Tag Archives: GOLD

SEMI-MONTHLY FISCAL/MONETARY UPDATE – SLUGGISH GDP, FED NORMALIZATION BEHIND SCHEDULE, GOLD THREATENS AN UPSIDE BREAKOUT

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GDP GROWTH SLUGGISH, FED BALANCE SHEET COMES DOWN-BUT BEHIND SCHEDULE, GOLD PRICE READY FOR UPSIDE BREAKOUT?

THE ECONOMY

It now seems clear that Q1’18 will not demonstrate a pickup in the economy. After 2.9% real GDP growth in Q4’17, lagging the much heralded 3% plus in Q2 and Q3’17 (Q3 aided by reconstruction activities after the storms), it now seems clear that Q1’18 will be closer to 2% than 3%. Recall that Q4 consumer spending, which included the best Christmas season in at least five years, included record high consumer credit card debt (with an increasing incidence of default) and a reduction of the consumer savings rate down to about 3% of household income, not the healthiest combination for longer term spending expectations. Sure enough, the first quarter of ’18 seems to be characterized by slightly higher consumer savings, as the public is still burdened with high health care, rent, and education costs. We saw a chart recently that indicates that about 33% of 25-29 year olds are living with parents or grandparents, up from about 26% in 2010. No doubt many of these Millennials are coping with the burden of student loans. Surveys indicate that many consumers are going to apply savings from the new tax bill against debts, rather than increase spending. Economic spokespersons (i.e.Kudlow, Mnuchin, etc.etc.) continue to predict that the tax bill will stimulate faster GDP growth and much higher tax revenues, in time reducing the federal debt burden. Time will tell, obviously, but the jury is still out, and the signs are not convincing so far.

FEDERAL RESERVE NORMALIZATION PROGRAM

The US Federal Reserve continues to “normalize” the bloated balance sheet, but is running behind schedule. Recall that the plan called for $10B/month reduction in Q4, $20B/month in Q1, $30B/month in Q2, $40B in Q3, $50B in Q4’18, and that’s as far as described. The plan fell behind schedule by $23B in Q4, fell another $4-10B behind plan in Q1 (depending on whether you use 3/28 or 4/4), so was $27-33B behind schedule as of 3/31, a significant percentage against the $90B that was scheduled. In the first week of Q2, ending 4/11, the Fed’s balance sheet was essentially unchanged. The rubber meets the road now with a reduction of  $30B monthly. Since the Fed’s activities affect short term interest rates rather than longer term, it could be instructive to look at what the bellwether ten year treasury note has done over the last six months. During Q4, as the Fed got $23B behind their $30B objective, the ten year traded between at 2.35% to 2.45%. The Fed stepped up their selling in Q1, meeting their quarterly objective (though not catching  up) and the ten year moved dramatically, from just above 2.40% to as high as 2.95% and closed Q1 at about 2.75%. So far in Q2, the ten year has traded back up to 2.85% as this is written.  The more volatile two year treasury, which bottomed around 1.3% in midSeptember, has moved in a straight line to 1.9% at 12/31, 2.27% at 3/31, and 2.38% today. These are very dramatic moves, and the pace of “normalization” continues to quicken. Time will tell what affect $30B/month of Fed “runoff” has on interest rates, but the possibility exists that rates could spike higher, especially if the Fed tries to catch up with the shortfall to date of about $30B. If interest rates spike upward in Q2, as they did in Q1, it could  be unsettling to capital markets that are already showing volatility that we have not seen in years

GOLD UPDATE

Gold has been “consolidating”, around $1350/oz., up 3-4% for the year, fairly firm day to day, seemingly threatening to break out on the upside. No doubt the increasing visibility of federal debt accelerating to over $1 trillion annually as far as the eye can see, is contributing to the interest, as well as the possibility of increased inflation. Since Central Banks, worldwide, are trying to stimulate inflation, it stands to reason that they would be continuing to purchase gold bullion, which they are. Market technicians, chartists, point to $1,375 and $1,400 per ounce as “breakout” levels on the upside. After a 4-5 year consolidation, some observers think gold bullion could make a move to new all time highs, above $2,000/oz. From our standpoint, the gold miners seem to be the most advantageous way to participate, since the gold mining stocks are even more depressed in price than the metal itself. The last time gold bullion was around $1,350/oz., in mid 2016, the gold mining stocks were about 35% higher. If the price of gold breaks out on the upside, the gold mining stocks should do even better.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD & MINERS SURVIVE VOLATILE MARCH MARKETS

