MONTHLY MONETARY UPDATE – GOLD BULLION AND THE MINING STOCKS “CONSOLIDATE” IN AUGUST, RESUME THEIR RISE IN SEPTEMBER – STILL THE BEST PERFORMING ASSET CLASS IN 2016
Gold, and especially the miners, “consolidated” their 2016 gains in August, with bullion down 3.3% and the mining stock indexes down 16.6%. I expect that August will prove to be a temporary setback in the new long term bull market for precious metal related securities. All the precious metal indexes are still up substantially for the year to date, as is our portfolio. While two or three days does not “make a season”, the typical seasonal strength in this asset class has been the case so far in September, so hopefully August will prove to be an outlier. Overall, our portfolio is moving in the right direction in the year to date.
There following points summarize the latest fundamental developments.
- The economic news continues to be relatively lackluster, including inconsistent job creation, minimal growth in wages and workweek statistics, the largest nine month drop in worker productivity since 1993 and a continuation of the multi-year drop in business investment and spending. Keep in mind that these disappointing numbers, accompanied by overall GDP growth of less than 2% ever since the 2008-2009 decline, is in spite of many TRILLIONS of capital creation by central banks, close to zero interest rates generally around the world, and something like 13 TRILLION DOLLARS of unprecedented negative interest rates on Japanese, German, and European sovereign debt. The largest financial “experiment”, engineered by Central Bank PHDs, in the history of the world continues to be in place. The larger and longer it prevails, the greater will be the magnitude of the unintended consequences.
- Accumulation of physical gold within gold related ETFs such as GLD flattened in August and July, still reflecting this year the most dramatic accumulation within the last 7-8 years. Meanwhile, Asian demand continues. This is a similar pattern to 2009, when the inflow “consolidated” in the summer, then resumed in the fall.
- It seems significant to us that two Central Banks (Switzerland and Norway) have recently reported that each have purchased about a BILLION Dollars worth of gold mining stocks. We have known that a number of Central Banks (Japan, China, Europe, and Switzerland) have been buying stocks and bonds with newly minted capital, but their purchase of gold mining equities reinforces our argument that gold is “the real money”. It makes a lot of sense, since Central Banks continue to purchase bullion, in record amounts, at over $1300/oz., and the mining companies have the “money” in the ground, recoverable at materially less than that.
- The U.S. Federal deficit, is now rising once again, approaching $600 billion in the fiscal year ending 9/30/16, projected to rise steadily to over $1 trillion dollars annually in the 2020s. The annual deficit came down from over $1 trillion annually, largely as a result of higher tax revenues, but those revenues are now decreasing, the rate of government spending continues apace, and will likely accelerate sharply under the newly minted U.S. administration. Both parties agree on the need for infrastructure spending, job training, and other populist measures, with zero discussion about restraining entitlements (65-70% of the total budget).
It should be clear to all that our convictions have not changed. We are always available for your questions/comments.