Tag Archives: GDX

SEMI-MONTHLY FISCAL/MONETARY UPDATE – U.S. ECONOMY SOFTENS – CENTRAL BANKS BUY GOLD!! – WILL THE UNITED STATES FOLLOW JAPAN?

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SEMI-MONTHLY FISCAL/MONETARY UPDATE  – U.S. ECONOMY SOFTENS –  CENTRAL BANKS BUY GOLD!! – WILL THE UNITED STATES FOLLOW JAPAN?

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. The standard punditry, led by Mad Money’s Jim Cramer, whose fundamental “rigorous” analysis seems to depend mostly on the stock market’s action over the last 24 hours, continues to report that the consumer remains “resilient”. Setting aside our anecdotal observations of restaurant traffic and sales trends, which are largely driven these days by $5.00 price points at lunch and three course meals for $10.00 at dinner, overall reported retail sales were up only 0.26% in October, failing to recoup the 0.32% loss in September. Adjusted for inflation, sales volume dipped 0.1% in October after a 0.4% decline in September, flat in the last three months, slowing steadily through 2019 from 2.2% and 1.0% gains in the respective March and June quarters.

Going forward, 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, just this morning Kohl’s (KSS) and Home Depot (HD) reported disappointing results, lowered guidance for the current quarter, and their stocks are trading down 18% and 5% respectively. 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.

CENTRAL BANKS BUY GOLD IN RECORD AMOUNTS

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.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – QE4 HAS CLEARLY BEGUN, GOLD SHOULD SHINE BRIGHTLY

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – QE4 HAS CLEARLY BEGUN, GOLD SHOULD SHINE BRIGHTLY

The equity averages were up modestly in October. Interest rates, intra-month, went down, then up, then down again after the Fed predictably lowered rates, ending the month where they began. Gold bullion was up 3.0%, and the gold miners were up closer to 5% For the year to date, gold bullion is up about 17% and the gold mining stocks are up about 30%. Still, this is just a beginning. The miners have just begun to outperform gold bullion on the upside. We expect gold bullion to go up by a multiple of its current price, and the gold miners by a multiple of that multiple. See point (4) below.

The most prominent recent short term developments that come to mind are as follows:

  • Whatever you call it, “QE4” or “whatever”, the latest monetary accommodation by our central bank has clearly begun. The Fed, as expected, lowered the fed funds rate by 25 bp last  Wednesday, and tried to make the case that rates are on hold, “pending the incoming data”. They should talk to the world class economist, David Rosenberg, who provides many indicators that point to consumers (who have been keeping the GDP positive) backing off. For the moment, in spite of the highly touted “greatest economy in US history”, GDP growth, in Q3 was all of 1.9%, and slowing. Furthermore, while the (disingenuous) Fed talked about buying treasuries starting October 15th at a rate of $60B per month, their balance sheet started expanding the week ending September 4th and is already up by $260B by the week ending 10/30. That’s a rate of $130B per month (started in early September, and double the stated $65B objective), and that’s in addition to the tens of billions they are adding to the repo market daily to add to short term marketplace “liquidity”. We don’t pretend to understand the daily repo market, but the need for Fed “intervention” on a daily basis cannot be a sign of financial strength within the capital marketplace.
  • We agree with David Rosenberg, who predicts that short term interest rates will move toward the zero bound as the Fed tries (in vain) to support the economy. There will be many painful unintended consequences from ten years of interest rate suppression. We can’t help to interject here, relative to gold: all the gold ever mined, about 160,000 tons,  is worth less than half of the current worldwide debt selling with a negative yield. The argument, therefore, that gold is “useless” because it earns nothing has become moot. Nothing is a better return than a negative yield.
  • The disillusionment, finally, with the ridiculous valuations of the money losing “unicorns” (i.e. WeWork, Uber, Grubhub, et.al.) indicate that the monetary debasement and credit bubble that has supported the last twenty years of (meager) economic expansion is finally winding down. In response, however, it is clear that the worldwide central banks will double down with their monetary heroin. It took more than $10 trillion of fresh paper to avoid economic disaster in 2008. It will take $20-30 trillion the next time. It always takes a bigger “hit” to stay “high”.
  • The gold miners have just begun to report their  third quarter, which is the first quarter in eight years that gold has been $200/oz. higher, YTY, and the operating leverage is asserting itself. The first group of mining companies that has reported so far has shown dramatically better results and those stocks have jumped 7-10% in days. With bullion down 20% from its high, but the miners down 50-75%, there us obviously the potential for a major upside move in the gold mining stocks.

Roger Lipton

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD MINING STOCKS READY TO POP, OUR GOLD FOCUSED INVESTMENT PARTNERSHIP FORMALLY OPENS TO NEW INVESTORS

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SEMI-MONTLY FISCAL/MONETARY UPDATE – GOLD MINING STOCKS READY TO POP, OUR GOLD FOCUSED INVESTMENT PARTNERSHIP FORMALLY OPENS TO NEW INVESTORS

Gold bullion is up about 14% for the year. The gold mining stocks, leveraged to the price of gold, are up more, as is our investment partnership, RHL Associates, LP, up about 20% for the year as of this morning. If ever the time was finally right for, what we consider to be, the single most undervalued asset class, it seems to be now. The gold miners will be reporting earnings for Q3 starting in early November, and it will be the first quarter in eight years where the average price of gold will be about 20% higher than a year earlier. Due to the leverage above break-even mining costs, earnings for the gold miners, depending on mining costs, could be from 40%-100% higher than a year ago.