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INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
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  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN

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FISCAL-MONTHLY FISCAL/MONETARY UPDATE – GOLD FIRMS, US DOLLAR WILL REMAIN WEAK, BYE BYE BITCOIN (BLOCKCHAIN ADVOCATES WILL GO WITH THE GOLD)

The broad equity market continued upward in January. Gold bullion was up a little over 3%, the gold miners were up less (GDX up 2.2%, GDXJ down 1.3%). Our gold miner related portfolio was up inline with that group. We believe that the gold miners will start to outperform gold on the upside as they report Q4’17 earnings, the first quarter in over a year that the price of gold was materially higher than a year earlier. That will continue to be the case as Q1’18 is reported, and all through this year if gold holds its current price above $1300. We describe below two particularly positive recent developments.

The US dollar has recently been dramatically lower, in particular against the Euro, which represents the second largest collective economy in the world. We have written in the past that gold does not necessarily move inversely to the dollar, as many observers believe, since it depends on the time period one uses. However, all other things being equal, a weak dollar helps rather than harms the price of gold. The question then becomes: what is really the US policy? Over the last year, both President Trump and Sec’y of the Treasury, Steve Mnuchin have made statements that they consider a weak dollar a “blessing” in terms of US exports, our economy and our trade balance. They backed off that stance recently as they were attacked by certain pundits. However, DJT has continuously said “it’s all about jobs” and he is certainly not afraid of debt and deficits, which would pressure the US Dollar to the downside. The latest indication in this regard comes just last week in Davos, when Commerce Sec’y, Wilbur Ross, reflected back to 1945, just after Bretton Woods had established the US Dollar as the world Reserve Currency, and the US (with a strong dollar) was willing to be supportive of other countries rebuilding themselves after WWII. Ross said, though, that “it is a different world today”. (Check it out on Youtube, minute 19-20 in the presentation). Obviously, he is pretty directly saying that the US can no longer afford to support the worldwide economy at our own expense, implicitly blessing a lower dollar.

The second potentially powerful positive development is that a number of prominent institutions are planning to introduce cryptocurrencies BACKED BY PHYSICAL GOLD. Just this week, the UK’s Royal Mint, responsible for producing all the physical money in the UK, has announced the launch of its own gold-backed cryptocurrency. Also announcing similar plans are the Perth Mint in Australia, and the Sprott organization of Canada.

We have written (skeptically) about Bitcoin over the last few months, which readers can access through our Search function on the home page. We don’t think it is a coincidence that, virtually to the day that Bitcoin topped at $20,000 and started to fall by 50%, gold has been edging upward. It seems more than reasonable to think that speculators and investors would rather own a cryptocurrency backed by gold than backed by NOTHING. Since the total market value currently invested in Bitcoin and others is still something on the order of $300-400 Billion, there could be substantial additional demand for physical gold, whose total worldwide annual production is $140-150 Billion.

We  obviously believe that our gold related investment strategy is more valid than ever.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – SOMETIMES A SIMPLE VIEW WORKS BEST, + BITCOIN UPDATE

