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Coins & bullion since 1973


Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 45th year in the gold business

September, 2018

U.S. Dollar and Gold: Is This Time Different?

by Dr. Thorsten Polleit, Degussa Market Report

On 13 August 2018, the price of gold fell below 1,200 USD/oz, declining to a 1.5 year low. What to make of this move? It seems that several factors have been at work in triggering the gold price decline. At the same time, it does not seem too far-fetched to think that the current market price of gold is now well below its true value, and so the chance for the gold price to go up outweighs the risk of a further drop by quite a margin. Here is why:

Given recent market uncertainty – amongst other things due to the Turkish Lira crisis and other emerging market currencies being affected by the turmoil – investors have substantially increased their demand for the Greenback. It does not only serve as a “safe haven” currency, but it also offers a positive interest rate (e.g. 2-year US bills offering a yield of around 2.6 per cent). In the international context, this is a rather attractive combination from an investor’s point of view.

What follows is an appreciating US dollar and – as its flipside – a decline in the price of gold in US dollar terms. In fact, investors seem to be convinced that the Greenback is the currency to hold, and that the US dollar can outshine the ‘gold currency’. This, however, appears to be a questionable proposition. For the end of the Fed’s hiking cycle might be closer than the market expects. The reason lies in the growing international US dollar indebtedness.

In the period of extreme low US interest rates, many foreign borrowers – in particular, those from emerging market economies – have taken on US dollar denominated debt. An appreciating US dollar causes them quite some trouble: It increases the costs of serving their debt. What is more, it makes rolling-over maturing US dollar debt more difficult: Lenders become hesitant to renew loans, and if they do, they can be expected to charge higher interest rates.

Deterioration in credit availability and the cost of funding undoubtedly has the potential of unhinging the credit-driven boom in many emerging market economies. This, in turn, is most likely to also have negative consequences for the developed economies around the world, including the United States of America. To cut a long story short: It seems that the Fed’s room for manoeuvring is quite limited, much more constrained than many market observers might expect.

Due to the high dependence of many economies around the globe on the US dollar, the Fed can no longer gear its monetary policy to the needs of the US economy alone. It can no longer ignore the consequences its monetary policy is most likely to have on other economies around the world. While the US economy may well need higher interest rates, many countries will have significant problems coping with US borrowing costs going up.

As soon as the financial markets find out that the Fed cannot continue its US economy-centred monetary policy, there is a decent chance that the reserve currency status of the US dollar will be critically reviewed. Because the question is:

What does it mean if the Fed’s monetary policy has to increasingly factor in the financial and economic needs of the ‘global economy’? The answer? The currently unshakable belief in the Greenback’s safe-haven status will lose some of its shine.

The Fed’s monetary policy would become, more than ever, a ‘bail-out policy’ for the rest of the world, that is coming to the rescue of foreign borrowers who have overstretched themselves by taking on US dollar debt. Printing great amounts of money and providing it at artificially low interest rates would become the hallmark of the ‘new Fed policy’. Hardly an outlook to inspire investor confidence in the Greenback’s store of value function.

In fact, the current inflow into the US dollar seems to disregard the consequences this will have on the international credit system and, as a result, the Fed’s monetary policy. The uncomfortable truth is that keeping the global credit system going, the Fed will have to churn out more fresh money, provided at artificially low interest rates.

Now you may ask: What is going to happen if the Fed ignores the consequences its policy has for much of the rest of the world? If it keeps raising interest rates according to the needs of the US economy? Well, the ‘day of reckoning’ would presumably not be long in coming. If the Fed’s monetary policy tightening tanks the boom of other economies around the world, the US economy is unlikely to escape the mess – and the Fed will have to reverse course.

Against this backdrop, investors are unlikely to get happy betting on the US dollar as the one and only ‘safe-haven currency’. In fact, from the viewpoint of the savvy investor, the ‘gold currency’ will have a role to play because the purchasing power of the yellow metal cannot be debased by central banks’ monetary policy. On top of that, gold does not carry a default- or credit-risk as time and savings deposits undeniably do.

