SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD, AND THE MINERS CONSOLIDATE, OBVIOUS REASON??

Gold bullion and the gold miners had a “consolidation” in September, though still up for the quarter and the year. Gold bullion was down 3.4% in September. The average of the two major ETFs, GDX and GDXJ, was down 11.1%.  It should be remembered that gold bullion is still up 14.5% for the year and the gold miners are up over 20%. This is  reasonably impressive performance of this presumably counter cyclical asset class,  considering that the US Dollar is at a high, as is the general equity market.

Virtually all of the decline in September was in the last week, which has been typical every year since 2013, prior to Golden Week in China (where a great deal of gold is bought, both by the government and the public). Golden Week is a 7-8 day semi-annual holiday. We’ve shown charts below of the gold price in the week before and after the start of this holiday, and you can see the decline and recovery which has been typical. For what it’s worth, gold is up 0.5% this morning at 11:00am as this is written, and the gold minering stocks are up over 2%. All the economic trends that we have long discussed are still in place, and accelerating.

There are a number of major current developments, all supportive of gold demand.

• QE4, a new round of money creation is already taking shape. The Fed has been forced to insert $50-75B of funds daily in the form of “Repos” into the short term fixed income markets. While these funds roll over from day to day, supposedly don’t accumulate, this sort of intervention is a sign of unusual strain within capital markets. Supposedly short term intervention aside, the Fed Balance Sheet has started expanding once again. After bottoming at $3.76 trillion on 8/28, the latest total is $3.858 trillion, up $88 billion in the last two weeks. The Fed has publicized their “data dependence”, but balance sheet expansion so soon has not been implied.
• The Japanese monetary authorities are newly committed to a new round of monetary stimulus, a continuation of the strategy that hasn’t worked for over twenty years. You don’t get out of a hole by continuing to dig.
• WeWork’s rapid transition from (private) market darling to a bankruptcy risk is a powerful form of therapy for worldwide money managers. This kind of disillusionment can quickly undermine capital markets, both debt and equity, and is an example of how crises develop “very slowly, then very quickly”.

Roger Lipton