Economics seems like such a complex subject, as represented by PHDs and pundits. Some of you may remember Martin Zweig, a very successful money manager who made his name by predicting the 1987 crash. More than that, his investment mantra, “Don’t Fight the Fed” has proven to be one of the simplest, but most durable, tools in capital management. While everyone seems to be celebrating two quarters of 3% GDP growth (not “great”, but better than 2%), and debating whether the economy will continue to strengthen or weaken once again, everyone seems to be forgetting that Central Banks around the world have enlarged their collective balance sheet by something like TEN TRILLION DOLLARS since the financial crisis of ’07–08. In an effort to stave off a deflationary collapse, the Fed, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Peoples Bank of China have created new currency (something like “cryptocurrency”), and bought all kinds of fixed income securities as well as equities. This has, as designed, inflated the bond and stock markets, keeping interest rates very low (still negative on trillions of fixed income securities) and elevated the stock markets to record highs. Janet Yellen and other economists are mystified as to why all this newly created capital has not stimulated inflation in wages and groceries, ignoring the fact that inflation has been huge in the capital markets, real estate, art and other asset classes with the notable exception of gold (so far). The “wealth effect” for the upper class at least, has allowed the for the purchase of a Van Gogh painting for a cool $450M and apartments in the Big Apple for $60-100M. Grocery and apparel prices have not inflated, but the creation of $10 trillion of fresh capital has had its intended inflationary consequences in the form of asset prices.

Now comes the test, as the Central Banks begin to “normalize”, reduce their balance sheets, and pull back the Keynesian accommodation that helped to avoid an even larger financial crisis back in ’08. Our SIMPLE point here: If Central Banks provided $10 trillion dollars of freshly printed currency, which no doubt was a major contributor to the steady (though anemic) economic growth of the last seven years and the straight line upward in the stock and bond markets, it seems reasonably predictable that the removal of that “accommodation” will reverse a lot of that economic progress and asset inflation.

Do not despair, however. In our view, the stock and bond markets will not collapse, and THE REASON IS SIMPLE. THE CENTRAL BANKS WILL CAPITULATE, and back off their intended “normalization”. Within a matter of months, the sale of securities by our Fed, and the reduction of purchases in Europe, Japan, China, and Switzerland, will create a year to year reversal of something like a trillion dollars, annualized, of buying power, and that will weaken the worldwide economy. At that point, the politicians will scream “do something”, and the Central Banks will back off their QT (Quantitative Tightening). The result will be the “can kicked down the road” once again. Unfortunately, though, each financial “heroin hit” has to be bigger than the last to maintain the economic “high” (anemic though it may be), so the accommodation will need to be even bigger. Of course the long term downside consequences will be even more dramatic but that is a story for another day. The bond market, with the ten year note still at a historically low 2.6%, (“disbelieving” the strengthening economy), and the gold market which has been firming over the last month or so (anticipating the next round of accommodation), may well be signaling exactly this scenario.

Regarding Bitcoin: Now down about 50% from its peak (about the time we last wrote about it, on 12/19 at the high), we stand by our analysis (from 8/1 and 9/5 at much lower prices, and again on 12/19) The search function on our Home Page will bring up those articles for you). The youtube link below humorously summarizes the situation.  Blockchain technology no doubt will have its applications, but Bitcoin and its 1300 brothers and sisters, amounting to hundreds of billions of dollars of newly “mined” currency, is not going to have material staying power. Watch this video, more truth than fiction.

 

 

 

 

 

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2017 YEAR END FISCAL/MONETARY UPDATE – BE CAREFUL OUT THERE!

To access this content, you must purchase Website Subscription.

INCLUDED IN YOUR ANNUAL SUBSCRIPTION:

  • Broad economic insight. As described in “Restaurants/Retail – Why Bother?” the restaurant and retail industries provide a leading indicator of far broader economic trends. You no longer have to be the last to know.
  • Two to three analytical pieces per week (“Roger’s Rap”) personally written by Roger Lipton describing corporate developments within his industry specialization, including their relevance to the broader economy.
  • Periodic “macro” discussions personally written by Roger Lipton, analyzing fiscal and monetary matters that will likely affect your investments and your business.
  • Opportunity to “Ask Rog” about your personal concerns, regarding individual companies or broader economic trends. Roger will use his best efforts to answer questions submitted, obviously limited by the number of requests . He may answer your question by email directly and/or include your question with his “Roger’s Rap” releases.
  • You are provided access to “Friends of Rog”, depending on your financial and operational needs. The outstanding individuals suggested here, have been personally “vetted” by Roger over decades. Roger receives no compensation based on whether or not use their services.
  • A free copy of the legendary best selling book, How you can Profit from the coming devaluation, as shown at right, written in 1970 by Harry Browne, which predicted the 2000% rise in the price of gold. This profound piece is more relevant today than ever, so Roger re-published it in 2012. This book will help you preserve the fortune you are in the process of accumulating.

