MONTHLY MONETARY UPDATE – GOLD BULLION AND MINING STOCKS MAKE NEW YEARLY HIGHS – BEST PERFORMING ASSET CLASS IN 2016

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MONTHLY MONETARY UPDATE – AUGUST 1, 2016 – GOLD BULLION AND GOLD MINING STOCKS MAKE NEW YEARLY HIGHS – BEST PERFORMING ASSET CLASS IN 2016

The general markets bounced back in July from the late June “Brexit shock”, supported we surmise by Central Bank assurances that they would do whatever it takes to support capital markets. More on that below.  Gold bullion was up 2.0% for the month and is up 27% for the year. Our portfolio outperformed gold bullion substantially for the month, as it has for the year to date.  So far this year, as we have explained in the past, the performance of the more volatile gold miners, rather than bullion itself, has affected our portfolio more than the price of bullion, since our options are “out of the money” and will increasingly contribute at higher bullion prices. The GLD options represent a modest portion of our capital and can contribute many times that if gold appreciates substantially.  We reiterate that the gold miners, while having made large percentage moves already this year, are still down very substantially from their highs, are still near historic lows relative to the price of bullion, and still have upside that is a multiple of current values.  In summary, we believe that our progress this year is just a start on the recovery from our multi-year decline.

There following points summarize the latest fundamental developments.

  • The economic news continues to be relatively lackluster, only about 1% GDP growth over the last 9 mos., ensuring continued low interest rates and accommodative monetary policy which is conducive to higher gold prices. Central Banks worldwide continue to take turns with various forms of stimulus. While our Fed has lately limited the support to continued historically low interest rates, Japan in particular is contemplating a new $200 Billion stimulus program, which would be the equivalent of more than $500 billion in an economy our size.
  • Accumulation of physical gold within gold related ETFs such as GLD flattened in July, still reflecting this year the most dramatic accumulation within the last 7-8 years. Meanwhile, Asian demand continues.
  • It is clear that major supply of physical gold from new mines is not on the horizon. There have been hardly any major discoveries (as opposed to 10-15 yrs. ago), variances and permitting can take a decade before production commences. Much higher prices would bring out more supply but production would still be a long way off.
  • China has clearly emerged as the center of worldwide physical gold bullion trading. Chinese banks are now part of the daily fix in London, a new daily fix price is about to be established in China, and the Shanghai Gold Exchange is by far the most active market for physical bullion. The Chinese government encourages the public to increase private ownership, the Peoples Bank of China (and other government agencies) continue their accumulation, and Chinese mine production (all of which stays in China) is the largest in world (16% of worldwide production).
  • Government debt, worldwide, at negative rates, has now grown from about $10 trillion to perhaps $13 trillion in just a month. We say again; this has not worked, does not work, and will not work in the future, creates all kinds of unintended consequences, and supports increased demand for gold. Our Fed, for one, has never raised interest rates in an election year, so a rate rise is off the table until December at the earliest, and, in any event, will not be a material influence whenever it happens.

It should be clear to all that our convictions have not changed. We are always available for your questions/concerns.