Gold gains from economic storms, ‘fake rates’ and Jackson Hole

Are You Prepared for These Potentially Disruptive Economic Storms?

By Frank Holmes – CEO and Chief Investment Officer U.S. Global Investors

Hurricane Harvey

Here in San Antonio, grocery stores were packed with families stocking up on water and canned food in preparation for Hurricane Harvey, which has devastated Houston and coastal Texas towns. I hope everyone who lives in its path took the necessary precautions to stay safe and dry—this storm was definitely one to tell your grandkids about one day.

Similarly, I hope investors took steps to prepare for some potentially disruptive economic storms, including this past weekend’s central bank symposium in Jackson Hole, Wyoming, and the possibility of a contentious battle in Congress next month over the budget and debt ceiling.

As you’re probably aware, central bankers from all over the globe visited Jackson Hole this past weekend to discuss monetary policy, specifically the Federal Reserve’s unwinding of its $4.5 trillion balance sheet and the European Central Bank’s (ECB) ongoing quantitative easing (QE) program. Janet Yellen gave what might be her last speech as head of the Federal Reserve.

As I told Daniela Cambone on last week’s Gold Game Film, there are some gold conspiracy theorists out there who believe the yellow metal gets knocked down every year before the annual summit so the government can look good. I wouldn’t exactly put money on that trade, but you can see there’s some evidence to support the claim. In most years going back to 2010, the metal did fall in the days leading up to the summit. Gold prices fell most sharply around this time in 2011 before rocketing back up to its all-time high of more than $1,900 an ounce.

Gold prices generally fell days before the annual economic symposium
click to enlarge

Many of the economic and political conditions that helped gold reach that level in 2011 are in effect today. That year, a similar Congressional skirmish over the debt ceiling led to Standard & Poor’s decision to lower the U.S. credit rating, from AAA to AA+, which in turn battered the dollar. The dollar’s recent weakness is similarly supporting gold prices.

In August 2011, the real, inflation-adjusted 10-year Treasury was yielding negative 0.59 percent on average, pushing investors out of government bonds and into gold. Because of low inflation, we might not be seeing negative 10-year yields right now, but the five-year is borderline while the two-year is definitely underwater. Bank of America Merrill Lynch sees gold surging to $1,400 an ounce by early next year on lower long-term U.S. interest rates.

Are Government Inflation Numbers More “Fake News”?

If we use another inflation measure, though, yields of all durations look very negative. For years, ShadowStats has published alternate consumer price index (CPI) figures using the methodology that was used in 1980. According to economist John Williams, an expert in government economic reporting, “methodological shifts in government reporting have depressed reported inflation” over the years. The implication is that inflation might actually be running much higher than we realize, as you can see in the chart below.

Official US consumer inflation vs shadowstats alternate
click to enlarge

If you believe the alternate CPI numbers, it makes good sense to have exposure to gold.

Recently I shared with you that Ray Dalio—manager of Bridgewater, the world’s largest hedge fund with $150 billion in assets—was one among several big-name investors who have added to their gold weighting in recent days on heightened political risk. That includes Congress’ possible failure to raise the debt ceiling and, consequently, a government shutdown. Dalio recommends as much as a 10 percent weighting in the yellow metal, which is in line with my own recommendation of 10 percent, with 5 percent in physical gold and 5 percent in gold stocks, mutual funds and ETFs.

I urge you to watch this animated video about opportunities in quality gold mining stocks!

Falling Dollar Good for U.S. Trade

Returning to the dollar for a moment, respected CLSA equity strategist Christopher Wood writes in this week’s edition of GREED & fear that it’s “hard to believe that the political news flow in Washington has not been a factor in U.S. dollar weakness this year.”

The U.S. media certainly wants you to believe that Trump is bad for the dollar. Take a look at this chart, showing the dollar’s steady decline alongside President Donald Trump’s deteriorating favorability rating, according to a RealClearPolitics poll.

US dollar tracks trumps favorability down
click to enlarge

However, a weak dollar is good for America’s economy. I’ve commented before that Trump likes a falling dollar, because it is good for the country’s export trade of quality industrial products. It’s also good for commodities, which we see in a rising gold price and usually energy prices.

Ready for a Big Fight?

You might have watched the Mayweather vs. McGregor fight, but have you been watching the fight between Trump and the Fed?