While gold bullion is about 25% below its high, the mining stocks are trading at 50-75% below their highs of 2011-2012, so the upside price action could be dramatic. We believe that the “catch up” will be just a prelude to an even bigger move when the gold price breaks out above its $1900 high. If gold goes to a multiple of its current price over the next five years, the gold mining stocks could, and should, go to a multiple of that multiple.

RHL ASSOCIATES, LP – THE TIMING LOOKS GOOD

For the first time since we transitioned our partnership, formed in 1993, from consumer stocks to gold related investments in 2011, we are formally opening to new investors. The last six years have not been pretty but 2019 is much better and we think it is just the beginning. Roger Lipton has always been, and will continue to be, the largest investor. The minimum investment is $500,000. The compensation arrangement is “1&10”, a 1% annual fee and 10% of profits, much lower than most investment partnerships. Funds can come in on the 1st of any month, starting November 1st, and can be redeemed at the end of any quarter, with 30 days written notice. There is no required minimum holding period. This is, obviously, a very brief description of RHL Associates, LP, should not be considered an “offering”, which can only be done by way of a formal offering circular. Contact us if you have a potential interest.

MONETARY STIMULATION BEGINS ANEW

You don’t get out of a hole by continuing to dig. Central banks around the world kept their economies moving forward (modestly) by the creation of something like fifteen trillion dollars. Turns out that, predictably, the debt burden has limited the GDP growth to under 2.5% in the US and Japan, not much more than that in Europe, and China’s hyper growth of the last thirty years has steadily slowed to just over 6%, and that is doubtful. In the US, after growing the Fed balance sheet from $800 billion to $4.5 trillion, it was reduced only to $3.76 billion before they said “basta”. Ten days ago, Jerome Powell said they would start increasing the balance sheet by $60 billion per month. WHAT HE DIDN’T SAY WAS THAT, BY OCTOBER 2ND THE FED BALANCE SHEET HAD ALREADY INCREASED TO $3.946 TRILLION FROM $3.760 TRILLION FIVE WEEKS EARLIER, AN INCREASE OF $186 BILLION. Seems like a couple of hundred billion these days is hardly worth discussing.

Japan and Europe are doing the same, $16 trillion of sovereign debt with negative interest rates is likely to increase, and there is no graceful way out of the worldwide credit and debt pyramid. Gold related assets are, at the very least, a useful hedge against problems in other asset classes.

IT IS NOT DEFAULT ON THE DEBT, IT IS SYMMETRICAL INFLATION

We try to read between the lines when monetary policy is discussed by our distinguished Fed governors. One of the principles underlying our ownership of gold related assets is that: the debt cannot be repaid. The numbers are too large. There will be a “default” but it will be in the form of inflation. An outright stated default, a blatant unwillingness to pay off interest or principal on the debt is politically unacceptable. We have all heard the commentary that the US will always make the necessary payments because we can just print the (unbacked) dollars. Of course this represents an abuse of our privileged position as the keeper of the world’s primary reserve currency, and for the time being that beat goes on. As a consequence, inflation is the likely solution. The public won’t blame the politicians for the continued “wealth gap”, and will continue to wonder why, though their wages are rising, their purchasing power never seems to keep up. Recall our article of August 14th, when we showed a chart of the wealth gap, starting in the early 1970s after Nixon closed the gold window and inflation took off. A 1971 dollar is worth about $0.15 today.

Almost everyone has forgotten that the Federal Reserve Bank was formed in 1913 to control inflation. In the new paradigm, the Fed has stated that 2% inflation is not only acceptable but is the stated goal, and other central bankers have followed along. Note however, that, EVERY TIME JEROME POWELL MENTIONS THE 2 PERCENT GOAL, HE SAYS “SYMMETRICAL 2 PERCENT”. You heard this here first ! This means that, because inflation has been running by less than 2% for some time, the Fed will not be disturbed if it runs above 2% for an extended period of time. Recall that inflation was 11-12% in 1974, 1975 and 1979 and north of 5% in almost all of the 1970s. Once the inflation genie is out of the bottle, it is folly to think the Fed will be able to control how high it goes, and they don’t really mind because the debt is easier to pay off. At 3-4%, it will be within their “symmetrical two percent” goal, and who knows how high it goes from there.

The price of gold went from $35 to $850 in the 1970s, the last time the world went through this type of situation, and gold is just as cheap today relative to the amount of currency and debt outstanding.

Roger Lipton

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

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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

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD, AND THE MINERS, CONTINUE TO SHINE – WE TELL YOU WHY, REALLY!!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD, AND THE MINERS, CONTINUE TO SHINE – WE TELL YOU WHY, REALLY!!

