featuring the following chart (with comments):
Here is what that chart looks like now with the December low in place at $1121/oz and the January turnaround – kicked off, I would guess, by aggressive short-covering, but likely now also driven by currency and longer-term inflation concerns. . . . .With gold currently trading in the vicinity of $1183, it is already up 5.5% from the December low.
We caution that just because gold has displayed a pattern in the past, it does not mean that same pattern or tendency will repeat itself in the future, so exercise due caution with this information.
. . .and after everything’s been stacked and counted, here is the final tally for 2016 on the primary investment markets:
1. Crude Oil –– +31%
2. Silver –– +15.2%
3. Commodities –– +11.6%
4. Dow Jones Industrial Average –– +11.5%
5. Gold –– +8.7%
6. Home Values –– +6.5%
7. U.S. Dollar –– +3.6%
After a solid year of the financial media pumping up stocks and the dollar and talking down gold and silver, stocks did only marginally better than gold and worse than silver, and the dollar didn’t even come close.
(Data sources: Bloomberg Commodities Index, Zillow Home Value Index, U.S. Dollar Index, Brent Crude Oil, Dow Jones Industrial Average, Gold Spot Forex, Silver Spot Forex)
Golden notable quotables for 12/29/2016. . .
“First, ‘record levels’ of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution.” – Lance Roberts, Real Investment Advice (Article: Records are records for a reason)
“During November, the UK (London) re-emerged as the main provider of gold to Switzerland, with the Swiss importing 48 tonnes of gold from London. This is the highest monthly gold import flow from the UK to Switzerland since last January. The second largest source of gold flowing into Switzerland during November was Hong Kong which provided 35 tonnes, with the UAE (Dubai) a distant third providing 16 tonnes, and the US sending just under 12 tonnes to the Swiss.” – Bullion Star
MK note: An old story. The ETFs are selling. The Chinese are buying. The gold is flowing East through the London–Switzerland–HongKong-Shanghai pipeline. The Chinese buy gold when the dollar price is falling.
“President-elect Donald Trump’s pick for budget chief, Mick Mulvaney, has been an active investor in gold and gold-mining stocks, often seen as a hedge against collapsing currency.The South Carolina Republican congressman has accused the Federal Reserve of debasing the value of the greenback and has praised bitcoin, an alternative currency. He held between $50,000 and $100,000 in precious metals as of the end of 2015, filings show.” – Noah Buhayer/Bloomberg
“Since the rate hike, gold prices have already risen a bit. This trend is on track to continue in the coming year, for a variety of reasons. For one thing, many experts believe as Donald Trump takes office it will strengthen the gold market.His proposed policies are likely to raise the national debt and increase inflation, which historically leads to a rise in precious metal values. There has also been an influx of commodities investments from China, which have driven copper and zinc up in the last few months, and stand poised to do the same for gold.” – Trevor Gerszt, NewsMax Finance
“[G]old has been a better investment than equities in recent times. Since the turn of the millennium, gold has returned over 300%, while the S&P 500 has returned 55.09%. In addition, the MSCI EAFE index, which represents the performance of large-cap and mid-cap stocks across 21 countries consisting of countries in Europe, the Pacific and the Middle East, has lost 5.21% since the turn of the millennium. If anything, the potential slump in gold should be seen an opportunity to add more gold to your portfolio for the long-term.” – Sam Alcock, The London Economic (Article: Why the potential gold slump will be temporary, hence presenting a buying opportunity)
MK note: The one thing about “potential slumps” is you don’t know when they are going to suddenly end – particularly in the gold market.
“Commodity experts and bullion traders feel that silver can trump gold in coming months as demand for the metal is increasing for solar panels and electronics sector. Demand for silver is increasing in the home décor and fashionable jewellery categories in the country which may push the price of the metal by almost 15-20% in 2017, feel the traders and analysts.”