At the symposium in Jackson Hole, Fed Chair Janet Yellen squared up directly against Trump when she defended the strict regulations that were put in place after the financial crisis. Echoing these comments was Dallas Fed chief Robert Kaplan. This is the opposite of what Trump has been calling for, which is the streamlining of regulations that threaten to strangle the formation of capital.

Hurricane Harvey

It’s important to recognize that the market is all about supply and demand. The number of public companies in the U.S. has been shrinking, with about half of the number of listed companies from 1996 to 2016. Readers have seen me comment on this previously, and I believe that the key reason for this shrinkage is the surge in federal regulations. The increasingly curious thing is that we are seeing the evolution of more indices than stocks, as the formation of capital must morph.

As I told CNBC Asia’s Martin Soong this week, there is a huge amount of money supply out there, and investors are looking for somewhere to invest. The smaller pool of stocks combined with the greater supply of money means that the market has seen all-time highs. In addition, major averages were regularly hitting all-time highs not necessarily on hopes that tax reform would get passed, but on strong corporate earnings, promising global economic growth and the weaker U.S. dollar.

Meanwhile, small-cap stocks are effectively flat for 2017 and heading for their worst year since 1998 relative to the market, according to Bloomberg. Hedge funds’ net short positions on the Russell 2000 Index have reached levels unseen since 2009. Remember, these are the firms that were expected to be among the biggest beneficiaries of Trump’s “America first” policies.

However, the weakness in U.S. manufacturing has a great impact on the growth of these stocks, as indicated by the falling purchasing managers’ index (PMI). The slowdown in manufacturing is offset by strength in services, shown by the Flash composite PMI score of 56.0 which came out this week. Though there is a spread between large-cap and small-cap stocks, historically this strong score is an indicator of growth to come.

Spread between large cap and small cap stocks continues to widen
click to enlarge

Some big-name investors and hedge fund managers are turning cautious on domestic equities in general. On Monday, Ray Dalio announced on LinkedIn that he was reducing his risk in U.S. markets because he’s “concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies).” Pershing Square’s Bill Ackman and Pimco’s Dan Ivascyn have also recently bought protection against market unrest, according to the Financial Times. Chris Wood is overweight Asia and emerging markets.

Stay Hopeful

It’s important to keep in mind that there will always be disruptions in the market, and adjustments to your portfolio will sometimes need to be made. For those of you who read my interview with the Oxford Club’s Alex Green, you might recall his “Gone Fishin’” portfolio, which I think is an excellent model to use—and it’s beaten the market for 16 years straight. Green’s portfolio calls for not just domestic equities, Treasuries and bonds but also 30 percent in foreign stocks and as much as 10 percent in real estate and gold.

Stay safe out there!

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Even another flash crash can’t keep gold price down for long

This is a lightly edited version of one first posted on the Sharps Pixley news website

2 million ounces of gold were dumped on the gold market in a minute on Friday, just ahead of Janet Yellen’s speech at Jackson Hole – and, after a very brief downwards spike to below $1,280, the gold price rapidly climbed back to unchanged.  This has to be an incredibly bullish signal for gold in that even this amount of presumably paper gold thrown at it (62.2 tonnes) couldn’t keep the gold price down.  Bloomberg described the 2 million ounce trade as ‘mysterious’.  Perhaps at least that is a welcome change from the usual ‘fat finger’ attribution which seems to be applied to these seemingly increasingly frequent mega-sales of paper gold which, despite protestations to the contrary, seem to be designed to keep the gold price suppressed.

Today, the gold price drifted upwards ahead of New York’s opening and then, at around 11.00 am New York time the price spiked upwards sharply, soaring through the $1,300 psychological barrier.  The question is where to next?

The key here may well be what has been happening with physical gold.  On Friday the SPDR Gold Shares ETF (GLD) had almost 6 tonnes of gold bought into it.  GLD has thus seen 18.33 tonnes of physical gold added to it in 2 weeks after what we might describe as ‘mysteriously’ seeing some 80 tonnes withdrawn over the previous two months – during which time the gold price didn’t seem to be spooked by this amount of gold being taken out of the world’s biggest gold ETF.  We had already pointed out the anomaly that America’s second biggest gold ETF – the iShares Gold Trust (IAU) – had not seen corresponding metal liquidations.  The Swiss gold import and export statistics, also reported in these pages, had shown that there appears to be a ready market in Asia for any physical gold released in the west, and this could well be a sign that gold could be moving into a short supply situation in the West.  If America starts buying physical gold again, we could thus see big price rises with buyers bidding up what might be an increasingly rare commodity.

