Is $1,500 gold on the cards this year?

Could the Stars Be Aligned for $1,500 Gold?

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

How the stars could be aligned for 1500 gold

In a January post, I showed how the price of gold rallied in the months following the 2015 and 2016 December interest rate hikes—as much as 29 percent in the former cycle, 17.8 percent in the latter. Gold ended 2017 up double digits, despite pressure from skyrocketing stocks and massive cryptocurrency speculation.

Will there be a fed rally in 2018
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I forecast then that we could see another “Fed rally” this year following the rate hike in December 2017. Hypothetically, if gold took a similar trajectory as the past two cycles, its price could climb as high as $1,500 this year.

As I told Kitco News’ Daniela Cambone last week, I stand by the $1,500 forecast. Before last week, investors might have been slightly disappointed by gold’s mostly sideways performance so far this year. But now, in response to a number of factors, it’s up close to 3 percent in 2018, compared to the S&P 500 Index, down 2.4 percent.

Living with Volatility

While I’m on the topic of equities, the S&P 500 dividend yield, for the first time in nearly a decade, is now below the yield on the two-year Treasury. Historically, the economy has slowed around six months after dividends stopped paying as much as short-dated government paper. This could spur some stock investors to trim their exposure and rotate into other asset classes, including not just bonds but also precious metals, which I believe might help gold revisit resistance from its 2016 high of $1,374 an ounce.

Two year treasury yeild is now higher than sp 500 dividened yield

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Volatility has also crept back into markets. It began with the positive wage growth report in February, implying the possibility of faster inflation. More recently, the CBOE Volatility Index (VIX), or “fear gauge,” has surged on the departures of Gary Cohn as chief economic advisor and Rex Tillerson as secretary of state, as well as the application of tariffs on steel and aluminum imports. Last week, President Donald Trump ordered tariffs on at least $50 billion of Chinese goods, stoking new fears of a U.S.-China trade war. In response, the Asian giant proposed fresh duties on as much as $3 billion of U.S. products, including wine, fruits, nuts, ethanol and steel pipes.

Volatility has returned to markets after a calm 2017
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As I see it, there could be other contributing factors pushing up the price of gold. A good place to start is with Trump’s recent appointment of former CNBC star Larry Kudlow as White House chief economic advisor.

Kudlow’s Kerfuffle Over Gold

Between 2001 and 2007, I appeared on Kudlow’s various CNBC shows a number of times, and though he always struck me as highly intelligent, informed and accomplished—he served as Bear Stearns’ chief economist and even advised President Ronald Reagan—it was clear he had a strong bias against gold. This was the case even as the price of the yellow metal was on a tear, rising from $270 in 2001 to more than $830 an ounce by the end of 2007.

Gold price continued to rise last decade even as bearishness in media persisted
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Kudlow showed his true colors toward gold as recently as this month, telling viewers: I would buy King Dollar and I would sell gold. As you can see below, this has’t been a prudent trade for more than a year now.

Gold price vs US dollar
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Earlier this month, Kudlow wrote that falling gold is good, as it “bodes well for the future economy.” He said he agreed with a friend, who called the metal an “end-of-the-world insurance contract.”

While there are those who would agree with him, it’s important to remember that gold is used for much more than as a portfolio diversifier, and its price is driven by a number of factors. These include Fear Trade factors, from inflation to negative real interest rates, and Love Trade factors such as gift-giving during cultural and religious festivals. The precious metal has important industrial applications as well.

And since I first went on Kudlow’s program, gold has outperformed the S&P 500’s price action nearly two-to-one, as I showed you back in December. Even with dividends reinvested, the market is still trailing the yellow metal.

Gold price has crushed the market more than 2 to 1 so far this century
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So it’s fine if gold isn’t your favorite asset, but to dismiss it wholesale as Kudlow has again and again is, with all due respect, irrational.

It’s Not About Steel, It’s About Stealing

Kudlow isn’t just anti-gold, however. He’s also anti-China, and even though he’s traditionally opposed tariffs in general, he supports Trump’s efforts to levy taxes on Chinese imports. Specifically, the duties are designed to offset the cost of intellectual property allegedly stolen by the Chinese over the past several years.

China’s J-31 fighter jet, for example, is believed to be a knockoff of Lockheed Martin’s F-35, the most expensive piece of U.S. military equipment. It’s for this reason that Lockheed’s CEO, Marillyn Hewson, was present when Trump signed the authorization to impose new tariffs.

The Chinese J31 fighter jet is thjought to be a knockoff of Lockheed Martins F35

Our intellectual property is hugely important to the U.S. economy. As important as steel and aluminum are, they account for only 2 percent of world trade, and in the U.S., it’s even less than a percent of gross domestic product (GDP). Technology exports, on the other hand, represent about 17 percent of U.S. GDP.

That said, the implications of a trade war with the world’s second-largest economy certainly have many investors concerned—all the more reason to consider adding to your gold allocation at this time. As always, I recommend a 10 percent weighting, with 5 percent in gold bullion, 5 percent in high-quality gold mining stocks and ETFs.

Is Trump Betting on the Wrong Guy?

On a final note, we were pleased to have an old friend visit our office last week. Michael Ding, a veteran of the U.S. Global investments team, joined us to share some laughs and his thoughts on what’s happening in Asian markets right now.

Specifically, Michael said that Ray Dalio, founder of mammoth investment firm Bridgewater Associates, which manages around $160 billion, has become something of an economic guru for members of the Chinese ruling party’s highest-ranking members, including Premier Li Keqiang. Dalio—whose most recent book, Principles, nowtops China’s bestseller list—is reportedly advising the country’s top bankers and economists on how to deleverage safely without triggering a so-called “hard landing.”

A trade war between the U.S. and China, Ray Dalio said recently, would be a “tragedy.”

So to put it in perspective: Whereas Trump has just now brought on Kudlow, the Chinese are leaning on a fellow American, Dalio, one of the smartest, most gifted money managers in the world—not just of our time but of all time.

Did Trump make the right call? Which player would you want on your team: Kudlow or Dalio? For my money, I would pick Dalio.

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Kudlow on gold – Admin stooge or …?

A view on Larry Kudlow, President Trump’s new Chief Economic Advisor, who apparently advocated buying the dollar and selling gold in one of his first pronouncements after accepting the new position.  This statement had an immediate negative effect on the gold price.  But, does he really believe what he said or is he just toeing the party line?

By Clint Siegner*

Gary Cohn resigned as President Donald Trump’s Chief Economic Advisor on March 6th. He and Trump didn’t see eye to eye on the recently imposed tariffs and the President selected CNBC commentator Larry Kudlow to replace him Wednesday. Perhaps it was Kudlow’s experience on television that got him the job.

Larry Kudlow

It doesn’t look like he was chosen for his intellectual honesty. Kudlow was quite vocal with his own opposition to tariffs.

He has suddenly done an about face and now says he can “live” with targeted tariffs. However, it gets worse than simply flip-flopping on trade.

In one of his very first interviews after accepting the post, Kudlow offered this bit of advice to investors: “I would buy King Dollar and I would sell gold.”

The dollar went on a dramatic losing streak during Trump’s first year in office – one of its worst annual performances in decades. Of course, that is just a single year.

The fiat dollar has been in almost continual decline versus real assets since the Federal Reserve’s establishment 105 years ago. It has lost 98.5% of its purchasing power relative to gold since then.

Kudlow must have seen the forecasts which show federal deficits spiking higher as the combination of tax cuts and higher spending wreak havoc on the budget. The tariffs should further weigh on the U.S. dollar as higher steel and aluminum prices drive inflation.

The prospects for the U.S. dollar are downright awful and Kudlow isn’t advocating for reforms which might improve that outlook. Instead, he is vocally advocating for the Federal Reserve to slow down on interest rate hikes.

It’s hard to believe anyone today could be particularly bullish on the greenback. Now that Kudlow is getting a federal paycheck, he is simply toeing the company line like he did for years at CNBC.

Kudlow has made a name for himself by constantly hyping the economy and stock market, cheering for “king dollar,” and criticizing gold – much to the detriment of viewers who followed his advice ahead of the 2008 financial crisis.

We’ll be paying particularly close attention to Kudlow’s moves now that he’s in the Trump administration. Early indications are not positive.

Rickards: Gold only place to go in coming financial panic

In the latest podcast from Mike Gleason* of  Money Metals Exchange Jim Rickards  warns of a huge financial crash ahead and that gold and precious metals will provide the only real way of protecting one’s wealth.

Listen to the Podcast Audio: Click Here or read the transcript below:

Mike Gleason: It is my great privilege now to be joined by James Rickards. Mr. Rickards is Editor of Strategic Intelligence, a monthly newsletter and Director of the James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. He’s also the author of several bestselling books including The Death of Money, Currency Wars, The New Case for Gold and The Road to Ruin. In addition to his achievements as a writer and author, Jim is also a portfolio manager, lawyer and renowned economic commentator, having been interviewed by CNBC, the BBC, Bloomberg, Fox News and CNN, just to name a few. And we’re happy to have him back on the Money Metals Podcast.

Jim, thanks for coming on with us again today. We really appreciate your time as always and, how are you?

Jim Rickards: I’m doing great Mike, great to be with you. Thank you.

Mike Gleason: Well Jim, I figure a good place to start here is with one of your most recent books. We want to get your take on the state of the world economy. In your book titled The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, you make some very interesting comments. Now while the financial media is talking about booming stock markets and accelerating GDP growth, you aren’t quite as optimistic. We both know that most of the growth we’ve seen in recent years has been built with huge amounts of central bank stimulus and the fundamental problems that drove the last financial crisis have hardly been resolved. In fact, you think the next financial catastrophe isn’t too far away and many among the elite are getting ready for it. If you can, briefly lay out some of what you’ve been seeing.

Jim Rickards: Sure Mike, you touched on two different threads. One is, let’s call it the short to intermediate term, which is how’s the economy doing? What would the forecast be for the year ahead? What do I think about stocks and so forth? That’s one part of the analysis, but the other one is a little bigger and a little deeper, which is what about another major financial crisis, a liquidity crisis, global financial panic and what would the response function be to that.

Let me separate. They’re related because, I mean the point I always make is that there’s a difference between a business cycle recession and a financial panic. They’re two different things. They can go together, but they don’t have to. For example, October 29, 1987, the Stock Market fell 22% in one day. In today’s Dow terms that would be the equivalent of 5,000 Dow points, so we’re at 26,000 or whatever, as we speak, a 22% drop would take it down about 5,000 points. You and I both know that if the Dow Jones fell 500 points that would be all anybody would hear about or talk about. Well, imagine 5,000 points. Well, that actually happened in percentage terms in October 1987. So, that’s a financial panic, but there was no recession. The economy was fine and we pulled out of that in a couple of days. Actually, after the panic, it wasn’t such a bad time to buy and stocks rallied back. Then, for example in 1990, you had a normal business cycle recession. Unemployment went up. There were some defaults and all that, but there was no financial panic.

