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June, and early July, were relatively quiet in the capital markets, though the equity market has worked its way modestly higher as bond prices have given back early ’17 gains. Precious metals related securities have moved comparably lower, as did gold bullion which was down about 2.2% for the month of June and 2% more in the thinly traded July 4th week.  As we have pointed out in the past, our position, relative to precious metals, is primarily in the gold miners which have not done well the last several years, but have substantial upside from the current historically inexpensive levels. As a case in point, the prominent gold mining mutual funds went up over 5 times in value (a quintuple) from early 2009 to the top in 2011.  Today, the miners are far cheaper relative to the price of bullion than they were then. One additional factor, which should benefit precious metal holdings, is the recent weakening of the US Dollar. A weak dollar is not a necessity for gold to go up in price, as we have pointed out in the past, but, all other factors being equal, a weak dollar is a positive for us.

It is becoming increasing clear that the current administration is incapable of passing more than a small fraction of their promised economic policy agenda. Health care reform will be a “bandaid” and tax rate reductions will not take place until later in the year, too late to help the economy in ’17. The form of the tax “reform” remains to be seen, but in an economy that is still weak by many standards, tax reductions (which increase, at the very least,  the near term budget deficits) may also may be less than promised.

Recent financial headlines have talked about major Central Banks trimming back their creation of new money. This has not, and, we predict, will not be the case. The chart below shows clearly that while the US Fed has “rested” with their money creation, the other Central Banks around the world have more than taken up the slack. The chart shows that since late 2011 when Gold peaked, Central Banks have created about $8 trillion of new unbacked colored paper. This will ultimately be inflationary, and the price of gold will catch up with almost all other major asset classes.

Relative to economic trends, which presumably are emboldening the Fed to talk about higher rates, and even reduction of their $4 trillion dollar asset portfolio, the highly touted “job creation” continues to be in mostly low paid jobs. Optimists are ignoring the hard facts that housing starts and auto sales have turned down and we all know about restaurant and retail sales trends. Limited Brands, a truly “differentiated” retailer was the latest to shock the world last week, so there continues to be hardly any place to hide, other than with Amazon or Netflix. GDP growth was below 2% in Q1, promises to be south of 2% in Q2. Consumer sentiment surveys have rolled over, as have other leading economic indicators. Obviously, GDP growth will not be anything close to 3% for ’17 as a whole. No doubt, the first time we have GDP growth for one quarter of 2.5% or so, a phalanx of economists will say “here we go”. The problem is that the Fed will then become emboldened to continue to raise interest rates and even lighten up their bond portfolio, which in turn will help to abort whatever economic recovery has begun.  I have no better way to put this situation than “between a rock and a hard spot”.  Should the Fed, or other Central Banks begin to reduce their balance sheets, it will be a matter of only a few months before weak economic trends force them to retrench and even start a new round of money creation. This is, after all, what Central Bankers “do”.

We own gold related securities not for a “safe haven” or a “non-correlated asset”, or an “insurance policy” but as the REAL MONEY, which it has been for 5,000 years. Gold is a unit of measure and a medium of exchange, and over time must be compared to other “currencies” such as “colored paper”, or even cyber-currencies such as bitcoin, none of which has stood the test of time.

The amount of gold that is “circulating” must be compared to alternatives, such as various sovereign currencies. When gold was $35.00/oz. in 1970, before gold went up over 20x in value, the US Treasury’s gold holdings represented 10% of the monetary base and 1.4% of M2. At the peak of the gold price in 1980, the US gold backed the monetary base by 92% and M2 by 9.7%. Today, gold backs the monetary base by 7.3% and M2 by 2.4% so we believe the case is strong that gold is about as cheap once again as it was in 1970. Upside of twenty times may be a bit too much to hope for, but if the fiscal/monetary affairs of worldwide Central Bankers continue to be so irresponsible, it may not be far off over the long term.