As I write, the gold price rise seems to have stalled at the $1,310 level and there will almost certainly be attempts to drive it down, or at least prevent it rising further.  But it does seem to have some momentum behind it and could well move up to the $1,320s.  But, as we have pointed out before, this time next week is the U.S. Labor Day holiday and this often seems to provide an inflection point in economic trends.  It could presage a sell-off in gold or see the price boosted into the stratosphere, figuratively speaking.  Nothing is simple with gold.  But if gold gets a boost after September 4th we could see equities – and perhaps bitcoin – moving sharply in the other direction.  Both would seem to be in bubble situations and sooner or later all bubbles burst.

We’d rather bet on gold than alternatives.  Even if there is a gold price turndown ahead it is likely to be relatively minor, while the fall, when it comes, as come it must, in equities and bitcoin could be devastating.  Food for thought ahead of the U.S. holiday weekend.

Gold waiting on Yellen and Draghi indicators

Gold Today –New York closed yesterday at $1,286.20. London opened at $1,285.95 today. 

Overall the dollar was slightly weaker against global currencies before London’s opening:

         The $: € was slightly weaker at $1.1799 after the yesterday’s $1.1794: €1.

         The Dollar index was slightly weaker at 93.28 after yesterday’s 93.31

         The Yen was slightly weaker at 109.63 after yesterday’s 109.29:$1. 

         The Yuan was slightly stronger at 6.6609 after yesterday’s 6.6621: $1. 

         The Pound Sterling was slightly stronger at $1.2822 after yesterday’s $1.2807: £1

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    8    25

     2017    8    24           

     2017    8    23

SHAU

SHAU

SHAU

/

277.00

276.39

Trading at 277.60

277.25

276.92

$ equivalent 1oz at 0.995 fineness

@   $1: 6.6609

       $1: 6.6621

       $1: 6.6624     

  /

$1,288.24

$1,285.33

Trading at $1,289.70

$1,289.40

$1,287.80

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle East eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

 New York closed at $3.20 lower than Shanghai’s yesterday’s close. Today sees Shanghai holding just $0.30higher than yesterday, which was $3.75 higher than London’s opening. The global gold markets remain close to each other with Shanghai barely moving.

Silver Today –Silver closed at $16.95 yesterday after $16.95 at New York’s close, Wednesday.

LBMA price setting:  The LBMA gold price was set this morning at $1,287.05 from yesterday’s $1,285.90.  The gold price in the euro was barely changed being set at €1,090.35 after yesterday’s €1,090.76.

Just before the opening of New York the gold price was trading at $1,287.20 and in the euro at €1,089.19. At the same time, the silver price was trading at $17.03. 

Price Drivers

We cannot remember seeing prices in the precious metals this calm for a few days. As we have said before Shanghai has had a calming effect on global gold markets, but even its calmness is remarkable. It is not that we expect anything dramatic from Jackson Hole but in such a calm market, any news at all, will have an impact.

We feel for Janet Yellen and Mario Draghi as the financial world waits for the slightest hint in their speeches today of dovishness or hawkishness. The slightest stumble on their part could influence the entire financial world. Nevertheless, central bank policies are really the only policies affecting the financial world.

It should be government policy with central bank policy backing up government policy, but governments just don’t seem able to get things done and have not done it since the credit crunch in 2008. In itself, this tells you just how fragile the financial world is, when governments are so emasculated.

It is so fragile that even if the two central bankers were neutral in what they said, the financial world will behave in a mercurial fashion. We do expect action in financial markets today which will turn the market calmness into a storm in the coming weeks.

But we need to be clear on the reality that whatever Yellen and Draghi say that does not directly affect exchange rates, will be gold neutral or will only affect gold prices for the short term. We remind readers that the gold price is a synthesis of global gold prices and not the result of U.S. factors. It reflects the condition of the currency and monetary world which continues to evolve away from dollar hegemony.

Once again there are no purchases or sales into or from the SPDR gold ETF and the Gold Trust as U.S. gold investors wait too.  

Gold ETFs – Yesterday there were no purchases or sales of gold into or from the SPDR gold ETF but there were small purchases into the Gold Trust of 0.44 of a tonne. The SPDR gold ETF and Gold Trust holdings are at 799.286 tonnes and at 215.91 tonnes respectively.

Since January 4th 2016, 177.55 tonnes of gold have been added to the SPDR gold ETF and to the Gold Trust. 

Since January 6th 2017, 15.95 tonnes to the gold ETFs we follow.