In 2008, you had both. You had a recession that began in 2007 and lasted until 2009 and you had a financial panic that reached a peak in September-October 2008 with Lehman and AIG, so they’re separate things. They can run together. Let’s separate them and talk about the business cycle. I’m not as optimistic on the economy right now. I know there’s a lot of hoopla. We just had the big Trump Tax Bill and the Stock Market’s reaching all-time highs. I mean, I read the tape. I get all that, but there are a lot headwinds in this economy. There’s good evidence that the Fed is over-tightening.

Remember the Fed is doing two things at once that they’ve never done before. They’re raising rates. I mean, they’ve done that many times, but they’re raising rates, but at the same time, they’re reducing their balance sheet. This is the opposite of QE. I’m sure a lot of listeners are familiar with QE, Quantitative Easing, which is money printing. That’s all it is. And they do it by buying bonds. Then when they pay for the bonds from the dealers, they do it with money that comes out of thin air. That’s how they expand the money supply. Well, they did that starting in 2008 all the way through until 2013, and then they tapered it off and the taper was over by the end of 2014, but they were still buying bonds. So, that was six years of bond buying. They expanded their balance sheet from $800 billion to $4.4 trillion.

Well, now they’re putting that in reverse. They grabbed the gear and they shifted it into reverse and they’re actually not dumping bonds. They’re not going to sell a single bond, but what happens is, when bonds mature, the Treasury just sends you the money, so if you bought a five-year bond five years ago and it matures today, the Treasury just sends you the money. Well, when you send money to the Fed, the money disappears. It’s the opposite of money printing. So, the Feds are actually destroying money, actually reducing the money supply, so they’re raising rates and destroying money at the same time. It’s a double whammy of tightening and I don’t believe the U.S. economy’s nearly as strong as the Fed believes. They rely on what’s called the “Phillips Curve,” which says unemployment’s low, that’s a constraint and wages are going to go up and inflation is right around the corner. And that’s part of the reason they’re tightening, but there are a lot of flaws in that theory.

First of all, the basic Phillips Curve theory is junk. It’s just not true. We saw that in the late ’70s when we had sky high unemployment and sky-high inflation at the same time. We’ve also seen it recently when we’ve had low unemployment and disinflation at the same time. So, you start by saying the Phillips Curve is junk, but even if you thought there was something to it, there’s so many problems with it in terms of labor force participation demographics, debt deleveraging, technology, et cetera, that it just doesn’t apply under the current circumstances.

So, the Feds are tightening for the wrong reason. They are tightening at the wrong time and there’s a lot of evidence that a lot of the growth in the fourth quarter was consumption driven, but that was debt driven. People charged up their credit cards, consumer debt spiked. The savings rate is near a very long-term low. It doesn’t look sustainable, so lots of reasons to think that the Fed’s going to overdo it, get it wrong, tighten, throw the economy either into a recession or very low growth with disinflation, so I’m just not buying the inflation “happy days are here again” story.

There’s also good reason to believe that the Tax Bill will not be as stimulative as people expect. All that’s truly going on is the running up the deficit by another trillion dollars and we’re already way into the danger zone and then that’s actually a drag on growth. So, there’s a good reason to think the economy is going to slow, that by itself would take the wind out of the Stock Market and close it at the potentially very serious Stock Market correction, at least 10%, maybe as much as 20%. We’re talking about going down as I say 5,000 or 6,000 points on the Dow before the end of the year, so that’s one scenario.

The scenario I talk about in my book really involves a financial panic. Now, the thing there is that these are not that rare. I already mentioned the one, really two-day panic in 1987, but in 1994 you had the Mexico Tequila Crisis. In 1997, you had the Asian Peninsula Crisis. In 1998, you had the Russia Long-Term Capital Management Crisis. In 2000, you had the dot.com meltdown. In 2007, the mortgage meltdown. In 2008, the financial panic. These things happen every five, six, seven years, not like clockwork, but that’s a typical tempo for these kinds of meltdowns and it’s been nine years since the last one. So, nobody should be surprised if it happens tomorrow. I’m not predicting it will happen tomorrow. I’m just saying nobody should be surprised if it does, whether it’s tomorrow, or next month or next year, or even a year and a half from now, don’t think for one minute that we’re living in a world free of financial panics.

By the way, these two things could happen together. You could have a slowdown that leads to a financial crisis, a replay of 2008. But here’s the difference and this is really the point of your question, Mike. In 1998, we had a financial panic and Wall Street got together and bailed out the Hedge Fund Long Term Capital Management. In 2008, we had a financial panic and the Central Banks got together and bailed out Wall Street, so each bailout gets bigger than the one before it. In the next panic, whether it’s this year or next year, who’s going to bail out the Central Banks. In other words, each panic’s bigger than the one before. Each response is bigger than the one before going down this chronological sequence.

The next one is going to be the biggest of all. It’s going to be bigger than the Central Banks and you’re only going to have one place to turn. If you had to get global liquidity right now, the Fed’s at that one and half percent in terms of the target Fed funds rate, so they most they could cut is one and a half percent to get back to zero. There’s good evidence that to get the U.S. economy out of a recession, you have to cut interest rates three or four percent. Well, how can you cut them three percent when you’re only at one and a quarter, one and a half percent. Well, the answer is you can’t, so then what’d you do? Well, then you go to QE, but they already did that.

They haven’t unwound the QE. They started to and that’s what I mentioned, but they haven’t unwound it. The balance sheet is still around four trillion dollars, so what’d going to go to eight trillion, twelve trillion? I mean, some people would say, “Yeah, what’s the problem.” Those are the modern, monetary theorists, Stephanie Calvin, Paul McCulley, Warren Mosler. There’re a bunch of them that think that there’s no limit in the amount of money the Fed can print, but there is a limit. It’s not a legal limit. Legally the Fed could do it, but there’s a psychological limit. There’s an invisible competence boundary that you cross when people just say “You know what, I’m out of here. Get me out of dollars. Get me into gold, silver, fine art, land. Whatever. Crypto-currencies, if you like. Whatever it might be but get me into something other than dollars because I’ve lost confidence in the dollar.” And we’ve seen that before also.

So, putting that all together, in the next financial panic and nobody should be surprised if it happens tomorrow, it’s going to be bigger than the Central Banks. They’re going to have to turn to the IMF for liquidity. The IMF has a printing press also, that’s the International Monetary Fund. They can print this world money called the Special Drawing Right of the SDR, so yeah, they can pull trillions of SDRs worth trillions of dollars. One SDR is worth about $1.50. They could pull trillions of SDRs out of thin air and pass them around, but here’s the point and I spoke to Tim Geithner about this, former Secretary of the Treasury. It takes time.

The last time they did this … and by the way, it went completely unnoticed, the panic was in ’08 and in August and September of 2009, the IMF did issue SDRs to help with global liquidity, but that was almost a year after the panic. The point is, the IMF is slow and clunky. It’s not the fire department. I mean, they might be like a construction crew that can come in and put in a new foundation, but they’re not the fire department that can help you when the building’s burning down.

So, what they’re going to have to do is what I call Ice 9. They’re going to have to freeze the system. First, starting with money market funds, then bank accounts, then stock exchanges, they might reprogram the ATMs to let you have $300 a day for gas and groceries. They’ll say, “well, why do you need more than $300 a day to get some food and gas in your car? Why do you need more than that? We can’t let you take all your money out of the bank. We can’t let you take your money out of the money market funds. We can let you sell your stocks.” And I describe all this in the book in detail with a lot of endnotes. You don’t have to read the endnotes unless you want to, but this is all documented. It’s all publicly available. It’s not some science fiction scenario. This plan is actually in place and I describe how.

Just to wrap up, I expect a weaker economy than the mainstream in 2018. Perhaps, a stock market crashing based on that alone. I also expect another financial panic. It’s impossible to say when, but eight years on, nine years on, I would say sooner than later. And this response function is going to be something that people haven’t seen since the 1930s.

Mike Gleason: Now, let’s talk specifically about gold, safe haven assets, including metals are way of vogue these days, at least among the mainstream public. Now, most investors likely will be flatfooted and probably won’t see the next financial crisis coming just like the one in 2008, until it’s too late. Confidence in the U.S. dollar and the financial system is hard to shake without plenty of good evidence that both are in trouble. We’re even seeing some gold bugs beginning to lose faith. They know that there is plenty of risk out there that you just laid out, but they are growing tired of watching just about everything outperform precious metals. What are you saying these days to people who might be thinking about selling gold and say, joining the party in the stock markets?

Jim Rickards: Well, let me spend some time on that, but just to say a kind word about the people you’re describing. Look, gold just finished a four-year plus bear market. It lasted from August 2011 to December 2015. In that bear market, gold went down about 45% peak to trough, and if you use the about $240 price from 1999 and just scale that up to $1,900 and then back down again to $1,050, which is where it was in December 2015, that was a 50% retracement. And by the way, my friend Jim Rogers, one of the greatest commodities traders in history, co-founder of the Quantum Fund with George Soros, a legendary commodities trader, he said to me … and he has a lot of gold. He expects gold to go much higher, as do I, but he said, Jim, “Nothing goes from here to there.” Meaning, he’s reaching way up to the sky up into outer space. He says, “Nothing goes from here to there without a 50% retracement along the way.”

And I think that was very good advice. Well, okay, but we’ve had the 50% retracement. That’s behind us. We’re in a new bull market now. There was a bull market from August 1971 to January 1980 and gold went up over 2,000%. From January 1980 to August 1999, there was a very long, 20-year grind it down bear market, and gold went down about 70%. Then you had a new bull market that lasted from August 1999 to August 2011 and in that 12-year bull market, gold went up over 700%. Then you had another bear market from August 2011 to December 2015 and as I said, gold went down 45%. We’re in a new bull market. It started in December 2015.

Now, here are the facts, gold goes up and down. It’s volatile and we know there’s manipulation. People get discouraged and they buy gold and then some hedge fund or China comes along in the gold futures market and slams the price down. “Oh, gee, why did I buy it?” I get all that. I understand the discouragement. I understand how difficult it is to watch stocks go up and Bitcoin go up and I’m sitting here with gold and it just seems to be going sideways, but it’s not true. In 2016, gold went up over 8%. In 2017, gold went up over 13%. So far in 2018, gold is up 3%. You take the entire period from the bottom of the last bear market to the beginning of the bull market, December 2015 to today, gold is up over 25%. It’s been one of the best performing asset classes of all the major asset classes. It’s not crazy like Bitcoin, but Bitcoin’s collapsing, which I also predicted some time ago.

So, the truth of the matter is 2016-2017 are the first back-to-back years of gold gaining since 2011-2012, although at that point, it was already off the top. It’s more a statistical anomaly that gold went up in the year 2011. Yeah, it did, but it was way down, way off the peak in September of that year. But now we have two back-to-back years of gold going up very significantly. We’re in year three, 2018, is year three of this bull market. It’s off to a very nice start. The fundamentals are good. Their technicals are good. The supply and demand situation is good. We haven’t even gotten into other potential catalysts, including War with North Korea, loss of confidence in the dollar, financial panic. Even a normal business cycle recession or if inflation gets out of control, there’s just a whole list of things that are going to drive gold higher.