MK note: Silver is up 14.5% in 2016 even after the sharp year-end correction. It has clearly outperformed gold which gained 7% this year as reported further down the page. Silver investors, we know from direct experience working with our clientele, view silver as a safe-haven alternative to gold with the added bonus of stronger upside potential (Experience also tells us it also has stronger downside potential.) I should add that silver also outperformed the stock market in 2016.
Silver sales at USAGOLD have steadily and markedly climbed year over year the past few years and we suspect that sales will be strong at the start of 2017 due to the currently low price level at around $16 per ounce. Last summer we experienced a strong increase in investor interest at the $16 to $18 price level. Then prices jumped to near $21 before correcting into the end of the year.
One of the more interesting points made toward the end of the linked article is that silver demand in India is likely to increase due to investor concerns that the government there will continue its war against gold ownership, and could attempt to curtail or stop imports. That war, we feel, is doomed to failure. India’s government is fighting thousands of years of culturally ingrained, deep attachment to gold. In the interim, however, practicality may carry the day and silver at some level would become, as the headline at the top suggests, the new gold in India.
If even a small amount of India’s massive gold interest were to migrate to silver, it could cause supply disruptions and premium increases here in the United States. We have seen before the hair trigger relationship between ramped up physical demand and premium increases. The physical silver market globally in terms of availability is not nearly as deep and liquid as gold, and a heavy source of new demand could become problematic. At the moment, premiums are higher toward the end of the year, but modestly so.
MK note: If 2016 was such a bad year for gold (which is what the financial press has been telling us for three months now), how is it that through the third quarter, physical gold investment demand posted its fourth best year in the past decade? (Top chart) How is it, too, that demand at the gold ETFs and mutual funds, a favorite measuring stick for the mainstream media, was up a solid 11 million ounces, or 15%+ on the year even after the strong third and fourth quarter draw downs? (Bottom chart)
As of this posting, gold is up 7% on the year despite the late year sell-off. The Dow Jones Industrial Average, amidst a media frenzy, is up 12.5%.
The 7% gain, assuming the market holds at this level, along with the investment demand increase represents the rest of the story on gold’s year. It wasn’t the best year on record, but, after all is said and done, it wasn’t all that bad either. With yield instruments paying precious little, that 7% return looks pretty good from a wealth management point of view.
One final point: Over the decade since the financial crisis began in 2007, the Dow is up 60%, and gold is up 78%. As you can see from the chart, demand went to a whole new level post-crisis and stayed there. This year’s resurgence under comparatively benign economic circumstances is worth noting.
“In the end, trees don’t grow to the sky, and few things go to zero. Rather, most phenomena turn out to be cyclical.” ― Howard Marks, Oaktree Capital
These charts are dedicated to those who understand the wisdom imparted above. Marks’ observation resides at the philosophical core of the enlightened gold owner. Why? Because he or she understands the cyclical certainty (or is it uncertainty?) of markets and the economy, indeed the cyclical certainty in the grand scheme of things of which the investment markets are only a small part.
“A true cycle,” says historian Arthur Schlesinger, “is self-generating. It cannot be determined, short of catastrophe, by external events. Wars, depressions, inflations may heighten or complicate moods, but the cycle itself rolls on, self-contained, self-sufficient and autonomous. . .The roots of cyclical self sufficiency lies deep in the natural life of humanity. There is a cyclical pattern in organic nature — in the tides, in the seasons, in night and day, in the systole and diastole of the human heart.”
At no point along the historical continuum are we ever at an end, nor are we ever at a beginning, and all along the way the twists and turns of the cycle will be sudden and unpredictable. That, in a nutshell, is why people own gold.
So it is that we can see the systole and diastole of the gold and dollar markets in the top chart showing the first (OBVERSE) and second (REVERSE) halves of 2016, as well as in the longer term relationship shown in the second chart.
In the end, the enlightened gold owner might buy into the latest investment fad and run with the crowd, if he or she so chooses. It is fundamentally better though to engage the madness of crowds with one’s safety net solidly in place.