SEMI-MONTHLY FISCAL/MONETARY UPDATE: BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE!!

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BITCOIN REVISITED: THE FLAW IS REALLY SIMPLE !!

On September 5th of this year I wrote an article about Bitcoin, which you can access below: After you have read the previous article, you can return here for my new conclusion. Good luck, and HAPPY HOLIDAYS !!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD VS. BITCOIN – ONE WILL BE UP, THE OTHER DOWN

The price of bitcoin is several times higher now, but I stand by this article. The FLAW in the whole cryptocurrency “bubble” is as follows. While the number of bitcoins that can be created is presumably limited, which would therefore provide the long term value as a currency ( just as with gold over the last four thousand years) the number of competing cryptocurrencies is not limited. Three months ago there were something like 800 competitors to bitcoin, combining to create a total worth of about $125 billion. Now there are more like 1100 “bitcoin like” alternatives, in total worth perhaps $400 billion. In the 1920s, during the Weimar inflation in Germany and Austria,  when a loaf of bread cost 1,000,000 German marks, a mark was therefore worth one millionth of a loaf of bread. If a Bitcoin is worth $20,000., for example, that means the dollar is worth one twenty thousandth of a Bitcoin. That doesn’t sound to me like the US Dollar is worth much, especially if a computer can issue thousands of similar currencies that dilute the Dollar even further.

When the books are written five or ten or twenty years from now about the financial follies of the early twenty first century, the Bitcoin (and competing cryptocurrency) mania will be viewed as one of the “ringing bells” before the bubble burst. One man’s opinion, FWIW.

Roger Lipton

 

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TAX “REFORM” LOOMS – CAN ECONOMY OVERCOME DEBT LOAD?

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – TAX REFORM LOOMS – CAN ECONOMY OVERCOME THE DEBT LOAD  ???

FOREWARD:

The general equity market continued strong in November, so there was no perceived need for a “safe haven” or “non-correlated” asset. Our precious metal portfolio was close to flat,  tracking the mining indexes almost exactly. GDX (the large miners) was flat, GDXJ (the smaller miners) was down 1.1%, TGLDX and OPGSX (Tocqueville and Oppenheimer) gold funds were down exactly 1.0%. So the beat goes on, and our conviction has not changed. We don’t know when the turn for precious metal holdings comes, obviously, but it is going to be dramatic. There is  no need to be “promotional” on this first fiscal/monetary post to be available  on the Restaurant Finance Monitor website. However, I am sufficiently convinced that a turn is near that we are accepting new investors into our investment partnership, with a reduced fee structure, for the first time since we began transitioning to a “gold fund” four years ago. We should interject here, to be legally compliant,  that this statement is not to be construed as an offering, which can only be made by way of an offering circular.

THE BACKGROUND

Nobody needs to tell me how painful it is to not be participating while the financial world “dances”.  Back in 1998 and 1999, our investing partnership was not benefiting while the dotcom mania roared. On January 1, 2000 I wrote that “we have seen this movie before, and know how it ends.” From March of 2000, when the dotcom bubble burst, our portfolio more than tripled over the next five years or so. The distortions within the financial markets today are must larger, and worldwide, in scope.

We could go back to the tulip mania of the 1600s, the Mississippi bubble in France and the South Sea bubble in Britain of the 1700s, but much more recently: the Japanese stock market peaked at 40,000 in 1990, descended to under 10,000 fifteen years later and still trades about 50% from that high; the dotcom mania of 1998-1999 was a “new paradigm”; and housing prices couldn’t come down, according to Ben Bernanke, Fed Chairman. The TV commentary was just as positive on 1/1/2000 and 6/30/2008 as it is today. Whatever modest strength there is in the worldwide economy has been supported by over TEN TRILLION DOLLARS of newly printed currency by the major Central Banks. It would be great if prosperity were that easy to create. The unintended consequences are still to come.