Current price action in financial markets clearly suggests that investors do not fear inflation or systemic default risks. This, however, appears to be grossly underestimating the true risk profile in the global credit and monetary architecture and it may well explain why there has been a sell-off in gold in recent days. However, there are good reasons to conclude that the sell-off has gone too far and that it has pushed the price of gold well below its ‘true value’.

In other words, gold has become cheap (and undeservingly so) – which might be painful for those currently holding gold but offers an excellent opportunity for those who want to build up their gold positions. In any case, it appears that we are right in the middle of a situation in which market prices do not reflect ‘true values’: The stock market seems to be expensive, and gold is too cheap. And history taught us that over- and undervaluations will be corrected over time.

This brings us back to the relation between the US dollar and gold. We might have entered a phase in which the US dollar – an unbacked paper currency – is no longer, and for political-economic reasons can no longer, serve as the world’s only reserve currency. If this assessment is true, or even half-true, going forward, the price of gold can be expected to move higher by quite a margin; perhaps much higher than most people expect under current conditions.

(Reprinted with permission. The Degussa Market Report is a service of Degussa Goldhandel, the Swiss gold and silver refinery – a major player in the global gold market.)

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The super-rich of silicon valley have a doomsday play

Bloomberg's Olivia Carville writes: “Years of doomsday talk at Silicon Valley dinner parties has turned to action. In recent months, two 150-ton survival bunkers journeyed by land and sea from a Texas warehouse to the shores of New Zealand, where they’re buried 11 feet underground. Seven Silicon Valley entrepreneurs have purchased bunkers from Rising S Co. and planted them in New Zealand in the past two years, said Gary Lynch, the manufacturer’s general manager. At the first sign of an apocalypse — nuclear war, a killer germ, a French Revolution-style uprising targeting the 1 percent — the Californians plan to hop on a private jet and hunker down, he said.”

We bring attention to this article to show the level of concern about economic, social and political instability among very rich, self-made, independently-minded entrepreneurs.  The placidity of the moment can give way to chaos in a heartbeat as anyone who has studied history – or lived through a Venezuela-type moment – will attest.  The odds of society having to deal with a breakdown at this level are slim, as these occurrences are rare.  It is the many levels of danger short of the ultimate unraveling that truly need to be hedged, bridged, survived.  Anyone who has thought their way through the problem will find their way to gold – the most effective and practical insurance policy against the dangers outlined in this article and the one that buys time. . . .that most valuable of commodities.

[Bloomberg article link]

Along the same lines . . . . Under the headline, Asia’s super rich advised to add more gold to their portfolios to protect assets amid storms pounding equity markets, the South China Morning Post reports that "Advisers to Asia’s super rich think their clients should put more of their money into gold, taking advantage of price declines to buy the yellow metal amid volatile global markets and US-China trade tensions, a new report said. A survey of these advisers found a preference for gold holdings amounting to 5 per cent to 10 per cent of total assets. That is up from an earlier recommendation of 3 per cent to 5 per cent, according the report, ‘Going for Gold’, which was released on Wednesday by US financial services firm INTL FCStone.”

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Mint reports American silver eagle sales surge in August

U.S. Mint sales of silver American Eagles in August jumped to their highest level since January registering a 73% gain over July and a 50% gain over August of last year. The surge in sales to 1,530,000 one-ounce silver coins for the month indicates investor demand for silver reawakening at currently low price levels. Mint sales of the gold American Eagle bullion coin for August were double the same month last year, but down about 40% from July. Low Mint sales in both metals over the past two years reflected inventory being sourced from the secondary markets following a string of record demand years prior to 2017. That secondary market supply suddenly driedup in Augus,t channeling demand back to the Mint.

Once back-logging begins, it tends to build-up in the system and almost always inspires fresh demand. So even if the Mint ramps up production, its capacity is limited and further disruptions can occur.  Artificially low prices, driven by paper traders on the commodities exchanges, can create distortions in the physical market.

The most burdensome of these is outright shortages and premium increases. Back-date stocks have already been pretty much depleted at the wholesale level. This will only put more pressure on the Mint to meet demand. We have had some uptick in premiums but nothing substantial as yet.  The history of premium increases, though, is that they can be aggressive and occur quickly without warning. Investors have been watching for a bottom and there is quite a bit of pent-up demand present in the silver market.