I will leave you with a final observation from the famed investor, Bernard Baruch, one of the original Wall Street contrarians who made a fortune betting against the crowd. In the late 1920s, he became a gold owner because he was “commencing to have doubts about the currency.”
“Have you ever seen in some wood,” he asks, “on a sunny quiet day, a cloud of flying midges — thousands of them — hovering, apparently motionless, in a sunbeam? …Yes? …Well, did you ever see the whole flight — each mite apparently preserving its distance from all others — suddenly move, say three feet, to one side or the other? Well, what made them do that? A breeze? I said a quiet day. But try to recall — did you ever see them move directly back again in the same unison? Well, what made them do that? Great human mass movements are slower of inception but much more effective.”
“Europe has brought us a depression worse than 1929. It has led to entire peoples being broken and humiliated, like the Greeks, all for the sake of preserving the infernal instrument of the euro. This whole disaster has been adorned by a chain of lies, shouted ever louder because they are afraid that the colossal damage they have done will be discovered.”
–– Claudio Borghi, Catholic University of Milan
MK note: With home-grown events over the past few months dominating Americans’ thinking, most of us have forgotten the developing problems in Europe. These center mostly around the euro and the demanding economic matrix that goes with it. Borghi reminds us of what is at stake in Europe. Elements in Italy are pushing for a quick election as early as February, which no doubt will become a referendum on the euro. Germany will also conduct an election in February and its role in a larger Europe will certainly be an issue, and Brussels just put the clamps on Greece’s bailout program to what end no one knows. All of these events will engage nationalist sympathies and inclinations. Europe is about to be tested.
“Oil has been on a tear, and gold may be next, especially once this week’s anticipated Federal Reserve rate hike is behind us.”
MK note: Quietly, oil is up 27% since mid-November.
Economist Harry Dent predicts ‘once in a lifetime’ market crash, says Dow could plunge 17,000 points
“I think this is going to be a stock market peak of a lifetime followed by a crash very similar to the early 1930s. This happens once in a lifetime,” Dent Research Founder Harry Dent recently told CNBC’s “Futures Now.”
MK note: “Impossible,” you say? Think again.
In the period 1929 through 1932 the DJIA went from 380.33 at its height (Sept, 1929) to 42.84 at its low (July, 1932). That calculates to a nearly 90% loss of value in stocks based on the average. Never say “never.”
The chart below, courtesy of our friends at Macrotrends.net, illustrates both the depth of the loss and the length of time stocks remained mired in negative territory. It took 25 years for the DJIA to return to the 1929 high (in late 1954).
With respect to gold ownership as a means to wealth preservation, the investor need consider first not just what one might gain from it, but what one might lose by remaining “all-in” the stock market (or bond market for that matter). Second, one should consider that the need for gold rarely surfaces, until. . . .well, until it’s needed. Attempting to become diversified after the fact is not nearly as effective as taking the proper steps before. The period 2007-2011 is a good example of that tenet. Last, note that the DJIA was in a rocket ship trajectory in 1929 – euphoria was running unchecked – then without warning the hammer fell.
Diversify. . .and let the financial winds carry us where they may.
“Looking ahead, Credit Suisse argues against the view of many pundits that U.S. President-elect Donald Trump’s fiscal policies are likely to hurt gold. The market has factored in an expectation that a mix of U.S. tax cuts, deregulation and infrastructure spending will boost the economy, pushing up real interest rates and strengthening the U.S. dollar. ‘We counter that trade protectionism and anti-immigration policies are negative for growth and positive for inflation,’ Credit Suisse said.”
MK note: Since election day, the markets have reacted as if the Trump administration were likely to be a re-run of the Reagan years. “Stocks and the dollar,” reported Bloomberg recently, “have risen since the Nov. 8 presidential election on hopes that Trump’s advocacy of big tax cuts, increased defense spending and deregulation will usher in another period of prosperity. The coming change will be a ‘profound president-led ideological shift’ akin to Reagan’s, according to Bridgewater Associates founder Ray Dalio. Trump’s advisers and the billionaire himself have embraced the comparison.”
