Tag Archives: GLD

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT ON UPSIDE ! FOR GOOD REASON

articles, , ,

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT ON UPSIDE ! FOR GOOD REASON

First, let me say that it pains me to be so pessimistic in my fiscal/monetary observations. I think that those of you who know me would agree that I am not a “perma-bear” or congenitally downbeat. I tend to look at the glass as half-full (at least) and almost always look at the bright side of a given situation. However, it is one thing to be an optimist, and it is quite another to disregard history (“fiscal/monetary”, in this case) and reality. There are sometimes empirical facts that can be disregarded only at one’s peril. Someone once said that there are two ways you can look like a fool in relation to a crisis, one is to be “early” and the other is to be “late”.  I continue to opt for the “early” alternative.

Over the last two weeks, it is apparent that the economy continues to sputter. Q1 GDP real growth is now estimated in a tepid range of 1.5-1.9%. The 10% growth in profits among S&P 500 stocks is largely due to easy comparisons in the oil patch. Half the gains  in the S&P 500 stock index have been due to 10 stocks, including Apple, Amazon, Alphabet (Google) and a few others.  interest rates have responded by moving lower again, Janet Yellin might only do two rate increases instead of 3-4, and gold has presumably “resumed” its long term bull market after a four year “consolidation”. The Trump Rally has run out of steam, as I suggested it might, as political reality has set aside the “animal spirits” following the election. Even with control of the White House and both Congressional houses, Obamacare, Taxes, Immigration, Infrastructure, etc.etc. are “very complex”, it turns out. It’s possible that $20 trillion of existing federal debt, excluding tens of  trillions of unfunded entitlements is a significant limiting factor on legislative options, as well as a continuing drag on growth. As this is written, the federal debt ceiling is days away from being exceeded, so the political wrangling relative to a potential governmental “shutdown” is about to begin.

Our friend, and world famous market strategist/economist, David Rosenberg at Gluskin Sheff in Toronto, just wrote: “..as we have said time and again, the best leading indicator from within the sales data are restaurants — not to mention that this is among the most discretionary of all the segments of the household budget. And sales on this front dropped 0.6% MoM after a 0.3% decline in February — down now in three of the past four months and four of the past six months.”  Sound familiar?? We would only add that restaurant sales have been a great leading indicator, so based on our decades of experience, we do not expect a general economic pickup any time soon.

Away from discretionary consumer spending, bank credit growth has slowed while trillion dollar subprime bubbles are now becoming  apparent in credit card, auto and college loans. In this context, it is interesting to note that slightly higher interest rates have already taken the steam out of auto sales (even with the ease of borrowing) and new home sales, both of which were important components of the eight year recovery from ’08-’09 (anemic though it was).

As far as gold’s role in a worldwide economy that is badly in need of growth to fuel tax receipts and pay down debt, a recent article by John Hathaway, admittedly “talking his book” as the highly successful manager of the Tocqueville Gold Fund, says it best:

“If the consensus view for robust growth proves wrong, what could it mean for gold? The Trump bull market is in our opinion mass self-delusion. While a presidential administration may be able to chart a course and set objectives, to our knowledge no administration in history has been able to repeal the business cycle. In our view, the current 97 month old business expansion is running on fumes.

“…..Gold would stand to benefit from a long-overdue loss of confidence in monetary policy. That loss of confidence could well set the stage for a Trump takeover of the Fed, with three of the seven seats on  the Fed’s Board of Governors open(the most since the Woodrow Wilson administration), including Chair Yellen, by next January.  Any remaining pretense that the Fed is an independent institution could vanish.

“The rationale for investing in gold is this: The practice of radical monetary policy for the past two decades has conflated systemic risk and will continue to do so. We believe that no escape is possible, including a return to normalized interest rates, in the absence of robust economic growth.  Easy-money policies since the Great Recession have solved nothing and only bought time. Hope for sufficient economic growth to restore a healthy ratio between debt and productive activity seems futile..

“….It is clear to us that current public policy is not working.  if the economy continues to stall, as we believe it will, answers will be sought. Trump and his advisors are pragmatists.  They have no allegiance to past policies and have the opportunity to affect lasting and positive change by reincorporating gold into the monetary system.  Trump himself is on record as being friendly toward gold.