The capital markets were skittish in August, increasingly worried about an economy that is slowing under the influence, among other things, of trade tensions. Much of the news continues to be supportive of higher prices for gold related securities. and our portfolio benefitted accordingly. Gold bullion was up 7.9% in August and is up 18.6% for the year to date. The mining stocks were up slightly more than bullion in August, and are up approximately double the gain in bullion for the year.  While we are gratified with the gold miners’ relative performance to date, they are still down far more than bullion from the 2011 high. Gold bullion is down about 20% from the 2011 high of $1900/oz, while the two largest gold miner ETFs, GDX and GDXJ, are down 54% and 75% respectively. Putting it another way: If bullion goes up 25% from here, back to its high, GDX and GDXJ could go up 100% and 300% respectively and our broad portfolio of miners should mirror that order of magnitude. Since we anticipate that bullion has the potential to sell at a multiple of the $1900 previous high, the 100% and/or 300% move as described above could be just the beginning.

There has been an increasing amount of media attention relative to the appeal of gold related securities, not all of it especially well informed. We want our readers to be as well informed as possible, so we we reprint below our article from 8/14, “THE CASE FOR GOLD”. Most of it is not new to our readers over the last several years, but we have tried to pull it all together. It’s been said that: “In every crisis, you can either be a fool before or after”. If a crisis is indeed ahead of us, we clearly fall into the former camp with our writings over the last several years, but we like to think that our conviction is at least well founded.

THE CASE FOR GOLD – FROM THE “TOP DOWN” TO THE “BOTTOMS UP” – HOW HIGH, AND WHEN?

Our conviction regarding gold, and gold related investments revolves around our conviction that gold is the real money, has been for thousands of years, and the reasons have not changed. Gold is limited in supply, durable, and accepted worldwide as a unit of exchange and a store of value. It is true that gold is useless in terms of being consumed or generating a return such as a dividend. However, it is the indestructibility and scarcity that have made it most useful in terms of backing paper currencies that could otherwise be diluted into oblivion by the politicians of the day. This has in fact been the consistent case throughout history and it is hard to conclude that today’s politicians, worldwide, will prove to be any more disciplined than those of the past.

A second part of our premise is that without a sound currency, there cannot be a sound economy. Unless the public has confidence in the buying power of the earnings that are received as a result of their effort, they will exert less effort in that pursuit. This has been reflected through the ages, before and including ancient Rome to the 21st century.

A corollary of the paper currency dilution is the inevitable higher price of goods and services. You don’t need a PHD in economics to understand that an increasing amount of currency chasing a fixed amount of product will result in higher prices. It so happens that this result is far more acceptable from a political point of view than the fiscal and monetary discipline necessary to avoid deficit spending. This predictable outcome produces a cruel tax on the working middle class (wealth gap?) that doesn’t understand why they are taking home a bigger paycheck but it just doesn’t seem to go as far as expected.

Another way to look at gold ownership as a long-term hedge against inflation: If we view gold as a currency/commodity, which competes with other similar “asset classes”. This includes the latest asset class which consists of over 2,000 cryptocurrencies led by the headline grabbing bitcoin. The amount of gold that is produced every year amounts to about $160 billion each year, and increases by about 2% annually (which happens to be approximately the rate of long-term real growth in the worldwide economy). Compare this production of gold, requiring substantial capital investment and risk, with the creation of trillions of dollars annually of unbacked (fiat) paper currencies that are produced with the click of a computer mouse. Which asset class do you think will hold its “value” better over the long term?

THE WEALTH GAP

The “wealth gap” that is decried by politicians around the world began to rear its head in the 1970s. We believe it is no accident that August of 1971, when Richard Nixon closed the gold window, ushered in this unfortunate phenomenon. The chart below shows this clearly.

THE CURRENCY AND THE DEBT

The following charts show how public and private debt has expanded since 1971 and how the US currency in circulation has expanded exponentially. It is interesting to observe how the US public and private total debt exploded in 1930 as the GDP sank 30%, fell back through the depression, stabilized through WWII and the post war industrial expansion, before taking off in the 1970s. As above, we believe it is no accident that a 1971 dollar has retained only about 15% of its purchasing power by 2019.

Some might argue that inflation has been subdued in recent years, running under the Fed target of 2%, even though deficits are rising. In fact, many PHDs are scratching their collective heads, wondering why this is so. However, while apparel and some consumer electronic products have not risen in price, the cost of large ticket items such as education, healthcare and rent have risen sharply during this period of monetary accommodation. The paper currency creation, worldwide, with the stated intention of a “wealth effect”, has inflated stock and bond prices. That wealth has predictably largely bypassed the middle class consumer, but allowed a Van Gogh painting to sell for $250 million and co-ops in New York City and London to trade for $100M or more. The suppression of interest rates has also affected the purchasing power of the upper class and fixed income dependent savers in that you need much more savings to maintain a previously enjoyed living standard.

