Gold and Bitcoin Surge on North Korea Fears

Article written prior to the sharpish turndown in the gold price after the weekend.

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

bicion

If you’re familiar with ABC’s popular reality show Shark Tank, you should already be familiar with the concept behind the San Antonio Angel Network (SAAN). Select entrepreneurs and innovators pitch their startup ideas to accredited investors, who can choose to make early-stage investments in a potentially successful company.

I attended an SAAN meeting last week at Ferrari of San Antonio, and what struck me the most was how fluid and seamless the whole thing is. Other professionals in attendance, including lawyers and CPAs, had a similar opinion, with some of them saying it was because there wasn’t any bureaucracy or red tape to hamstring the presenters.

This is unlike the world of mutual funds, which I believe has become excessively regulated.

As I’ve said numerous times before, regulation is essential, just as referees are essential to a basketball game. No one disputes that, because otherwise there would be chaos.

Similarly, the new and very unregulated world of cryptocurrencies has grown dramatically, beyond bitcoin and ethereum. Did you know there are over 800 cryptocurrencies? These new initial coin offerings, called ICOs, are like initial public offerings (IPOs) but with little regulation or accountability. As I’ve commented before, if the refs get too powerful or too numerous, and the rules too complex, the game becomes nearly unplayable.

Cryptocurrencies Still Draw Investor Attention Following China Crackdown

Bitcoin, ethereum and other cryptocurrencies have had a meteoric year, with more than $2 billion raised in ICOs so far in 2017, according to Bloomberg. Approximately $155 billion in cryptocurrencies are in circulation around the world right now. Bitcoin by itself is at $78 billion, which is close to the $90 billion invested in all gold ETFs.

Cryptocurrencies have made red hot moves this past year
click to enlarge

Like gold, cryptos are favored by those who have a deep distrust of fiat currency, or paper money. Money, after all, is built on trust, and the blockchain technology that bitcoin is built on top of automates trust through an electronic ledger that cannot be altered. Every transaction is anonymous and peer-to-peer. The system is entirely decentralized and democratic. No monetary authority can see who owns what and where money is flowing.

This, of course, is a huge reason why some world governments want to crack down on the Wild West of virtual currencies, especially with bitcoin surging close to $5,000 this month.

China did just that last week, putting a halt to new ICOs and crypto transactions. In response, ethereum tumbled as much as 15.8 percent last Monday, or $55 a unit. Bitcoin lost $394 a unit.

China’s decision comes a little more than a month after the SEC said cryptocurrencies are securities and therefore should probably be regulated as such. At this point, though, the implications are unclear.

What’s clear to me—after seeing firsthand how easily and quickly transactions are made—is that there’s no going back. It’s possible cryptocurrencies will one day be regulated. But I’m confident bitcoin, ethereum and some other virtual currencies offer enough value to weather such a potential roadblock.

I also believe there has to be a happy medium between the excessively regulated fund industry and the potential chaos of the cryptocurrency. This is what I witnessed at the SAAN event I mentioned, which allowed the professionals in attendance to gain information, ask questions and make informed decisions.

Gold Trading Above $1,350 an Ounce

Speaking on cryptocurrencies last week, Mark Mobius, executive chairman of Templeton Emerging Markets Group, said gold could be a beneficiary of China’s decision to clamp down on ICOs. As more governments and central banks turn their attention to virtual currencies, investors could move back into the yellow metal as a store of value.

That’s a possibility, but I think gold’s price action right now is being driven by negative real Treasury yields and fears over a potential conflict with North Korea. Adjusted for inflation, the two-year and five-year Treasuries are both currently yielding negative amounts, and the 10-year continues to fall closer to 0 percent.

Real treasury yeilds fall further
click to enlarge

As I’ve explained numerous times before, gold and real interest rates share an inverse relationship. It makes little sense to invest in an asset that’s guaranteed to cost you money—which is the case with the two-year and five-year government bond right now. Investors seeking a “safe haven” might therefore add to their weighting in gold, especially with North Korea’s Kim Jong-Un raising tensions.

The yellow metal closed (last week) above $1,350 an ounce, more than a one-year high – (but has come down quite sharply this week as some of thge geopolitical fears eased – temporarily perhaps? – Editor).   