And the last point I want to make, Mike, is that gold is doing this performance against headwinds. The Fed has been raising rates. When you raise nominal rates and you tighten real rates, that’s normally a very difficult environment for gold and yet, gold’s going up anyway. Can you imagine what’s going to happen when the Fed has to back off… because right now, as I said, they’re over-tightening. When this economy slows, and that data starts rolling in later in the first quarter and early second quarter of 2018, the Fed’s going to do what they call “pause.” It doesn’t mean they’re going cut rates. That’s somewhere down the road, but they pause, which means that they …

Right now, they’re like clockwork. They’re going to raise every March, June, September, December – 25 basis points each time, boom, boom, boom, boom like clockwork. But, every now and then they don’t. They skip. They pause. Well, if your expectation is they’re going to raise and then they don’t, they pause, that’s a form of ease. It’s ease relative to expectations. That’s what’s going to happen later this year. All of a sudden, this headwind’s going to turn into a tailwind and gold’s going to get an even bigger boost. I see it going to $1,400 over the course of this year, perhaps higher. My long-term forecast for gold, of course, is $10,000 an ounce, but that’s … and I’m not backing away from that. That’s just simple math. That’s the implied noninflationary price of gold if you need to use gold to restore confidence in a monetary system in a financial panic or liquidity crisis where people have lost confidence. That’s not some made up number. That number is actually fairly easy to calculate, but you don’t go there overnight. You got to get to $2,000 and $5,000 before you get to $10,000.

I think right now, we’re in a new bull market. It’s going to run for years. We’ve got that momentum. We’re off the bottom, but people are always most discouraged at the bottom, right? Well, that’s the time you should buy. It’s just human nature. I’m not faulting anyone. I’m not criticizing anyone, it’s just human nature to say, “Oh man, I’m so beaten down. I’m so sick of this. I’m so tired of this.” Well, that’s usually the time to buy and guess what, it is.

*Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.

The Fed’s options and the changed picture for gold – Greg Weldon

The latest Mike Gleason* interview with Greg Weldon where the latter talks us through Fed options, the markets, gold price rigging  etc.  Greg’s research calls for the markets to roll over, and he’s expecting some very rough waters ahead based on key metrics he’s focused on – consumer spending and debt. He also weighs in on the tricky spot the Fed is in and where this is all pointing for both stocks and for gold.

Mike Gleason: It is my privilege now to welcome in Greg Weldon, CEO and President of Weldon Financial. Greg has over three decades of market research and trading experience, specializing in metals and commodity markets and even authored a book in 2006 titled Gold Trading Bootcamp, where he accurately predicted the implosion of the U.S. credit market and urged people to buy gold when it was only $550 an ounce.

He is a highly sought-after presenter at financial conferences throughout the country, and is a regular guest on financial shows throughout the world, and it’s good to have him back here on the Money Metals Podcast.

Greg, thanks for joining us today. And it’s nice to talk to you again. How are you?

Greg Weldon: I’m great, thanks. My pleasure, Micheal.

Mike Gleason: Well, when we had you on back in mid-August you were optimistic about gold at the time. We had a pretty good move higher, shortly thereafter that ended up with gold hitting a one year high. But it stalled out around $1,350 in early September and we’re currently back below $1,300 as we’re talking here on Wednesday afternoon. Gold hit resistance at about the same level in the summer of last year, so give us your update as to your current outlook. What drivers, if any, do you see that can push gold through that $1,350 resistance level in the months ahead, Greg?

Greg Weldon: Yeah, well, exactly as you said. You had the move that we were anticipating when we last spoke and it kind of had already started from the 1205-ish level. All of this fitting into the kind of bigger picture, technical structure that still leads to a bullish resolution. But as you accurately mentioned, you got up to what have been close to, not quite even towards last summer’s highs around $1,375, $1,377. In this case, around $1,360 and ran out of steam.

The dollar kind of changed some of the picture and the thought process linked to the Fed changed some of the picture. So, you embarked on a downside correction. $1,260 was the low, you have a nice little correction from that level. That was the level that equated to 200-day exponential moving average. It’s a level that was just below the 38% Fibonnaci retracement of the move up from $1,205. Actually, the move up from $1,123 back at the end of 2016. So you had real, critical support there. So, to me, everything’s kind of mapped out the way you might expect it to, structurally, in this market.

From here, one of two things happens, I think. Well, one of three things, anyway. You could be cut if you have a bit of low rally backed up to $1,300. You back below it a little bit to dollars; still looks kind of strong. It’s an interest rate differential dynamic as a more hawkish view for the Fed is priced into the Fed funds; that gets transferred into the two-year and five-year treasury notes. The two-year treasury notes at a record high-yield relative to the German two-year schatzi. So, that lifting the dollar … it’s kind of gravitational pull to the upside. And that is some of the downside risk here; that the rally we just saw is kind of you b-wave and maybe you have a c-wave down towards $1,240. That’s kind of an ultimate low. Whether or not it plays out that way, longer term we still like it.

Mike Gleason: Precious metals have had a pretty respectable year all in all. Gold is up about 11% year to date. Silver is up about half as much. There isn’t exactly a lot of excitement. It seems like it’s always two steps forward, one step back. Sentiment in the physical bullion markets, where we operate, is muted. There are multiple factors to consider as to why metals markets are stuck in a bit of a rut. It seems to us that one of the big ones is the equities market stock prices just keep marching relentlessly higher. Either investors have become totally desensitized to risk or maybe there just isn’t as much risk as well think there is. In any event, barring some sort of spike in inflation expectations, which pushes metals and stocks both higher, we don’t see gold and silver breaking out unless investors start getting nervous about stock market valuations and thinking about safe havens. So what are your thoughts about equity markets and how they relate to precious metals, Greg? And where do you see stock prices headed in the near term?

Greg Weldon: Yeah, I mean it’s a perfect question because the reality is, and we in our daily research we focused on this, in fact yesterday. We haven’t spoken … It sounds like we arranged this question. Focusing on the fact that gold, relative to S&P, is at a low. You really are kind of lows that we’ve seen before, but at a level where if you get much lower, you’re breaking down to multi-year lows and this whole thing gets called into question from a technical perspective. But my problem with looking at it from a technical perspective, is that I think the stock market is living in borrowed times. Basically, the Fed has done exactly what they wanted to do. They have flushed people out of safe havens and into risk assets. That’s the whole idea of QE. It worked. You reflated the stock market. That has facilitated a huge, unprecedented rise in consumer credit.

Instead of the housing market being the collateral like it was in 2006 and 2007, now it’s the stock market that’s the collateral, the Googles and Amazons of the world and the Facebooks of the world. And you have this demand that is being driven or really being fed by credit. Now you see the credit numbers start to slow. They’re unsustainable. You start to see the consumer roll over a little bit. So that’s the number one risk to the stock market; it’s actually the consumer.

If you look at the retail sales numbers, outside of automobiles and gasoline, which is price-based, you don’t have much of anything. And you have eating and drinking growth slowing. That’s a key component, a key layer to the discretionary spending that’s an important tell to the bigger picture. The consumer discretionary sector is breaking down against the S&P. So that’s a warning sign to me.

You have, in terms of the dynamics around what the expectation is for GDP growth, predicated upon policies that have not yet been even agreed upon, let alone voted upon, let alone implemented, let alone starting to work. So, I worry about that kind of fracture between the expectations, the patience level of stock investors, diminished returns, diminished volumes. I think there’s a stock market risk. That’s one of the reasons we like gold, because what would go hand in hand with that, was some kind of maybe statement or a pull back on the dot plot from the Fed that would then cause the dollar to come off its little rally here.

Mike Gleason: Let’s play the devil’s advocate maybe a little here. We look at these record stock prices and wonder about what is beyond this extraordinarily high valuations in the past when PE ratios hit these levels, it was a signal that markets were nearing a top. But there’s one big difference between the past and today: the advent of high frequency and machine-driven trading. Huge amounts of daily volume is generated by trading algorithms. That is a game changer. These programs don’t sense risk on an emotional level like human traders do. They respond very differently to geopolitical events. So, if today’s markets seem disconnected from reality, perhaps because it’s because they are.

Now you have been on the front lines, trading in these markets for decades. You were a witness for how markets have transformed in recent years. What is your take on high frequency and algorithmic trading and what does it say about the possibility that current equity market valuations can be sustained or maybe even pushed higher? What are your thoughts there, Greg?

Greg Weldon: That’s phenomenal question and it’s very well timed given that we did a big special in September called “Shrinkage,” which is a shift in the Fed policy here. But if you take now your question, which is pertinent now, and you look at experience, in my experience over decades, it brings back 1987 right off the bat. We’re not saying the market’s going to crash. There clearly there are a lot of differences. But when you ask about high frequency trading, it sounds to me, the first thing I think of, is portfolio insurance on steroids, times a thousand, times ten thousand. So, the risk in terms of just what is the catalyst that then causes kind of that cascading downside?

One of the things we’ve been pointing out to our customers… and by the way, I’m working out a gigantic special that shows just how intriguing some of the similarities are around movements in the dollar, movements in bonds, movements in gold, and movements in stocks, and some of the ratios, and even down to crude oil, Fed policy and CPI. Now as there was basically from 1985 to ’87, once they kicked in the Plaza Accord, which depreciated the dollar. A lot of intriguing connections there and the special report that I’m writing on this, it’s called “What, Me Worry?” which we’d love to make available to any of your listeners, first of all, if they want to email me.

But in terms of the catalyst, setting it up, again I think the landmines are laying in wait out there. I think if you take an example, one of the things, like I said we’ve been telling our customers, if you take Amazon or Google. Stock are trading at $1,000 a share. You need $1,000 to buy one share. So, the volume of trading has diminished dramatically over the last couple of years as the stock prices has gone up. The ownership is huge. And it’s passive, and it’s managed investments, it doesn’t matter, it doesn’t discriminate in terms of what type of investor. The people who want to own these stocks, own them. The dynamic between the price level being so high, nominally speaking, to buy up block shares, the amount of money needed, pure and simple, against the volume, to me, sets up something like you’re talking about that would be exacerbated by a flash crash. So, it becomes very scary in terms of what kind of meltdown could you see if you get the ball rolling to the downside.

I still think that this is something that will play out over some time. I think the Fed is there. I don’t think this is … There are a lot of differences. I’m not trying to make a direct ’87 comparison. But I’ll tell you what, the risk is there. No doubt about it. The risk is rising.

Mike Gleason: In terms of the Fed here, Greg, what is your thinking on who it might be that talks over for Janet Yellen as the next Fed chair and then also, tell us what you think they’re going to do here in terms of getting inflation to where they want? Basically, what are your general thoughts on the Fed and Fed monetary policy? Clearly everyone’s favorite subject.

Greg Weldon: Really, it’s two totally separate questions right now because who is Donald Trump going to pick versus how inflation going to play out. I think if you look at what the Fed is saying, the Fed has been very clear. This is where (Jerome) Powell becomes, what seems to be, and I’m not saying I believe this, I’m just saying it seems that Powell’s a logical choice if, IF, your goal is to maintain policy. Thinking about bringing in a guy like (John) Taylor, and the Taylor rule and where the natural level of Fed funds should be here, he would obviously be a much more hawkish choice. While him and Trump might have really gotten along, and maybe there’s a lot Trump can learn from him, I don’t think that’s the guy Trump wants in terms of policy for trying to get his growth agenda going.