CENTRAL BANKERS

Central bankers have no use for gold because gold, as a governing mechanism for the issuance of the paper currency, puts the central banker out of business. However, they know where the bodies are buried so let’s follow what they do, not what they say. The following charts show the consistent accumulation over the last ten years by the central banks, notably by Russia and China, two or our greatest adversaries. It is worth noting that reported Chinese gold holdings are assumed by many to be very much understated.

 GOLD HOLDINGS vs. MONETARY BASE

The following chart shows the value of the gold held by the United States, since 1918 (shortly after the Fed was established in 1913), relative to the adjusted monetary base. You can see that from 1913 until just before the end of WWII, the value of the gold was about 35% of the monetary base. After the Bretton Woods agreement in 1944 whereby the US Dollar was established as the reserve currency, the percentage drifted down. The monetary base was growing steadily, and the US gold backing was declining, but the world was relatively unconcerned during a postwar recovery period. In the late 1960s, however, as US spending for the Vietnam War and President Lyndon Johnson’s Great Society accelerated, US trade and operating deficits became widely anticipated. Over 50% of the US gold was exchanged for dollars within eighteen months prior to August, 1971, when Richard Nixon “closed the gold window”. At that point, our gold amounted to only 6-7 % of the US monetary base. This level is important because we are back to that same level today.

We are not suggesting that the US, or anyone else, will make their paper currency convertible into gold any time soon. It wouldn’t work for long, in any event, because deficits in all major trading countries are larger than ever, and paper currencies would once again be tendered for gold. No country could back their currency with gold, unless they were “balancing their books” or, at the least, that prospect was in sight. We do, however, feel that the value of the gold “in circulation” should have a relationship to the value of alternative currencies. You might be surprised to learn that the country most able to make their currency convertible into gold would be Russia, perhaps our most prominent political adversary and a consistently large buyer of gold.

WHAT PRICE GOLD??

We refer to a couple of charts to approximate a reasonable level for the price of gold, relative to (1) a percentage of foreign exchange reserves and (2) as a percentage of paper currency in circulation. The chart just above this section shows that the value of the gold relative to the paper currency in circulation has a history, during steady non-inflationary growth, of being in the range of 25-35 %. The chart below shows the value of central bank gold holdings as a % of total foreign exchange reserves.

The chart above indicates that 7% could be 35%, or five times the current price. The chart below indicates that 7% could be 45% or 6.4x the current price. These ballpark calculations indicate what we consider to be a rational value of 5-6x the current $1500/oz, or $7,500-9,000/oz. This ballpark price range objective is at the current time. Since the upward adjustment in the gold price will likely be over a number of years, the appropriate price would be even higher by then.

THE TIMING

The following two charts provide insight into the possibility of an imminent major upward move. The first chart shows the high correlation of the gold price to the amount of worldwide sovereign negative yielding debt, now amounting to a cool $15 trillion. People, that’s a big number and even in Germany, the strongest European country, the entire yield curve is now negative. We believe that the amount of negative yielding debt will continue its upward march, and could even include some of the US debt. The continued upward trend of this indicator could be influential in breaking the gold price out above the previous all-time high of $1911. That, in turn, could ignite the price toward the price objectives noted above.

The second chart shows a nineteen-year price chart of gold. It shows the end of an 11-12-year bull market, ending in 2012, then a 6-7 year “consolidation”. The price has now clearly broken above $1400, the previous high. Chart technicians would say that the longer the base, the bigger the move. It is conceivable that a new bull market has begun that could last for quite a few years. This would tie in to our logic that the price of gold could be 5-6 times higher over a number of years.

CONCLUSION:

You get the picture!!

Roger Lipton

P.S. We produced two YouTube videos back in 2012 relative to this subject matter, each of which remains completely relevant. They are each only three minutes long. We have provided those links below:

https://www.youtube.com/watch?v=1ebZO5iMNeg
https://www.youtube.com/watch?v=ah7Y2rHuhCs

 

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – FED ACTS, CAPITAL MARKETS REACT, GOLD MINERS SHINE

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE FED ACTS, CAPITAL MARKETS REACT, GOLD MINERS SHINE

The general equity market was up just a little in July as the investing world waited to see how aggressive the Fed would be in terms of lowering rates. When the cut in rates yesterday afternoon was only 25 basis points, all capital markets sold off, with his remarks interpreted as if this cut would be “one and done”. This will not be the actuality, in our opinion, as extended monetary ease will be necessary to support the weakening worldwide economy. It is encouraging to us that, with gold bullion virtually flat for the month of July, based upon the prices of GDX and GDXJ, the two largest gold mining ETFs, and TGLDX, OPGSX, AND INIVX, the three precious metal mutual funds that we track,  the gold mining stocks were up about 5% for the month. This price performance is starting to reflect the inherent operating leverage within the miners vs. the price of gold bullion. For the year to date,  the gold mining stocks are up about 24.1%, nicely outperforming gold bullion which is up 9.9%.