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Why the gold ETF is the wrong vehicle for serious, long-term investors

This 12-minute video put together by expert Elliott Wave analyst and attorney, Avi Gilburt, is well-worth the time spent listening to it, particularly if you want to own gold and silver for safe-haven purposes.  The ETF, for the reasons Avi Gilburt outlines, is not the way to do it.  He describes in some detail the inherent dangers of owning gold and silver through ETF shares, and the full audio/video is highly recommended.  The best way to own precious metals is the old tried and true approach – physical bars and coins in your possession. “Stay away from the ETFs," says Gilburt, "I’m hoping to give you some taste at least of how toxic these funds are and should not be seriously considered as long-term investment vehicles.”

[Full Video]

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Bridging the Fourth Turning with Gold

Like Howe, I too believe that the “giant problem” will somehow find resolution, but my concern is getting across the bridge between the “final season of history” and its ultimate resolution – whatever fate might dictate. That is why I own gold personally and why I think every thinking investor should own it as well. The name of the game is to protect wealth and not leave the results of your life's work on the table, as the fourth turning moves into its final phases. A diversification of about 10%-30%, in my view, will get the job done as it did in the first phases of the crisis from 2008-2009.* How high you go within that range depends upon on how strongly you feel about the dangers that lie ahead.

[Link to full article by your editor]

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Hedging financial warfare
A new and important reason for physical gold and silver ownership (not ETFs)

James Rickards this past month issued a clear warning – his most important in a long time.  Financial warfare – the ability of America’s enemies to penetrate and disrupt markets and infrastructure through malware and other forms of electronic weaponry – is something few investors contemplate. “The result", says Rickards, "could be a market decline of 20% or more in a single day, comparable to the stock market crash of October 1987 or the crash of 1929. You would not have to trade anything or be in the market during the attack; you would be wiped out based on the market decline even if you did nothing.” 

As Rickards points out, the threat is very real especially under the current tension-filled circumstances, and prudent investors need to take it into account. “The key,” says Rickards, “is to have some portion of your total assets invested in nondigital assets that cannot be hacked, wiped out or disrupted in financial warfare. Such assets include gold, silver, land, fine art and private equity that is usually represented by a paper contract and does not rely on electronic exchange trading for liquidity.” This is the financial market equivalent of living off the grid. We strongly recommend reading the full article.

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This time is different. – No really.

The Daily Reckoning's Brian Maher writes: “‘Experience keeps a dear school,’ said Ben Franklin, ‘but fools will learn in no other.’ The wise man remembers. The fool forgets. The wise man listens. The fool talks. He ignores both the living and the dead… the immemorial dead, whose whispers carry the distilled wisdom of history. No – this time is different, comes the fool’s eternal cry. The past is of no use to me.”

Maher's message is timely. The right portfolio strategy keyed to diversification across asset classes, including precious metals, forgives a lot of wrongs, in fact, often rights the wrongs and allows the investor to live another day.  The point is that not every lesson need be learned from experience.

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The ‘National Emergency Loophole’: How Trump could intervene in the market to crush the dollar

Zero Hedge recently posted its take on how the White House could offset the Fed’s interest rate policies in terms of their effect on the trade wars and the strong dollar.  An intervention like this, in our estimation, would have a major impact on the gold market.

“Here is why [Nomura’s Richard] Koo is confident that it is only a matter of time before Trump directly intervenes in the FX market:

‘A protectionist policy that must be individually tailored to each product category requires large numbers of administrative staff, and a period must be established during which companies can apply for exemptions. Exchange rate-based adjustments, on the other hand, entail no such costs. In that sense, the more problematic administrative delays become and the more industry opposition mounts, the greater the likelihood that President Trump will replace tariffs with exchange rates as his main tool for addressing US trade imbalances.’

The loudest warning to date that Trump could rock the currency world has come from Charles Dallara, the former U.S. Treasury official who was one of the architects of the Plaza Accord, the 1985 agreement between the U.S. and four other countries to jointly depreciate the dollar. ‘The trade debate will increasingly include the currency issues,’ he told Bloomberg. ‘It’s inevitable.'”