“…The appeal of gold is visceral and consonant with the anti-elite sentiment of populism. So much the better for the ‘barbarous relic.’

“….the fact remains that gold is massively underpriced in all paper currencies. It would be preferable if the necessary adjustments could occur without a repeat of a 2008-like financial crisis. We give this possibility a chance, albeit slim.  In any event, we expect a significant repricing of gold higher during the current administration, whether by design or because of market events.”

Couldn’t have said it better myself, so I haven’t.

Roger Lipton

 

 

SEMI-MONTHLY FISCAL/MONETARY REPORT – RISE IN INTEREST RATES A DONE DEAL – GOLD GOES HIGHER!

articles, , , , ,

March 20, 2017 – Semi-Monthly Fiscal/Monetary Report – First of Three 2016 Interest Rate Rises in 2017 – Why is Gold Price Up?

There are an unusually large number of important moving parts right now. They include: Health care and federal budget debates, federal debt ceiling having been reached, new employment reports apparently encouraging (The nationwide average temperature was 41 degrees, 7 degrees warmer than the 95 year average, which no doubt helped.), physical gold continues moving from west to east, U.S. Fed raises funds rate and suggests two more increases in 2017, GDP reports continue to be anemic, and the US Dollar has finally backed off from its most recent high.

In Discussion of the High Points:

65-70% of the US economy is dependent on consumer spending, and a large concern of Main Street is the cost of health care. The promise to “repeal and replace” the ACA “on day one” was clearly not practical, and it seems clear now that whatever legislation is passed will only “tweak” the current situation, at least in the short to intermediate term. President Trump, and his surrogates, seem to be admitting now that it will be two to three years before the effect of the changes are felt in the form of reduced healthcare costs for the public. This line item does not bode well for better consumer spending any time soon.

Our Federal Reserve has raised fed funds rate by 25 basis points, and points to the possibility of two more increases in 2017. Caveat emptor, always, from Janet Yellen: the decision will be “data dependent”. Should GDP weaken from the already tepid sub-2% level, further rate increases could burden the economy to an unacceptable degree. A stronger US Dollar would likely accompany rate increases, so US exports, in addition to probably weaker home and auto sales would likely result from the proposed rate increases. Yellen’s “go slow” remarks were considered “dovish”, the interpretation being that rates will likely remain historically low for the foreseeable future. In turn, this strengthened the markets for bonds and gold.

The congressional budget debate, just begun, shows increased defense spending to be offset by major reductions in agencies such as the EPA, and is sure to be contentious. Importantly, the current debate deals only with the trillion dollar “discretionary” portion of the federal budget, which is only 25% of the total budget. The suggestions so far indicate a balance between increases and decreases, not a major reduction. Since the annual deficit is running at about 15% of the total budget, and the debt increased in the last twelve months by 25% of the total budget (the difference being “off budget” “investment” spending), even a reduction of 10%, for example, of the discretionary portion, would only be 2.5% of the total budget, and nowhere close to closing deficit gaps. Nowhere in the discussion yet is how to pay for the trillion dollar infrastructure needs or the necessity to reduce entitlements. President Trump explicitly promised not to reduce entitlements, so it will be interesting to see how the administration dances around the 75% ($3 trillion) non-discretionary portion of the federal budget.

The federal debt ceiling has been reached, so government spending is taking place under “temporary” measures. This can go on for a few months, but sooner or later, legislators will have their fifteen minutes of fame in the form of a congressional debate on this subject. The government will not be closed down, but it could cause some concern in capital markets as the US debt burden grows beyond what many economists consider already dangerous levels. I could provide a chart that shows the price of gold following the level of US debt. These two items were tightly correlated over many years, especially since 2000 when both the debt level and the price of gold started rising sharply. The two measures diverged in 2013 as the debt level kept rising but the gold price retreated from a high of 1900 to a low of 1050 and the current level of 1230. Gold would have to be in the area of $1900 per ounce if it were to catch up with the new debt level. Furthermore, I believe there are numerous additional reasons for the price of gold to be materially higher than $1900 in the not too distant future.