The price action of gold bullion and the gold mining stocks is beginning to attract attention, but ownership is still almost non-existent among North American investors. Many of the reasons provided by observers have some validity, but are nothing new to all of us. The monetary stimulus, the deficit, the debts, the geo-political risks, the political dysfunction, the increasing social unrest and the wealth gap are all continuing worldwide trends that have long been in place but are suddenly become newsworthy. It’s been said, in response to how a crisis develops: “very slowly and then very suddenly”. The following are a few of the most important reasons that precious metal holdings are all of a sudden performing well.

FUNDAMENTALLY: David Rosenberg, one of the most highly regarded investment strategists, and not a perennial “gold bug” by any means, just a couple of weeks ago, wrote “WHY GOLD HAS ALLURE”.

(1) The Fed is set to cut rates (as discussed above), which will send the fed funds rate into negative territory in real terms.

(2) Geopolitical risks, including Iran’s behavior, are increasingly bothersome.

3) Trade talks with China do not seem to be making progress, and Beijing has “tools” to hit back, including the ability to weaken their currency and/or continue reducing their US Treasury holdings.

(4) The economic war between the US and France is heating up, as Emmanuel Macron imposes a tax on American large cap tech companies. At the same time, trade tensions increase between the US and Japan, as well as South Korea.

(5) The Chinese economy, as well as the entire Asian economy, is clearly in retreat, adding to the prospect of worldwide monetary ease.

TECHNICALLY: In terms of supply of demand for physical gold, and the price charts:

(1) Central Banks around the world have continued their massive accumulation, a total of 374 tons in the first half of calendar ’19. While the first half total was down around 5% from ’18, the annualized rate of 750 tons is far more than in prior years. Russian and Chinese Central Banks continue their steady accumulation.  India, between their central bank and their population, perennially the second largest accumulator of physical gold, imported 78 tons in May alone, running 49% ahead of a year earlier. Poland has now joined the other major buyers, buying a huge (for them) 100 tons in the second quarter alone. Sine the total annual worldwide production is about 3400 tons, these purchases are very meaningful.

(2) The price charts, for gold as well as gold mining shares, indicate much higher prices. Gold bullion has broken out to a five year high, though still 25% below the 2011 high. The gold mining shares are at three year highs but are still as much as 75% below their 2012 high.

The gold mining stocks are still substantially undervalued by many historical measures. Gold bullion, is down about 25% from its all time high of about 1900 in 2011, but GDX (the ETF with the larger miners) is down over 50% from its high and GDXJ (with the small to midsize miners) is down 75%. Our expectation is that gold bullion, will sell for a multiple of its current price and the mining stocks at a multiple of that. The timing, as always, is the big question, but the pieces seem to be falling into place, as outlined above.

In summary, there are never any certainties, especially in the short run, but it seems like both fundamental and technical considerations are in gear, and indicating much higher prices for precious metal securities.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – PRECIOUS METALS ACT WELL, AS FUNDAMENTAL AND TECHNICAL FACTORS BOTH SUPPORT MUCH HIGHER PRICES

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – PRECIOUS METALS ACT WELL, AS FUNDAMENTAL AND TECHNICAL FACTORS BOTH SUPPORT MUCH HIGHER PRICES !!

FUNDAMENTALLY:

David Rosenberg, one of the most highly regarded investment strategists, and not a perennial “gold bug” by any means, just this morning wrote “WHY GOLD HAS ALLURE”.

(1) The Fed is set to cut rates, which will send the fed funds rate into negative territory in real terms.

(2) Geopolitical risks, including Iran’s behavior, are increasingly bothersome.

(3) Trade talks with China do not seem to be making progress, and Beijing has “tools” to hit back, including the ability to weaken their currency and/or continue reducing their US Treasury holdings.

(4) The economic war between the US and France is heating up, as Emmanuel Macron imposes a tax on American large cap tech companies. At the same time, trade tensions increase between the US and Japan, as well as South Korea.

(5) The Chinese economy, as well as the entire Asian economy, as clearly in retreat, adding to the prospect of worldwide monetary ease.

TECHNICALLY

In terms of supply of demand for physical gold:

(1) Russian and Chinese Central Banks continue their steady accumulation.

(2) India,  between their central bank and their population,  perennially the second largest accumulator of physical gold,  imported 78 tons in May alone, running 49% ahead of a year earlier.

(3) The price charts, for gold as well as gold mining shares, indicate much higher prices. Gold bullion has broken out to a five year high, though still 25% below the 2011 high. The gold mining shares are at three year highs, still 60% below the 2012 high.

SUMMARY

There are never any certainties, especially in the short run, but it seems like both fundamental and technical considerations are in gear, and indicating much higher prices.

Roger Lipton

SEMI-MONTLY FISCAL/MONETARY UPDATE – GOLD STARTS TO SHINE, WITH GOOD REASON !!

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SEMI-MONTLY FISCAL/MONETARY UPDATE – GOLD STARTS TO SHINE, WITH GOOD REASON!

