NEWS &VIEWS
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 47th year in the gold business

JULY 2020


 “Mphm!”
Gold ownership as a lifestyle decision

“It is related of the illustrious Sandy McHoots that when, on the occasion of winning the British Open Championship, he was interviewed by reporters from the leading daily papers as to his views on Tariff Reform, Bimetallism, the Trial by Jury System, and the Modern Crave for Dancing, all they could extract from him was the single word ‘Mphm!’ Having uttered which he shouldered his bag and went home to tea. A great man. I wish there were more like him.” – P.G. Wodehouse

Source: The Strand, November 1921

These days opening the morning newspaper or switching on the evening news can be akin to an assault on mind and senses, as the media compete daily to see who will do the best job of ‘shocking and awing’ us. The sensual bombardment has risen to a new level upon the 2020’s visitation of the pandemic – as we all know. Quite often, we let that assault get the better of us – the blood pressure rises and the mood sours. Sandy McHoots, as Wodehouse describes him in the short profile quoted above, harbored a healthy, well-cultivated disdain for that sort of thing. My guess is that McHoots was not just the greatest living exponent of golf, he was also a gold owner.  How could it be otherwise?

Though rarely discussed, gold ownership has as much to do with personal philosophy and how we wish to conduct our lives as it does finance and economics. In many ways, it is a rational portfolio decision that suits the times, but it is also a lifestyle decision that provides some peace of mind no matter what happens with the pandemic, the latest mania on Wall Street, or the election-year machinations in Washington D.C. As Richard Russell, the now-deceased editor of the Dow Theory Letters once put it, “I still sleep better at night knowing that I hold some gold. If or when everything else falls apart, gold will still be unquestioned wealth.”

In an article published in Vanity Fair magazine a few years ago, writer Matthew Hart captured in one short paragraph the essence of gold ownership:

“An ounce of gold cost $271 in 2001. Ten years later it reached $1,896 – an increase of almost 700 percent. On the way, it passed through some of the stormiest periods of recent history, when banks collapsed and currencies shivered. The gold price fed on these calamities. In a way, it came to stand for them: it was the re-discovered idol at a time when other gods were falling in a heap of subprime mortgages and credit default swaps and derivative products too complicated to even understand. Against these, gold shone with the placid certainty of received tradition. Honored through the ages, the standard of wealth, the original money, the safe haven. The value of gold was axiomatic. This view depends on a concept of gold as unchanging and unchanged—nature’s hard asset.”

You should not buy gold because you need to make money, but to protect the money you already have. Don’t look at the price at any given point in time as a barrier but as an incentive – especially if it is needed to fill a vacancy in your portfolio. Don’t buy the paper pretenders, but the real thing in the form of coins and bullion. To do otherwise is to plug into the financial system you are trying to hedge. Don’t fall prey to glitzy television ads or slick websites, do your due diligence instead. It will pay dividends beyond what you might imagine. And last, do not allow the naysayers in your circle of friends and associates divert your interest from the task at hand. Allow yourself instead to pursue your interests as you see fit.

Summer doldrums turned upside down

With everything else that is going on in the economy and financial markets, it is easy to overlook the fact that we are heading into the summer doldrums – a time historically when demand for precious metals sags, prices typically stay in a range, and dip-buyers take whatever opportunities might present themselves. Then again, as unpredictable as markets have become of late, anything could happen – including a summer rally in precious metals prices.

As illustrated in the charts below, there has been a clear change of direction in sentiment annually from the 185-195 day mark – midway in the year. So far this summer, though, in a repeat of last summer, gold and silver have broken with tradition by turning in a strong June, as shown in the third chart. Since the beginning of May when the doldrums officially began through the end of June, gold went from $1768 to $1783 – a 5.6% gain.  Silver has had a significantly better early summer – up 21.6% since the beginning of May going from $14.97 to $18.20.

If the rest of 2020 plays out like 2019, we could be in for an interesting second half of the year. In the final six months of last year, gold appreciated 9.5% from $1385 to $1512 per ounce.  Silver did even better – rising almost 18% from $15.15 to $17.86.

gold seasonal chart 10 year average
line chart showing silver seasonality 10-year average

overlay chart showing gold's 2020 performance against seasonal averages - a breakout is in motion

Charts courtesy of GoldChartsRUs/Nick Laird

Big banks – led by Bank of America – see a big future for gold

One of the more pleasant surprises accompanying gold’s rally thus far this year has been generally positive outlook voiced by several prominent funds and institutions. Here is a sampling of those bullish forecasts beginning with Bank of America’s recent call for $3000 gold over the next 18 months.

