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November was a fairly quiet month in the capital markets, the general equity market up modestly, bonds little changed, gold and gold miners down slightly. Gold bullion was down 3.2%, the gold miners , as measured by the the mining ETFs (GDX and GDXJ) were down about the same. The three mining mutual funds we follow (Tocqueville, Oppenheimer, and Van Eck were down about 4.0% on average. For the year to date, gold bullion is up about 13.7%, and the miners are up better than 60% of that. Our partnership, almost entirely invested in gold minng issues, has performed similarly. Still, we feel this is just the beginning of a resumption in the long term bull market for gold (see the chart below) and the highly leveraged, and still relatively depressed gold miners.

The chart below shows the price of gold versus the S&P average, since 2000, clearly indicating the resumption of a long term uptrend. For those of you that want to look longer term, the S&P average was about 100 in August, 1971, when gold was $35.00/oz. and Richard Nixon eliminated the conversion of dollars into gold, so gold is up 42x since 1971 and the S&P is up 30x. A critic of this analysis might point out that from 1980 to 2000, gold bullion went from $850 to $250, but we believe that $850 was probably too high, and the 20 years that followed were an aberration after inflation was (temporarily) tamed.

If you want to look longer term, before 1971 and going back to 1934, after FDR devalued the dollar by raising the price of gold from $20 to $34, the S&P has gone from about 100 to 3000, up 30x, and gold is up about 44x. The long term return from stock ownership would include dividends, which gold does not provide, so this comparison is not quite fair, but the main point here is that it is not the dollar, or another paper currency that is the real money. Gold has been the only surviving currency over thousands of years. The appropriate view is that in 1913, when the US Fed was established, to control inflation,  a US dollar was worth 1/20 of an ounce of gold, and today a US dollar is worth only 1/1500th of an ounce of gold. The US Dollar has therefore lost over 98% of its value, not exactly a record to be proud of.

THE US ECONOMY – the best house in the worldwide bad neighborhood.

Though the yield curve is no longer inverted, aided by the fact that the FED has pumped almost $300B into short term paper in the last ninety days, there are tangible signs that the US economy is slowing, and is not far from rolling over into recession. After 2.1% real GDP growth in Q3’19, the New York Fed is now predicting Q4 GDP growth at just 0.4%, and the normally bullish Atlanta Fed is now down to 0.3%. Both estimates have been coming down week by week. In the public marketplace, with 65-70% of the US economy dependent on the consumer, reported results are mixed. Walmart and Target are doing relatively well, but Kohl’s (KSS) and Home Depot (HD) reported disappointing results, lowered guidance for the current quarter. It is noteworthy that Kohl’s is a discount retailer and Home Depot is dependent on new housing and renovation, both important portions of the consumer related economy.


We’ve written many times, relative to Central Banks’ attitude toward Gold, investors should do as they do, not as they say. They don’t like to confirm that gold is the ultimate store of value, as opposed to the fiat/cyber currencies that they produce with the stroke of a computer key, backed only “by the full faith and credit, yada, yada”. However, the chart below shows vividly that they switched from seller to buyer in 2010 and that continues to this day. They bought 374 tons in the first half of ’19, which would annualize to over 750 tons, a record. This represents about 20% of worldwide annual production of 3500 tons. The likelihood, also, is that China’s accumulation is substantially understated.


 JAPAN – three “lost decades” later – with Central Bank intervention

Japan’s experience since the peak of their GDP growth and stock market in 1989-1990 provides an insight into the power, or lack thereof, of a central bank to stimulate growth. The easy money strategy in Japan has been especially prevalent since prime Minister Shinzo Abe took office seven years ago. Interest rates in Japan have been below zero since 2015, and the Bank of Japan has printed money to buy bonds and equity ETFs to the point where the BoJ balance sheet is now 104% of 2018 GDP, up from 40% at the end of 2012. This compares to 20% and 39% of GDP in the US and Europe respectively. Japan has demonstrated that, while Central Banks may be able to paper over a pending financial collapse, stimulating economic growth is another story. GDP growth in Japan has averaged all of 0.49% from 1980 until 2019, with an all time high of 3.2% in 1990 and a low of -4.8% in Q1’19. Part and parcel of the Japanese situation is that their government debt is about 250% of GDP, much higher than the US situation, which is just above 100%. An optimist could conclude that the US has a long way to go before our Fed balance sheet or government debt becomes a problem. That might be true, and we might also be looking at GDP growth no higher, and perhaps a lot lower, than 1% for the next 20-30 years.

There are many other fiscal/monetary developments that should be supportive of higher gold prices, including the new surge in government deficits and accumulated debt, also the surge in low rated corporate debt that would be a huge burden in a weaker economy. It’s trite but true: you don’t get out of a hole by continuing to dig, and that, unfortunately, is the primarily strategy of worldwide fiscal/monetary policy makers. We are available, as always, to discuss your questions and concerns.

Roger Lipton