Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 46th year in the gold business
“There has been a dramatic change in sentiment.” – Adrian Day
Summer doldrums turned upside down
Gold’s June upturn separates 2019 from the pack
The summer months historically present a buying opportunity in precious metals as illustrated in the charts shown below. In the past, 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, gold has broken with tradition by turning in a strong June, as shown in the third chart.
“Gold trading usually gives pundits, dealers, and investors a break at some point over the summer,” observes Adrian Ash at BullionVault. “But like 2007, 2008, 2009, 2011 and 2016…this year is proving no time to take your eye off the market. And if 2019 is going to see an old skool summer lull in gold trading, it won’t feel much like a discount up at these prices.” With a range of economic and geopolitical issues preying on investor psychology – particularly at the funds and institutions that have fueled the upside this year – the summer of 2019 might go down as one of those years when we bypass the annual slowdown. Last year, gold hit a low of $1178 in mid-August. By December 31st, it was trading at the $1280 mark.
Charts courtesy of GoldChartsRUs/Nick Laird
‘Expect markets to keep singing gold praises’
A quick run-down on gold’s performance in a select group of currencies over the past twelve months as of the end of June, tells the story of rapidly evolving change in attitude among global investors. Over the past year, gold is up 15.7% in euros, 17.1% in Chinese yuan, 10.2% in Japanese yen, 13.6% in Indian rupee and 16.3% in the yuan. For comparison purposes, gold is up 12.8% in the U.S. dollar.
That change in attitude extends beyond the citizenry to central banks pursuing gold acquisition policies of their own. “Net buying by central banks,” reports the World Gold Council in Gold Demand Trends, “reached 145.5 tonnes in Q1, 68% higher y-o-y. This is the highest volume of Q1 net purchases since 2013 (179.1 tonnes), comfortably exceeding the five-year quarterly average of 129.2 tonnes. On a rolling four-quarter basis, demand reached a record high for our data series of 715.7 tonnes.”
“These days,” says Financial Times’ Lex columnist, “it is not dollars that emerging countries feel they have to hold. They want gold, and plenty of it. Since the first quarter of 2015, central banks in China, Russia, India and Turkey have boosted their gold holdings by two-thirds to 4,960 tonnes. Diplomatic and trade rows with the US explain some of this buying. There is a move to avoid buying dollars for their foreign exchange reserves. . . US interest rates are probably headed down. That move should depress the dollar against other currencies. Expect markets to keep singing gold’s praises.”
Chart courtesy of World Gold Council
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Trump dollar devaluation could send gold back to record highs
“China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!” – Donald Trump
The President is many things to many people, but the one thing he is not is naive enough to allow his adversaries to use currency depreciation as a means to circumvent the sting of tariffs. He would rather fight fire with fire through a devaluation of the dollar. For that to occur, though, he will need the co-operation of the Fed – hence the heavy pressure for easy money policies.
“Much of what is going on right now recalls the early 1970s,” writes Martin Wolf in a Financial Times editorial, “an amoral US president (then Richard Nixon) determined to achieve re-election, pressured the Federal Reserve chairman (then Arthur Burns) to deliver an economic boom. He also launched a trade war, via devaluation and protection. A decade of global disorder ensued. This sounds rather familiar, does it not? In the late 1960s, few expected the inflation of the 1970s.” The few who did, though, profited enormously by purchasing gold at $35 prior to the devaluation and holding it through the tumultuous decade that followed. Gold rose nearly 25 times.
Though almost no one expects an uptrend of that magnitude for gold in the 2020s, Forex Live‘s Adam Button offers a framework by which gold might return to the record highs of 2011. “If the choice is between gold or a bond that yields 5% that’s one thing but the balance changes when it’s gold versus something that yields nothing,” he says. “Add on the chance of more QE, a currency war or a real war and gold looks better and better. It’s not going to be a straight line but we’re back in an easing cycle. The last easing cycle ended with gold at $1900. If central bank easing unfolds as expected, we will get back there. If there’s a recession or war, it will go even higher.”
Wealthy Americans fret about finances
Image by TheVisualCapitalist/Jeff Desjardins
“Even relatively wealthy Americans are so worried about their finances that it’s affecting their mental and physical health,” says Bloomberg’s Lananh Nguyen. “That’s one of the findings in a Bank of America Corp. survey of more than 1,000 people in the U.S. who have enough investable money to qualify as “mass affluent.” Financial concerns affected the mental health of 59% of respondents, while 56% said their physical health has been hurt.” One wonders how many among that 59% are properly diversified – and by that, we mean with gold and silver as part of the portfolio mix. (Too many see diversification as the proper mix between stocks and bonds.)