Bank of America
Bank of America recently upped its forecast for gold over the next 18 months to $3000 per ounce.  “If you put the three together – extremely lax fiscal policy, extremely lax monetary policy, and a huge increase in bank deposits,” says Francisco Blanch, head of derivatives research at the Bank of America, in a recent Bloomberg interview, ” I think there is a pretty good chance here we will see a big rotation into gold driving prices a lot higher. Investors are confused. They do not know what to do with their asset allocations and I think a lot of them will choose to go for the yellow metal as an alternative to cash in their portfolios … and by the way when I say investors, I don’t just mean retail investors, I also think institutional investors are going to make that choice.”  Blanch forecasts a return of inflation pointing out that the Fed has “done in 18 days what it took almost nine months to do in 2008 and 2009.”

Credit Suisse
The summer advance in both metals is most directly related to the economic ill-effects of the coronavirus and the stimulus/rescue programs launched by central banks and governments around the world to combat it.  “With 10yr US real yields threatening to break lower,” says Credit Suisse in a report cited at FXStreet, “we look for gold to correspondingly break higher from its range above $1765 to confirm a resumption of its core bull trend with resistance seen at $1796/1803 next. … Big picture, we continue to eventually look for new highs above $1921, with resistance then seen next at $2000, then $2075/80.” 

BlackRock
BlackRock is seen as the new Goldman in the sense that it is the new dominating presence in the financial markets. What they have to say about gold, therefore, is worth noting. Like Goldman (Please see below), BlackRock is positive on gold saying in a client advisory (Golden Resilience Rules) it sees “structural tailwinds that could boost gold.” Anyone who has purchased gold over the last few years will attest to the tailwinds pushing the metal. BlackRock holds out the prospect that there is more to come: “While gold supply has fallen, investment demand for gold has spiked. Investors allocated $14.8B to gold ETPs in Q1 2020 –the largest quarter for inflows since records began in 2011. April was the largest single month on record for gold ETP inflows, with investors adding a further $9.2B, and 2019 was the tenth successive year of net positive purchases of gold by central banks. This demand has helped offset some of gold’s Q1 losses in the jewelry and technology sectors due to industry stoppages. We expect demand from investors and central banks to remain strong over 2020; combined with short-term supply pressures, this could make gold increasingly attractive.”

PIMCO
Pimco joins the list of major financial firms incorporating gold in their portfolio mix. “One thing we’ve done is to start looking at gold,” says Geraldine Sundstrom, portfolio manager, asset allocation at Pacific Investment Management Company, as she explains how the firm is preparing its portfolio in the current market. Sundstrom made the comment in an interview with Bloomberg’s Francine Lacqua.

Goldman Sachs
Goldman recently upgraded its forecast on gold to $2000 per ounce and silver $22 per ounce based on fears of future dollar debasement. “In 2020,” reports Goldman Sachs in a recent client advisory reviewed at ZeroHedge, “the virus has led to unprecedented fiscal and monetary stimulus. It remains unclear how much more stimulus will be deployed by DM governments, how the resulting deficits will translate into higher taxes down the road, and how long monetary policy will remain ultra-loose. Finally, it is unclear whether the crisis leads to second round shocks, such as social unrest, political volatility, or rising international tensions. In such an environment, demand for defensive assets (gold in particular) will continue to expand, in our view.” It goes on to say that “our economists expect inflation over the next 5 years to average 1.73% vs current market pricing of 1.02%. Therefore, real rates in the US are expected to continue to fall, increasing debasement concerns and putting upward pressure on gold.”

table showing gold ETF flows by country May 2020

Table courtesy of the World Gold Council

The strong showing in gold ETF flows the first five months of the year is a reflection of continued interest in gold bullion among funds and institutions hedging an array of economic, financial, and geopolitical concerns. United States stockpiles were up a strong 20.6% in May.  Also, note the growing interest in various European countries and Mainland China.  At 3510 total metric tonnes, ETF stockpiles globally now exceed the official gold reserves of every nation on earth except the United States.

Editor’s note:  Wall Street banks and hedge funds buy gold through ETFs for reasons having to do with convenience and storing/insuring large amounts of metal. A good many Main Street investors, though, still prefer direct ownership in the form of coins and bullion for reasons explained by DoubleLine’s Jeff Gundlach here.

(More below)


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Gold has had a very good year and it’s only half over

Gold Hedger Positions
Gold = Gold hedger positions (Last: -287292)
Red = Gold hedger net as % of Open Interest (Last: -54)

overlay line chart from SentimenTrader showing gold hedgers positions leading gold price

Click to enlarge

by Jason Goepfert, SentimenTrader

Tech isn’t the only asset having a good half-year – gold is, too.

Through about the half-way point of 2020, gold has returned more than 16% and is at its highs for the year. Meanwhile, it suffered only a small drawdown from where it closed 2019. Momentum is a powerful thing, and when gold had good years, it tended to keep going. Over the next few months, gold tended to keep rallying, with only 4 out of 18 years showing a substantial decline in the months ahead.

One concern is that ‘smart money’ hedgers are betting against the metal, holding more than 50% of open interest net short, which means that speculators are heavily long. This has been an issue in recent years, but not so much historically.