Physical gold continues to move from west to east in a major way. The Indian public had been the largest importer of gold in the world, until the Indian government tried to limit gold imports last year to improve the governmental trade deficit. This culminated in an announcement on November 8th, that almost all (turned out to be 86%) paper currency was to be turned in by 12/31 for a new paper currency. This process took place in November & December, predictably creating temporary economic turmoil, including a sharp reduction in the purchase of gold by the public. This process has apparently run its course, the Indian economy is picking up, and gold imports (for the wedding season) are reported to be up 175% from a year earlier. Gold imports in India were down 39% in 2015, still at 558 metric tons (about 19% of worldwide production), so this year’s rebound could be a material influence on the supply/demand equation. The Chinese public, as well as Chinese governmental agencies (the People’s Bank of China being only one) continue to import physical gold at record amounts. It’s possible that India, as described, has at least temporarily dislodged China as the world’s largest importer. North American investors, within the US in particular, are showing a continued relative disinterest in physical gold and related securities.

When Alan Greenspan raised the fed funds rate 17 times, from 2004 to 2006, the price of gold went up by 62%, so higher rates do not prevent gold from rising. With the second rate rise behind us, and two more expected, the worst of expectations may be behind us, likely discounted by investors. This aspect, combined with the other factors discussed above, could provide a powerful influence on the price of precious metals. It’s possible, and even logical, that the gold price increase the last several days, from $1200 to $1230 per ounce, is a harbinger of the trend to come.

Roger Lipton

SEMI- MONTHLY FISCAL/MONETARY UPDATE – GOLD BEGINS TO SHINE AGAIN – WITH GOOD REASON !

articles, ,

2/1/17

SEMI-MONTHLY FISCAL/MONETARY UPDATE

The market for gold, the gold miners, and the general market as well, firmed up in January, as did our portfolio. Gold bullion was up 5.4% and the miners were up 15-16%. The factors that I discussed in our yearend report, describing the negative influences on gold during the fourth quarter of ‘16, all abated in January, as discussed below.

The negative influences on precious metal investments during late ’16 were: (1) a very strong stock market after the election. (2) Currency chaos in India, traditionally a very large source of demand for gold. (3) Consistent liquidation of physical gold from the bullion ETFs such as GLD (4) Higher interest rates and a strong US dollar, both of which affect the short term trading pattern for gold, though of less importance over the long term.

As we suggested might happen: During January the general stock market started to return to “reality”, with the new administration now expected to be predictably unpredictable, and Make Volatility Great Again. The economy has not yet strengthened, though consumer confidence survey’s are improved. The Indian economy seems to be adjusting to its currency adjustments, while US interest rates have stabilized and the US Dollar has retreated from its recent high. Lastly, liquidation from the gold ETFs has abated, though accumulation has not yet begun. Overall, the “ technical”  deterioration in the price of gold, as evidenced by the chart patterns, seems to have repaired itself, and many trading technicians would say that the gold price has now bottomed and turned upward.

I believe the next dose of economic reality will set in when the new administration tries to reconcile the spending promises with deficit concerns (from both sides of the political aisle). In one of President Trump’s few interviews since taking office, when questioned about his previous promise to cut government spending by 10% and the government workforce by 20%, at the same time target a balanced budget, he responded “A balanced budget is fine, but sometimes you have to fuel the well….a strong military is more important than a balanced budget…..Our country is in bad shape…we have to rebuild our country…our infrastructure, our roads…bridges, highways, schools…our country is in bad shape.” So much for a balanced budget any time soon.

Going back to basics, in terms of the reasons that we have gotten so heavily involved in gold related investments over the last several years:

Our government’s debt is almost exactly $20 trillion, excluding unfunded entitlements. It represents a continuing burden on our economy, and each additional point of interest represents $200B of annual interest expense (one reason why interest rates cannot go up too much, not with the Fed’s blessing at least). That’s $20,000,000,000,000. (Did you realize how many zeros there are?)  However, we all agree that the only hope is to “grow out of” this dilemma. A stronger economy, if it were to happen, could generate higher tax revenues, perhaps spending could be controlled, and we could begin to liquidate the debt.