At the moment, with taxes and deficits all over the news cycle, it may be useful to reflect upon the fact that gold prices made their last major move, doubling in price from 2008 to 2011, just as it became clear that the annual deficits and cumulative debt were going nowhere but UP. The last several years, as there has been less concern about deficits, the gold price has in fact “consolidated”, but as described below: here we go again.

First, recall that, as we described a year ago, over the nine years ending 9/16, the reported annual deficits were a total of $7.755 trillion. However, the cumulative debt increased from $9.0T to $19.4T, an increase of $10.4T. So, as disturbing $7.755T of deficits are, an extra $2.64T (a lot of money) was spent, somehow “off budget”, capitalized “investment”, or whatever. The cumulative US debt was 20.24 at 9/30/17, up $700B from a year earlier, though Congress approved $503B in February 2016.

I am not making this up.

The site: www.usgovernmentspending.com, describes it this way: “People naturally assume that the annual Deficit is the total that the Federal government borrows each year. Actually, this is not so. The Deficit is simply the difference between the Federal Outlays and Federal Receipts. Usually the Feds borrow a lot more than the annual Deficit. The difference is “Other Borrowings”. Only in D.C. I have provided here the link to the “Spending Details”. Honestly, I can’t make sense of it, but the result is clear. https://www.usgovernmentspending.com/numbers The reason that increasing debt cannot be ignored is that the higher the debt load that any organization carries, the more difficult it is to invest for the future. This applies to an individual family unit as well as a government. A classic book, “This Time is Different. Eight Centuries of Financial Folly”, written by Reinhart and Rogoff in 2011, researched hundreds of situations over eight centuries, showing that when a government’s debt exceeds about 100% of their Gross Domestic Product, it becomes a serious burden on the ability to grow. The United States debt is now about 105% of our GDP, and that could be one of the key reasons that we have been stuck in a 2% economy for the last ten years. Some observers counter that Japan, after all, has a debt load that is 260% of their GDP, and their economy hasn’t collapsed, so our debt is modest in comparison. True enough, but their stock market is still down 50% from its high 28 years ago, and their government is frantically printing money to avoid a deflationary collapse. Right now, the Japanese government is buying $60B of securities, monthly, to keep interest rates low and try to stimulate their economy. Since their economy is one third our size, that would be the equivalent of us printing $180B monthly, over $2 trillion annually, which would not be viewed favorably by capital markets if it were necessary here.

The Current Situation – Talk about “Fake News”

This is what politicians “do”: The new tax proposals and budgeting discussion revolves around limiting the tax reductions (and therefore the potential “increase in the debt”) to $1.5 trillion over ten years. The Republicans, of course, are arguing that a better economy, scored “dynamically”, will “reimburse” the theoretical deficit with offsetting tax revenues. That debate aside, this whole discussion leads one to think that the $20.5 trillion today shouldn’t be allowed to be more than $22 trillion a decade from now. WRONG. What nobody tells you is that the $1.5 trillion increase is on top of the already budgeted TEN TRILLION DOLLAR increase based on present expectations by our Congressional Budget Office. (This is the so-called “baseline”, but you haven’t heard that word uttered by either political party). The current “baseline” debt is projected to increase roughly $1 trillion dollars every year over the next ten years. The debate therefore is not whether the debt is going to go from $20.5T to $22.0T, but whether it will go from $20.5T to $30.5 or $32.0 Trillion. Keep this in mind as you watch the celebratory dance of the Republicans after the tax reform, such as it is, becomes law. The Democrats will be screaming about the new Ponzi scheme, but it’s just like the old Ponzi scheme.

BACK TO THE FACTS

Of course there are lots of assumptions built into all these projections, and they could be materially inaccurate. Unfortunately, governmental agencies are notoriously overly optimistic, and spending is usually higher than projected, as described above. In the current fiscal year, ending 9/30/18, the CBO projection is an increase of $1.03 trillion. With spending on the storms, higher defense spending, higher health care expenses, I’ll take the “over” side of the bet on the size of this year’s deficit. As a corollary to this discussion, think about the fact that it is only the very low interest rates that have allowed us to carry the $20 trillion without blowing up the deficit even further. If interest rates should be higher, along with an additional $10 trillion (or whatever) of debt, the prospect of ever reducing the total debt burden is really remote. If Reinhoff and Rogart’s “This Time is Different” is even only directionally correct, we’re “screwed”.