The fact that gold is still hitting new highs despite signs of high optimism earlier this year is a good sign. If gold can continue to hold ground despite high optimism, then it suggests a long-term positive market environment much like the mid-2000s. There are some minor shorter-term negatives; if those can calm down in the weeks ahead, then it should present a better risk/reward for the metal heading into the late summer.”

Editor’s note: We always appreciate the creative analysis and viewpoint Goepfert brings to the table on a range of investments and economic issues – including gold – offered at his website linked above.

Dollar’s erratic performance raises eyebrows among prominent analysts

One of the oddities in the current market mix has been the erratic – some would say bipolar – performance of the dollar since the pandemic became a major problem at the beginning of the year.  As you can see in the chart below, gold and the dollar index moved higher in tandem from late 2019 as the two safe-haven investment vehicles most in demand. Since the dollar’s mid-March peak, though, they have begun to move in opposite directions indicating that their decades-long inverse correlation might be coming back into play.

overlay line chart showing the US dollar index and gold performance 2017 to presentSources:  ICE Benchmark Administration, St. Louis Federal Reserve [FRED]

Stephen Roach, the widely followed economist, and Yale University senior fellow, recently told MarketWatch that a sharp deterioration of the U.S. dollar “could be a very near-term phenomenon” not an event that looms off in the distance. “I do think,” he said, “it’s something that happens sooner rather than later.”

Bloomberg’s widely-followed opinion columnist John Authers offers a similar warning. “It looks as though the time for a renewed dose of dollar weakness is here,” he says. “If it happens, that will be great news for many.  On both a real basis (taking inflation in different countries into account) and in nominal terms, the dollar is roughly where it was 20 years ago. After various switchbacks during the shocks of the first half of this year, it also appears to be in a downward trend.” Authers sees a weaker dollar as something the Trump administration wants and the Fed in an election year has taken measures to accommodate.

We leave the final word on the matter to Hugh Hendry, the outspoken British fund manager. “[W]ith overseas nations printing central-bank reserves to buy dollar assets,” he warns in his newly-released advisory, The Dawn of Chaos, “and with banks and credit markets now uncomfortable with owning Treasuries, and what with a podcast star running the Fed, I can see US stock and gold prices rising considerably higher and volatility exploding to the upside … I can see the dawn of CHAOS, people, and it’s going to change the course of history once and for all!” Hendry believes a massive devaluation of the dollar is required saying “[i]f The Fed doesn’t change then the world’s going to snap.”


Scientists discover new structure in gold
that only exists at extreme states

Cartoon image of Dr. MoneyWise with pointer“Scientists have just discovered something new about gold. When extreme crushing pressure is applied quickly, over mere nanoseconds, the element’s atomic structure changes, becoming more similar to metals harder than gold.” – Michelle Starr, ScienceAlert

Dr. Moneywise says: History teaches that under the crushing pressure of a financial meltdown gold hardens the portfolio, makes it more resilient!


Moral hazard as a permanent built-in market feature (Think tulips ……)

“If markets no longer have moorings to the economy,” writes Jim Bianco in a Bloomberg opinion piece, “then investment money lacks consequences and purposely acts aggressively to a point that seems reckless. This further enhances its impact on markets.” The old saying – “Everything is fine until it isn’t” – comes to mind. The question is not if the Fed will conduct a bailout, but whether or not it is going to accelerate the bailout already in progress. Moral hazard in this scenario becomes a permanent, built-in feature of the market until, we gather, the whole thing blows up in one very large seismic event.

Think tulipomania ……

During the Dutch Tulipmania, the price of one special, rare type of tulip bulb called Semper Augustus sold for 1000 guilders in 1623, 1200 guilders in 1624, 2000 guilders in 1625, and 5500 guilders in 1637. Shortly thereafter, the bottom fell out of the market and prices plummeted to 1/200 of their peak price – a mere 27 guilders. In the artwork above an individual, portrayed in fool’s garment, is shown trading a hefty pouch of gold for a handful of tulip bulbs. It is no mystery who got the better part of that bargain. History teaches us that no era is immune to financial mania including our own. As a matter of fact, a good many believe that we are fully immersed in a stock market mania right now.

Related please see: Extraordinary Popular Delusions And The Madness Of Crowds / Charles Mackay / 1841


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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 accuracy, timeliness, or completeness of the information found here. The views and opinions expressed at USAGOLD are those of the authors and do not necessarily reflect the official policy or position of USAGOLD. Any content provided by our bloggers or authors is solely their opinion and is not intended to malign any religion, ethnic group, club, organization, company, individual, or anyone or anything.


Michael J. Kosares is the founder of USAGOLD and the author of The ABCs of Gold Investing – How to Protect and Build Your Wealth With Gold. He is also editor and commentator for USAGOLD’s Live Daily Newsletter and editor of the News & Views monthly newsletter.

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