SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD CONSOLIDATES – DEBT AND DEFICITS WILL AGAIN BE THE FOCUS!

The general stock market was  very quiet for the month, as was the price of gold bullion (down a fraction of 1%).  There was a slight overall decline in the price of mining stocks (GDX was flat GDXJ was down 2.6%). We believe the mining stocks will resume their upside performance once gold starts to firm up again. For 2017 to date, the performance of the mining stocks has been almost entirely responsible for the gain in our portfolio and that will continue to be the case.  To give you some idea of the possible upside, GDX (the large miner index) tripled from late 2008 in the next two years. GDXJ, the small and mid-cap miner index, did not exist in 2008, but would have to increase 7x in value to get back to its 2011 high. Considering that the current excesses in the fiscal/monetary world are larger than ever, I believe the possible upside could be even greater than we have seen in the past. I should quickly point out that the timing remains uncertain.

The fundamental developments that are worth noting, as well as our further observations, are as follows:

• Eastern demand has not abated. India and China have together provided the most important demand for physical bullion. In India, after a decline in 2016 exacerbated by governmental intervention in November and December, increased gold imports by 175% in February (vs.2016) to 96 metric tons. At the Shanghai Gold Exchange, the largest dealer of physical gold in the world, 179 tons of gold were withdrawn, 60% higher than in 2016.
• It is becoming clear that the Trump administration’s policies will be difficult to implement. The attendant uncertainty is not good for capital markets and, conversely, should be supportive of the gold price. Anecdotally, his golfing partner this past weekend, was Rand Paul, who mistrusts the Fed and definitely likes gold. His father, Ron Paul, owns a lot of gold mining stocks.
• The federal debt ceiling has to be raised by the end of April, which will refocus the capital markets on this ongoing drag on the economy. The gold price has consistently (until the last four years) matched the increase in US debt, as well as the increase in Central Bank balance sheets). The “catchup” would place the gold price at $2000/oz. or higher.
• Once the Fed has raised rates a couple of more times, they will be equipped to reverse themselves, and ease again. Anticipation of this could re-ignite the gold price at any time.
• A headline in the Wall Street Journal just this morning is illustrative of the topsy turvy monetary world we are living in: CENTRAL BANKERS RETHINK 2% INFLATION TARGET – meaning they want inflation to be HIGHER – considering that the Federal Reserve Bank was formed in 1913 to “control inflation”, this is a noteworthy revision of their objective.

Roger Lipton