The general capital markets were strong in June: equities because investors came to the conclusion that the Fed “put” is back in place, and bonds because the Fed tightening (“QT”) is behind us. Gold and the gold mining stocks were strong as well, for lots of overdue reasons, a couple of which  are discussed below. Gold bullion was up 8.0% and gold mining benchmarks were up 18.4% (the average of ETFs,  GDX and GDXJ) and 16.2% (the average of precious metal mutual funds (TGLDX, OPGSX, and INIVX) respectively. Our  portfolio was up in line with the benchmarks. The  subject matter below describes only a couple of the many reasons that justify the recent overdue action in gold and the gold mining stocks.  Reminds me of the song “we’ve only just begun”.

THE SINGLE BIGGEST REASON TO OWN GOLD RELATED SECURITIES !!

The most important justification for our our ownership of precious metal related securities is the 5,000 year history of gold being the safest and surest protection of purchasing power. Gold is a unit of exchange and a store of value. There has never been an unbacked “fiat” currency that has survived. It is just a question of time until the politicians of the day dilute their currency into oblivion and today’s politicians (of both parties) are clearly on the same path. Our portfolio represents gold as the safest currency and we believe that the history of the quantity of gold owned by Central Banks relative to the amount of paper currency they have created (M2 or “FMQ” as shown on the below chart) is indicative of where we are at the moment. You  can see from the chart below that gold bullion relative to M2 was at a low in 1970 (before gold went from $35 to $850/oz. and 2000 (before gold went from $250 to $1900). Lo and behold, gold is at that level again today. In terms of a price objective, we believe $850, the top of the parabola in 1980, was too high. Probably $300-$400 was more appropriate. The move from $250 in 2000 to $1900 was more justifiable, based on our standard that the gold owned by Central Banks should be in the range of 25-40% of the paper currency out there. This is the range between 1790 and 1913, before the creation of Central Banks, when inflation was zero and real GDP growth averaged 4%. This is how we conclude that an appropriate price of gold today is perhaps $5-7000 per oz. Of course, this price objective is moving higher all the time as more paper currency is created. Two or three years from now, the objective could well be $9-10000/oz. We conclude that just because gold has gone from a low of $1050 a couple of years ago to $1400 now, we will not be tempted to lighten up any time soon. If we had a stock that had gone from $10.50 to $14.00 and we thought the upside was north of $50.00 per share, that would be a lot of money to potentially leave on the table. Don’t forget that the mining stocks, depressed as they still are, could move 2-3x as much as the gold price.

We like to keep our letters short, but since we recently reviewed the “state of the union” in terms of the current deficit, we present the information below. This part of the puzzle is important because it indicates how much new paper “fiat”, unbacked, currency must  be created to fill the deficit gap. We predicted a few weeks ago, when we published this information here that the deficit for the current year would be over $1 trillion. The Congressional Budget Office has now confirmed our work.

$206B US DEFICIT IN MAY – HEADING TO $897B FOR YEAR , MAYBE OVER $ONE TRILLION NEXT YEAR ? – YEAH, RIGHT !! – and the FED now agrees.

There are about 250 persons working at the Congressional Budget Office, according to their website. Their budget, according to Wikipedia was $46.8M annually, as of 2011, probably higher now. Their projections are widely quoted, and presumably relied upon by policy makers in our administration. The CBO updates their projections on an irregular basis, sometimes several times per year, sometimes only once per year. The update from 5/2/19, only two months ago has now been adjusted upward. Considering how far off their past projections have been, and the questionable assumptions within their analyses, it is a wonder that anyone takes these numbers seriously, and the latest installments provide a good example why not.

A brief two months ago, on 5/2, based on relatively firm numbers through March, and presumably pretty reliable indications through April, the CBO predicted that the US operating deficit through the current fiscal year, ending 9/30/19, would be $897 Billion. April and May results are now reported, and the table below shows the monthly numbers for the last two fiscal years.

You can see that last year’s total operating deficit was $779B, and the total debt went up by $1,271B (due to “off budget” items, the largest of which is the social security shortfall). The projection two months ago was for the current year’s deficit to be $897B, up 15.1% from fiscal ’18. The total debt is not projected, and you can see that number frozen the last few months since our administrators have already exceeded the formal debt “limit”.

The April result, with tax receipts generating the surplus (normal for April) of $160B, which was lower than the $214B surplus a year earlier, so the cumulative deficit through April (shown at the extreme right of the table) was up 37.6%. They May results showed a $206B deficit, up from $147B, so the cumulative deficit is up 38.6% year to  year. Last  year, the monthly deficits from June through September totaled  $246B. The CBO projection, on 5/2, of $897B for the ’19 year would allow for only $158B the rest of the year, down 36% from the last four months of fiscal ’18 – which was ridiculous.

We don’t have 250 professionals pushing numbers here but during the current year:  December’s YTY deficit reduction (which some might have considered hopeful) was on an  immaterially low base. March’s improvement was material, but March and April combined (tax season) showed a $13B surplus this year versus $5B in fiscal ’18, which is an immaterial change. May bounced back to a 40.1% increase YTY in the deficit. You can see, along with ourselves, that the last four months would have to be 36% lower than last year, improbable, to put it mildly.

