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There is lots of economic/political/social news day to day, but we believe the underlying fiscal/monetary problems will soon dwarf the currently discussed issues. In this country alone, billions of dollars per day (in deficit spending) are being created out of thin air.   It’s been said that “money is the source of all evil”. That may be true, but a currency of some sort is necessary to exchange goods and services to make social progress. Since we are in the midst of the largest monetary experiment in the history of the planet, and we don’t believe it will end well, unfortunately, we continue to monitor developments.

While there was quite a bit of intra-month volatility in the capital markets in November, the changes were minimal over the entire month. The precious metal markets were much quieter, but there was one notable down day, November 23rd, the reason not quite clear, with mining stocks down 3-4% which was not recovered by month end.  In any event, the gold mining industry, represented by GDXJ (the small to mid-cap miners) and the three prominent funds, Tocqueville, Oppenheimer and Van Eck were down about 2.7%.

Every indication is that the long-term financial issues overhanging the worldwide economy are becoming more intense every day, any one of which could ignite the monetary embers:

(1) The US Treasury must raise over $100B every week, to finance the growing deficit and refinance the maturing debt, and the Federal Reserve is no longer a buyer but a seller of securities. The “bid to cover” ratio for two-year US Treasuries has been coming down in recent months, and last month was the lowest since December 2008, the peak of the financial crisis.

(2) Major foreign purchasers of our debt, including China, Japan & Russia have backed off or eliminated entirely their purchases of US Treasury securities, to some extent replacing that portion of their foreign reserves with gold. As a corollary, the US trade balance that President Trump is so desperate to improve, would reduce the US dollars in foreign hands, which would in turn reduce the demand for our debt, contribute to higher interest rates, slow our economy, and trigger greater stimulus.

(3) Only six to nine months ago, reporters were talking about “worldwide synchronized growth” with no sign of inflation, truly a “goldilocks” situation. Just two weeks ago, headlines in the Wall Street Journal said “GLOBAL ECONOMIC SLOWDOWN DEEPENS”, “INFLATION TICKS HIGHER…”, “INTERNATIONAL FIRMS IN US SEE AUTO TARIFFS AS A THREAT”. As a corollary, Japan and Germany reported GDP contraction in Q3, Chinese growth continues to slow. So much for Goldilocks.

(4) The US current deficit, is exploding, will clearly be over $1 trillion in FY ending 9/30/19, with the total debt going up by more like $1.5T including borrowing from the Social Security Fund. There is no chance of less government spending, especially the next two years with the two houses of Congress split. According to the Wall Street Journal, the US will spend more on interest in 2020 than it spends on Medicaid, more in 2023 than it spends on national defense, and more in 2025 than it spends on all non defense discretionary programs combined. THIS IS SERIOUS, AND IT IS IMMINENT. The relevance of the deficits and debt is that the higher the debt load, the chance of the economy breaking out with productive expansion is reduced.

(5) The long-term suppression of interest rates has serious unintended consequences. Among them is the “misallocation of resources” as investors large and small “reach for yield”.  The current news flow is starting to reflect it. The Wall Street Journal two weeks ago had the headline DEMAND FOR RISKIER DEBT LETS COMPANIES SHIFT ASSETS.  The text ….” Investors are literally giving away the store to squeeze out meager returns from picked over market for corporate debt. Demand for riskier bonds and loans has been so intense that companies…are able to move valuable assets beyond the reach of creditors. Investors continue to make it easier for them to do so by agreeing to terms …that offer fewer and fewer protections.” The financial community has a very short memory. Ten years ago, the phrase was “covenant light”, and mortgage companies were making NINJA loans to homeowners with No Income No Job, and No Assets. Who said, “history doesn’t repeat, but it rhymes”? Just this morning, this was described in the Wall Street Journal in relation to sub-prime Auto Loans.