In that context, how you maintain continuity, which really isn’t that bad. They’re certainly not tight and they’re not tightening to any nth degree. It’s almost Goldilocks material here, inflation aside. Powell is a logical choice because you make a headline splash, which of course he loves. You basically make a change, but you kind of keep the status quo.

The other one would be (Kevin) Warsh. He was more away from QE and towards just using interest rates. He’s an interesting kind of dark horse. Yellen is certainly a dark horse. What mattes really is how does the Fed decide they’re going to deal with this inflation issue when they can’t even decide what’s causing it? Because you keep hearing transitory, idiosyncratic. These are the words that being used repeatedly, over and over and over again to describe, and you’ve had one Fed official go so far as, and even Yellen herself has made comments to the effect of, “We don’t understand why it’s not materializing.”

Again, kind of back to the Taylor model, the basic rule of thumb that the Fed is counting on, i.e. hoping for, is that as the labor market continues to tighten wages, inflation will go up and that will support of a general rise in prices. The question now becomes is the natural rate of unemployment lower than we thought it was. Or, are there structural differences now, technologically based dynamics in the labor market that has hollowed out the labor market, the reason you still have participation rate while finally up a little, is still so low historically, therein lies the question. What is it kind of keeping inflation back and how does this play out?

I think the employment numbers from this month, for September, were huge in the sense it was the biggest wage number … and you know how I break the number down. To the nth degree, this was the real deal. Only one month, but still the real deal, and the best wage number we’ve seen since 2007. So, will that continue? We know anecdotal evidence is there. Will this continue over the next couple of months?

If you look at CPI and PPI, the pipeline, the year-over-year dynamics around some of the commodities, God forbid, grains, oil seeds, and tropical commodities started to rally because then you’d have a real problem. Look at what the base models are doing. Look at what energy potentially you’re going to break out here. So, I think there is some inflation coming and it’s apt to push the Fed to have to raise to meet their dot plots, and I think that’s going to be problematic for the equity markets. They’re walking the high wire act with no safety net. It’s a very difficult job.

Mike Gleason: Getting back to metals here for a bit. We would like to give our listeners an update on the silver and gold price rigging scandal that erupted a year and a half ago when Deutsche Bank was forced to acknowledge cheating and turned over mountains of evidence, which may prove damning for a number of other banks. But the courts and regulators have a record of moving slowly, if they do anything at all. Now you’re much closer to the futures markets than we are. Are you aware of any developments on that front and what do you see as the implications of the civil action against the bullion banks? Do you sense that the Deutsche Bank revelations here led to more honest markets, perhaps because of all that evidence struck fear into banker’s hearts or is it more business as usual for these bullion banks who seem to have so much influence in these markets, Greg?

Greg Weldon: I have the sense it’s business as usual. I get the sense that it’s a kind of laissez faire attitude about that because the problem is so big, if we were to actually kind of get unearthed, the impact would be much, much larger and we would know it based on the price section very quickly. It’s a powder keg. It’ll blow at some point. This is something, gosh I’ve been in the business how long, and we’ve been talking about this how long? Really, this goes way, way back. The degree to which it has gotten worse is, I mean, the thing you debate, not whether it exists or not. Is it going to be somehow uncovered to the extent that it causes that kind of disruption? I think again, this is probably fodder for a great movie… a spy movie or whatever.

Sure, there’s probably a lot of that kind of thing going on in background, but in terms of the day to day operation of the trading of these metals, I don’t see any tangible impact in the dealings I have here, no.

Mike Gleason: Well Greg, as we begin to close, give us a sense of what you’re focusing on here, maybe some of the things that we haven’t touched on and then give us a sense of how you’re evaluating these markets for your clients. Do you think it’s time to get defensive, go to cash, favor metals and commodities here as an inflation hedge, or does the wave of exuberance in stocks still have a ways to go? Any final comments or anything else that you want to leave us with today?

Greg Weldon: Well, I think some of that depends on whether they can actually get some kind of job done in Washington where the Republicans finally realize their own necks are on the chopping block here, so let’s finally ban together and get a tax reform package done. We’ll see whether that happens. I think that might be one of those last gas type of moves for the stock market. It could be a “buy the rumor sell the fact,” but I think lot has been priced in and I think there’s still going to be disappointment down the road for that.

I’m watching the consumer specifically. The retail sales numbers have been really poor all year. It’s minuscule gains in discretionary items since January. And the debt numbers are interesting. You’re starting to see a roll over, starting to see rise in delinquency rates. The debt obligations for consumers and for the Federal government, by the way, are high despite the fact that rates are still low. Can you imagine if the Feds actually did push rates a hundred basis points higher over the next however many, 14, 15 months? I think that would have a real reverberating effect on the consumer and on the government where deficits are still increasing and they’re at high levels again. No one talks about it. You have $20 trillion dollars in sovereign debt and you’re about to push the five-year note above 2%, which is your trigger to increase cost on funding the debt. Man, the land mines are out there.

I’m watching all of it. That’s what we do for our clients every single day because never before, have you had to be more plugged in. Look at the way things happen so much more quickly now. You asked about what’s the difference from 30 years. So much more availability of news, quickly. But the fact of the matter is, the basic thing that we do hasn’t changed at all, which is dissecting all of it, connecting all the dots, and kind of trying to make it all make sense in terms of what the markets are doing and how you might profit from that.

Mike Gleason: Well Greg, thank you so much for joining us again. We enjoyed it very much and love getting your very studied and experienced outlook on the state of today’s financial world. Now before we let you go, please tell folks about Weldon Financial, how they can find you, and any other information they should know about you and your firm.

Greg Weldon: Sure, thanks, appreciate that. We’re found at WeldonOnline.com. We do Weldon Live, one product, one price. It’s kind of a multi-layered product, although it’s just again, one price. We do daily and we cover daily global macro, fixed income, foreign exchange, stock indexes and ETFs, precious and industrial metals, energy, and agricultural commodities. And we tie them all together and we have what we call our Trade Lab, which is part of Weldon Live. These as specific trading recommendations in all of those sectors, we’re old school futures guys, so that’s kind of the way we approach it. What we find is a lot of family offices or independent brokers or even individuals out there, and there’s no reason with the way your see ETFs now being utilized that the average investor can’t operate more like a hedge fund manager or CTA.

We try and provide rhyme and reason to what’s going on and then specific strategies to take advantage of it. Weldon Live found at WeldonOnline.com.

Mike Gleason: Well great stuff. Thanks so much for your time today, Greg. I hope we can talk again down the road. Take care and we appreciate you coming on.

Mike Gleason

Investors Should Brace for the Fed’s October Tightening Gambit

by: Stefan Gleason*

September’s Federal Reserve meeting left interest rates unchanged but sounded a hawkish tone. The Fed seems intent on hiking interest rates again come December.

Following Fed chair Janet Yellen’s remarks this Tuesday, interest rate futures markets bumped up the odds of a year-end rate hike to 81%.

The more immediate – and perhaps more important – policy move pending from the central bank is its plan to gradually reverse its Quantitative Easing bond buying program starting in October.

Yellen calls it “balance sheet normalization.” She is right in acknowledging that there’s nothing normal about the $4.5 trillion balance sheet the nation’s currency custodian has built up following the financial crisis of 2008.

Whether the Fed’s bond portfolio ever will get “normalized” to pre-crisis levels will depend on how markets react to the Fed’s attempt at Quantitative Tightening beginning next month.

The Fed technically won’t sell bond holdings into the market. Instead it will let bonds mature without rolling them over. The effect on the market will be as if a regular, reliable, very big customer stopped buying.

Initially, the Fed will allow $10 billion in Treasuries and mortgage-backed securities to mature off its balance sheet per month. Over the next year, the pace of “normalization” will accelerate. It is slated to eventually reach $50 billion per month.

Quantitative Tightening, if it goes through as planned, will withdraw hundreds of billions of dollars’ worth of liquidity from the financial system. Fed chair Yellen thinks the impact on long-term interest rates will be minor.

She has to know that the risks to the equity markets are huge. After all, her predecessor, Ben Bernanke, touted the bond buying program as an effective way to boost the stock market. Since 2009, the stock market has followed in roughly the same direction as the Fed’s balance sheet.

The latest run-up in stocks since the 2016 election has been different in character. The Fed’s balance sheet hasn’t expanded during this period. Instead, optimism toward the prospects of stimulus in the form of tax cuts has helped lift equity valuations.

Monetary Tightening and Another Failure on Capitol Hill Could CRUSH the Stock Market

This fall, investors could get hit with political disappointment on the tax front (if recent legislative let downs are any indication) coupled with monetary tightening. We may soon find out how much the stock market can take… until it finally breaks.

Stock Market

As for precious metals markets, they are less sensitive to changes in interest rates than bonds or equities. Conventional wisdom is that quantitative tightening and higher rates will be bad for gold and silver. That conventional wisdom seems to be confirmed by the pullback in metals since the Fed’s September meeting.

A pullback, however, does not make for a trend!

Gold and silver prices are still up since Janet Yellen first raised rates back in December 2015. In fact, that rate hike coincided with a major cyclical bottom in the precious metals.

It’s worth recalling what happened back when the third round of Quantitative Easing (“QE3”) was announced in September 2012. At the time, many analysts assumed that QE3 would provide an immediate boost to gold and silver prices. Instead, the metals markets responded counterintuitively. They declined for several months following the Fed’s announcement.

The lesson is that precious metals markets don’t move in direct sympathy with Fed easing or tightening. Nor are they necessarily hurt by rising long-term interest rates, as is the conventional wisdom (at least among precious metals naysayers and ignoramuses).

Gold and Silver Have Almost No Correlation to NominalInterest Rates

Metals show virtually no correlation to nominal interest rates. What matters is real interest rates – which is to say, interest rates relative to the inflation rate.

Interest Rates

There is also the safe-haven factor. Demand for physical precious metals has been soft since the “Trump rally” began. As the stock market hits record after record and the bond market chugs along, conventional investors see no need to seek the safety of sound money.

Of course, it’s inevitably the case that the masses will be extremely bullish at market highs (and extremely gun shy at market lows).

It’s been a long time since any real fear has entered the conventional markets.

Nobody on Wall Street seems terribly concerned about the Fed’s plans to tighten in the fourth quarter. But the bond market is starting to reflect some preemptive selling.

October and November are known for their potential to get volatile. A jump in volatility would mean downside for stocks. Precious metals markets could go either way. Given the risks to conventional financial assets posed by the Fed, owning gold and silver is a smart way for investors to hedge themselves.

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

Gold and silver surge despite more big sales out of GLD

 Gold Today –New York closed the day before yesterday at $1,248.40. London opened at $1,262.00 today. 

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

         The $: € was weaker at $1.1728 after the day before yesterday’s $1.1654: €1.

         The Dollar index was weaker at 93.50 after the day before yesterday’s 93.97

         The Yen was unchanged at 111.25 after the day before yesterday’s 111.25:$1. 