So…the last estimate for the current year (9/30/17) deficit was about $500 Billion, and reality will no doubt be materially higher. However:  If we were to start to generate a surplus (at some indeterminate point) and reduce the deficit by $10M each day, it would take 5,479 years. That’s five thousand, four hundred, and seventy nine years. At $100M each day, it would only take 547 years. OK you say:  we have a large economy, and trickle down economics might at some point generate a surplus of $1B per day, $365B per year. If you believe it could happen, at the top of (a long term) business cycle, and the politicians wouldn’t find a way to “invest” it for the benefit of their constituents, it would only take 54.7 years of steady surpluses. Obviously, there has never been a positive business cycle for anything remotely resembling half a century. For additional perspective, President Clinton’s administration generated a surplus of $87B in 1998, $157B in 1999, $290B in 2000, and G.W.Bush had a surplus of $154B in 2001. We therefore averaged $172B of surplus for four years out of the last thirty six. That doesn’t give this observer much confidence that the current debt can be reduced materially in the normal course of economic, political, and social events.

My conclusion; The debt is too big, the order of magnitude is almost beyond comprehension. The only way to deal with it over the long term is by DEFAULT, either by liquidation through inflation, or outright cancellation. Either way, “money” and “assets” around the world will be restructured. Gold, as the ultimate money, will be one of the few assets to retain its purchasing power. The good news: After the fiscal/monetary “house cleaning”, when (not if) it happens, the sun will still rise in the east and set in the west. Life will go on, but the assets will be re-allocated. There are assets other than gold that will survive, such as well located real estate, sound businesses, diamonds and works of art. I continue to feel, however,  that gold related investments, as a liquid and time tested asset class, represent among the best values of all.

Roger Lipton

 

SEMI-MONTHLY FISCAL/MONETARY REPORT – WHAT’S THE RESULT OF $ TRILLIONS $ WITH NEGATIVE RATES

articles, , ,

SEMI – MONTHLY FISCAL/MONETARY REPORT – NEVER BEFORE IN RECORDED HISTORY – TRILLIONS WITH NEGATIVE INTEREST RATES – IS THIS CONSTRUCTIVE ?

While this is just one of the monetary milestones, and marketplace distortions,  we are witnessing, never before in 5000 years of recorded history has there been a period where interest rates were negative. This is not a geographically isolated or immaterial development, nor is it limited to short term securities.  Something like 35% of all the sovereign (governmental) debt that is outstanding now yields less than nothing, penalizing “savers” for their prudence. In a financial world  far more financially linked than ever before, these debt instruments are not issued by “banana” republics, rather by countries that include Japan, Germany, and Switzerland (and the U.S. is barely above zero).

Central Bankers remind me of too many Pychotherapists who, when faced with an unexpected or inadequate  response to prescribed medication, take the simplest, and apparently the most obvious, remedy: Just Increase the Dosage ! Another way to put it: “In a hole? Just keep digging!”

Since the financial crisis of 2008-2009, major trading countries have taken turns in  implementing various forms of monetary stimulus, including government spending, financial bailouts, transitioning from minimal interest rates to ZIRP (Zero Interest Rate Policy) to NIRP (Negative I.R.P.), to weakening their currencies.  Debt around the world piles up faster than respective GDPs, so it has become increasingly impractical to allow interest rates to rise, which in turn would wreck governmental budgets.  At the same time, the increasingly large stimulus programs have generated less and less productive growth. The “financial heroin” hit must become increasingly large to even approach the most recent short time “high”.  Of course, more than one Central Bank has expressed their hope that politicians would replace monetary measures with budgetary approaches. In essence, the Central Bankers have no bullets left, but THERE IS NO POLITICAL WILL, on either side of the aisle, to implement the necessary budgetary reforms. In a historical context, this is not new, or surprising. There has NEVER been an unbacked “fiat” currency that has survived. Our 1913 dollar, when the Federal Reserve Bank was established to control inflation, is worth less than $.03 today. In another 100 years, I have no doubt, it will be worth $.03 x $.03, and that’s close enough to destruction. Best to have your wealth in asset classes other than government issued paper money.

Books have been, and will continue to be, written, which describe the cause, the effect, the prescriptions, the “endgame”, the unintended consequences. We don’t know exactly how all this plays out over time, and the timing of our suggestions would be uncertain in any case, but some things we know. Major distortions to the “normal” marketplace are already evident. With all the monetary stimulus, banks are not lending, and businesses are not borrowing. Corporate executives would rather make an acquisition or buy back stock, than build a plant and take on long term employment responsibilities.  While the stated “unemployment rate” would normally indicate that we are at “full employment’, the jobs are temporary, relatively low paying, and the most stable group of workers has been those above 65 years of age. May have something to do with the fact that their savings are earning nothing, so they prefer to keep working. At the other end of the spectrum are the recent college graduates, burdened by student debt (often backed by Uncle Sam).