(6) Don’t take it from me. I’m just a veteran restaurant analyst. What could I know? However, within the last few months: Richard Fisher, former Dallas Fed Chair said: “…interest expense and healthcare expenditures will soon be more than 50% of revenues. At some point you have to pay the piper…We (the Fed) have been suppressing the yield curve. it’s a ticking time bomb”.

Ludwig von Mises, the legendary Austrian economist long ago taught us: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come soon as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

(7) Just last week Goldman Sachs came around (finally) to the view that markets offer an extremely attractive entry point for longs in goldWe see diversification value in adding gold to portfolios.” Goldman is (finally) forecasting a slowing US economy….at this stage of the business cycle, gold may be particularly appealing as a portfolio diversifier given that long-term bonds may be hurt if U.S inflation surprises to the upside … If U.S. growth slows down next year, as expected, gold would benefit from higher demand for defensive assets.”

Unfortunately, though Jay Powell, and other Central Bankers, might wish to persist in their collective attempt to contract credit, the politicians around the world can be expected to continue to kick the can down the road. Their unstated reality is “whatever happens will happen, but “not on my watch.” Politicians, economists, and capital market strategists, will soon be screaming “DO SOMETHING” and the Central Bankers will accommodate. Jay Powell gave us the first indication of that with his comments last week. Steven Mnuchin, Treasury Secretary, confirmed that just this morning, saying Powell is trying to position the Fed to stimulate when necessary.

Roger Lipton


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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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The general equity market was up in August, gold bullion was down about 3%. The mining stocks fared worse, with the two largest mining ETFs, GDX and GDXJ, down 12.9%.  Strange as it may seem, the apparent reason for the relatively poor performance of the miners may be a turning point. On July 31st, Vanguard announced it was “restructuring” its $2.3 billion Precious Metals and Mining Fund, and the newly named “Global Capital Cycles Fund” will start its new strategy in late September. Moves like this from a major institution are often a sign of “capitulation”, evidence of extreme negative sentiment, and marking a bottom as positions are liquidated. In particular, back in 2001, Vanguard removed the world “gold” from what was then its “Gold and Precious Metals Fund”, which coincided with a low in gold before a ten year rally. So, we’ll see.

If the facts had changed, we would have changed our strategy, but the underlying reasons are intact. The rampant creation of currency, and monstrous increase in debt, around the world, can do nothing but cause inflation in the long run, because it’s the only way out for the politicians who can’t admit to spending their constituents into financial oblivion. The amount of gold held by major central banks, relative to their circulating currencies, is approximately the same level as it was in 1970, before gold went from $35/oz. to $850/oz. There will be a “catch-up” again.

We believe, also, that the relationship between the price of gold and the US debt is valid, and the debt obligation as shown on the chart below is understated, not including monstrous unfunded entitlements. The price of gold moved in lockstep with the growing US debt, from 2000 until 2009, and for decades before that. In 2009, after a steady 9 year rise, because markets anticipate, gold ran sharply ahead when it became clear that the Obama administration was going to sharply increase the annual deficit. The price of gold diverged on the downside from late 2011 until the bottom of 2016, likely, because the annual reported deficits were lower, even though the debt steadily increased from “non-budgeted” spending. For example, this fiscal year ending September, the reported deficit will be about $800B but the increase In debt is already over $1 trillion. We think another inflection point is at hand, as the annual deficit and cumulative debt are accelerating again.

The gold mining stocks have fared even worse than bullion recently, down more than 50% since gold was at the current level four or five years ago.  That 100% catchup could be on top of the leveraged move that the mining companies, as operators, make when bullion changes price.  Financial markets can make shockingly rapid moves at certain times, as illustrated by the recent volatility in BItcoin, first up by over 20x and down by two thirds more recently. We believe this will again be the case with gold bullion, much more so with  the mining stocks, this time on the upside.