“You’d be surprised,” Laurie Kamhi, managing director of a fund that serves entrepreneurs and executives, recently told Financial Times “at how many of them invest in bars as a way to store money.” In that same article, Brent Armstrong, a partner at Weatherly Asset Management which caters to clients $2 million to $25 million in assets, says gold is a unique commodity. “We can look at its use in jewelry and electronic products,” he says, “but it’s also been a human emotional store of value for thousands of years.”
Money managers, by and large, tend to focus on the bottom line, i.e., the tangible return on investment. With gold, though, there is also an intangible reward – peace of mind. In the end, there is much to be said for that quality of the precious metals which addresses the basic need for a reliable store of wealth in financially challenging and uncertain times. Want less stress – or no stress? Diversify and let others fret about their finances.
Inverted yield curve launched two gold bull markets since 2000
“The indicator on the bottom of this chart,” says Wall Street Window‘s Mike Swanson, “is the gap between the 3-month and 10-year US Treasury bond. As you can see it is now below zero, which means that the interest rate on the 3-month bond is higher than that of the 10-year. This is the very definition of an inverted yield curve and forecasts a future slowdown in the economy and future interest rate cuts from the Federal Reserve. Now as you can see this has happened twice in the past twenty years and both times it did gold soon broke out of a long-term resistance level to launch big massive gold bull runs that lasted for years.”
PIMCO analytical tool predicts higher gold prices
PIMCO, the bond fund, has developed an analytical tool that tracks “the relationship between gold prices and interest-rate yields,” writes Lauren Silva Laughlin in the Wall Street Journal’s Heard on the Street column. “[It] concludes that for every 1 percentage point decline in inflation-adjusted yields, gold prices should move up by roughly 30%. In that light, the recent jump in gold prices looks fairly tame. Since the end of October, inflation-adjusted yields on 10-year Treasurys have fallen roughly 0.9 percentage point, while gold is only up about 13%, PIMCO notes. The fund manager figures gold should have risen 20% to 30% in total based on the yield movement.” At the end of October gold was trading at $1215 per ounce. For gold to reflect PIMCO’s projected gains, it would need to be priced in the $1450 – $1575 range.
“If I had to pick my favorite for the next 12 to 24 months, it would be gold. If it goes to $1400, it goes to $1700 rather quickly. When you break something like that [the 75-year expansion of globalization and trade], a lot of times the consequences won’t be seen at first. It might be seen one year, two years, three years later. . . So that would make one think that it’s possible that we might go into a recession or make one think that it would make rates go back toward the zero bound level and of course in a situation like that gold is going to scream.” – Paul Tudor Jones, Bloomberg interview 6/12/2019
“Gold prices could outperform a lot of assets in the coming months. In fact, don’t rule out gold going for even $2,000 per ounce. The case for owning gold keeps getting stronger. You really potentially be making a big mistake if you ignore the yellow precious metal. Why be so bullish on gold? Well, there are a few factors that could raise the price of gold, including uncertainty, volatility, low-interest rates, and money devaluation. And right now, a lot of these factors are coming into play, which could lead to gold prices skyrocketing.” – The Lombardi Letter
“Although we have not had a Fed rate cut exactly yet, we have expectations that rates are going to go lower particularly real interest rates (the nominal interest rate minus inflation) and so that typically means gold’s price is on the rise and I think this move is here to stay.” – Will Rhind, Graniteshares [Yahoo interview]
“The moral of the story is that nobody should be complacent in these times when recession risk is so high, especially because the coming recession is likely to set off a global cluster bomb of dangerous bubbles and debt. The current probability of a recession is the same as it was during the Big Short heyday of 2007 when subprime was blowing up – just let that sink in for a minute. Do you think ‘this time will be different’? How can it be different when we didn’t learn from our mistakes and have continued binging on debt and inflating new bubbles?! Anyone who believes that ‘this time will be different’ is seriously delusional and will be taught a very tough lesson in the not-too-distant future.” – Jesse Colombo, Real Investment Advice
“Well, my recommendation is, since we came off the gold standard in ’71, put yourself on the gold standard. So, I’m a very simple man. I save gold and silver coins. I have no ETFs. I don’t have savings. I keep my money out of the banking system. So, I’m on the gold standard. I operate outside the banking system. And I’m accountable. I am responsible for my own life. Trump’s my friend. I don’t expect him to take care of me, my God. All these people, Social Security we know is going bust. It’s got no money. I think 78 cents of every dollar collected in taxes now goes to entitlement programs or the debt. We can’t keep functioning like this.” – Robert Kiyosaki, Rich Dad Poor Dad