Gold price up more than 15 percent year to date
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Despite Efforts to Control Spending, National Debt Expected to Continue Growing: CBO

Similarly driving the gold Fear Trade are concerns over the national debt. Last week President Donald Trump sided with Congressional Democrats in raising the federal borrowing limit to allow Hurricane Harvey recovery aid to pass. An initial package of $7.85 billion for Harvey victims was agreed upon, but with total costs expected to be as high as $190 billion—more than the combined costs of Hurricanes Katrina and Sandy—and with Hurricane Irma the federal aid amount could eventually run even higher.

Trump partially ran on reigning in government spending, which I and many others would like to see. Even so, this might not be enough to control our runaway debt. According to an August report by the Congressional Budget Office (CBO), debt will likely continue to grow as spending for large federal benefit programs—Social Security, Medicare and the like—outpaces revenue. Interest payments on the debt will only continue to accelerate as well.

Below is a chart showing national debt as a percentage of GDP going back to the founding of the U.S. Although we’ve seen periodic spikes in response to national crises, the debt could soar to unprecedented levels within the next 10 years.

Federal debt expected to continue rising
click to enlarge

Financial writer Alex Green, the Oxford Club’s chief strategist, told me during my recent interview with him that he thought out-of-control spending posed a greater threat to our country than even North Korea.

I tend to agree with him, and that’s why I believe that investors should have a 10 percent allocation in gold, with 5 percent in bullion and 5 percent in gold stocks, mutual funds and ETFs.

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Gold price: Korean bomb test could see fireworks in the gold market

Edited and updated version of an article I published on the Sharps Pixley website at the weekend following the North Korean hydrogen bomb test confirmation.

When the world’s largest gold ETF – SPDR Gold Shares (GLD) – adds gold into its holding, the gold price usually rises – and vice versa, and perhaps the second most bullish pointer for gold is that between June 8th and August 7th, some 80 tonnes of gold were liquidated out of GLD with only a limited overall impact on the gold price.  For the first month of the two month sell-off period, gold did fall back, but in the second month of sales out of GLD the gold price reversed and actually rose.  OK, so without these sales perhaps the gold price would have risen more sharply.  Since August 7th though we have seen purchases into GLD and the gold price has indeed risen fairly substantially, despite what look like big ‘flash crash’ sales of paper gold knocking the price back sharply, but only succeeding to do so for a very short time.

 Another factor which has been apparent is that the trading volumes seen over the past few weeks have been particularly high for the end of what is a holiday period.  This suggests a raging battle under way between gold bulls and gold bears which the bulls appear to have been winning.  But – and it’s a big but – the holiday period is now coming to an end with the Labor Day holiday and the serious players will be back at their desks.  As we have pointed out before, major U.S. holidays seem often to provide inflection points in the markets, and observers will be keen to see whether Labor Day 2017 will prove to be one of these and see the gold price either take off strongly upwards, or be knocked sharply back yet again.

But the No.1 bullish factor for the gold price this week is probably the fact that North Korea is confirmed to have tested a new, more powerful, nuclear weapon (50-60 kilotons according to reports – some put it at 100-120 kilotons) over the weekend, and the claim by North Korea that it could be fitted to one of its inter continental ballistic missiles (ICBMs).  This may well sway any likely post-Labor Day inflection point towards the likelihood of a serious gold price boost this week, although initial upwards price movement has been limited – the powers that be have obviously been successful so far in damage limitation!

GLD liquidations or purchases may also provide a strong pointer to market direction for precious metals.  It tends to be bank and/or fund purchases or sales which account for major moves in GLD, so whether the ETF’s gold content bleeds or grows should be an excellent guide as to where the gold price may be headed.  Weak U.S. economic data has effectively removed the Fed’s prospective rate rise scenario from the gold price equation – at least for a couple of months although may have an impact again in November as speculation will reign over whether the Fed will implement another small rise in December, or kick the can down the road once more.  The U.S. dollar is looking weak and a weak dollar tends to see the dollar gold price rise. And it is the dollar gold price which the market judges to be the most important indicator, even though the gold price in other currencies, like the euro or the yen, should perhaps be just as relevant to the gold investor.

We have ignored silver in this scenario, but silver continues to be tied to gold.  The gold:silver ratio (GSR) has fallen back below 75 again and will undoubtedly fall further should the gold price get a boost after Labor Day and the latest North Korean bomb test.  We see the GSR coming back down into the 60s which would make silver a far better short term buy than gold, but beware silver’s volatility.  However neither would be much good in a nuclear wasteland!