         The Yuan was stronger at 6.7377 after the day before yesterday’s 6.7506: $1. 

         The Pound Sterling was stronger at $1.3138 after the day before yesterday’s $1.3031: £1.

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    7    27

     2017    7    26           

     2017    7    25

SHAU

SHAU

SHAU

/

272.64

274.40

Trading at 275.00

271.95

273.84

$ equivalent 1oz at 0.995 fineness

@    $1: 6.7377

       $1: 6.7506

       $1: 6.7504     

  /

$1,251.19

$1,259.36

Trading at $1,264.49

$1,248.01

$1,256.78

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.]

 The reaction to the Fed’s inaction not just on rates but on the timing of the contraction of the Fed’s Balance Sheet, interrupted the gold price relationship between global markets. New York closed at the same level as Shanghai yesterday, but London opened at just $2.50 below Shanghai’s trading level this morning. The price differentials between the global markets were nearly eliminated on the back of the Fed’s inaction. We look today to see just how global markets interact and to see if they are really narrowing their differences.

If you had been following our commentary in the Gold Forecaster newsletter on China and the shift of pricing power to the east, you would not have been tempted to sell your holdings of gold or silver!

It is clear that it is now necessary to understand what drives each gold market across the world if one is to understand the gold price and where it is going. To focus on just the U.S. market, as if it is the only gold price driver, is to make yourself vulnerable to grave portfolio mistakes on gold. One cannot be this parochial any more, as the U.S. lost that pricing power a while ago.

To ignore the deep fundamentals driving each market would do the same. To ignore other global gold markets would do the same too.

Silver Today –Silver closed at $16.45 the day before yesterday after $16.40 at New York’s close Monday.

LBMA price setting:  The LBMA gold price was set this morning at $1,262.05 from yesterday’s $1,245.40.  The gold price in the euro was set at €1,077.11 after the day before yesterday’s €1.074.68.

Just after the opening of New York the gold price was trading at $1,263.52 and in the euro at €1,078.78. At the same time, the silver price was trading at $16.78. 

Price Drivers

The Fed decided not to raise rates, as expected but only said they would start lowering the Fed’s Balance Sheet, relatively soon. This disappointed markets including the global gold markets that are taking the gold price above previous resistance levels into the $1,260 region.

But once again the biggest feature of the day was the softening dollar. It has confirmed it is in a ‘bear’ market and will decline over the next few years. More and more analysts including major institutions are now talking the dollar down, over the long term.

Bear in mind the analogy that the currency world has had the dollar, almost as the tree trunk, while other currencies have been the branches of that tree. If the trunk withers what will happen to the branches? The only way to save the tree is to replace it with several trunks. These will come from the main trading blocs of the world. The euro will be joined by the Yuan [which now accounts for just under 2.00% of global trade pricing – it could be more if we include oil] with the dollar in a diminished role.

Gold will then become the facilitator between currencies to reinforce confidence in them.

Gold ETFs – In the last two days we have seen sales of 14.20 tonnes of gold from the SPDR gold ETF (GLD) sales of 0.99 of a tonne from the Gold Trust (IAU). The SPDR gold ETF and Gold Trust holdings are a 785.424 tonnes and at 210.87 tonnes respectively.

Despite these ongoing, heavy, persistent gold sales from the SPDR gold ETF the gold price has risen through more levels of heavy resistance. There is no doubt in our minds that if the gold price holds above $1,260 and rises, these investors will return to gold and drive gold prices higher.

With U.S. sales of gold now greater than has been acquired in 2017 and accounting for longer term holders of gold, we believe that U.S. gold investors are now close to being sold out.

Since January 6th 2017 No tonnes of gold have been added to the SPDR gold ETF and the Gold Trust. In fact, in this year 2017 the level of gold in those funds is now -6.168 tonnes.

Julian D.W. Phillips 

GoldForecaster.com | StockBridge Management Alliance 

6 Things Precious Metals Naysayers Get Dead Wrong

by: Stefan Gleason*

Gold attracts its fair share of detractors. But the most common objections to gold as money, and as a safe-haven asset within an investment portfolio, are misplaced. Anti-gold myths are ubiquitous.

Mega billionaire Warren Buffett remarked derisively of gold that it “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility.”

That brings us to the first thing precious metals naysayers get wrong…

Myth #1: “Gold has no utility.”

Warren Buffett is without question one of the world’s greatest investors. But he is not without biases.

Buffett’s primary business interests are in banking and insurance.

Facts vs Myths

He has literally made fortunes off the fiat monetary regime. He took part in (and benefited from) the government bailouts of the financial system. He (along with most other Wall Street and banking titans) supported Hillary Clinton for president.

So maybe, just maybe, Buffett’s hostility to gold has something to do with his deep, symbiotic connections to the political, banking, and monetary establishments!

In any event, the claim that gold has no utility is false. It’s been chosen by the market as money because of its many useful features, including fungibility, divisibility, durability, and rarity. Gold also functions as a store of value precisely because it, unlike Federal Reserve notes, has uses beyond that of a currency.

Even if gold weren’t hoarded in vaults, people would still dig it out of the ground at great cost for its uses in electronics, jewelry, art, and architecture. In an economic sense, $50,000 in physical gold is just as useful as a $50,000 sports car – as determined by the market.

Myth #2. “Gold is the money of the past. Digital crypto-currencies are the money of the future.”

Every generation comes up with some new reason to regard gold as a “barbarous relic.” Previously it was the advent of paper money. Then the creation of the Federal Reserve. Now the rise of internet-based crypto-currencies is hailed by some as a technology that will render gold obsolete as money.

The reality is that no paper or electronic or currencies ever have or ever could replicate the unique monetary properties of gold. Central banks continue to accumulate it. And new crypto-currencies actually backed by gold and silver are in the works.

A crypto-currency that combines the convenience of digital transactions with the security of metals backing could ultimately knock Bitcoin off its perch – and be a source of billions of dollars in new demand for gold and/or silver.

Myth #3. “Precious metals markets can’t go up while the Fed is raising interest rates.”

This persistency of this myth is surprising given how often in market history it has been dispelled. Gold prices hit a major bottom in December 2015 just as the Fed initiated its first interest rate hike. Gold and silver rallied big during the rate hiking campaign from 2014 to 2016. Back in the late 1970s as interest rates rose dramatically into the double digits, gold prices rose in tandem – until, finally, nominal interest rates actually exceeded the inflation rate by 1980.

The direction of the gold price is keyed into real interest rates, not nominal rates. When real rates are negative or inflation expectations are rising, that tends to be bullish for precious metals.

Gold Vs U.S. Real Interest Rate

Myth #4. “If the economy crashes, then so will gold.”

Gold is one of the least economically sensitive assets you can hold as an investor. The yellow metal exhibits virtually no long-term correlation with the stock, bond, or housing markets – and a relatively low correlation with industrial commodities such as oil and copper.

When every sector of the stock market including mining stocks crashed in 2008, gold itself managed to eke out a positive gain for the year. Gold isn’t impervious to economic shocks that may affect things like demand for jewelry, but safe-haven buying by investors is often more than enough to pick up the slack.

Myth #5. “Ordinary investors can’t win in gold and silver markets that are manipulated.”

A distinction needs to be made between physical metals markets and manipulated paper markets. Most of the manipulation that occurs in futures (paper) markets is done for short-term technical purposes – to game a few cents on bid/ask spreads, break resistance levels, force options to expire worthless, etc.

Ordinary investors absolutely should not try to trade the paper markets. They won’t beat the big banks and other institutional traders at their own game.

To the extent that paper prices are artificially suppressed, however, that’s actually an advantage for buyers of physical metal.

They can obtain it at a discount.

Meanwhile, artificially low prices serve as a disincentive to new mining production, which makes the long-term supply/demand fundamentals for gold and silver even more favorable.

Myth #6. “Gold pays no interest so it’s therefore a poor investment.”

Warren Buffett’s Berkshire Hathaway shares pay no interest or dividends. Venezuelan junk bonds yield more than 50%. Which is the better investment?

Obviously, the size of the nominal yield doesn’t in itself tell you whether a financial asset is a good investment. Even the “safe” yield provided by U.S. Treasury securities isn’t safe from inflation. Or from taxation.

Since physical precious metals aren’t debt instruments and therefore pay no interest, their inflationary upside potential is all tax-deferred growth. You owe no taxes until you actually sell (or take distributions from a traditional IRA).*

Gold poised to attack $1,300

Gold Today –New York closed at $1,279.60 yesterday after closing at $1,278.20 Friday. London opened at $1,289.50 today. 

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

         The $: € was slightly stronger at $1.1246 after yesterday’s $1.1264: €1.

         The Dollar index was slightly weaker at 96.73 after yesterday’s 96.77

         The Yen was stronger at 109.52 after yesterday’s 110.51:$1. 

         The Yuan was stronger at 6.7954 after yesterday’s 6.8036: $1. 

         The Pound Sterling was barely changed at $1.2904 after yesterday’s $1.2905: £1.

Yuan Gold Fix
Trade Date     Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    6    6

     2017    6    5

     2017    6    2

SHAU

SHAU

SHAU

 

 

281.27

278.34

 

Trading at 283.60

281.35

277.96

 

$ equivalent 1oz at 0.995 fineness

@    $1: 6.7954

       $1: 6.8036

       $1: 6.8153     

 

   

 

$1,280.86

$1,265.28

 

Trading at $1,293.08

$1,281.23

$1,263.55

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.]

 While New York saw the gold price rise a little it was Shanghai that gave the spurt to the gold price trading at $1,293 late in their day today. London was pulled up at the opening to just $4 below Shanghai.

Silver Today –Silver closed at $17.57 yesterday after $17.52 at New York’s close Friday.

LBMA price setting:  The LBMA morning gold price was set today at $1,287.85 from yesterday’s $1,280.70.  The gold price in the euro was set at €1,144.40 after yesterday’s €1,137.04.

Ahead of the opening of New York the gold price was trading at $1,294.15 and in the euro at €1,148.62. At the same time, the silver price was trading at $17.73 

Price Drivers

Mainland China is set to import about 1,000 metric tons from Hong Kong in 2017, says, president of the Hong Kong gold exchange. That compares with net purchases of 647 tons last year and would be the biggest since 2013, data from the Hong Kong Census and Statistics Department confirmed.

Local consumption was up 15% in the first quarter, with sales of bars for investment climbing more than 60% and dwarfing a 1.4% rise in jewelry buying, according to data from the China Gold Association.  

Imports from Switzerland topped 100 tons in the first four months of the year, according to calculations on data reported by the Swiss Federal Customs Administration. In December, China imported 158 tons from Switzerland, taking the total for the year to 442 tons, up from 288 tons in 2015.