“I find that for me, being a history buff makes it almost impossible not to be a believer in the metal that has been a fixture and sign of value and wealth since ancient times. I am a gold bug and have been since I first started in the commodities business in the early 1980s. There is no other asset that gives a person the same feeling than gold. Holding a kilo bar of the yellow metal is a feeling that no other investment can elicit.” – Andrew Hecht, Seeking Alpha
“I reckon that puts us in a very interesting position for the next 18 months. Trade wars will remain a major distraction and concern – whatever happened in Osaka over the weekend, about the only thing we can confirm is nothing is really fixed! Instead, the dominant factor in coming months could be the US Federal Reserve – and how it is likely to come under increasing pressure from Trump, who is now in full electioneering mode. That puts a whole new complexion on the Game of Markets.“ – Bill Blain, Morning Porridge
“The ‘threat’ is best seen through the emergence of exchange-traded funds (ETFs), which allow investors to get a proxy physical gold exposure through an investment via their stockbroker. In truth, these products are, in many cases, more expensive than trading and storing physical gold (especially for larger investors with a long-term investment time frame), have less trading flexibility, and are less secure than owning real physical gold.” – Jordan Eliseo, ABC Bullion/Australia
“It took the United States 193 years to accumulate its first trillion dollars of federal debt—the gross debt, as it’s called. We will add that much in the current fiscal year alone. All told, the government owes $21.5 trillion, give or take a few careless tens of billions—that works out to $65,885 for each American. It’s the ease of borrowing that drives the growth in federal IOUs. The remote political cause of this predicament is the ideology of statism. In Washington, this takes the form of tax and tax, spend and spend, elect and elect; on Wall Street, it’s found in too-big-to-fail, a virtually socialized mortgage market, and an overreaching, manipulative central bank.” – James Grant, Time To Worry, The Weekly Standard; (Also see Grant’s Interest Rate Observer)
“I believe this breakout is the real deal and the resumption of the bull market in gold is finally upon us. I have no idea how high gold can go, but there is no shortage of reasons to cause folks to want to own some, although I’m not going to bore everyone by reciting all the potential catalysts once again. Now that gold is in motion, it will create more buying interest. Even though everyone claims they want to buy assets on the cheap, what they really want to do — now more than ever — is buy something that’s moving.” – Bill Fleckenstein, well-known market analyst at King World News
“One thing that amazes me about the current cohort of global central bankers is the lack of insight into the fact that their extreme loose monetary policy and financial repression may actually be making deflation in the real economy worse despite clearly succeeding in creating rampant inflation in financial assets. To be sure some of the major players in the central banking orbit, such as ex-Fed Governor Kevin Warsh, have broken out of the QE group-think that grips the minds of central bankers. Warsh has openly stated that financial repression has exacerbated, rather than cured, our economic ills.” – Albert Edwards, SocGen
“The ancient Egyptians believed their gods had shimmering skin made from gold. While the Aztec word for gold, teocuitlatl, literally translates as ‘excrement of the gods’. From ancient Rome to the California gold rush, this dense shimmering metal has been immutably connected with divine quality and the sense of opportunity. The reason for this is simple: gold is the most special element of them all.” – James Dacey, Physics World
A word on USAGOLD – USAGOLD ranks among the most reputable gold companies in the United States. Founded in the 1970s and still family-owned, it is one of the oldest and most respected names in the gold industry. USAGOLD has always attracted a certain type of investor – one looking for a high degree of reliability and market insight coupled with a professional client (rather than customer) approach to precious metals ownership. We are large enough to provide the advantages of scale, but not so large that we do not have time for you. (We invite your visit to the Better Business Bureau website to review our five-star, zero-complaint record. The report includes a large number of verified customer reviews.)
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.
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 [Third Edition]. He is also editor and commentator for USAGOLD’s Live Daily Newsletter and editor of the News & Views monthly newsletter.