While North Korea’s Kim Jong-Un may not be as unstable as the media makes him out to be, the bomb test is yet another serious escalation in the DPRK/US confrontation and the big danger for further escalation here is that President Trump may be forced into military action, having backed himself into a corner with his rhetoric.  Unlike Iraq it looks as though North Korea’s weapons of mass destruction (WMDs) are real and the U.S. may now feel it has to make a move, however costly this may be to the U.S. itself and its Asian allies within easy range of North Korea’s missiles, before the threat to the U.S. itself escalates further.   If North Korea has indeed developed a nuclear warhead for its ICBMs and they are capable of targeting U.S. mainland cities, the U.S. may feel the necessity to strike and try and curtail the programme before the threat grows to an uncontrollable level.

The seemingly increasing threat of war between North Korea and the USA, could well give the gold price a huge boost in the days and months ahead with safe haven demand escalating worldwide – and particularly in Asia and the U.S. itself.  It could also persuade those banks holding big short positions in gold and silver to cover and reverse their policies.  A gold price reset could be on the cards even sooner than those like Jim Rickards and Eric Sprott have suggested – see $5,000 gold – then $10,000. Gold bulls sing from same songbook.

Thus be prepared for fireworks when North American markets re-open this week, although one suspects the big institutional holders with enormous short positions in gold and silver amy do their best to limit rises while, perhaps, unwinding from these.   The latest North Korean bomb test is probably favouring gold moving upwards – perhaps strongly – once the markets are back in full swing.

Gold Breaks Out to New 2017 High

by: Stefan Gleason*

Gold’s naysayers and doubters came out in full force earlier this summer as sentiment reached its nadir. The mid-year pullback in prices did, too.

There can be no doubt about it now – gold has broken out of its summer doldrums. On Monday, the yellow metal finally broke through the longstanding $1,300/oz resistance zone to make a new high for the year at $1,316.

Gold - Continuous Contract (August 28, 2017)

Assuming the breakout holds, the next upside target is $1,375/oz, the high point for 2016.

There are plenty of bullish factors behind gold’s recent upside momentum to continue pushing prices higher in the days and weeks ahead. The gold mining stocks are starting to show relative strength again. And the U.S. Dollar Index appears to have begun another new down leg this week, falling Monday to a two-and-a-half-year low.

Another bullish factor is geopolitics. Gold gained a few more dollars in early trading Tuesday morning in Asia after North Korea launched a missile over Japan. Japanese Prime Minister Shinzo Abe said, “Their outrageous act of firing a missile over our country is an unprecedented, serious and grave threat and greatly damages regional peace and security.”

On any ordinary news day, this dangerous provocation from North Korea would be the top story on all the cable news channels. Hawks would be calling on the U.S. to retaliate, and doves would be warning of the potential for millions of deaths in the event war breaks out in the densely populated region.

For now, though, the unprecedented flooding caused by Hurricane Harvey is the Trump administration’s top priority. Early estimates are that the storm has caused $40 billion in damage. Water levels are still rising in Houston, and surrounding areas extending to Louisiana, so the scale of the catastrophic losses stemming from 11 trillion gallons of water will continue to grow in the days ahead.

Several major oil refineries have been shut down by the storm. However, crude oil production is little affected. Oil inventories are expected to build even as gasoline prices rise (gasoline futures jumped 3% on Monday).

The disaster is bringing Americans from disparate backgrounds and worldviews together, united in a common purpose to help provide relief to those in need. Perhaps Congress will set aside some of its partisan acrimony when it goes back into session next week. Unfortunately for taxpayers, though, outbreaks of bipartisanship are usually associated with emergencies that cause both sides to agree on even more spending.

The political pressure to make sure federal agencies are equipped to handle Harvey relief efforts (which will be ongoing for months) figures to be overwhelming. Conservatives who had aimed to force concessions in an upcoming budget fight may conclude that they now have no leverage to do so.

Government Shutdown

President Donald Trump so far hasn’t backed off his vow to pursue border wall funding even if Congress refuses and a government shutdown occurs. But a government shutdown in the aftermath of a major natural disaster could be a political disaster for whoever gets blamed for it.

With so many risks hitting investors this week, it’s no surprise that the gold market is benefiting from safe-haven inflows.

Silver is benefiting as well. Although the silver market has not yet hit a new high for the year, prices advanced nearly 2.5% Monday to close above the 200-day moving average.

If silver can now start showing leadership, that would be bullish for the entire precious metals complex. The gold:silver ratio currently stands at about 75:1. Gold is still trading at a high price historically relative to silver.