As far as the proposed tax cuts stimulating the economy through lower taxes for the middle class, it is now clear that that many of the tax cuts will affect the wealthier citizens (which is what the Democrats have been screaming). The details currently in play are in a continuous state of flux and too numerous for us to analyze, and the House and Senate proposals are about to be modified further, no doubt further muting the potential benefits of this “huge” tax reform. Overall, however, we don’t expect the final “reform” to substantially stimulate the economy through better middle class consumer spending. Maybe on the business side. In terms of public discretionary spending, it will continue to be burdened by higher health care, education and housing expenses.

The public subsidies will continue, deficit spending will be at an increasing rate for the foreseeable future, and the much higher governmental debt load will be a drag on the desired economic growth. If there is any part of the current administration’s agenda that will work, it will be the reduced administrative burden, which is being implemented by executive order rather than legislation. We fear, unfortunately, that with an incomprehensible amount of debt. It could prove impossible to grow the economy faster than the debt load and achieve, in essence, “escape velocity”.

All of this is to say that there will be no political will to reduce deficits or debt, “normalize” interest rates, or implement the necessary adjustments to “the swamp”. The capital markets, including the ridiculous cryptocurrency mania, will adjust to more realistic economic expectations. Gold, the most “unloved”, the screaming “bargain” among asset classes, will “catch up” at some point soon. Bargains are always unloved at the bottom. Our ownership of the gold miners should benefit by a multiple of whatever the gold price does. The “money” is in the ground, so it is just a question of when it gets monetized by the mining process.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION FLAT IN OCTOBER – GOLD MINERS HAVE NEVER BEEN CHEAPER

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION FLAT IN OCTOBER – GOLD MINERS DOWN 3-5%, HAVE NEVER BEEN CHEAPER

In terms of the price action of Gold, and the Miners,  October was a continuation of the year to date. The general market continued upward, whether justified or not, and investors didn’t feel a strong need for an “uncorrelated” asset such as gold, which was down about 1% for the month.  GDX (the ETF representing the large miners) was down 2.0%. GDXJ (the small and medium miners was down 4.8%. The two most prominent mutual funds specializing in the gold miners, Tocqueville (TGLDX) and Oppenheimer (OPGSX) were down 3.7% and 4.3% respectively. The miners have virtually never been cheaper relative to the price of gold, as discussed below, so, though it hasn’t “kicked in” yet, the leverage on the upside could (we would say “should”) be amplified when gold moves higher.

As referenced above, the mining companies, with their operating leverage, normally are more volatile than the price of gold itself. While it is true that many mining companies have suffered from poor management, including acquisitions and exploration in politically unattractive countries, over the last five years there have been many management upgrades and the mining companies we hold are generally in politically stable jurisdictions. At the same time, the mining process itself has become more efficient, and the price of energy (a major expense) is a lot lower than several years ago.

The  price  performance of the miners as a group, since 2011, has been dismal, to put it gently. While gold bullion is down from $1900 to $1275m the mining stocks have done a great deal worse. The following chart shows graphically what two indexes of mining stocks have done relative to the price of gold. The “XAU” is the Philadelphia Stock Exchange Gold and Silver Index, capitalization weighted. “HUI” is the New York Stock Exchange “Gold Bugs index”, equal dollar weighted of major gold miners. The chart shows clearly that the mining stocks’ valuation have literally never been cheaper relative to the price of gold. Even with no upward movement in the price of gold, the mining equities could move 100-200% upward just to “catch up”. Add to this our conviction that gold bullion itself could be many times the current price and you can see why gold related securities, the minng stocks in particular, are an important part of our investment approach.

