August 2017 Newsletter – He Who Holds the Gold, Makes All the Rules

Over the last 25 years of my career in precious metals I mostly have talked about economics, and the government’s inability to manage their debt.  Very seldom do I write in detail about Gold, yet in this current environment coming up, we could see a surge in the cost of Gold.  For those that have heard me talk on the radio, have read my newsletters, or have heard my Podcasts, seldom have I ever talked about Gold or Silver making a significant move.  I believe we could be moving into an era, fortunately yet unfortunately, where the old saying will be true:

“He who holds the Gold, makes all the rules!”

In January of this year I shared my prediction on national radio, my podcasts, and in print that we would have a Bull market in stocks and gold simultaneously.  As of this writing year to date, stocks are up 9.8% (index of the Dow), and Gold is up 10.2% (spot index of Gold).

Many people questioned me and asked, “How can that be, don’t they usually move in opposite directions?”  These two markets usually did until 2001.  There are a handful of fundamentals that drive the Gold market.  

Macro and Micro Gold Trends

Let’s take a look at the Macro and Micro, in other words, the long and short term trends of the gold market.  Let’s start with the Macro, the big picture, or the long-term trends that causes Gold to move up.

The main fundamentals are: the mining cost of gold, supply vs. demand, the inability for our government to manage its debt, inflation, the Dollar index, and financial uncertainty.  These all are the major components that drive Gold.  In the past I have heard people that make sensational comments on Gold, of either how it is going to go up to thousands of dollars in a short amount of time versus others that are making predictions it will collapse.  Both extremes will be wrong.  Those that are behind these statements, probably have good intentions, yet have limited to zero experience in the Gold market.  Their far-fetched predictions capture one’s attention, which is what is designed to do.  While they have your attention you can buy their book, or subscribe to their newsletters.  I am not discrediting them, but one should never invest in any market when such extreme numbers are being predicted.  In my 25 years of experience I have seen people lose their credibility when their wild predictions fall way short.  

The Mining Cost of Gold

Gold is a physical asset which has a direct correlation with “the average mining cost of Gold”, in other words, how much it costs to mine an ounce of Gold.  This low/high range of numbers will change over time and go up inadvertently.  In 1999 when gold spot was $255, the average mining cost of gold was $150-$310.  This was the bottom of the gold market.  One reason Gold moved up is because over time we have to dig deeper into the earth which costs more therefore as time goes on Gold will cost more.  Currently the mining cost of Gold is $1050-$1425 according the World Gold Council.  With spot gold currently at $1295 and a technical support/floor at $1200, Gold is set to break through $1300 this year.  Clearly we are in the range of the mining cost of gold, therefore gold is not “overvalued”.  Some say, “Gold is too high.  I should have bought gold when it was…”.  As an investor, if you are buying in the perimeters of the mining cost of Gold, you are then buying at appropriate levels.  

Supply Versus Demand

On the supply side of Gold there are two factors:

• Mine supply (newly mined Gold)
• Scrap supply (Gold sourced from old fabricated products, i.e. jewelry, and industrial components melted down)

On the demand side this includes:

• Jewelry demand (Gold content used in newly manufactured jewelry products bought locally at retail level)
• Industrial demand (the volume of Gold used in industrial applications such as wire, semiconductors/electronics, dental alloys)
• Retail bar investment (the net volume of bars that are purchased by individual investors, which would include ETF’s, through retail channels)
• Coin investment (newly minted government coins from countries around the world)
• Central Banks (Approximately 10 Central Banks from around the world, hedging against the dollar)  In the last 15 years the four categories listed above have not seen as much demand as Central Banks, the largest entity that creates the most demand.

When a market moves up money pours into that market which contributes to its rise.  In August of 1999 Gold was at $253, the bottom of the Gold market.  Currently Gold is at $1295 or rose 411%. During that same timeline, The Dow in 1999 was 10,829, and currently is at 21,813 or up 101%.  Obviously many analysts, financial planners, and brokers don’t understand Gold.  In reality Gold can speak for itself when you do the comparison.  