One has to be guarded about figures from Hong Kong being representative of Chinese demand. Gold enters China from Switzerland but also through Beijing and other ports of entry. In addition, the country mines around 450 + tonnes a year. It also imports gold directly from mines it owns outside the country. So the figures mentioned here are  just part of the picture. What we do learn from these is that Chinese demand is running close to record levels. The government has encouraged this as a matter of policy, so as to build up the nation’s gold. Gold is not allowed to be exported from the country. The volatility of the Stock Exchange there is a discouragement for long term investors and is not regarded as competition for gold, as in most parts of Asia gold is not bought for profit but for financial security.  As the Chinese middle classes burgeon so more and more gold investors arrive in the market. On top of this present middle classes continue to buy more.

India

Ahead of GST, jewelers increased their purchases to replenish inventory, so as to profit from demand for gold after the additional GST was imposed. From a year ago the gold imports surged four-fold to 103 tonnes. Now that the GST rate increase has happened, it is likely that internal gold demand will jump until these extra stockpiles are reduced. We fully expect Indian gold imports to slow until the harvest time is over, round about September.

With the forecasts for the monsoon positive this year and indeed having already started in  some regions, we believe demand later in the year will increase strongly.

Inflation in the E.U. and U.S.

The Federal Reserve’s preferred price measure rose 1.7% in April from a year ago, down from 1.9% in March and 2.1% in February. Core inflation, which strips out volatile oil and food costs, also slowed to the weakest annual pace since 2015. This raises questions about next week’s rate hike.

In the Euro zone, while producer prices rose 4.3% from a year earlier in May, that pressure has yet to flow through to consumer inflation. Euro zone inflation decelerated to 1.4 % in May, the weakest reading this year, from 1.9% a month earlier. We do not expect the E.C.B. to begin slowing their stimulus program until there is a marked change in this figure.

Gold ETFs – Friday, saw no purchases of gold into the SPDR gold ETF, but saw purchases of 0.66 of a tonne of gold into the Gold Trust. Their holdings are now at 851.003 tonnes and, at 205 tonnes respectively.

Since January 6th 2017 43.759 tonnes have been added to the SPDR gold ETF and the Gold Trust.

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

Deliberations on the U.S. Fed rate rise and gold

Two articles published by me on sharpspixley.com in the aftermath of this week’s FOMC meeting announcing a 25 basis point U.S. interest rate rise and looking ahead to three more in 2017.  Despite virtually every analyst and commentator predicting the increase which should have suggested that the rise had already been discounted in the recently weaker gold price the news precipitated a further $20 plus fall despite this.  This totally disregarded the Fed predicting three rate rises in 2016 the last time it increased rates by 25 basis points, exactly a year ago, and then failing to raise rates at all until now.  How short memories are – particularly in the financial world.  And how poor the Fed’s record has been in predicting the path of the U.S. economy.  Perhaps it will be all-change in 2017 under the somewhat unpredictable President-elect Trump, but we see some hopes being damped.  Whether gold will benefit, or continue to weaken, will probably depend on the big money which is likely to continue setting paper gold prices which still dominate, although Shanghai is doing its best to bolster prices – so far to little avail.

The first of the two Sharps Pixley articles written a couple of hours after the rate increase decision was announced, and the accompanying Fed forecast can be read by clicking on this link: Gold hammered on U.S. Fed rate decision.

The second was written the following morning (UK time) as the gold price continued to weaken and the dollar index to strengthen.  Indeed much of gold’s fall could be put down to dollar strength rather than gold weakness, although offloading of gold from the big gold ETFs did continue which will not have helped sentiment.  To read this article click here: Gold and silver dip further as dollar continues on upwards path.

Today the rise in the U.S. dollar index appears to have halted and precious metals prices appear to have stabilised.  Whether that will continue into next week we do not know given the gold bears appear to be in the ascendant, but there is an impression gold has been oversold, the dollar overcooked and maybe, just maybe, something of a precious metals recovery is already under way.

Gold and silver holding up ahead of Fed announcement

Gold Today –New York closed at $1,158.60 yesterday after closing at $1,162.20 on the 12th December. London opened again at $1,160.00 today.

Overall the dollar is slightly weaker against global currencies today.

         The $: € was weaker at $1.0649: €1 from $1.0643: €1 yesterday.

         The Dollar index was slightly weaker at 100.87 from 100.97 yesterday. 

         The Yen was stronger at 114.95: $1 from yesterday’s 115.30 against the dollar. 

         The Yuan was weaker at 6.9025: $1 from 6.9009: $1 yesterday. 

         The Pound Sterling was slightly stronger at $1.2656: £1 from yesterday’s $1.2672: £1.

 Yuan Gold Fix

Trade Date Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2016  12    14

      2016  12    13

      2016  12    12

SHAU

SHAU

SHAU

264.98

265.04

264.34

264.99

264.93

264.12

$ equivalent 1oz @  $1: 6.9025

      $1: 6.9009

$1: 6.9138

  $1,194.03

$1,194.58

$1,189.20

$1,194.08

$1,194.08

$1,188.21

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle Eat 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.]

 Shanghai prices held $30.48 higher levels than prices in New York. London opened at a higher discount to Shanghai of $29.08.  

It is again reported that the requirement for importing gold into China is a ‘licence for each batch’ of gold imported. Yes, the PBoC can restrain these licenses to limit imports, but it is unlikely that they would hold back such licenses. There is no confirmation of the refusal to issue licenses by the PBoC to gold importers, so we would question such control until there is evidence.

The withdrawals from the SGE were at record levels in November and the declining Yuan would boost demand in December too, but we would like to see the SGE withdrawals for December before we accept that the PBoC is holding imports back.

Some report the ‘premium’ of SGE prices over London is entirely due to such restraint and this would be logical, but take a look at Yuan prices  and you will see the declining prices on the SGE and the relative stability of  Yuan prices argues for steady to declining demand. That’s why we see Shanghai reflecting prices of physical gold as opposed to those of ‘paper’ gold.

This stability of prices is shown in the unwillingness of Shanghai prices to decline when London and New York declined, not in rising prices in China.

LBMA price setting:  The LBMA gold price setting was at $1,160.95 this morning against yesterday’s $1,157.35. 

The gold price in the euro was set higher at €1,090.45 after yesterday’s €1,090.40.Ahead of the opening of New York the gold price was trading at $1,161.95 and in the euro at €1,091.75.  At the same time, the silver price was trading at $17.10.

Silver Today –Silver closed at $16.91 at New York’s close yesterday from $17.07 on the 12th December. 

 Price Drivers

The Fed’s announcement is what will move markets today, not the rate hike itself, as this has been discounted already. If there is no rate hike then that’s a different matter.

Gold markets are marking time ahead of the announcement later today. This is the last statement they will make before Trump takes power. Will that change things, or some part of the statement, reflect this? We doubt it, but nothing is certain these days. Trump has already pointed fingers at the Fed saying they are the cause of the current ‘bubbles’ in markets.

What is likely is that the Fed will continue to wait to see the evidence on which it will act and that points to no more hikes until the second half of 2017. On balance the slow pace of interest rate hikes is positive for gold, particularly in the light of the cuts in production put forward by oil producers. Higher oil prices will spur [bad] inflation making it likely that interest rates are lower than inflation as growth will be badly impacted by higher oil prices.

As you see below, even the sellers of gold have paused waiting for the Fed. Do not be surprised to see a surprising gold market today!

Gold ETFs – Yesterday, there were no sales or purchases from or into the SPDR gold ETF but a sale 0f 0.51 of a tonne from the Gold Trust holdings, leaving their respective holdings at 856.259 tonnes and 196.95 tonnes. The slowing of sales to such low levels is proving supportive of the gold price.

Silver –Silver is continuing to look solid above $17.00 but this could change in a heartbeat.  

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

To ensure you can benefit from the future higher gold prices we will see then, you need to hold it in a manner that makes sure it can’t be taken from you. Contact us at admin@stockbridgemgmt.com to buy physical gold in a way that we feel, removes the threat of it being confiscated. We’re the only storage company that offers that! – We’re Shari’ah compliant!]

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Global Gold Price (1 ounce)
  Today yesterday
Franc Sf1,173.28 Sf1,174.28
US $1,161.95 $1,158.70
EU €1,091.75 €1,092.29
India Rs.78,379.34 Rs. 78,297.99
China Y 8,021.75 Y 7,998.51

 

September Fed rate rise spectre knocks gold and stocks – again

You put the Jack back in the box and it then jumps out at you again.  As the September FOMC meeting approaches the fear that the U.S. Fed will make a move towards raising interest rates at that meeting has surfaced yet again and is playing havoc with the markets.  Gold slid back to the high $1,320s, silver was testing $19 on the downside, the Dow plunged almost 400 points, the S&P 500 fell over 50 points and the NASDAQ over 130 points.  Crude oil fell around 3.7%, while the US Dollar Index climbed back to the mid 95s from a 94.99 close a day earlier.

Now maybe that should all be a warning to the FOMC.  Apparently the downturn in the markets was because it was announced that the normally dovish Fed Governor, Lael Brainard, is due to speak at an event on Monday.  The fear is that she may say something that is less dovish than her usual stance and that could trigger further falls as analysts and traders try to read that as foreseeing a Fed rate rise announcement at the meeting, despite this likelihood having been previously discounted because of a lower than anticipated nonfarm payroll increase a week ago followed by a fall in Services PMI.  Manufacturing PMI had already been looking weak as well.

From gold and silver’s point of view maybe the sooner the Fed does implement its second rate increase in a year (as opposed to the four rises it had been targeting at the end of last year) the better.  If there is to be another rate rise this year it’s likely to be another tiny 25 basis point increase which will still leave rates in effective negative territory taking real inflation into account, but if the rumour that such an increase might happen (and analysts apparently only give it a 24% chance that it will) can knock the markets back so much in a single day, what would the fact do?

Many well respected commentators and analysts have been predicting a stock market crash now for some time – and one that would rival, or even exceed, that of 2008 and if they are correct in their judgement it might only take a trigger like the next Fed rate increase to bring the whole house of cards crashing down.  Can the Fed afford to take that risk?  It certainly could talk itself into so doing having for so long preached interest rate normalization without doing anything apart from various board member statements being seized upon.  We have commented before as to whether FOMC committee members should be allowed to make statements between meetings as every nuance of what they say is picked up by the markets and tends to move them sharply one way or the other.  It is too easy to manipulate markets so – but then this could be deliberate Fed policy as yet another means of keeping people guessing, although the potential for thus influencing the markets, and the dollar, by individuals cannot be ruled out.  There’s an awful lot of money at stake here!  See: Fed member statements move gold price up or down. Should this be allowed?

Gold Jumps on Latest U.S. Data

Gold continues to be strongly driven by speculation as to if and when the U.S. Fed will decide to increase interest rates.  But this mood is very much data driven and while some positive figures last week, coupled with what were taken as some potentially hawkish statements by the Fed Chair and Vice Chair, had led to some sharpish falls in the gold price on the expectation that this had put the possibility of an interest rate increase announcement following the FOMC meeting to be held on September 20th and 21stback on the cards.  But data this week in the form of a poor ISM manufacturing figure, and now a considered-weak nonfarm payrolls increase, have reversed the gold price movement as now a September rate hike announcement is seen as unlikely again.