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – CASH IN/CASH OUT – KINDERGARTEN ECONOMICS

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SEMI-MONTHLY FISCAL MONETARY UPDATE –

CASH IN/CASH OUT – KINDERGARTEN ECONOMICS

INTRODUCTION:

Our continuing coverage of macro-economic trends and the related performance of precious metal related investments, is based on a  conviction that a strong economy must be supported by a credible currency. If workers don’t have confidence in the exchange value (represented by the currency paid to them) they will expend less effort toward that end. Gold bullion has protected consumer purchasing power for literally thousands of years. In the history of the planet, there has been no “fiat” currency (unbacked) that has not been destroyed over time by politicians too eager to please their voters. Since 1913, when our Federal Reserve Bank was created to control inflation, a dollar has become worth less than three cents. Today’s politicians, all over the world, obviously show no “political will” to do otherwise. While we continue to invest in consumer related situations, a major portion of the investment partnership we manage is invested in gold related securities. We believe that the modestly higher price of gold, and the mining stocks, in 2016 and 2017 represents just the beginning of a new leg in the long term upward trend that started in 2000. We further believe that gold is as cheap today, relative to other currencies outstanding, as it was in 1971, at $35.00 per ounce before it ran to $850 per ounce in 1979. We provide to our subscribers, as a gift, the classic book, written by Harry Browne in 1970, which concisely and accurately rationalized and predicted the enormous rise int he price of gold. While we don’t expect to see gold more than 20x higher anytime soon, as in the 1970s, we believe the price of gold could be many times its current price sometime during the next 3-5 years. We suggest that readers interested in this subject read our previous updates on this website.. 

SEMI-MONTHLY FISCAL/MONETARY UPDATE -KINDERGARTEN ECONOMICS

The general stock market was up modestly in September, since there was no perceived day to day need for gold, as the presumed “safe haven” investment. Gold bullion was down 3.4% and the gold mining stocks were down about 7.0%, though both are still up modestly for the year. Posssibly the largest perceived negative for gold was the Fed’s inclination to begin selling off their $4 trillion bond portfolio which would also be a form of tightening. As we have previously discussed, we don’t think either effort can go very far before the already sluggish economy rolls over and the politicians scream “enough, do something”. As discussed below, the current deficit in Y/E 9/30/18 will rise sharply once again. Nor will a reduction in the cumulative deficit or the Fed balance sheet bring a graceful end to the monetary folly of the last ten years. Gold, as the best long term currency, will play its historical role.

Increasing governmental annual operating deficits & cumulative debt, as well as a slow economy accompanied by ongoing very low interest rates, are supportive of an increasing price of gold. This is not necessarily true over a month or two, or even a number of years but over a longer period of time it is predictable. Since 2000, when all of the above trends became well established, the price of gold has gone from $300/oz. to over $1300/oz., outperforming almost every other asset class.

The economy continues to be sluggish, even though a phalanx of optimistic economists predict that GDP growth is just about to improve. We doubt it, and the revisions for the current September quarter are coming through lower rather than higher. GDP growth in the fiscal year ending 9/30/17 will no doubt be much closer to 2% than 3%. This has been the case for almost a decade, it continues to be the case, and we believe will be reality in the foreseeable future, with an economy burdened by an oppressive debt load.  The recent Fed announcement of the initial steps to unwind the $4 trillion balance sheet (which backstopped the financial crisis ten years ago, but has not jump started the economy) amounts to a form of tightening, and is modest in any case. If the Fed sticks to the program outlined, it will only reduce the Fed balance sheet by about 10% by the end of calendar ’18.

Meanwhile, the cumulative U.S. debt is now comfortably over $20 trillion, with the 9/30/17 yearly deficit about to exceed by a still undetermined amount over $700 billion. There is no question that the deficit in Y/E 9/30/18 will be higher, at least close to $1 trillion, possibly materially higher, especially with higher defense spending, health insurance subsidies, and the start of infrastructure spending. (Can’t forget “The Wall”) There have unfortunately been a large number of “shovel ready” projects created by the recent storms, likely to cost over $100B.

