SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD PRICE QUIET, GDXJ DECLINES WITH RE-BALANCING, CONGRESS “BETS THE FARM” ON TAX REFORM

GOLD BULLION UP A LITTLE, THE MINERS SELL OFF

The general markets were relatively quiet in the month of April, as was the price of gold bullion (up 1.7% for the month). The gold mining stocks were volatile, on the downside, especially in the second half of the month. This short term divergence between the miners and the bullion price appeared to be clearly related to the “re-balancing” of GDXJ (the small to medium sized mining ETF). Apparently, GDXJ attracted enough capital that it was unable to buy enough small to medium sized mining companies to match its tracking mandate, so it modified its formula to include some larger companies, selling something like $2 billion of smaller holdings, taking GDXJ down 10.2% for the month (over 12% in the second half of April alone, while gold itself was down only 1.7%).  Presumably, the price action of bullion and the mining stocks will again correlate, directionally, from this point forward, and that seems to be the case over the last few days. Broadly speaking, there is nothing wrong with the mining companies that a higher gold price won’t solve, and we continue to feel that will be the case.

FUNDAMENTAL DEVELOPMENTS – TRUMP ADMINISTRATION BETS ON TAX REDUCTION

The most important development of the month occurred last night, as the House and Senate have apparently reached an agreement to “keep the government open” through September ‘17, coming together on a $1.1 trillion spending bill. It is important to recall that the $1.1 trillion only represents the discretionary portion of the $4 trillion US budget, so entitlement reform continue to the “third rail” for both parties. Entitlement reform must be addressed or there is hardly any hope of reducing the operating deficits. “Hardly any” is the term we use because 4-5% GDP growth (which we believe is “hardly any” possibility) would generate much higher tax revenues, bring the annual deficit under control (or even generate a surplus) and reduce the concern about the cumulative deficit. Keep in mind that there have been only four surplus years out of the last thirty six, for a total of about $750 billion, not much relative the current cumulative $20 trillion (excluding unfunded entitlements).

The latest “kick of the can down the road” is a sign that the Republicans are completely capitulating on spending initiatives such as infrastructure, Planned Parenthood defunding, a large defense buildup, “the wall”, etc.etc. We interpret this to mean that it is now ALL ABOUT THE TAX PLAN. Time will tell. We anticipate that the obvious inability of the Trump administration to effectively implement their legislative program will begin to affect consumer sentiment. It’s obvious already that consumers, while sentiment surveys look good, are not “walking the talk”, and we suspect that will continue to be the case. If we’re right, the economy will still stall, Interest rates will not go up by much, the Fed will provide the next round of stimulus, whatever form it will take, and gold will resume its bull market.