The ratio can move rapidly to the downside when silver prices are surging. That was the case from late 2010 to early 2011, when the ratio dropped from the high 60s to the low 30s. An even bigger move could be in store for those who buy silver now, while the gold:silver ratio is still in the 70s.

Gold – Rhetoric and U.S. economy calling the price

Article first posted on info.sharpspixley.com yesterday

While there is little doubt that the USA has a much larger and proven nuclear arsenal than North Korea, Kim Jong Un will know that to deploy this against the relatively small Asian nation is fraught with problems in that nuclear fallout as a result of any such attack could also have an impact on China and South Korea – the one a potentially even more dangerous adversary and the other an ally.  Whereas if North Korea were to take out say Guam with a nuclear strike, which it has threatened to do, the impact on other nations would be far less.  However we feel either scenario is unlikely, although one can’t rule out an escalation into conventional warfare..

In assessing the risk though one assumes the U.S. is also bearing in mind that North Korea has long threatened drastic military action against its many perceived adversaries, but has seldom, if ever, delivered this.  There is also no certainty that North Korea has developed small enough nuclear warheads to fit into its Intercontinental ballistic missiles (ICBMs) which it has been developing, nor if they really have the range to reach the U.S. mainland, or the accuracy of delivery to hit their targets with any precision.  Anti-missile defence systems are also likely to be deployed around potential targets by America and its regional allies, but their efficacy is also unproven.

The whole rhetoric game – from North Korean Supreme Leader Kim Jong Un on the one side and President Trump on the other – may thus be bluff on both sides, but with a U.S. President who is prone to shoot from the hip, it is still a very dangerous confrontational game.  While a conventional non-nuclear war between the two powers would be hugely costly in terms of lives (North Korea has a huge and well equipped military) – even if China was not to be drawn in on the North Korean side – it would also be enormously dangerous to the South Korean capital, Seoul, which is only 35 miles (60km) from the North Korean border and potentially within artillery range.  (North Korean capital Pyongyang is around 130 km (80 miles) from the border so would not be quite so vulnerable to artillery attack from the South).

The big question probably is whether President Trump is painting himself into a corner with the ever-expanding hostile rhetoric.  Kim Jong Un has a history of not following through on his more dire threats so may feel that Trump will also prove to be a paper tiger.  But is this a misjudgement?  The world just doesn’t know and there is a fear that the continuing provocations may just result in a shooting war.  While nuclear arms may not be deployed by either side, at least initially, were North Korea to see itself losing such a conflict, its seemingly unstable leadership might consider launching a nuclear strike and heaven knows what that would lead to.

China may also be drawn in to any military conflict as it would rather not see a potentially hostile regime on its border.  If a shooting war does start then the ultimate diplomatic solution would, assuming Kim Jong Un is actually defeated, perhaps give China control over whatever government would take the place of the current North Korean regime.

Gold supposedly thrives on uncertainty and while the hostile rhetoric between North Korea and the USA continues, the ensuing uncertainty will build.  Coupled with the U.S. economy not performing as the Fed would like, we could also see a further decline in the U.S. dollar which should, de facto, give a boost to the dollar price of gold, which could thus be seen to appreciate strongly in dollar terms as 2017 progresses, even if the gains are not mirrored in other key currencies.

At the moment the gold price seems to be hovering uncomfortably in the $1,280s.  Some seem to be trying to knock it back – U.S. trading on Friday for example saw the gold price pulled back sharply from a couple of brief forays into the $1,290s, but whether this was profit taking, or a case of once again the powers-that-be not wishing to see the psychological $1,300 level breached, remains to be seen.  Morning trade in Europe today has seen the yellow metal move a little weaker in price, but this week could be make-or-break in terms of a move into the $1,300s.  There are still a couple of weeks of the northern hemisphere holiday season yet to run when trading can be thin, although that hasn’t been the case in the past week, but we will probably have to wait until post U.S. Labor Day (Sept 4th) for any real trend to develop.

What will happen then will be very much dependent on the escalation, or de-escalation of the U.S.-North Korean militaristic rhetoric and on U.S. economic data, which has recently been gold supportive in showing weakness in the purported U.S. economic recovery, thus reducing the Fed’s interest rate raising options

Over the longer term, this observer remains on the side of the gold bulls.  Asian demand, which is soaking up virtually all the physical gold which is available, will continue to grow as the overall wealth trend in the region remains positive; New mined supply will remain flat, or trend downwards, albeit perhaps only marginally.  Should U.S. safe haven demand return – more likely the longer the Trump-Kim war of threats continues – then we could see a serious squeeze in physical gold availability and the diminution of the ability of paper gold transactions – real or spoofed – to control the price.  Interesting times!