Some observers suggest that higher GDP growth, propelled by lower tax rates, will quickly solve the debt problem. The U.S. federal budget for Y/E 9/30/18, still in the formative stage, will no doubt involve a higher short term deficit, but would hopefully ignite the growth, reduce or eliminate the annual deficits, even pay down the cumulative debt. This “dynamic scoring” is a complex subject, but Steve Mnuchin, Treasury Secretary, recently provided guidance. He said that 3% growth, up from the current 2%, would generate $2 trillion of extra federal tax revenues over 10 years. Unfortunately, that is only an average of $200B annually, only a modest down payment on the apparent current $1T run rate. Conclusion: The debt and deficit Beat Goes On, which in turn burdens the economy’s opportunity for a higher growth rate.

As a sign of the ongoing absurdity, and danger, taking place in the monetary world: a Wall Street Journal article last week talked about China based Alibaba Group Holding, Ltd having created the world’s largest money market fund, now at $218B, up from $124B only six months earlier. The rapid growth is no doubt a function of the very attractive seven day yield of 4.02%, up from 2.3% a year earlier. The disconnect is that one-year Chinese bank deposits only yield 1.5% and even 10 year Chinese bonds earn only 3.6%. The extraordinary 4.02% yield has been generated by investing in “financial instruments with longer maturities”, no doubt of lesser quality and less liquid than a “money market” model would suggest.  It was a big deal ten years ago when a US money market fund couldn’t redeem deposits at $1.00 per share, which has always been the model. In China today, and around the world, investors continue to “reach for yield”, which inevitably ends badly.

Roger Lipton

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE BEAT GOES ON – IGNORE RISK AT YOUR PERIL

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SEMI-Monthly Fiscal/Monetary Update – The Beat Goes On – Ignore the Risks at Your Peril

Increasing governmental annual operating deficits & cumulative debt, a slow economy accompanied by ongoing very low interest rates, are all supportive of an increasing price of gold. This is not necessarily true over a month or two, or even a number of years but over a longer period of time it is predictable. Since 2000, when all of the above trends became well established, the price of gold has gone from $300/oz. to over $1300/oz., outperforming almost every other asset class.

The economy continues to be sluggish, even though a phalanx of optimistic economists predict that GDP growth is just about to improve. We doubt it, and the revisions for the current September quarter are coming through lower rather than higher. GDP growth in the fiscal year ending 9/30/17 will no doubt be much closer to 2% than 3%. This has been the case for almost a decade, and it continues to be “on the come”.

Meanwhile, the cumulative U.S. debt is now comfortably over $20 trillion, with the 9/30/17 yearly deficit about to exceed $700 billion (we don’t know by how much). There is no question that the deficit in Y/E 9/30/18 will be higher, probably close to $1 trillion, especially with higher defense spending, health insurance subsidies, and the start of infrastructure spending. There have unfortunately been a large number of “shovel ready” projects created by the recent storms, likely to cost over $100B.

Some observers suggest that higher GDP growth will quickly solve the debt problem. The newly proposed budget U.S. federal will no doubt involve a higher short term deficit, but would hopefully ignite the growth, reduce or eliminate the annual deficits, even pay down the cumulative debt. This “dynamic scoring” is a complex subject, but Steve Mnuchin, Treasury Secretary, recently provided guidance. He said that 3% growth, up from the current 2%, would generate $2 trillion of extra federal tax revenues over 10 years. Unfortunately, that is only an average of $200B annually, only a modest down payment on the current $1T run rate. Conclusion: The debt and deficit Beat Goes On (increasing the burden on future growth).

As a sign of the ongoing absurdity, and danger, taking place in the monetary world: a Wall Street Journal article last week talked about Alibaba Group Holding, Ltd having created the world’s largest money  market fund, now at $218B, up from $124B only six months earlier. The rapid growth is no doubt a function of the very attractive seven day yield of 4.02%, up from 2.3% a year earlier. The disconnect is that one-year Chinese bank deposits only yield 1.5% and even 10 year Chinese bonds earn only 3.6%. The extraordinary 4.02% yield has been generated by investing in “financial instruments with longer maturities”, no doubt of lesser quality and less liquid than a “money market” model would suggest.  It was a big deal ten years ago when a US money market fund couldn’t redeem deposits at the “buck” model due to illiquidity. In China today, and around the world, investors continue to “reach for yield”, which predictably will end badly.

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