Roger Lipton

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We wrote several articles on this subject, last summer and again in December. Our first cautionary notes were written 8/15/17 and 9/5/17 provided here, with Bitcoin trading just south of $5000:


Our last analysis was written 12/19/17, within a day of the high price above $19,000, provided here:


In a nutshell, not today, not tomorrow, but over a few years from now, it’s over. Blockchain technology no doubt has its applications but cryptocurrencies will fade into oblivion, with most of the fundamental flaws previously described in the articles linked above. We are not always right, and sometimes we are right or wrong, but for the wrong reasons. In this case, we’ve got it right for the right reasons. For heaven’s sake, don’t get seduced now, just because Bitcoin is down from $19,000 to $6,000. It is still $6000 too high.


Gold bullion has hit a new low for the year, with the gold mining stocks following along, leveraged as usual to the price of gold. As we have previously written, there are all kinds of reasons that gold should be spiking higher, rather than lower, and it is only a few months ago that gold was on the verge of an upside breakout. Best we can figure, in addition to a very strong dollar, the downside pressure on the gold price has been from Central Bank selling, a result of turmoil in Turkey in particular.  We believe this will run its course shortly, if it hasn’t already.

Turkey’s commitment to gold had already been demonstrated to be less consistent than every other important Central Bank. While most other Central Banks have been steadily buying (or maintaining holdings) in recent years, Turkey’s holdings declined from 504 tons in July 2015 to 377 tons in Jan 2017, then built up steadily to 582 tons in Mid 2018. The most recent report shows they only hold 236 tons in July, so they have apparently liquidated 342 tons in the last couple of months.  The good news is that they don’t have much left, perhaps nothing by now.

Recall that the Central Banks in total have been steady buyers over the last nine years, in the range of 300 tons annually, up 36% YTY in ’17 to 366 tons, and running up 42% in Q1’18, the highest first quarter since 2014. Turkey’s disposition in Q2 will obviously skew that quarter’s result.

Let’s go through today’s top ten sovereign gold owners, and their change in reported holdings over the last several years. We say reported because China, in particular, is likely understating their holdings in a major way. The highlights are that the US, with over 8,000 tons is nearly as much as the next three countries combined. For six consecutive years, Russia has been the largest purchaser, increasing its holdings by 224 tons in 2017 and  overtaking China  to hold the fifth spot. Not every central bank is a buyer. For the second year in a row, Venezuela was the largest seller, 25 tons in 2017 apparently sold to pay off debt. Total  sales declined by 55% in 2017, the lowest since 2014, obviously overcome by purchases since the total net increase was 366 tons. This nine year old trend is obviously demonstrating that central banks consider gold to be an increasingly important store of value and safe haven asset.

India is the tenth largest holder, with 560 tons, representing 5.5% of their foreign reserves. This has been virtually constant since 2015. It is well known that the Indian public believes in gold as a long term store of value, with gold jewelry often part of a bride’s dowry.

Netherlands, at #9, owns 612.5 tons, representing 68.2% of their foreign reserves, constant since 2015. Interesting that the Dutch Central Bank recently repatriated a large amount of its gold from the U.S.

Japan, at #8, owns 765.2 tons, only 2.5% of its foreign reserves, constant since 2015. Interesting that they have been one of the most aggressive money “printers”, with interest rates in January 2016 below zero, helping to fuel worldwide demand for gold.

Switzerland, at #7, owns 1040 tons, 5.3% of its foreign reserves, constant since 2015. Interesting that while Switzerland for many years was a hub of gold trading with European counterparties, much of today’s trading is done with the increasingly important Hong Kong and China bullion markets.

China, at #6, reports 1842.6 tons, representing a mere 2.4% of its $3T of foreign reserves. After not reporting since 2009, the People’s Bank of China reported 1708 tons in mid 2015, up over 60 % in 6 years. Monthly reports were then provided for about a year, with an increase to 1842 tons with no change reported since the end of 2016. Since China is the largest miner of gold in the world, about 400 tons per year, and no gold seems to leave China, most observers believe that various government agencies are absorbing a great deal. It is not hard to conclude that the 1842 tons may be understating the true holdings controlled by the government by thousands of tons. The government has also encouraged public ownership with gold backed bank savings accounts.

