Gold’s golden cross as negative interest rates help boost price

By Frank Holmes, CEO and Chief Investment Officer for US Global Investors

'Golden Cross' for Gold
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Last Friday, gold experienced a “golden cross,” a technical indicator that occurs when an asset’s 50-day moving average crosses above its 200-day moving average. It’s the first such movement in nearly two years and is a sign that gold might have further to climb.

But there’s more exciting news involving gold. On the same day that New Jersey Governor Chris Christie endorsed Donald Trump for president, the precious metal received its own high-profile endorsement. In a note to investors, Deutsche Bank said it’s time to buy gold, writing: “Buying some gold as ‘insurance’ is warranted.” The bank also stated its opinion that gold “deserves to be trading at elevated levels versus many other assets.”

The metal is already up 15 percent so far in 2016, its best start to the year in decades. But it started 2015 strong too, if you remember, before prices began to collapse in February.

Inflation consumes the return on your five-year Treasury bond.So what’s the difference between then and now?

Gold owes a lot of its success this year to negative real interest rates, something it didn’t have on its side in early 2015. As I’ve mentioned many times before, the metal has historically done well when real rates turned negative (because then you essentially end up paying the government to hold on to your money). To get the real rate, you subtract the consumer price index (CPI), or inflation, from the five-year Treasury yield. If it’s positive, investors will be more likely to put their money in Treasuries, and if it’s negative, they’ll seek out other stores of value—including gold.

In January 2015, the five-year Treasury yield averaged 1.37 percent, while inflation, less food and energy, posted a tepid 0.2 percent. This resulted in an overall real rate of 1.35 percent—a headwind for gold.

But here we are a year later, and real rates have gone subzero. With the five-year yield at 1.51 percent and inflation at a healthy 2.2 percent—its strongest reading since June 2012—real rates have dropped to negative 0.69 percent. This has helped make gold much more attractive to investors. For the month, as of February 24, the precious metal has risen nearly 10 percent.

How Real Interest Rates Drive Gold

There’s another way of looking at inflation, though—the ShadowStats Alternate Consumer Inflation index. For years, economist John Williams’ site has reported actual, or “real,” economic data that often tell a very different story from the official government numbers.

Williams argues that at one time, the official CPI was useful in determining changes in consumer prices year-to-year. But government officials continued to tinker with their methodologies, in effect “moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”

Below you can see the actual inflation rate, according to ShadowStats, based on 1980 methodologies. Whereas the official CPI is 2.2 percent, “real” inflation is running closer to 9 percent, adding to gold’s allure.

Official Inflation vs. ShadowStats Inflation
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Oil Rallies Following S&P 500’s Best Week of 2016

Following the S&P 500 Index’s best week of 2016, oil prices are strengthening on news that Russia and Saudi Arabia, the world’s two largest producers, are scheduled to meet next month to discuss possible production cuts. This, along with rising gasoline demand in the U.S., seasonality trends and supply disruptions in Iraq and Nigeria, has helped push both Brent and West Texas Intermediate crude comfortably above $30 per barrel. It was oil’s best week since August 2015.

The rally has given investors renewed confidence in domestic stocks after one of the largest equity selloffs earlier in the year. The correlation between crude and S&P 500 stocks is currently at levels not seen since 1990, according to the Wall Street Journal.

Brent Oil and Domestic Stocks Began to Decouple…But Have Been Trading Closely Together Year-to-Date
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Oil’s gain arrives at a time when President Obama announces plans to impose a $10.25 “fee” on every barrel of crude sold in the U.S. The details are fuzzy at this point, but the revenue would reportedly go toward clean energy initiatives such as electric cars, charging stations, public transit and high-speed rail.

These are all admirable goals, but charging oil companies what’s essentially a tax is the wrong way to go about it. The proposal has already been met with strong criticism from analysts and think tanks, who estimate that, if enacted, it would push up production costs, hurt employment and capital formation and lead to slower growth. The Congressional Research Service (CRS) concludes that oil and gas prices would rise, while the Tax Foundation writes:

[T]he annual level of GDP would be 0.3 percent less than otherwise (an annual loss of $48 billion in terms of the 2015 economy), private business capital stocks (e.g., equipment, structures) would be 0.6 percent lower, and 137,000 full-time jobs would be lost.

