DC Advisory
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The market for gold, the gold miners, and the general market as well, firmed up in January, as did our portfolio. Gold bullion was up 5.4% and the miners were up 15-16%. The factors that I discussed in our yearend report, describing the negative influences on gold during the fourth quarter of ‘16, all abated in January, as discussed below.

The negative influences on precious metal investments during late ’16 were: (1) a very strong stock market after the election. (2) Currency chaos in India, traditionally a very large source of demand for gold. (3) Consistent liquidation of physical gold from the bullion ETFs such as GLD (4) Higher interest rates and a strong US dollar, both of which affect the short term trading pattern for gold, though of less importance over the long term.

As we suggested might happen: During January the general stock market started to return to “reality”, with the new administration now expected to be predictably unpredictable, and Make Volatility Great Again. The economy has not yet strengthened, though consumer confidence survey’s are improved. The Indian economy seems to be adjusting to its currency adjustments, while US interest rates have stabilized and the US Dollar has retreated from its recent high. Lastly, liquidation from the gold ETFs has abated, though accumulation has not yet begun. Overall, the “ technical”  deterioration in the price of gold, as evidenced by the chart patterns, seems to have repaired itself, and many trading technicians would say that the gold price has now bottomed and turned upward.

I believe the next dose of economic reality will set in when the new administration tries to reconcile the spending promises with deficit concerns (from both sides of the political aisle). In one of President Trump’s few interviews since taking office, when questioned about his previous promise to cut government spending by 10% and the government workforce by 20%, at the same time target a balanced budget, he responded “A balanced budget is fine, but sometimes you have to fuel the well….a strong military is more important than a balanced budget…..Our country is in bad shape…we have to rebuild our country…our infrastructure, our roads…bridges, highways, schools…our country is in bad shape.” So much for a balanced budget any time soon.

Going back to basics, in terms of the reasons that we have gotten so heavily involved in gold related investments over the last several years:

Our government’s debt is almost exactly $20 trillion, excluding unfunded entitlements. It represents a continuing burden on our economy, and each additional point of interest represents $200B of annual interest expense (one reason why interest rates cannot go up too much, not with the Fed’s blessing at least). That’s $20,000,000,000,000. (Did you realize how many zeros there are?)  However, we all agree that the only hope is to “grow out of” this dilemma. A stronger economy, if it were to happen, could generate higher tax revenues, perhaps spending could be controlled, and we could begin to liquidate the debt.

So…the last estimate for the current year (9/30/17) deficit was about $500 Billion, and reality will no doubt be materially higher. However:  If we were to start to generate a surplus (at some indeterminate point) and reduce the deficit by $10M each day, it would take 5,479 years. That’s five thousand, four hundred, and seventy nine years. At $100M each day, it would only take 547 years. OK you say:  we have a large economy, and trickle down economics might at some point generate a surplus of $1B per day, $365B per year. If you believe it could happen, at the top of (a long term) business cycle, and the politicians wouldn’t find a way to “invest” it for the benefit of their constituents, it would only take 54.7 years of steady surpluses. Obviously, there has never been a positive business cycle for anything remotely resembling half a century. For additional perspective, President Clinton’s administration generated a surplus of $87B in 1998, $157B in 1999, $290B in 2000, and G.W.Bush had a surplus of $154B in 2001. We therefore averaged $172B of surplus for four years out of the last thirty six. That doesn’t give this observer much confidence that the current debt can be reduced materially in the normal course of economic, political, and social events.

My conclusion; The debt is too big, the order of magnitude is almost beyond comprehension. The only way to deal with it over the long term is by DEFAULT, either by liquidation through inflation, or outright cancellation. Either way, “money” and “assets” around the world will be restructured. Gold, as the ultimate money, will be one of the few assets to retain its purchasing power. The good news: After the fiscal/monetary “house cleaning”, when (not if) it happens, the sun will still rise in the east and set in the west. Life will go on, but the assets will be re-allocated. There are assets other than gold that will survive, such as well located real estate, sound businesses, diamonds and works of art. I continue to feel, however,  that gold related investments, as a liquid and time tested asset class, represent among the best values of all.

Roger Lipton