Gold back over $1280; Silver over $17; U.S. recovery fragile and vulnerable

Gold Today –New York closed yesterday at $1,279.30. London opened at $1,278.00 today. 

Overall the dollar was stronger against global currencies, early today. Before London’s opening:

–         The $: € was stronger at $1.1732 after the yesterday’s $1.1760: €1.

–         The Dollar index was stronger at 93.70 after yesterday’s 93.61.

–         The Yen was weaker at 109.98 after yesterday’s 109.75:$1.

–         The Yuan was much stronger at 6.6594 after yesterday’s 6.6782: $1.

–         The Pound Sterling was weaker at $1.2980 after yesterday’s $1.3005: £1

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    8    10

     2017    8    9           

     2017    8    8

SHAU

SHAU

SHAU

/

273.77

273.21

Trading at 275.75

273.69

272.70

$ equivalent 1oz at 0.995 fineness

@   $1: 6.6594

       $1: 6.6782

       $1: 6.7059     

  /$1,270.07

$1,262.21

Trading at $1,282.92$1,269.70

$1,259.84

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 just under $10.00 higher than Shanghai’s close yesterday. Then today sees Shanghai lifting the gold price even higher as you can see. London is still lagging but not by much as it opened

We were looking to see if this was a jump on the back of the deteriorating situation with North Korea. We would have thought that if this were so, the gold price would have jumped higher. So far the evidence is not there.

London is $5 lower than Shanghai, but raced to catch up and at one point in London was the same as Shanghai’s earlier trading levels.

Silver Today –Silver closed at $16.86 yesterday after $16.38 at New York’s close Tuesday.

LBMA price setting:  The LBMA gold price was set this morning at $1,278.90 from yesterday’s $1,267.95.  The gold price in the euro was set at €1,091.03 after yesterday’s €1,080.30.

Just before the opening of New York the gold price was trading at $1,280.60 and in the euro at €1,092.38. At the same time, the silver price was trading at $17.10. 

Price Drivers

The gold price in dollars is now at $1,280, so the answer to yesterday’s question, “Will it run higher in the $1,270s?” was given in a day! So, where next?

The Yuan continues to strengthen strongly against the dollar, which itself is strengthening against other currencies.

The Fed

Members of the FOMC are talking to the media in very dovish manners. The evidence that inflation is falling has clearly disturbed them. After the 2015, 2016 steady building of inflation, it is falling back again. This implies that we may well not see another rate hike in 2017. They still feel that a start to the Fed’s Balance Sheet tightening will be made. After all, it will be slight and the Fed believes it will have barely any impact on markets.

While academically that may be true, psychologically it may be a mistake. The recovery remains vulnerable and fragile. Any hint of tightening may well cause a market reaction when they broach that subject with action. Meanwhile, the earnings picture is pointing to it peaking in the near term, if it has not already done so. This makes equity markets toppy. They could turn mercurial if evidence arrives that tightening, even slightly, is about to happen.

Gold will benefit from any stalling of Fed tightening. Real interest rates continue to be negative but if inflation falls back further until rates are not negative, we fully expect the Fed to turn back to the easing path.

North Korea

It is apparent that North Koreans are being fed propaganda that the U.S. is its main enemy and about to invade the country. This distracts from the dire economic state of the country. President Trump is reinforcing that idea with his responses. His words would, in the North Koreans eyes, justify continuing on the threatening war path. The President of the country is seen as a psychopath and intent on going ahead with his threats.

China, on the other hand, will not allow that buffer state to be destroyed, bringing the U.S., militarily dominated South Korea to its doorstep. This formula will lead to conflict, we now believe. But the markets have not yet responded to this potential. Gold has not jumped as it would have done if markets were reacting. The rise overnight in the gold price in the U.S. was not via physical buying but a dealer’s response to the North Korean situation. On the other hand the rise in Shanghai prices would be based on physical dealings. A $10 rise in Shanghai falls far short of a ‘war fear’ rise.

As we said yesterday, “Gold will benefit if war does break out as the war hurts financial markets the whole world over.”

Gold ETFs – Yesterday there were no changes in the holdings of the SPDR gold ETF or the Gold Trust holdings yesterday. The SPDR gold ETF and Gold Trust holdings are at 786.869 tonnes and at 211.43 tonnes respectively.

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