Our projection, with 247 professionals fewer  than the CBO was for the following, and we published this conclusion several weeks ago: The last four months would provide a deficit about  40% higher than a year ago ($247B), which would provide for $346B  on top of the current $739B, for a total of $1.08 Trillion. This is 20% higher than the $897B projection made by the CBO with only five months left in the fiscal year. We shouldn’t have to point out that: if the CBO was 20% off the mark with five months remaining, their projections ten years out don’t have a great deal of credibility.

Furthermore: the total debt, whether or not the debt ceiling has been formally raised, will have expanded by $1.3-$1.5 Trillion, bringing it close to $23 trillion.

We have presented a great deal of information in this letter, and our conclusions are justified by much more. The biggest single reason that gold and gold mining stocks are going up in price is that they never should have gone down in the first place.  All the reasons we have discussed over the last six or seven years continue to intensify.

Roger Lipton

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD TAKES OFF, FOR GOOD REASON !!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD TAKES OFF, FOR GOOD REASON !!

The general equity markets were down materially in May, the worst month in about eight years. The bond market firmed up, as it becomes clearer that the economy is slowing and Quantitative Tightening (QT) is ending. Gold bullion was higher by 1.5%. The average of the gold mining ETFs (GDX and GDXJ) were up 2.0%. The three precious metal mutual funds that we monitor (TGLDX, OPGSX, and INIVX) did a little better on average, up 3.7%. Considering how strong the US Dollar has been, and the strength in the stock market until just recently, gold bullion and the gold mining stocks have held up pretty well for the month and the year. Once again, the prospect for a major move in gold bullion and an even larger move in the gold mining stocks has only improved with time. The longer the fundamental fiscal/monetary trends that we have discussed continue, the larger the upswing  will be. Gold bullion broke above $1300 per oz. just last Friday and is up over 1% today. The gold miners are also trading higher. The “consolidation” in the price of gold, and the gold miners, has been longer than we anticipated, but the last few days could be the resumption of the long term bull market in precious metal related assets. It’s been said that “in any crisis, you have a choice or either looking like a fool before, or after, the event.  Based our long stated conviction that gold related securities represent the most underpriced  asset class, we are in the former group at the moment. We believe that there will be a great number of observers who, upon reflection, say: “How could I have not seen this coming?”

The fundamental developments over the last month that come to mind are the following:

  • The economy is weakening and tighter money is behind us. A renewed era of easier money and lower interest rates should be a tailwind for precious metal prices.
  • Gold bullion continues to be aggressively accumulated by Central Banks, China (way understated) and Russia most notably. Russia has bought over 200 tons annually for four years in a row, at the same time almost eliminating their holdings of US Treasuries.
  • The US deficit for the year ending 9/30/19 will be comfortably over $1 trillion. Be aware that the cumulative deficit is frozen” at just over $22 trillion because the US has reached its debt “ceiling”. The cumulative number will stair step to close to $23 trillion when Congress acts in the next few months. Furthermore, it is virtually guaranteed that the US is within a year of $24 trillion, and not far from $25 trillion by January 2021 when a new (or old) administration could consider adjustments. Of course, neither Donald Trump nor any of the Democratic candidates seem likely to reduce entitlements, which is the only remedy. Compounding the problem, the fiscal/monetary trends so evident in the US are also in place in Europe, China and Japan, the next three most important economies.

There are only two ways out of the worldwide debt burden. One option is outright default. The alternative is “unstated” default by paying off the debt with paper currencies depreciated by major inflation, and that is the new stated mandate of central banks worldwide. The gold price and the gold mining stocks will be major beneficiaries.

Roger Lipton

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE BEAT GOES ON !!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE BEAT GOES ON !!

The general equity markets were up modestly in April. Gold bullion was down a fraction of 1%. The miners, which had outperformed gold bullion in the first quarter gave back their gain. For the year to date both gold bullion and the gold mining stocks are essentially flat. Considering that the US Dollar is at a high and the general equity market has been strong, that is reasonably good performance for a non-correlated asset class.  Fundamentally: nothing has changed regarding the long term fiscal/monetary trends. In fact, the prospect for a major move in gold bullion and an even larger move in the gold mining stocks has only improved. The longer the fundamental factors that we present prevail,  the larger the price move in gold bullion and the mining stocks will be.

 Over the last month, the following bullet points come to mind:

  • Ten years after the sub-prime bubble of ’08-09, new financial excesses have arisen, including a private equity mania (Lyft, Uber,  Wework, etc.), a subprime auto bubble, a student loan bubble, a sovereign debt bubble among emerging economies, a “levered loan” bubble.
  • Central Banks continue to buy record amounts of gold bullion. They understand that the paper currencies are being diluted and are increasingly aggressive in diversifying their foreign exchange reserves away from US Dollar. China and Russia, increasingly considered our adversaries, are the most prominent gold bullion buyers. In India, where the public traditionally accumulates gold, the central bank has again become a substantial buyer, increasing their holdings by 50 tons (the total by over 10%) in just the last 15 months.
  • Debt creation as a GDP stimulant is increasingly impotent. As calculated by highly regarded economist, David Rosenberg, since 2007 “global debt has ballooned by $140 trillion while global GDP has risen by only $20 trillion. The “bang for the debt buck” is clearly diminished, and that will only get worse over time.
  • The highly touted 3.2% growth in US real GDP was largely dependent on non-recurring factors. Inventory build, government spending, and lower imports together contributed 2/3 of the total. The 3.2% number was also calculated based on only 0.8% annualized inflation, and that assumption is questionable. One thing we can count on, however,  is that economic performance in the US will continue to be presented in the most favorable possible  light between now and November, 2020.
  • Following on the previous point, just this morning Steven Mnuchin, Sec’y Treasury, pointed out that the US debt limit, which has already been exceeded, will have to be raised within six months, because our financial flexibility will have been utilized. $22 trillion is comfortably in the rear view window, and $23 trillion is months away.

The following discussion is a bit “technical” in nature, but we feel is crucial in terms of long term expectations for financial markets.

CENTRAL BANKS BUY STOCKS AND BONDS – A RECIPE FOR LONG TERM DISASTER !! – A LESSON IN “MARKET MAKING”

It’s been a number of years since we had an active market in the US for initial public offerings. Decades, and a number of stock market cycles ago, this then young analyst watched quite a few small companies come public, in many cases underwritten by brokers much smaller than the surviving investment bankers of today. Some of those underwriting firms, well intentioned to be sure, supported the brand new issue with a supporting bid, figuring it was just a question of time before the market figured out that the stock was attractive, the supporting bid could be removed, the stock would be freely trading and move up, the public customers would be happy, and the broker might even make a profit when selling their acquired inventory. Other underwriters, not so committed to supporting the new issue price, allowed the stock to trade freely immediately, tolerating the higher volatility, and allowing the free market to establish (“discover”) the price, for better or worse.

The interesting aspect of these two approaches was as follows: The firms that intervened in the marketplace in many cases finally choked on the inventory, their capital was not sufficient to buy the stock forever, and they ultimately went out of business. The more prudent underwriters that allowed for “price discovery” (as the PHDs would put it) by the normal supply and demand of the marketplace lived to play another day.

This small scale example applies to the trading habits of worldwide central banks today. As the US government builds its debt over $22 trillion, which is more than 100% of our GDP, lots of observers say it is no big deal since Japan, for example, has government debt at 250% of their GDP. The Japanese economy is still functioning, with slow growth to be sure, but there is no evident crisis. This reminds me of the cartoon where the guy jumps off the cliff, and, while in the air, calls out: “I feel fine !!”

There are over $10 trillion of government securities trading with less than a zero percent yield. This is as a result of the US, ECB, Japanese and Chinese central banks buying stocks and bonds, supporting the price of stocks and bonds, and suppressing fixed income yields. In this absence of true price discovery by the marketplace, fixed income savers have been penalized, to the benefit of stock and bond holders, creating a wealth effect for the latter. This good fortune on paper could (and will) be temporary, but for the moment, just like the guy who jumped off the cliff, we feel fine !!

Where are we in this process ??  In addition to the negatively yielding fixed income government securities, the Bank of Japan (that has been doing this for almost thirty years) now owns about $250 billion of Japanese ETFs, or 75% of that entire market of ETFs. On the fixed income side, the Bank of Japan owns about 45%, or $4.5 trillion worth of all the Japanese government bonds outstanding. With it all, the Japanese economy is still running well below 2% real growth, with inflation at well under the 2% objective. It is of course an important sub-text that central banks worldwide are trying to stimulate inflation, rather than subdue it, which was the original objective.  Closer to home, we have been informed that our Fed is abandoning QT, preparing for a new form of QE, which, some have suggested, could include the purchase of US equities as well as bonds.

Here’s a quick economic lesson for the hundreds of PHDs that are working within central banks, which we guess isn’t part of the new Modern Monetary Theory. Don’t intervene in a market unless you are prepared to BUY IT ALL, because you will, eventually. Witness the holdings of the Bank of Japan, who have been at this game the longest, still without the result they have been reaching for. Aside from a long list of unintended consequences that have yet to play out, the attempt to lighten the inventory, (Sell to whom?) has just been demonstrated in the US. One down month in the stock market (December) with the two year treasury rate approaching 3% and the US Fed caved. Whom do you think the Japanese Central Bank can sell to?

The above described central bank intervention in capital markets will inevitably destroy most international currencies, including the US Dollar, because the money will have to be created to support the capital markets and the presumed wealth effect that will prevent economic collapse and that will be highly inflationary. This is the “bubble” that Donald Trump described when he was campaigning but that he has forgotten about since he is in office. The politicians and central bankers will continue to chase their long term (NEW) goal of creating inflation substantial enough to service long term debt obligations. We described early in the article how the debt increase in increasingly impotent in terms of stimulating GDP growth. The corollary is that the debt, worldwide, is far too large to be paid off in the currencies of today. Substantial inflation is the only politically acceptable remedy, since outright default is too obvious to the voting public.

Roger Lipton