Though there are profound similarities between the two philosophically in terms of tax, defense and deregulation policy, the economic conditions Trump will face are the polar opposite of what Ronald Reagan faced in 1981. Investors, as a result, could be basing investment decisions on a false assumption.
When Reagan took office the United States was just coming off a disastrous encounter with runaway inflation. If inflation was going to be tamed, the interest rate would have to be pushed to a level higher than the inflation rate, something then-Fed Chairman Paul Volcker in fact accomplished. It killed inflation, restored dollar strength and touched off a long-term stock market rally.
This time around, the United States is coming off a brush with a disinflationary crisis that still threatens to tumble into full-scale deflation. Different medicine is required. In fact, there have already been rumblings that the Fed will be very careful to keep the interest rate under the inflation rate for the foreseeable future. The goal is to ignite inflation – an outcome that by definition would undermine the purchasing power of the dollar. How the markets will perform under such circumstances remains to be seen, but already some analysts are predicting a return to a 1970s-style stagflation – an environment that produced a bear market in stocks and bonds and a bull market in precious metals, quite the opposite of what markets are signaling at this point in time. (The bond market, thus far, stands alone among primary investment markets as reacting according to the historical script.)
Two different worlds – Reagan’s and Trump’s – and the incongruity of market expectations when measured against the historical record is telling. Eventually the financial markets will come down from the present euphoria and begin to consider what the odds-on economic reality will look like for 2017 and thereafter. Credit Suisse may be on to something.
“[Officials] fear that Chinese corporations and citizens will decide en masse that they would be better off taking their money abroad to buy companies or invest in gold, stocks or real estate. Such capital flight could sap the liquidity that is required to keep China’s bubble from popping.”
MK note: China has “sent its printing presses into overdrive,” says Financial Times columnist James Kynge. So what’s next? Some interesting history and conjecture in this op-ed.
MK note: This is an interesting video clip – CNBC interviewing “The Big Short” author, the highly-respected Michael Lewis. Lewis makes reference to the very same problem that Steven Hawking raised in his op-ed in The Guardian over the weekend, i.e., privatizing profits and socializing losses. Socialism for “elite Wall Street guys,” as Lewis calls it. I am not sure that the Trump administration intends to roll back the Volcker Rule, a worry Lewis expresses in this interview. In fact, Trump has talked about going the whole nine yards and re-introducing a modern version of Glass-Steagall which, until it was repealed in 1999, kept commercial banks from indulging in the kind of speculative activities that almost brought the house down in 2007-2009. Unless something has drastically changed, Glass-Steagall is the exact opposite of where Lewis thinks Trump stands. Worth watching. Three minutes and you become a bit more well-informed.
Investors push November Gold Eagle sales to strongest month of 2016 and second best over past three years
MK note: We talk a lot about the disconnect between the paper pricing of gold and silver on the commodities exchanges and the demand for physical metal. We just had another example of that in November. As the price dropped, investors loaded up and they continue to load up – 2016’s best month and the second best over the last three years. Premiums on gold and silver American Eagles are rising as we go into year end. We just had another premium increase on gold Eagles yesterday.
In addition, to the day-to-day problem of bullion coin pricing, there is an additional, even deeper, problem and that is the long-term viability of the mining industry with respect to production. In a recent Financial Times article, Mark Bristow of the globally important Randgold mine operator, says that supply shortages are “inevitable unless some major discoveries of large, high grade ore bodies are suddenly made which frankly seems a remote possibility.” He says, “for the first time in history, gold supply into the future is under enormous pressure.” On top of the general decline in global production, there is another important factor with long term implications for new mine supply. Two of the largest producers, China (#1) and Russia (#3), nationalize their production in a purposeful attempt, like all gold owners, to diversify from paper currencies.