[Full post]

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Gold gains month to month 2016-2018

This chart shows the gains or losses in gold from the same month a year earlier. Since the Fed began raising interest rates in early 2016, gold has gone higher in 22 out of the past 30 months. That means that you could have purchased gold in any one of those months a year earlier and showed a gain 12 months later, and sometimes that gain was significant – as much as 10% to 22%! 

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India's gold and silver bar demand skyrockets

Scrap Monster reports that “The gold bar imports by the country skyrocketed by 450% in July this year, says the most recent trade statistics published by India’s Gems and Jewellery Export Promotion Council (GJEPC). The cumulative imports during the initial four months (Apr ’18 to July ’18) of the current fiscal year too were up significantly by over 300% when compared with the corresponding period last year.”

India’s gold jewelry imports declined by almost 40% over the same period. The corresponding jump in bar demand leads us to the conclusion that Indian citizens are buying gold for investment purposes, the result of concerns about the rupee and India’s debt position.  India’s demand could be the first tangible sign of growth in general investment demand for gold among emerging nation-states affected by the trade wars, domestic currency weakness, and concerns about external debt. In our estimation, the burgeoning demand for gold in the emerging countries affected by the nascent currency and debt problems will become a major factor in the physical supply-demand picture for the rest of 2018 and beyond.

As for silver, Smaulgold's Louis Cammarosano tells us that "While the Indian government’s anti-gold initiatives have dented official gold demand in India, black market sales and imports continue. Silver has been a direct beneficiary of the campaign against gold. Indians prize silver for its beauty and also give it as gifts. It’s no substitute for gold, but it is viewed favorably.”

Surging demand for gold and silver in India usually indicates a bottom.  It is also worth filing for future reference that India’s people “prize silver.”  That attachment could accrue as a positive for the fundamentals in the years to come.

If you have an interest in the kind of analysis you are now reading, you might appreciate our LIVE DAILY NEWSLETTER – news, opinion and analysis as it happens. Always timely and posted for gold and silver owners or for those thinking about owning it.  Are you a prospective gold owner trying to make up your mind?  FREE ACCESS! Your interest is welcome at no cost or obligation.

Powell goes dovish in Jackson Hole speech, good for gold

“Trump was not chiding the Federal Reserve for the first time," says CNBC's Patti Domm on the president's remark that he could use some help from the Fed on interest rates and hence the dollar, "but his most recent tirade triggered an uproar, both for the unorthodox nature of the remarks from a president and the appearance that he was meddling with the Fed’s independence. But he also hit on the very thought at the top of mind for many a market pro right now — is the Fed going too fast and could it pause?”

Fed chairman Jerome Powell has made a dovish comment or two over the past few months that largely escaped interpretation as such.  When he talks about an “asymmetric” rate policy, for example, it might be interpreted as keeping the interest rate below the inflation rate, thus promoting a negative real rate of return.  That in itself is inflationary, but the markets have ignored the overture.  “I think his comments are important. They’re taking the tack tha,t at the moment, ‘our policy has to stay pristine and independent from political interference,’ but the other thing is, what if he’s [i.e., the president] right?” said [Mitsubishi Financial Group’s Chris] Rupkey. “What if rates are having a harmful effect on the prospects for growth here.” Also, there is the overall effect of Fed policies on third world countries and, in conjunction with that, big banks in the developed economies.

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Gold Trading Hours

Whenever the gold market gets active, we have a large increase in visitors at our Gold Trading Hours page.  Investors want to see which markets – Asian, European or American – are the focal point for price movement.  They also want to know when a particular market is going to open or close in areas where gold might experience an influx of buying or selling interest.  That is why we designed this popular page with market hours and a live clock showing the local time in that particular market and all the other major gold markets.  Gold Trading Hours is one of the quiet pages at USAGOLD that garners significant global interest particularly when the market is moving or breaking news warrants more than average interest. We also invite you to return here regularly – to this Live Daily Newsletter page – for up-to-the-minute gold market news, opinion and analysis as it happens.

We invite your visit.  We encourage your bookmark.