Again, affordable and reliable clean energy is a noble pursuit, but in the case of the $10.25 tax, the costs far outweigh the benefits. A much better and possibly more consequential strategy can be found in private sector efforts such as Bill Gates’ recently-founded Breakthrough Energy Coalition. Together with a couple dozen other billionaire businessmen and executives—including Richard Branson, George Soros, Mark Zuckerberg, Amazon CEO Jeff Bezos, Bridgewater Capital founder Ray Dalio and Alibaba CEO Jack Ma—Gates plans to invest billions into clean energy innovations over the next several years.

Cheniere Energy becomes the first-ever U.S. company to export liquified natural gas (LNG).

We’re encouraged by the fact that the U.S. just launched its first-ever shipment of liquefied natural gas (LNG) for export. The LNG, sold by Houston-based Cheniere Energy, left the Sabine Pass terminal in Louisiana last week and headed for market in Brazil.

This historic event confirms the U.S. as a major energy superpower, with the potential to be the world’s top supplier, and it should help support LNG demand around the world. The industry has a bright future.

Trans-Pacific Partnership the Cure for Sagging Global Trade

Here at U.S. Global Investors, we follow government policy closely because it’s a precursor to change. The political party matters little. It’s the policies that have the most significant ramifications, and both major American parties are capable of creating both good and truly awful policies.

Having said that, I might disapprove of Obama’s 10 percent oil tax, but I applaud him for continuing to put his weight behind the ratification of the Trans-Pacific Partnership (TPP). The TPP, as I’ve pointed out numerous times before, would help global trade by eliminating 18,000 tariffs among the 12 participating Pacific Rim countries. Last week the president said he planned to send the agreement to Congress for a vote sometime this year, and when that day comes, I urge our senators and representatives from both sides of the aisle to make the right choice.

Now more than ever, global trade needs a boost. According to the CPB Netherlands Bureau for Economic Policy Analysis, the value of goods traded across the globe, in dollar terms, fell a whopping 13.8 percent in 2015 after falling 2 percent the previous year.

Meanwhile, world trade volumes grew only 2 percent in 2015, the slowest year since the financial crisis, according to a recent report by the Organization for Economic Cooperation and Development (OECD).

Significant Slowdown in Global Trade Growth
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The OECD additionally trimmed its 2016 growth outlook to 3 percent, down 0.3 percentage points from its November projection.

Joining the OECD in downgrading growth projections is the International Monetary Fund (IMF), which lowered its forecast 0.2 percentage points to 3.4 percent. To strengthen growth, G20 countries should “reduce overreliance on monetary policy,” the IMF writes in a report ahead of the meeting among finance ministers and central bank governors in Shanghai past weekend. Further, “credible and well-designed structural reforms” are needed to “lift potential output” and provide some “coordinated demand support.”

I second the IMF’s calls for G20 nations to rebalance their monetary and fiscal policies and to reform rules and regulations that stand in the way of global trade. The TPP, which will involve countries that represent 40 percent of the world’s GDP, is a step in the right direction. But for synchronized growth to be achieved, more will need to be done.

Gold ETFs continue building; Silver decouples downwards

Gold TodayGold closed in New York at $1,222.80 down from $1,233.00. In Asia on Monday, it rose to $1,231.25 ahead of London’s opening. It then rose further to be set by the LBMA at $1,234.15 up from $1,231.00.  Since Friday’s setting, gold fell to $1,212 but not on physical selling. The dollar index is stronger at 98.25 up from 97.39 on Friday.

The dollar is up against the euro at $1.0895 up from $1.10248 on Friday. The gold price in the euro was set at €1,132.77 up from €1,116.65.

Ahead of New York’s opening, the gold price was trading at $1,232.00 and in the euro at €1,131.05.  

Silver Today –The silver price closed in New York at $14.65 down 48 cents.  Ahead of New York’s opening the silver price stood at $14.80.

Price Drivers

The result of the G-20 meetings, as usual, were disappointing. There was no real consensus on government support for solid growth and a warning was given by Mark Carney of the Bank of England that monetary policy was not sufficient to stimulate growth and that negative interest rates directly weaken exchange rates, eventually to no avail. The E.U. and Japan were the targets of this statement.

More importantly it is clear that if such policies were not halted it will be ‘every man for himself’ in a currency ‘war’! The euro went much weaker this morning as perhaps more negative interest rates were on the way. The Yen remains strong, still attracting capital.