Russia, at #5, reports 1909.8 tons, representing 17.6% of foreign reserves. The Russian Central Bank has been the largest buyer of gold for the past six years, just last year overtaking China’s reported holdings. They bought 224 tons in 2017, at the same time selling a large portion of its US Treasuries.

France, at #4, reports 2,436 tons, representing 63.9% of foreign reserves, constant since 2015. There has been political pressure to not only put a formal freeze on selling, but also to repatriate the entire amount from foreign vaults.

Italy, at  #3, reports 2,451.8 tons, representing 67.9% of foreign reserves, constant since 2015. European Central Bank President, Mario Draghi, was the former Bank of Italy governor. He has described gold as “a reserve of safety”, adding, “it gives you a fairly good protection against fluctuations against the dollar.”

German, at #2, reports 3,371 tons, representing 70.6% of foreign reserves, virtually flat, down 9 tons since 2015. Last year, Germany completed a four year repatriation program to move 674 tons from France and the US back to its own vaults.

United States, at #1, reports 8133.5 tons, the highest percentage, at 75.2% of foreign reserves, holdings constant since 1971 when Richard Nixon closed the hold window. It is interesting, to us at least, that the value of our gold holdings, as a percentage of US monetary aggregates, is almost exactly where it was in 1971 before gold went up over 20x in value.

Taking the above into consideration, there is every indication that Central Banks other than Turkey, along with Chinese agencies in addition to the PBOC, and public buyers, in China, India and elsewhere will absorb Turkish sales (if they haven’t already). Especially in the case of China, India, Japan, and Switzerland, with low single digit percentages of their reserves invested in gold, obviously aware of the worldwide debasement of paper currencies, and the danger in most other asset classes, it makes sense to increase their gold allocation. We continue to believe that  gold will again emerge as a store of value and a safe haven. Gold bullion and gold mining stocks will catch up with the ongoing price inflation of virtually every other asset class. Money printing and deficit spending does not create long term prosperity.

Roger Lipton



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SEMI-MONTHLY FISCAL/MONETARY UPDATE – You Don’t Want to Know How the Sausage is Made !!

The general capital markets were fairly unchanged in June, gold bullion was down 3.4%. Interestingly, the gold mining stocks were down hardly at all. The gold mining ETFs, GDX and GDXJ, were almost exactly flat. The three major gold mining mutual funds were down an average of 0.8%.  Every indication is that substantial quantities of physical gold continues to move from West to East but the “paper” market, including options and futures, dominates the day to day price. The mining stocks acted noticeably better, when normally they could be down (or up) at least twice the price of gold. There was documented accumulation of GDX and GDXJ which is often a precursor of an upward move in bullion and an even larger move in the miners.


In just the last few days, the following articles support our long held conclusions that a great deal of turmoil in the worldwide financial/capital markets is ahead, which we believe will cause our Fed and other Central Banks to “cave” and move back to monetary accommodation, which will spark a new run in gold related securities:

(1)    First Quarter GDP latest revision shows 2.0% real growth, down from the last estimate of 2.3% and the previous estimates in the high 2s. As for Q2’18, the latest NY Fed estimate is 2.7%, a lot lower than the highly touted 4% or more the Atlanta Fed and others have been talking about.  Even if Q2 comes in north of 4%, real GDP growth over the last year or so has been no higher that the “high 2s”, not much higher than the average of 2.3% average of the last 8-9 years and that modest increase from the “low 2s” is largely due to more government spending financed by more government debt and this is not healthy or sustainable over the longer term.

(2)  The global yield curve, the spread between 1-3 year and 7-10 year government securities, has just gone “negative”, per the JP Morgan GBI index. This yield curve “inversion” most of the time presages a recession within 6-12 months.