The latest employment figure suggesting the U.S. had added 151,000 jobs during August, as against expectations of 175,000 to 185,000, with a jobless rate of 4.8% saw gold spike by nearly $20 at one time to above $1330, on the publication of the announcement, before starting to slip back a little again.  Traders and analysts now appear to see no Fed rate increase announcement until the December FOMC meeting – to be held on the 13th and 14th of that month – if then.  That will be yet another blow to the Fed’s economic forecasting credibility given that it has consistently over-estimated U.S. growth and had suggested at the end of last year there would be three or four rate increases this as it moved to ‘normalize’ rates, while so far there have been none.

It is actually a moot point as to whether the U.S. economy is actually in recession or not.  The stock market certainly suggests otherwise but this is buoyed up by low interest rates and Fed monetary policy, whereas some other key indicators make more negative reading.  Apart from the slower than anticipated job growth and the Chicago PMI downturn to below 50, it is apparent that the stronger dollar is impacting manufacturers who export adversely, while the latest domestic news from the auto industry in that sales turned down 4.2% in August.  Reuters reports that some carmakers say the industry has peaked and that a long-expected decline due to softer consumer demand had begun.  All is not well in the world’s largest economy!

Gold – the Real and Honest Currency

Mike Gleason* of Money Metals Exchange interviews Michael Pento of Pento Portfolio Strategies who has some extremely interesting views on the U.S. economy, the data which supports it, and on gold.

Mike Gleason: It is my privilege now to be joined by Michael Pento, president and founder of Pento Portfolio Strategies and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the US Debt Market. Michael is a money manager who ascribes to the Austrian school of economics and has been a regular guest on CNBC, Bloomberg, and Fox Business News, among others.

Michael, it’s good to talk to you again. Thanks very much for joining us today and welcome back.

Michael Pento: Thanks for having me back on.

Mike Gleason: Well to start off here, Michael, I want to get your thoughts on some of the economic data we’re seeing out there and maybe you can explain some of the market action to us because there seems to be a lot of confusion. Now as you pointed out in an article you wrote earlier this week, we have a big disconnect between what the payroll reports and the employment numbers are showing compared to the tax receipts the Treasury Department is collecting. Talk about that if you would and also let us know what conclusions you’re drawing from these numbers.

Michael Pento: Well unfortunately, the conclusions I’m drawing is that the payroll numbers aren’t telling the truth. If you listen to the Labor Department, the number of net new jobs created year-over-year this fiscal year so far – it’s going to end at the end of September, so we have almost all the data in – there has been 1.66 million net new jobs created. One would assume if you have all these people in a net basis in the workforce that tax receipts would be increasing, and yet, you see corporate receipts are down 12.8% year-to-date and individual tax receipts are down 0.4% year-to-date. Furthermore, there’s something called the FUTA tax, and that’s basically a tax on, employment insurance tax on, the first $6,000 of anyone employed. So unless these people that are employed, supposedly full time and gainful employment, are earning less than $6,000 a year, these people should be paying into this pool. And those receipts are actually down year over year.

So I believe that the Bureau of Labor statistics is inflating this data and I believe the quality of the data, in other words, the number of jobs created and the quality of those jobs are mostly part time in nature and very low paying service sector jobs, which by the way, would also explain the absolute lack of productivity. Don’t forget, in case you don’t know, in case your audience isn’t aware, productivity has dropped for three quarters in a row, and a productivity of part time bar maids is not very high. That would explain the discrepancy between the two numbers that I just described between the Bureau of Labor statistics and the tax receipt data, and it also explains why I think this economy is most likely in a recession right now.

Mike Gleason: There’s something else here that doesn’t seem to add up. We continue to see records in the stock market, but earnings are not keeping up with the rise in share prices. It’s hard to know who’s actually buying shares. Zero Hedge has reported that retail investors don’t seem to be buyers. So is it possible that the fed might be actively playing in this market? We do know the Swiss Central Bank has been buying U.S. stocks and certainly Bank of Japan is a huge buyer.

Michael Pento: Sure. Really, is it that much of a stress to believe that the Federal Reserve is doing exactly what other central bankers are doing? I think we’re all headed towards helicopter money. This is where this is all going to head up. So if you look at earnings on the S&P 500, it is down 5 quarters in a row and most likely it will be 6 quarters after this earning season is wrapped up. So if you have 6 quarters in a row of falling earnings, what is supporting the stock market, which is, by the way, trading at record highs? If you look at median PE ratios, if you look at price to sales ratios, if you look at total market cap to GDP ratios, this is the most expensive market in aggregate that we have ever had in history. It’s even more expensive when you think of the fact that you have earnings that are most likely falling, that means negative, 6 quarters in a row.

So who is inflating the stock bubble? It has to be the Bank of Japan, the Swiss National Bank, the European Central Bank, and the Fed, even if they’re not directly buying ETS as they are over there in the maniacal inflation seeking retirement colony in Japan. You at least have to admit that keeping interest rates near zero for 90 months and inflating the Fed’s balance sheet by $3.7 trillion has bent down the yield curve to almost a flat level where it sits now at a 10-Year around 1.5%. That has forced everybody in a wild search for yield and where are they going? They are going every place from municipal bonds to collateralized loan obligations to REITs to every type of fixed income proxy there is, even to high performance sports cars and art. So every asset is in a bubble thanks to the fact that risk-free, so called risk-free, rate of return has been pushed down to near zero for 90 months on a worldwide basis.

Mike Gleason: You’ve written a book about the coming bond market collapse and I want to get your comments on that market here. We continue to see bond prices holding strong and even rallying. Central banks have been huge buyers, but it appears even the private sector can’t get enough of them. Investors are taking bonds with negative yield in many cases and I’ve seen reports that offerings have even been over-subscribed. Has the ongoing strength in bonds surprised you and have you revised any of your thinking on the dire predictions about the bond market? Because there is an argument out there, Michael, that the central banks can continue to buy bonds with newly created electronic money until the moment the electricity goes out.

Michael Pento: Well they certainly can. I wrote the book in 2013. I never expected that yields would go into negative territory. So I was prescient, I was definitely ahead of the curve, calling this a bond bubble when nobody else was calling this a bond bubble, but what has occurred basically, quite simply, is that the bond bubble is more elastic than I thought and has gotten much, much bigger. Look at the amount of global debt. Global debt right now is $230 trillion, up $60 trillion since 2007. That is 300% of global GDP.

The U.S. debt is 350% of GDP. The average ratio of U.S. debt to GDP is 150% and that existed for decade after decade after decade prior to going off the gold standard in 1971. So we went from 150%, which is sort of the average, the normal, to 350% debt to GDP. And there’s a massive accumulation of this debt. But by the way, this is not debt that’s been taken on by you put your savings in the bank and you have robust GDP growth, you save a little money, and that money is loaned out to the private sector for what? Capital good creation and for engendering productivity enhancements. This massive accumulation of debt isn’t at all that genre, it’s unproductive debt that is only made serviceable by unprecedented increases in base money supply. This is the perfect recipe for stagflation.

So if you add a massive increase of unproductive debt, and I gave you the numbers, $230 trillion – totally unproductive debt going to share buybacks and hole digging and pyramid building – this debt is not going to be accompanied by any type of GDP growth. It’s unserviceable unless central banks continue their torrid and unprecedented pace of quantitative easing. Just put a figure on that. There is now occurring $200 billion of quantitative easing every month, every month. So worldwide, central bankers are engaged in QE to the tune of $200 billion a month of central bank credit creation. So if you have stagflation, no growth, and a massive and unprecedented and intractable increase in the base money supply, of course you’re going to get inflation. You have to get a rapid rise inflation. And when that occurs, you’re going to have a collapse in the bond market, the likes of which we have never seen before.

Let me just quickly take you to Japan, an example I love to use. 250% debt to GDP, that’s just federal debt, that’s not gross debt, it’s just federal debt. You have an inflation target of 2% and you have a perpetual recession, never ending. It’s been going on and off since 1989. What happens when the BOJ, the Bank of Japan, successfully achieves a 2% inflation target … And don’t be misled for a second, no central bank can peg an inflation target, it will go to 2% and then keep on going. Here you are holding a Japanese JGB, ten year note, going out ten years, yielding negative ten bases points, inflation is rising, going north of 2%, and you’re dealing with an insolvent nation. The debt you hold is that of an insolvent, broke nation that is going to default.

What are you going to do? You’ll panic out of that note. You will sell that to anybody because you know that the central bank of Japan, the BOJ, will be getting out of the monetary monetization business. That’s what I predict will happen. It’s going to happen in Europe, it’s going to happen in Japan, it’s going to happen in the United States. And when that happens, when yields spike, it will reveal the insolvency of that global $230 trillion debt condition.

Mike Gleason: Let’s pivot and talk about the metals, specifically, certainly, we’ve seen some very strong action this year, which began back in January and February when we spoke to you last. Gold is up about 25% for the year, silver’s up about 40%, but both metals have come under pressure here over the last couple of weeks. The mining stocks, which have been on absolute tear, have pulled back as well. Do you expect this to be a prolonged correction in the metals with prices maybe heading lower into September or October? What are your thoughts there on the metals?

Michael Pento: Well let’s give you the reason. First of all, I am not a Pollyanna about any asset class. If I thought that the Federal Reserve was going to be able to engage in a protracted, steady increase in the Fed funds rate in the matter they did between 2004 and 2006, if I thought that they were going to be able to do this in the context of steadily increasing GDP growth, then I would tell you, “You better get the hell out of gold and gold mining shares as quickly as possible”. I can tell you right now, I don’t believe that’s the case.

So the pullback I see right now is healthy in nature, it’s way overdue, and it was engendered by, it was caused by, a plethora of talking heads from the FOMC, Federal Open Market Committee, coming out and it was perfectly timed up until this Jackson Hole meeting, which is occur on Friday, to tell Wall Street that they are way too quiescent in their view that the Fed is not going to raise interest rates in 2016. They haven’t done so yet. They did once, as you know, in December of 2015. The market fell apart. And they threatened four rate hikes this year and we are now coming up to September and have no rate increases so far.

I believe they may raise once in December after the election. That all depends if the economic data turns around. If you look at what’s happened with GDP, if you look at Q4 GDP 2015, Q1 and Q2 (of this year), we are now displaying zero handles on Gross Domestic Product. And if you look at the latest data on housing, existing home sales – which is by far the much bigger portion of home sales, vis a vis, new home sales – and if you look at mortgage applications, mortgage applications are now down year-over-year and existing home sales are down year-over-year.

That says that the all-important housing market is rolling over, people cannot afford home prices, and I think after that brief blip up in data that you see in July, Q3 will also be very anemic and the data between now and the end of the year will most likely not allow the Fed to raise interest rates between now and the end of the year, but even if they go once in December, the most salient point I can make to your investors is that the central bank will be very clear that this is not part of a protracted, elongated rate hiking campaign.

In other words, they’re going to go very, very, very slowly, as they’ve evidenced so far, and the terminal point, which they call the neutral Fed Funds Rate, will be much slower than at any other time in the past. You think about in history neutral Fed Funds rates are usually 5% to 6% on the overnight lending rate. They’re at 3%, that’s their target right now, and I believe, after these next few meetings in September and December, Janet Yellen will come out and tell you that the terminal rate, the neutral target rate, is something in the neighborhood of 2%, so they’ll be lower for longer and have a much lower terminal rate. By the way, I don’t think they ever get there. As I said before, I think the economic data turns profoundly negative between one or two more rate hikes. We enter into an inverted yield curve, we enter into a fully manifested recession, and that means the Fed joins the ECB and BOJ back into quantitative easing.