In the last 15 years the demand for Gold has outstripped the supply.  Central Banks, in the last 7 years, have bought more Gold than the previous 50 years combined.  Central Banks are forward thinking and look to the future seeing major problems ahead along with massive uncertainty.  Individuals make decisions for Central Banks, not computers.  Studying economics, money, government debt, and interest rates is what they do.  As a result they have the same concerns and fears individuals do, only highly magnified because of the amount of money they manage.  This is why by their actions alone, a Bull market in Gold is here for some time.  This remains in place until the next crisis hits (which will be greater than 2008) then in the aftermath of the crisis the Bull market in Gold may subside possibly.

Government Debt

Republican presidents after Eisenhower have increased the Federal Debt as a percentage of Gross Domestic Product (GDP) by 60%.  Democratic presidents have reduced the debt as a percentage of GDP by a total of 9%.  

Obama was the only Democratic President during whose time in office debt has risen relative to GDP.

 

 

Since 2001 every president has increased the Federal Debt as a percentage relative to GDP.  This is also the trend with the current administration.  If President Trump gets his $1 Trillion Infrastructure Bill passed then this trend will escalate.

Our country’s debt has been manageable throughout most of our history until the last 10 years.  A new trend started in 2001 when interest rates went to .25% and our country, and even the world, went into a new era.  In essence The Federal Reserve created a new environment, a bubble that I have wrote about in a previous newsletter.  Bubbles burst and this one is no different.  

The new belief was introduced and since supported:  High debt ratios are not only acceptable but needed to support and expand economies.  Once economic growth reaches certain levels then tax revenues would escalate to bring debt reduction.  Sounds great in theory.  Seldom does it work, which why we are $20 Trillion in government debt.

In this environment this makes Central Banks that hold U.S. Dollars uneasy and are then forced to increase their holdings in Gold, which shows up in higher prices in Gold. 

Inflation 

Governments coupled with Central Banks have used inflation as the tool to manage and lower a government’s debt.  This is done through manipulation of interest rates by devaluing their currency then paying down the country’s debt with devalued dollars.  The most prominent time was recently was during the 70’s.  We had inflation and interest rates rose to double digits. From 1975 to 1980 Gold rose 500%.  Then interest rates came down and so did Gold.  

The Federal Reserve has created distinguishable trends that could add a significant upward pressure on Gold.  The Fed has previously created an artificially low interest rate environment.  During that time the Fed became the biggest buyer of U.S. Treasuries.  Now the Fed needs to reverse all of this.  They are going to unwind their balance sheet that has ballooned to $4.5 Trillion.  Also, they are going to normalize interest rates to the 3.5-4.5% range. These two actions will go hand in hand.  When doing so this will cause inflation, trigger a stock correction, and a rise in Gold.  The Fed raised the interest rate twice this year, and each time stocks pulled back and Gold went up.  This is why they recently took a pause in raising rates.

The Dollar Index 

As the dollar goes down historically Gold goes up.  There is a belief that has been created, unfortunately, by individuals in my industry saying that the dollar can go to zero.  I say the dollar can be worth less but not worthless.  The value of the dollar is comprised of 6 other currencies of the world in addition to the dollar.   It is currently trading at 92.2 points, like the Dow trades in points.  Earlier this year it was at 103.82 or down 11.1%.  During this time Gold has moved up 12.3% by index.  The short term, and also long term trend for the dollar index is down.  Many see it falling to the mid 80’s this year.   In the next couple of years it will break its support of 72.  Once it does that the dollar will fall rapidly.  This goes hand in hand with many seeing major economic turmoil within the next 2 years.

Micro Trends

Gold has a short term yearly cycle that is fairly predictable.  Gold has a pattern that has been true for the last 37 out of 41 years.  It moves up more in the second half of the year than the first half of the year.  This first six months of this year Gold moved up 7.3%, which goes with my prediction I made in January saying Gold will move up 10%-20% in 2017.  Historically the month of May, June, and July are the least performing months, while September and October are the biggest movers for Gold.  Ironically those are historically the worst months for stocks.  August starts this upward trend for the fall and winter months are the hottest seasons for Gold.