(3)    With the Chinese stock market down 20% from its early ’18 high, a Chinese government think tank (backed by the Chinese Academy of Social Science) has warned of a “financial panic” in the world’s second largest economy, caused by leveraged purchase of shares (as in 2015), rising US interest rates, trade tensions with the US, bond defaults and liquidity shortages in China. The Chinese government should “be willing to step in with full financial support, rather than taking piecemeal steps” the study said. Just yesterday, the Financial Times reported that the China Development Bank was tightening loan approvals for its “slum development” policy, a program which has provided (a cool) $1 trillion to homebuyers since (only) 2016. The implications of the monetary manipulations by the world’s second biggest economy are huuuge!. Our take: a much higher gold price will accompany future economic “adjustments” that will have been exacerbated by governmental interventions.

(4)    Russia has cut its US Treasury holdings over 50%, from $102.2B to $48.7B in just four months from 12/17 to 4/18. While these numbers are small relative to the trillions that China and Japan hold, US Treasury securities held by all foreigners, as a percent of their reserves, has declined from 64.59% in 2014 to 62.7% in 2017, so they are steadily diversifying away from dollar related securities. Gold, as a share of foreign exchange reserves has held steady. Central Banks have continued buying hundreds of tons annually, as they have since 2009. They bought 116.5 tons in Q1’18, the most in any Q1 since 2014 and up 42% YTY.

(5)    The Wall Street Journal, several days ago, headlined “UK Central Bank Warns on Debt Risk”. The article said “it sees pockets of risk to the stability of the financial system including US corporate borrowing, risky loans in Britain, foreign-currency lending and emerging markets….as central banks step back from the easy-money policies of the past decade and trade tensions escalate.” You can google the full article, but we don’t make this stuff up.

(6)    Just under the previous article, on June 28th, the headline read: “Fed’s Ability to Fine-Tune Interest Rates is Tested”. The Fed lost “control” of the markets in ’08, salvaged the situation with trillions of financial accommodation. In some ways, the problems are larger today and the Fed, with their hundreds of PHD economists, has had a poor forecasting record.

(7)    While many observers underplay “systemic” risks in today’s financial markets, leverage in derivative securities is larger, non-financial corporate debt is at a new high (exceeding the last high in ’08), ETFs made up of cap-weighted securities will have little liquidity in a downdraft, which especially could apply to high yield fixed income ETFs. Rising default rates on student loans and subprime auto loans, sharply rising US deficits, underfunded social security and federal health care obligations are all problematic whether the market overlooks these trends for the moment or not. The momentum in capital markets can turn, literally, on a dime. If someone doesn’t think the Chinese monetary manipulation has provided at least the possibility of “systemic risk” to the worldwide economy, they are living on the wrong planet.

(8)    The equity markets are highly valued by historical standards. Interest rates are still very low which means bond prices also have substantial downside risk, especially the high yield sector where investors around the world have been “reaching for yield” for a decade.


Many of the above factors have been in play over the last four or five years, building over decades, and the timing of the unwinding of the worldwide credit bubble continues to be uncertain. It’s been said that in every crisis, you can look like a fool either before the event or after. Another advisor, when asked how a crisis develops, said “very slowly and then very quickly”. Just recently, we asked a highly regarded economist and market strategist, who agrees with us, when the turn will come. His response was as good as any: “On any given Sunday”. When it happens, a great number of people will say “how could I have not seen that?”

Roger Lipton


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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

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – Modest apparent changes in April, huge developments under the surface!


The results for all the capital markets changed only modestly in the month April, in spite of intra-month volatility. Gold bullion was down almost exactly 1%, Gold mining stocks were up about 1.2%. We continue to feel that the gold mining stocks, 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 increase in profits for the gold miners will be huuuge and the stocks should sell for multiples of the current price.

We believe that the lackluster price action in gold and the miners has been due to the expectation of much higher interest rates, an apparently stronger economy, the perceived lack of a need for gold as a “safe haven”, and the renewed strength in the US Dollar. We don’t believe any of these factors will last much longer, and none of which will preclude higher prices in the long run.

