Tag Archives: Central Banks

SEMI-MONTHLY FISCAL/MONETARY REPORT – GENERAL EQUITY MARKET VOLATILE – RE: GOLD, THE SPRING IS COILED, THE GUN IS LOADED

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GENERAL EQUITY MARKET VOLATILE – RE: GOLD, THE SPRING IS COILED, THE GUN IS LOADED

November 1, 2018

The general equity market was volatile and weaker during October. Gold bullion, and the mining stocks were relatively quiet, all changes rather immaterial.  Gold bullion was up 2.2%; the mining stocks as represented by an average of the three mutual funds we track (Tocqueville, Oppenheimer and Van Eck) down an average of 1.8%, possibly weaker from the tail end of the Vanguard liquidation we have discussed. The two ETFs, GDX and GDXJ were up an average of 1%, so obviously their holdings did better than the broader mutual fund portfolios.  Though it’s our job to focus, and report, on small changes such as these, the longer term is obviously our major concern. The downside damage in the gold sector over the last several years obviously dwarfs a few points one way or another, and the upside when it comes will make our monthly reports seem immaterial.

The following bullet points summarize our current thoughts:

  • Gold, as a “safe haven” is not yet in great demand in “the West”, though major accumulation continues in China & India and all major Central Banks. North American investors will see the light sometime soon, especially if the equity market’s recent downside volatility persists.
  • The mining stocks continued to act a bit weaker than bullion in October, possibly representing the tail end of the Vanguard liquidation.
  • It is just a question of time until Jay Powell, Fed Chairman, backs off of his intention to keep raising rates, and reinstitutes an accommodative monetary policy (QE4, or whatever). This will happen when the stock market takes a more sustained tumble and the slowing worldwide economy becomes more apparent. Calendar ’19 will not have the tailwind of much lower tax rates, and the resumption of monetary stimulus should generate much more interest in gold related securities. The gun is loaded, the spring is coiled.
  • Central Banks, including Russia, Poland, Turkey, India, China, and others, are steadily increasing the gold bullion reserves within their foreign exchange holdings. Through September, the amount bought was the largest in six years, over 200 tons, and that doesn’t include China, who alone may be purchasing that much, or more.
  • Central Banks, on the other hand, are reducing their holdings of US Treasury securities, expressing dissatisfaction with our accelerating deficits.
  • China, allowing their currency to cheapen, has virtually offset the effect of the new tariffs. This demonstrates how major trading competitors can use their currency as an economic, and even political, weapon of sorts.
  • China, Russia, and Europe have set up alternate payment systems that do not require the use of US Dollars, undermining the credibility of the US Dollar as a reserve currency. The last time there was a major movement away from the US Dollar was 1971, when Richard Nixon ended the dollars convertibility into gold, inflation took off and gold went from $35 to $850/oz.
  • The recently announced merger of Barrick Gold and Randgold, both within our portfolio, is no doubt a reflection of what they perceive as a bargain price level, and their desire to be the very strongest participant in a dynamically evolving gold market. These kinds of transactions often occur at the bottom of a cycle.
  • Goldcorp, one of the premier gold mining companies, also in our portfolio, just announced a buyback of approximately $350M of their public shares, an obvious statement that their stock is considered substantially undervalued, and another possible indicator of an inflection point.
  • There have been hardly any major gold discoveries in recent years, as opposed to a decade ago. Since major new mines can take a decade or more before production commences, increased demand will not bring out more supply for many years, even at higher prices, and the upside price volatility will be that much greater.
  • Considering that the price of gold bullion, though down this year, has been fairly steady the last several months, even in the face of higher interest rates and a strong US Dollar, we believe the stage is set for a major rally in gold bullion and the mining stocks once the dollar weakens a bit (or more) and/or the stock market has its long overdue correction (or worse).

For the above reasons, and many others, we believe the stage is set for a major upward move in the most unloved asset class on earth.  Legendary investors like John Templeton are famous for saying that the time to buy is when there is “blood in the street”. It seemed that way to us a few years ago, but nobody can tell when the bottom will be put in. None of the concerns that we have been enumerating regularly have gone away. It’s not a question of “if”, just a question of “when?”.

Roger Lipton

P.S. As I finish this letter, at 10:18am on November 1, the dollar is weak, gold bullion is up 1.2% and the mining stocks are up about 3%. Every long trip has to start with a single step😊

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES – BITCOIN “ADJUSTMENTS”

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD SLOWLY RISES –  BITCOIN “ADJUSTMENTS”

The price of gold bullion firmed a bit through the month of July, with gold bullion up about 2.3% for the month. The chartists could say that a base has been formed to support a major move upward. The gold mining stocks were up somewhat more, reflecting the operating leverage from the change in price of their end product. Our major position in the miners continues to be our  emphasis and, as we have pointed out before, has the potential to multiply our portfolio value by many times. The weakening of the US Dollar which began in June continued through July. A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.

We talked last month about the steady increase in the monetary base that has been created by Central Banks worldwide, and that this financial experiment will undoubtedly end badly. An increasingly dangerous corollary of Central Bank currency creation is the purpose to which those funds are put to work. What is not well known is that Central Banks have been buying hundreds of billions of dollars of equities. Since major Central Banks cumulatively hold over $11 trillion of foreign currency reserves, it is natural that they should want to diversify those reserves away from the currencies which are being continuously diluted. Along with steady buying of Gold (which we suggest is the “real money”), the Central Banks are adding equities to the mix/

The Bank of Japan has been buying Japanese ETFs at the rate of $53 billion per year, and now holds over 71% of those ETFs. The bank is now one of the top 5 owner of 81 companies within Japan’s Nikkei 225 index. As reported by Grant’s Interest Rate Observer, the Japanese Financial Services Agency (Japan’s SEC) is now “paying close attention” to this phenomenon.

The European Central Bank has been buying 60 billion euros worth of bonds monthly, and Mario Draghi recently announced a continuation (A hesitancy to back off?) In the meantime, Deutsche Bank CEO, John Cryan, has said: “There has been absolutely no price discovery now in corporate bonds….which is a very dangerous situation”.

The Swiss National Bank has been steadily buying equity securities, including US based companies. Equity securities, as of Q3’16, comprised 20% ($128 billion) of their of their $643 billion in foreign exchange reserves, up from 7% in 2009, including investments of $1.7 billion in Apple, 1.08 billion in Exxon, and $1.2 billion in Microsoft.

Here in the US, our Fed has talked about beginning to unwind our $4.2 trillion balance sheet by no longer reinvesting the funds from securities that are maturing. The result of this form of money “tightening” can only be a guess, especially with an already soft economy.

These are serious amounts of capital being put to work in an increasingly dangerous way. To some extent, Central Banks are biased toward continued equity (and bond) buying, because their absence from the marketplace would cause a price decline and trillions of dollars of “paper losses” on their respective balance sheets. I learned a long time ago (the hard way) that when you become “responsible” for supporting a particular market, the best possible strategy is “get out of the way” and take the current loss before it inevitably becomes much larger. The key question, at this point for Central Banks, now becomes “Sell to Whom?”.

Lastly,  a Wall Street Journal  Headline this morning reads: Bitcoin RIval Arises From Sector Spat. I will write more about Bitcoin, and the other “Cryptocurrencies” in the near future. As a preview: I believe that years from now, books will be written about the current fiscal/monetary world we are living within, and the cryptocurrrencies will be appropriately viewed as symptomatic of the tail end of the financial folly. Stay tuned on this subject and, in the meantime, be careful out there.

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