This is something for the long-term gold investor to seriously contemplate. It is not a small thing and is not something that is going to miraculously resolve itself at some turn down the road. When you blend into the analysis, that the gaps between production and consumption need to somehow be made-up from above-ground sources, it adds even more question marks for bullion investors. Central banks, an historical source of supply for decades, switched over to net buyers in 2010 and never looked back.
Someday the disconnect is going to resolve itself and when it does the old saying “he who owns the gold makes the rules” is going to ring truer than ever.
“Donald Trump sold all of his stock holdings in June, a transition spokesman said Tuesday, potentially helping the president-elect avoid some conflicts of interest when he takes office in January.”
MK note: Either that or he might have been worried about the bubble bursting. . . . . Can a president say that?
“[Apparently] the pattern of fading a potential crisis and then scrambling to cover and get long when everyone takes a breath and realizes that this time is not the apocalypse either still holds more than ever. I can’t justify any of this. The lesson investors and traders are getting is that everything is a buying opportunity and you need to not miss the boat. Brexit? Bullish. Trump winning the election? Bullish. Italy saying no to the referendum and the Prime Minister handing in his resignation? Bullish. Heck, all we need is a coup d’etat in India and the entire Belgian banking system to go kablooey and the S&P 500 will be at 3,000 by Christmas Eve.”
–– Michael Block, Rhino Trading
MK note: Well, a coup d’etat in India might be a bit much, though the millions who have had their cash holdings unceremoniously and without warning demonetized by government mandate might think otherwise. . . . . . . The quote above came in too late to make our “Reflections on the Election” newsletter yesterday. It definitely would have made it and probably near the top of the page had I seen it before publication. To express the same sentiment about gold, wherever in the above you see the word “Bullish” simply substitute the word “Bearish.” And add to the conclusion “. . .and gold would be at $150 by Christmas Eve.” . . . . . . . We live in odd times getting odder by the day.
“Donald Trump and Brexit shocked most of the world in 2016. But not readers of last year’s Bloomberg Pessimist’s Guide, which warned that the unthinkable could happen in both cases. Now the authors are turning their attention to 2017.”
MK note: The “Guide” offers a long list of reasons why you might want to make sure you at least have a respectable portion of your portfolio in precious metals. I would have to go through it again, but I do not recall even a mention of the potential disintegration of Italy’s banking system. All of which raises a point: With everything the authors mentioned, there are any number of black swans circling the global economy any one of which could land unexpectedly. At any rate, if you can plow your way through it, this presentation is bound to unnerve even the most hardened gold owner/veteran. If that happens, give us a call. We have the proper medicine and, at the moment, the price is right.
“China has curbed gold imports in the wake of government attempts to clamp down on capital leaving the country, according to traders and bankers. Some banks with licences have recently had difficulty obtaining approval to import gold, they said — a move tied to China’s attempts to stop a weakening renminbi by tightening outflows of dollars, the banks added.”
(1) Until we get hard numbers on what this means in terms of imports, these curbs are so much whistling in the wind with respect to overall demand. We should not forget that China’s stated aim is to build its official sector reserves and the stock of gold among the Chinese people. The curbs might end up putting a temporary lid on the already high levels of demand, but, then again, it might also have no effect at all – a ham-handed attempt to stop a gold buying panic within China’s borders.
(2) The bigger story here is China’s attempt to keep capital from leaving the country – something it shares with a good many emerging countries at this juncture – and the direct effect it is having on the U.S. Treasuries market. China is selling Treasuries to offset capital flight and a rapidly weakening yuan. Bloomberg is reporting today that global bonds are suffering their worst monthly meltdown ever with $1.7 trillion in capital evaporating from the international asset pool. [LINK] That’s a major number and a major concern for the incoming Trump administration even as Wall Street parties-on like nothing unusual is going on.
(3) The scary part of this is that the Fed may have already lost control of interest rates. China, Japan and Saudi Arabia, three of the largest holders of U.S. Treasury paper, are now net sellers of U.S. government paper.