The US economy is not as strong as advertised. After several quarters last year that averaged about 3.0% of real GDP growth, Q1’18 came in at a modest 2.3%. It is important to note that government spending of $4.5 trillion is part of our $20 trillion GDP economy. When government spending of $150 – $200 billion (over perhaps H2’17) to repair storm damage, that adds 1.5 to 2.5 points to GDP growth. That means that something like half (or more) of the “growth” in the last six months (as a % of $10T of six months’ GDP) was due to storm remediation. (That’s correct, I checked the math three times.) As another example, an increase of $100 billion in defense spending, over a year, will add 0.5% to our annual GDP. So, the bigger the deficit (in turn increasing interest expense), the better the GDP appears. The apparently stronger GDP growth in H2’17 was also positively affected by the weaker dollar and this, too, has changed lately, probably contributing to the tepid 2.3% Q1’18 GDP real growth.

Interest rates have moved up steadily, as the Fed has simultaneously raised the short term Fed Funds rate and sold increasing amounts of its bloated $4.3 trillion balance sheet. The much higher interest expense, combined with government spending will explode the deficit, which in turn will burden the economy even further. The Fed will back off. We will have new round of stimulus, much bigger than the “financial heroin” hit of ’08-’09. That should finally spark gold related securities much higher. It’s just a question of time.

Roger Lipton

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The capital markets were volatile in February, stocks down, bonds down, gold bullion down 2.1%, the gold miners were down more (the gold mining ETFs, GDX: down 10.1%, GDXJ: down 6.8%, the three prominent gold mining mutual funds, Tocqueville, Oppenheimer, and Van Eck, down an average of 8.3%). Our gold related portfolio modestly outperformed the group, down a little less. However, the fundamentals described below continue to support our positioning.

The most prominent fundamentals that come to mind are:

(1) Central Banks, notably Russia and China, continue to accumulate gold bullion. The Central Bank of Russia bought another 20 metric tons in January, increasing its holdings every month since March 2015. Their official holdings, at 1857 tons now exceeds the announced reserved at the People’s Bank of China, but China hasn’t told us in almost two years (how much gold they hold. In  mid -2015, they announced an increase of about 600 tons (over the previous 6 years) to 1,658 tons, and then announced monthly increases for about six months thereafter, reaching about 1800 tons, at that point, officially. However,  China produces the largest amount of gold in the world, at over 350 tons annually (out of 300 tons mined worldwide), and none of it leaves the country, purchased by various Chinese government agencies. Informed observers (include ourselves) therefore believe that their agencies now own double or triple (or more) than indicated.1658 tons. In total, worldwide Central Banks (without China) continue to accumulate about 400 tons per year, as they have since 2009. It is interesting to note that Central Banks have bought 4-5 times as much gold in the last five years as they have US Treasury securities. That trend seems to be continuing. At the same time, new trading arrangements are taking place between China, Russia and the Mideast, with swap arrangements based on the relative prices of Chinese Yuan, gold bullion and oil. It will obviously benefit China and Russia, in lots of ways, if gold trades at a higher level.

(2) The US debt burden, annual and cumulative, is going up, big time, once again. We have written repeatedly that the annual stated deficits are understating the annual increase in total debt, because of “off budget” expenditures. Over the last nine years, while the reported deficits have totaled $7.5 trillion, the debt went up by $10.2 trillion, an understatement of a cool $2.7 trillion. It is now clear that the “reported” deficit in the US fiscal year ending 9/30/18 will, at the very least, approach $1 trillion, and be well above that number in fiscal ’19. It is anybody’s guess what the actual increase will look like, since DJT is not afraid of debt. When the deficit took off in 2009, the price of gold went up over 50% in the next two years and the gold mining stocks more than doubled. It is interesting that the GDX is at the same level today ($21-22/share) with gold bullion at $1310, as it was in early 2009 when gold was well under $1000, so the upside is that much greater.