Julian D.W. Phillips – GoldForecaster.com | StockBridge Management Alliance 

Gold and Silver marking time: Waiting on Jackson Hole statements

Gold Today –New York closed yesterday at $1,290.20. London opened at $1,287.10 today. 

Overall the dollar was slightly weaker against global currencies before London’s opening:

         The $: € was slightly weaker at $1.1794 after the yesterday’s $1.1784: €1.

         The Dollar index was slightly weaker at 93.31 after yesterday’s 93.39

         The Yen was slightly stronger at 109.29 after yesterday’s 109.36:$1. 

         The Yuan was slightly stronger at 6.6621 after yesterday’s 6.6624: $1. 

         The Pound Sterling was slightly weaker at $1.2807 after yesterday’s $1.2811: £1

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    8    24

     2017    8    23           

     2017    8    22

SHAU

SHAU

SHAU

/

276.39

277.34

Trading at 277.20

276.92

276.92

$ equivalent 1oz at 0.995 fineness

@   $1: 6.6621

       $1: 6.6624

       $1: 6.6559     

  /

$1,285.33

$1,287.00

Trading at $1,289.17

$1,287.80

$1,289.07

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle East eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

 New York closed at $2.40 higher than Shanghai’s yesterday’s close. Today, sees Shanghai holding almost the same level as it did yesterday, which was $2.27 higher than London’s opening. The global gold markets remain pretty much in line with each other.

We continue to see prices pausing and building strength, ahead of breaking higher.

Silver Today –Silver closed at $17.08 yesterday after $17.00 at New York’s close both Tuesday.  It has slipped back today.

LBMA price setting:  The LBMA gold price was set this morning at $1,285.90 from yesterday’s $1,286.45.  The gold price in the euro was barely changed being set at €1,090.76 after yesterday’s €1,090.86.

Just before the opening of New York the gold price was trading at $1,287.55 and in the euro at €1,090.36. At the same time, the silver price was trading at $16.96. 

Price Drivers

The currency and precious metal prices are remarkably quiet again, today. Once again there are no purchases or sales into or from the SPDR gold ETF and the Gold Trust.

While we do recognize that the Shanghai market has reduced volatility in the London and New York, currency and precious metal prices remain in calm waters. The Jackson Hole meeting of central bankers on Friday is headline news as Draghi, of the E.C.B. may now give a speech.

What we need to say about central bankers in the developed world is that they have to and will, keep interest rates negative for the foreseeable future.

With that being said we now see a calm rising gold price, in all currencies, reflecting that it is a measure of the value of currencies and not the other way around of late. For instance, the Shanghai gold price for the last couple of days has been very stable, while the Yuan is appreciating against the dollar. The dollar is struggling to hold levels in the dollar index, confirming what we have said since we called not only the top of the dollar index, but the start of the bear market in the dollar.

As we said before the dollar has entered a multi-year bear market as it loses dollar hegemony in favor of a multi-currency system. It is only a matter of time before China becomes the largest economy in the world, not only because it has around 4 times the population of the U.S. and three times that of Europe, but its infrastructure is nearly brand new as are its manufacturing industries. Germany and Japan gained the same advantages after the Second World War and look at them now.

After the establishment of the euro in 1999 that currency took a nearly 25% position in global reserves. As China grows so the Yuan will take an ever increasing percentage of global reserves. The currency system as we know it, was designed for dollar hegemony [including being the only currency with which to pay for oil] not a multi-currency system. The potential ruptures to the foreign exchange world necessitate gold taking a more important role. China has realized that, which is why it is amassing so much gold in its reserves including in the hands of institutions and its citizens. It still has a long way to go on that front before it has adequate amounts of gold in the country [gold is not allowed out of the country].

We are not convinced it wishes to hold just as much as the U.S. It will hold as much gold as it deems necessary to ensure its international position and size is backed by sufficient gold to guard it against any monetary crisis and to reinforce the Yuan internationally.

Gold ETFs – Yesterday there were no purchases or sales of gold into or from the SPDR gold ETF or the Gold Trust. The SPDR gold ETF and Gold Trust holdings are at 799.286 tonnes and at 215.47 tonnes respectively.

Since January 4th 2016, 177.11 tonnes of gold have been added to the SPDR gold ETF and to the Gold Trust. 

Since January 6th 2017, 15.51 tonnes to the gold ETFs we follow.

 Julian D.W. Phillips – GoldForecaster.com | StockBridge Management Alliance