Gold ETFs On Friday there were purchases of 2.82 tonnes into the SPDR gold ETF and purchases of 0.27 of a tonne into the Gold Trust. The holdings of the SPDR gold ETF are now at 762.405 tonnes and at 188.52 tonnes in the Gold Trust.   While Friday saw smaller but continuous purchases they were not heavy enough to have a forceful effect on the gold price. Please note that the price remains in the hands of U.S. investors.

Indian demand remains on the sidelines until the Indian budget details are out, today. Demand was held back hoping for a cut in duties in the last week. If duties are cut then the demand will jump as buyers see up to a 10% cheaper price there. That brings prices down from [see below] nearly Rs.85,000 an ounce to Rs.76,500. That will draw out new Indian demand. It will also make it much more attractive for Indian investors as the ‘spread’ on prices will narrow significantly, making both trading and investment more attractive.

It is feasible that the Indian government will drop duties, because the Trade Balance of Payments has improved significantly because of the plunge in oil prices, giving space for a popular decision such as the lowering of duties on gold.

Silver – For the first time in years the silver price broke away from the gold price and fell heavily. Yes, the gold price did fall and attempted to threaten the Technical picture for gold, but has started the week higher in a much better Technical picture. So we have to watch to see if silver will bounce back, like gold or has it really broken away. How it performs today will guide us on this. So today is a day for gamblers while professionals gauge the picture carefully.  


Julian D.W. Phillips | | StockBridge Management Alliance

Time to buy gold as OECD and IMF warn

Gold TodayGold closed in New York at $1,233.00 up from $1,229.20 on Thursday. In Asia, it rose to $1,237 ahead of London’s opening. It then pulled back during the morning to be set by the LBMA at $1,231 down from $1,235.40. The dollar index is slightly weaker at 97.39 up from 97.44 on Thursday.

The dollar is almost the same against the euro at $1.1024 up from $1.1028 on Thursday. The gold price in the euro was set at €1,116.65 up from €1,120.24.

Ahead of New York’s opening, the gold price was trading at $1,237.00 and in the euro at €1,121.79.  

Silver Today –The silver price closed in New York at $15.13 down 11 cents.  Ahead of New York’s opening the silver price stood at $15.13.

Price Drivers

There was no change in the SPDR gold ETF or the Gold Trust yesterday. The holdings of the SPDR gold ETF are now at 760.323 tonnes and at 188.25 tonnes in the Gold Trust.  Today in the U.S., is a frantic day, as Friday’s usually are, so be ready for action! The Technical picture remains positive.

This time COMEX did not drag prices down when there was no activity in the gold ETFs.

Indian demand has remained muted with discounts on the gold price. This is for two reasons, the first being that the recent price jumps were too big and too quick, so Indian buyers retreated to the sidelines.

More importantly and secondly, with the Indian budget coming up next week, the hope that government will lower the 10% of duties they imposed on gold imports will be lowered. This would reduce, if not eliminate, smuggling [possibly responsible for an extra 250+ tonnes extra of imported gold]. Then ‘official’ if not real, import figures would change. But right now we expect a shunt-effect as demand is held back to be released after the budget, whether or not duties are lowered.

We are informed that the expected Yuan Gold Fix on the Shanghai Gold Exchange will begin on the 19th April. At least 10 banks will be involved including some foreign banks. We expect the volumes traded of physical gold will be very large. This marks one of several structural changes in the global gold market which will change its shape and nature.

Meanwhile, across in the developed world, the G-20, usually a disappointing event, commences today. The OECD and IMF have issued strong warnings that debt is too high and unless governments step up to the plate to promote real growth [fiscal policies and infrastructural projects for a start] the downward trend in growth will continue. We can’t see governments doing this after 8 years so far, of failing to do this after the ‘Credit Crunch’. Warnings concerning a ‘currency war were also given by the Bank of England.

Citibank has come out and warned of a global recession coming. With the continuing shift of wealth and trading power continuing to eat away at the developed world, only vigorous action by governments can stop the rot. But when Germany opposes Fiscal stimulus ‘because debt levels are too high’, then we begin to lose hope!

Silver – The silver price is now holding back despite the continued positive picture for gold.


Julian D.W. Phillips | | StockBridge Management Alliance