(3) We wrote last month about how short term US interest rates have moved sharply higher, almost to the day when the US Fed started to unwind their bloated balance sheet. The pace was a modest $10B per month in Q4’17, going to $20B per month starting January ’18, then $30B per month in Q2, $40B per month in Q3, and $50B/mo. in Q4. Considering that the debt markets will not be supported by the Fed, as opposed to several years ago, we speculated that this will be an increasing burden over time, helping to push rates higher. So here is a day to day reading of the treasury market, courtesy of Gran’ts Interest Rate Observer. On Tuesday, two days ago: “a $60B auction of four week bills was priced to yield 1.495%, the highest since September 2008…..a $22B auction of 52-week bills fetched 2.02%, the highest since the 52-week auction was reintroduced in June 2008…the economist at Jefferies commented that: ‘the surge in bill supply has caused the market to cheapen up…there’s value in the yield. How much cash is there to absorb it?'”

By the fall of ’18 there will have been a trillion dollar swing, year to year, in terms of Central Banks supplying securities to the market rather than buying. On top of that, the US will be financing a trillion dollar annual deficit as well as rolling over a couple of trillion dollars of maturing short term securities. Personally, I don’t know whether the worldwide economy will be strong enough to provide the liqidity to absorb the anticipated supply of fixed income securities, but it sure seems like a question worth asking. Maybe this is one reason that central bankers continue to accumulate more gold than US fixed income securities.

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The broad equity market continued upward in January. Gold bullion was up a little over 3%, the gold miners were up less (GDX up 2.2%, GDXJ down 1.3%). Our gold miner related portfolio was up inline with that group. We believe that the gold miners will start to outperform gold on the upside as they report Q4’17 earnings, the first quarter in over a year that the price of gold was materially higher than a year earlier. That will continue to be the case as Q1’18 is reported, and all through this year if gold holds its current price above $1300. We describe below two particularly positive recent developments.

The US dollar has recently been dramatically lower, in particular against the Euro, which represents the second largest collective economy in the world. We have written in the past that gold does not necessarily move inversely to the dollar, as many observers believe, since it depends on the time period one uses. However, all other things being equal, a weak dollar helps rather than harms the price of gold. The question then becomes: what is really the US policy? Over the last year, both President Trump and Sec’y of the Treasury, Steve Mnuchin have made statements that they consider a weak dollar a “blessing” in terms of US exports, our economy and our trade balance. They backed off that stance recently as they were attacked by certain pundits. However, DJT has continuously said “it’s all about jobs” and he is certainly not afraid of debt and deficits, which would pressure the US Dollar to the downside. The latest indication in this regard comes just last week in Davos, when Commerce Sec’y, Wilbur Ross, reflected back to 1945, just after Bretton Woods had established the US Dollar as the world Reserve Currency, and the US (with a strong dollar) was willing to be supportive of other countries rebuilding themselves after WWII. Ross said, though, that “it is a different world today”. (Check it out on Youtube, minute 19-20 in the presentation). Obviously, he is pretty directly saying that the US can no longer afford to support the worldwide economy at our own expense, implicitly blessing a lower dollar.

The second potentially powerful positive development is that a number of prominent institutions are planning to introduce cryptocurrencies BACKED BY PHYSICAL GOLD. Just this week, the UK’s Royal Mint, responsible for producing all the physical money in the UK, has announced the launch of its own gold-backed cryptocurrency. Also announcing similar plans are the Perth Mint in Australia, and the Sprott organization of Canada.

We have written (skeptically) about Bitcoin over the last few months, which readers can access through our Search function on the home page. We don’t think it is a coincidence that, virtually to the day that Bitcoin topped at $20,000 and started to fall by 50%, gold has been edging upward. It seems more than reasonable to think that speculators and investors would rather own a cryptocurrency backed by gold than backed by NOTHING. Since the total market value currently invested in Bitcoin and others is still something on the order of $300-400 Billion, there could be substantial additional demand for physical gold, whose total worldwide annual production is $140-150 Billion.

We  obviously believe that our gold related investment strategy is more valid than ever.

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