Gold Trading Hours
London – New York – Sydney – Hong Kong – Shanghai – Tokyo – Zurich

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The hunt for the next Nostradamus

“'He told everyone the truth. But no one listened. Until now'," writes Jamie Powell in a Financial Times article. Economist Tim Lee predicted the crisis in Turkey.  In conjuction with it, he also predicts “there will be a series of financial seizures” that will ultimately end-up in European and American financial markets.  This Financial Times piece builds on a New York Times’ article over the weekend about Tim Lee under the headline “Turkey’s Financial Crisis Surprised Many.  Except This Analyst.”  “Turkey,” he says, “is the canary in the coal mine.”

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Notable Quotable

“Of course, if you knew a large devaluation of your currency was approaching then shifting money into hard assets like gold, which is priced in dollars, would make a great deal of sense. So to would the inflationary impact of tariffs. Gold is the classic inflation hedge as a monetary metal. Strange then that commercial speculators have been running near record short gold positions, driving gold prices lower and lower in recent months. They operate with extreme leverage and this greatly distorts gold prices to the downside. Then again, as soon as the wind changes and these shorts all have to be covered then there will be a huge surge in the price of gold. Nice for those who bought at low prices in June or now.” – Peter Cooper, The National

“We are now seeing an overwhelming body of evidence coming together to suggest that gold and silver have hit bottom. And that even if they haven’t, the bottom is very close as downside risk is very limited. On a more mundane level, the drop in gold and silver prices in the recent past is pushing many mines to the brink of becoming uneconomic at a time of an impending supply crunch, a situation that must soon lead to higher prices. Whilst we were premature in calling a bottom earlier this year, it really does look like the time has come to ‘back up the truck’ for reasons that we will now set out as briefly and succinctly as possible.” – Clive Maund, Tech analyst

“Why does the cycle move as it does? What causes these periodic alternations, this ebb and this flow, in the national priorities?  If it is a genuine cycle, the explanation must be primarily internal. Each phase must flow out of the conditions – and contradictions – of the phase before and then itself prepare the way for the next recurrence. A true cycle 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.” – Arthur M. Schlesinger, Jr., The Cycles of American History

“The point is that we should soon see rapid inflation globally the likes of which we have not seen since the Roman Empire circa 275AD. This is because the governments of the developed world, including Europe, Japan and the US, will soon have to admit that their future solvency depends upon interest rates that can never normalize and debts that will be forever monetized.  In other words, expect an internal inflation crisis to wipe out much of the purchasing power of all fiat currencies due to global central banks’ response to the imminent bursting of the current global financial bubble.” – Michael Pento, FX Street

In case you missed last week's issue. . . . . .
– Get the jump on inflation with an investment in graded, historic U.S. $20 gold pieces


“In 1997, Bob Mundell predicted that ‘Gold will be part of the structure of the international monetary system in the twenty-first century.’ As has often been the case, Mundell’s prediction might just be prescient. Indeed, Iran, Russia, and Turkey could, and just might, make Mundell’s prediction a reality. One foolproof way to do that is via gold-based currency boards. Currency boards have existed in more than 70 countries, and a number are in operation today. Countries with such monetary institutions have experienced more fiscal discipline, superior price stability, and higher growth rates than comparable countries with central banks.” – Steven Hanke, economist, Johns-Hopkins University

“Students of monetary history should recall that global growth shrank  in the wake of the Smoot-Hawley Tariff Act of 1930, and the US was forced to devalue the dollar against gold in January 1934 with the result that the gold price rose by 70% (from $20.67 to $35.00).” – Martin Murenbeeld, Gold Monitor newsletter

“[T]he object of speculation may vary widely from one mania or bubble to the next. It may involve primary products, especially those imported from afar (where the exact conditions of supply and demand are not known in detail), or goods manufactured for export to distant markets, domestic and foreign securities of various kinds, contracts to buy or sell goods or securities, land in the country or city, houses, office buildings, shopping centers, condominiums, foreign exchange. At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the processes involved. Not surprisingly, swindlers and catchpenny schemes flourish.” – Robert Z. Aliber and Charles P. Kindleberger, Manias, Panics and CrashesAnatomy of a Typical Financial Crisis (2001)

“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.” – James Grant, Interest Rate Observer


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 the accuracy, timeliness or completeness of the information found here. (Please see our Risk Disclosure here.)

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