On a technical level the resistance for Gold is $1300.  It has moved up to that level recently 2 times only to pull back and stay within the range of $1200-$1300.  Many analysts are calling for higher prices in Gold.  I believe when Gold breaks and closes above $1300 for more than 5 days, a new floor will be created.  Gold will then gather momentum and make a move to $1400 this year.  We are within days of this happening.

Developing Trends

As much that I have a deep love for our country, the obvious pink elephant in the room is that none of us can change the behavior of our Government, Congress, which is our elected officials, and neither The Federal Reserve.  Those individuals are people that influence markets and the economy good or bad.  Sometimes their influence will move markets where investors benefit.  Sometimes their misjudgment will cause investors to lose billions of dollars.  Other times their action of doing nothing, can have a severe impact for decades.  President Trump was elected for the most part because Americans are sick and tired of nothing getting done.  Unfortunately Congress hasn’t gotten a darn thing done this year.  The Republican Party has had 7 years to come up with a plan to repeal and replace Obamacare.  All we have is failed attempts because the plans presented are worse than what we currently have.  

What compounds the problem is by September 29th we are facing several things that need to get done when Congress comes back from their summer vacation.

1. Annual Budget.
2. Passing an insurance plan otherwise 8 million children will not have health insurance.
3.  The decision to continue to subsidize health insurance companies, which the government gave in last year’s budget was $10 Billion.  This years will be much higher since Obamacare is falling apart.
4. Tax Reform/Tax Cuts is one of the major items on President Trump’s agenda that doesn’t have to be passed by September 29th but does go with the Annual Budget.
5.  The Debt Ceiling, more critical than other four items combined.

This micro topic is substantially different than the rest and it could cause a government shutdown.  President Trump said in a speech rally recently that if he doesn’t get funding for the wall he will shut down the government.  

I have already started writing next month’s newsletter which will come out in early September.  I will go in depth about The Debt Ceiling and how this could not only shut down our government, but could cause a credit downgrade, and even a default.

As a result of this many see the handwriting on the wall.  Besides what President Trump has done with his pen through Executive Orders nothing has gotten done. Zilch!  We have had 8 months to pass bills on what President Trump campaigned upon.  Congress has blocked each bill, each time!  What makes you think that now, all of a sudden, in only 12 days, Congress has the ability to agree and pass the most crucial item called The Debt Ceiling? 

Wise investors are preparing and buying gold.

History has proven there’s too much gridlock in Congress.  Too many politics, too much talk with too many agendas, while nothing gets done.  Investors are following their gut, moving money out of paper investments and into Gold.  In many cases this is going against their financial planner and stockbroker’s advice, of whom they know very little about Gold.  These wise investors are not taking the chance that things will just work out.  In a perfect world all of the items will get done before September 29th. Unfortunately our world is far from perfect and much closer to a disaster.  I hope Congress does the right thing in raising The Debt Ceiling.  If so we have only “kicked the can down the road” with our debt obligations, that are mathematically unmanageable.  This will only cause Gold to move higher.  If Congress behaves as they have done recently then buckle your seatbelt.  We will either have a government shutdown, a credit downgrade, or possibly default for the first time in history.  Any of these things could trigger a Bail In.  Gold is preparing to rally in this environment.  Don’t be the person that says ” I wanted to buy some Gold when it was under $1300 but my advisor told me No!”  Now is the time to move.  Our company has done more volume in business in August than the previous 3 months combined.  Roll over your 401k or IRA, and buy physical Gold and hold it in your hands without a tax liability.  You can also buy Gold outside of your retirement and you will receive and hold that Gold too.  But time is running out and it is currently not your friend.  Get on the Gold Train and when you hold your Gold in your hands you will know what it feels like to say “He Who Holds the Gold, Makes All the Rules!”