DC Advisory
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June  4, 2018

The equity market firmed in May and the fixed income market strengthened late in the month, after sinking mid-month, ending modestly higher (yields lower) than at May 1. Precious metals related holdings were quiet overall. The gold miners did slightly better than gold bullion which was down 1.2%.  We can’t help but repeat last month’s statement, that we continue to feel that the gold mining stocks, which represent almost all of our portfolio, represent the best value (and most unloved) asset class of all. The “money” is being safely stored, in the ground.  It is just a question of when it will be brought north and exchanged for the “colored paper” of its time, and the quantity of green paper (in the US) will be a multiple of the current $1300 per oz. The dramatic increase in profits for the gold miners will put their stocks an order of magnitude higher than they are currently.

The thoughts that currently come to mind are as follows:

  • The economy, while firming, is not at the 3-4% GDP growth that the administration advertises. After several quarters last year that averaged about 3.0% of real GDP growth, Q1’18 finally came in at a modest 2.2%. It will obviously take GDP growth of well over 3% (far from certain) for the rest of the year to reach the 3% annual objective. The higher interest rates will hinder consumer spending as well as limit the government’s ability to stimulate. Also, an inhibition, the tariff/ trade negotiations continue to keep the business community and capital markets on edge.
  • The Fed is barely keeping up with the plan to shrink their $4.2 trillion balance sheet. While they are stretching to reduce by the current rate of 2.8% (big deal!) annually, interest rates are steadily moving higher which drags on the economy and insures that the current selling program won’t make much of a dent before the program gets abandoned, and it won’t be long.
  • Inflation (which is a good reason for owning gold) is not as dormant as commentators indicate. “Core Inflation”, the most commonly quoted indicator, excludes food and energy. You know what grocery and restaurant prices (heavily influenced by higher labor costs) are doing, and the recent gasoline price rise is absorbing a lot of the recent tax cut.
  • The US deficit in the year ending 9/30/18 is officially estimated at $825B, but I’ll take “the over”. Certainly at least $1 Trillion is in the cards for 9/30/19 with higher defense spending, higher interest costs, and lower taxes on an economy that remains sluggish.

We believe that, due to any number of possible catalysts, the Fed will back off. The inevitable new round of stimulus should finally spark gold related securities much higher. It’s just a question of time.

Roger Lipton