Mike Gleason: Well as we begin to close here, Michael, I would certainly think that a negative real interest rate type environment is likely to continue. Sounds like maybe that’s what you’re predicting. What do you think that’s going to mean for the metals? And also, just give us your thoughts on the whole election as we move towards the election season here in November.

Michael Pento: Well first of all, I’d like to tell you that I believe that nominal rates are going to stay very low and I believe stagflation is going to be coming more and more into the fore. You’re looking at real yields, which will be moving further into negative territory. Anybody who knows anything about gold will tell you that this real and honest currency is absolutely essential during times when nominal rates are negative and real interest rates are even further negative, and that’s exactly the condition that we are headed into. If you look at nominal GDP, it’s just 2.4% year-over-year. If inflation is higher than 2.4% then we are now in a recession.

I also want to give you one more data point. I know it’s very data heavy, but that’s how I am and that’s how your audience is going to be able to grasp why it’s so essential to maintain their position in gold and in the miners. Core inflation is up 2.3% year-over-year. Real GDP is up just 1.2%. So inflation is twice as high as real GDP. That’s stagflation, that condition is going to get worse, that is going to make real interest rates even lower, and that is going to force people more and more into the protection of gold.

And I want to also touch before we end, you asked me about the election. Donald Trump is on record saying that he’s the king of debt and that he loves debt. He is also on record saying that if the U.S. ever enters into another 2008 type scenario, that we can default upon that debt. Now if you ever wanted to have another reason to own gold instead of treasuries that yield almost nothing is the fact that the nominal yield you’re getting, which is practically zero, if even that nominal yield has been threatened to be defaulted upon. So while Trump is a deficit lover, so is Clinton, who I believe will, by the way, unfortunately, win the election. So I believe both of these candidates are lovers of debt. Both of these candidates will be vastly increasing to the amount of debt deficits that we run up, which by the way, will be and must be monetized, and according to Mr. Trump, will be defaulted upon. At least he’s being honest.

Mike Gleason: Well we’ll leave it there. Excellent stuff Michael. We always appreciate your insights and thanks for being so generous with your time. As always, we really enjoy your commentaries, and on that note, if people want to both read and hear more of those from you and want to follow your work or learn more about your firm, tell them how they can do that.

Michael Pento: The website is www.PentoPort.com. My email address is mpento@pentoport.com. And the office number here is 732-772-9500. Love to have you subscribe to my podcast. You can read my commentaries online all over the place. I’d love to be also be able to help you manage your money through this tumultuous time that we’re going through, which will get much worse.

Mike Gleason: Again, great stuff Michael. Hope you enjoy the rest of your summer. I look forward to catching up with you again soon. Hope you have a good weekend and thanks for the time today.

Michael Pento: Thank you Mr. Gleason.

Mike Gleason: Well that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more info, visit PentoPort.com. You can sign up for his email list, listen to his midweek podcast, and get his fantastic market commentaries on a regular basis. Again, it’s PentoPort.com.

And don’t forget to check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.

 

Dovish Fed and Brexit drive gold and silver upwards. $1300 in sight?

Edited and updated version of Julian Phillips’ latest commentary following the dovish Fed comments implying perhaps only one rate increase this year, if that.

With the Fed completing its two-day meeting today markets held their breath to see if any surprises would be sprung on us. We didn’t expect any. But we may hear Mrs. Yellen be less optimistic than the market expects and hopes. The persistent desire for higher interest rates, which the Fed indicated was on the way in summer, may well miss summer and autumn. We see winter as an appropriate time because of the cold damage winters can cause. The U.S. economic recovery may well be looking OK but the data threatens to weaken. In itself this prospect has so far put the Fed off raising rates. In the event gold surged to the high $1,290s

The global economy continues to weaken and will affect the U.S. Most importantly, a rate hike would cause the dollar to rise, something that will damage the U.S. economy.  In the event gold surged up to the highish $1.290s making another tilt at $1,300, before being brought back down a few dollars in later trade.  It will be interesting to see what the Asian and European markets make of the latest Fed inaction overnight and tomorrow.

Global financial markets are tensioning up in preparation for next week’s Brexit vote, with the Yen hitting new recent highs at 106.21: $1, as global equities continue to rise slightly to ‘toppy’ areas.

As we have said in the past, equities are rising because they are the only place left where there is yield, not because a rosy future lies ahead. The huge danger in this is that if and when interest rates do rise, both bonds and equities will tumble!

Yesterday, we mentioned ‘a potentially devastating set of ‘ripple’ effects’’. We need to emphasize this. We are not simply talking about the ripples setting off other crises elsewhere, we are taking about a group of crises being set off and when synergized together, create an even larger global crisis in which precious metals will blossom.

Gold ETFs – On Tuesday the holdings of the SPDR & gold Trust rose yet again as 2.376 tonnes was purchased into the gold ETF, leaving its holdings at 898.671. No purchases or sales were made in the Gold Trust, leaving its holding at 196.90 tonnes.  This persistent buying is not simply holding prices up, but steadily draining London’s physical gold liquidity. We are under no illusion that once the ‘season’ for gold begins in September. Market physical shortages will shine through.

Silver –Silver is again marking time without making as strong a move as gold.

 

Regards,

Julian D.W. Phillips

GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance

Jobs, Brexit and Gold – the unholy trio that are upsetting the Fed applecart

As maybe I’ve mentioned before, of the plethora of supposedly independent information and reports which come through to me in my daily emails, one I will always read assiduously is Grant Williams’ Things that make you go hmm… twice monthly (usually) newsletter.  Not only does he take a pretty jaundiced view of much of what passes for mainstream economic analysis and media comment, but he expresses his opinions forthrightly and with good humour as anyone who has attended one of his conference presentations will be well aware.

Grant is both a Singapore-based fund manager and very well followed commentator on geopolitics and economics and he occasionally touches on gold as a part of this terrific coverage in his subscription-based newsletter.  He makes you sit up and think – and understand that much of what data is released by governments, central banks and government funded economists is more akin to some of the claptrap often put out by junior mining and exploration companies (and some bigger ones too) and their PR companies in trying to hoodwink investors by putting a strong positive spin on financial and drilling results which often, on deeper analysis, should be suggesting quite the opposite.

His latest newsletter, entitled ‘The 60 Second Excitement’ looks in some depth, inter alia, at the latest U.S. non farm payroll figures, the possibility of a Brexit (Britain leaving the European Union) and their combined effect on the gold market, gold stocks and the gold price should the initially unexpected materialize – as it has already done with the U.S. jobs figures.

Let’s take all these in order:

Firstly the latest U.S. jobs statistics which showed an increase in non-farm payroll figures for April of only 38,000 – hugely below the consensus expectation of 160,000 – coupled with also reducing the figures for the prior two months as well.  Yet in Fed terms the positive spin was that the overall unemployment rate fell to 4.7% (below the Fed 5% target),  but conveniently ignoring the incontrovertible fact that according to government stats this relatively low unemployment rate has only been achieved by an ever-continuing rise in the percentage of people who have somehow withdrawn from the labour market altogether.  One is thus drawn to John Williams’ (no relation to Grant or myself – we Williamses seem to be getting around!) Shadow Stats, which looks at such government statistics more in the way they used to be calculated before goalposts were moved (several times in some cases).  According to Shadow Stats the U.S. unemployment rate is, in reality, is somewhat north of 20%, which would seem confirm reality rather than manipulated government statistics.

Prior to the latest jobs announcement observers had seen the likelihood of the Fed raising rates 25 basis points in June much more likely and gold had been suffering as a consequence.  After the jobs announcement the likelihood of a June rate rise receded substantially, although some observers feel a July rate rise still on the cards if U.S. economic data between now and then looks supportive – and if the U.K votes to stay in the European Union in the referendum on June 23rd.  Others think September, or even later, will see the next Fed rate rise.  Undoubtedly the Fed has talked itself into imposing another rate increase this year, or perhaps two, just to maintain what little credibility it may have left in its ability to really jumpstart the U.S. economy and promote sustainable growth.

But now back to Brexit.  As we have pointed out here before there’s a substantial underswell amongst the British public of anti-EU feeling.  Whether this will express itself in a Brexit vote remains uncertain – a set of opinion polls published today (so after the latest TTMYGH newsletter was written) – suggest that the Brexit vote may indeed carry the day, although the high powered government-based Remain propaganda machine may yet prevail.  But if the Brexit option does emerge triumphant in just over 2 weeks’ time, with its decidedly uncertain, and almost certainly immediately negative impact on the U.K. economy, there are a growing number who believe the impact on the whole European Union concept – and even on the global economy – could actually be even more severe.

There has been a huge ‘project fear’ campaign unleashed on the U.K. electorate by the Remain camp, but as Grant Williams points out all the statistics being put about predicting doom and gloom for the U.K. economy as a whole and for the wealth of the person in the street, are totally unquantifiable – much as the positive spin on some drilling results from exploration juniors could be equally speculative but on the positive side.  Not that the pro-Brexit campaigners are not equally guilty of disseminating unquantifiable statistics and suppositions of their own.

So what has all this to do with gold?  Gold tends to thrive on uncertainty and the Fed’s dithering over rate increases, growing concerns about whether the U.S. economy is actually growing, and the potential effects of a Brexit should it come about – which looks to be much more of a possibility now than it did only a couple of weeks ago, are all uncertainties gold could thrive on. Add to that the apparent beginnings of a downturn in global gold production and doubts about continuing supply availability, coupled with what has been enormous gold ETF demand so far this year, and this is all gold supportive.  True, Asian demand has slipped.  Indeed this fall in demand from the East coupled with the huge ETF demand shows there has been something of a reversal in gold flows with more flowing into the Western gold ETFs than into India and China combined.  But virtually no-one believes that Asian demand will not pick up again – quite probably later this year and if this is accompanied by a continuation of ETF inflows the doubts about availability of unattributable (i.e. freely available physical gold) will multiply.

Grant Williams also points to another supportive phenomenon in the performance of gold stocks which have been hugely outstripping the rise in the metal price, and which have been remaining relatively strong even through the recent correction in the gold price.  Some of the biggest gold stocks of all have more than doubled and the most significant gold stock indexes and ETFs have been outstanding performers vis-à-vis the gold price itself.  Gold stocks are often the precursors of significant moves in the gold price rather than just being followers.

But while the TTMYGH newsletter highlighted just the three factors noted above, Grant Williams goes on to end with the comment: There are plenty more (such factors).  He mentions China, the upcoming US elections, the explosion in corporate debt levels and perhaps the biggest problem of all—unfunded pension liabilities—which will all have a big part in determining what kind of outcome the world gets as the ghosts of 2008 return.  You have been warned.

The above article is a lightly edited version of one I posted onto the info.sharpspixely.com site a day earlier