The ongoing Central Bank strategies have not worked in Japan over the last twenty five years, have not worked in Europe or the US over the last 8-9 years, and are running out of steam in China. Yes, a financial calamity was avoided in 2009, so that can be considered a Central Bank victory, but that’s getting to be a long time ago. Balanced and effective productivity enhancing measures have to be put in place, but the politicians and the Central Bankers seem to be calling the same old plays.

We believe that interest rates will remain negligible, if not negative, as far as the eye can see. We believe that Central Banks will be increasingly desperate to stave off deflation, as we have witnessed in Japan over the last twenty five years, Europe and the U.S. more recently. It hasn’t worked, it doesn’t work, and it will not work. We believe that gold related securities will continue their recent rise, as this reviled and (we believe) misunderstood asset class catches up with alternative investments. If someone tells you that there is not enough gold to back government issued paper  currency, as it once did in more productive times, it’s true. At $1,350/oz,  they are right. At $7,000/oz, they are wrong, One way or another, currencies around the world have to be “restructured”.  Without a sound currency, we will not have a sound economy.

I created several three minute videos on Youtube, relating to gold as an asset class, which can be accessed from the right side of our Home Page. Enjoy !

MONTHLY MONETARY UPDATE – GOLD BULLION AND MINING STOCKS MAKE NEW YEARLY HIGHS – BEST PERFORMING ASSET CLASS IN 2016

articles, , ,

MONTHLY MONETARY UPDATE – AUGUST 1, 2016 – GOLD BULLION AND GOLD MINING STOCKS MAKE NEW YEARLY HIGHS – BEST PERFORMING ASSET CLASS IN 2016

The general markets bounced back in July from the late June “Brexit shock”, supported we surmise by Central Bank assurances that they would do whatever it takes to support capital markets. More on that below.  Gold bullion was up 2.0% for the month and is up 27% for the year. Our portfolio outperformed gold bullion substantially for the month, as it has for the year to date.  So far this year, as we have explained in the past, the performance of the more volatile gold miners, rather than bullion itself, has affected our portfolio more than the price of bullion, since our options are “out of the money” and will increasingly contribute at higher bullion prices. The GLD options represent a modest portion of our capital and can contribute many times that if gold appreciates substantially.  We reiterate that the gold miners, while having made large percentage moves already this year, are still down very substantially from their highs, are still near historic lows relative to the price of bullion, and still have upside that is a multiple of current values.  In summary, we believe that our progress this year is just a start on the recovery from our multi-year decline.

There following points summarize the latest fundamental developments.

  • The economic news continues to be relatively lackluster, only about 1% GDP growth over the last 9 mos., ensuring continued low interest rates and accommodative monetary policy which is conducive to higher gold prices. Central Banks worldwide continue to take turns with various forms of stimulus. While our Fed has lately limited the support to continued historically low interest rates, Japan in particular is contemplating a new $200 Billion stimulus program, which would be the equivalent of more than $500 billion in an economy our size.
  • Accumulation of physical gold within gold related ETFs such as GLD flattened in July, still reflecting this year the most dramatic accumulation within the last 7-8 years. Meanwhile, Asian demand continues.
  • It is clear that major supply of physical gold from new mines is not on the horizon. There have been hardly any major discoveries (as opposed to 10-15 yrs. ago), variances and permitting can take a decade before production commences. Much higher prices would bring out more supply but production would still be a long way off.
  • China has clearly emerged as the center of worldwide physical gold bullion trading. Chinese banks are now part of the daily fix in London, a new daily fix price is about to be established in China, and the Shanghai Gold Exchange is by far the most active market for physical bullion. The Chinese government encourages the public to increase private ownership, the Peoples Bank of China (and other government agencies) continue their accumulation, and Chinese mine production (all of which stays in China) is the largest in world (16% of worldwide production).
  • Government debt, worldwide, at negative rates, has now grown from about $10 trillion to perhaps $13 trillion in just a month. We say again; this has not worked, does not work, and will not work in the future, creates all kinds of unintended consequences, and supports increased demand for gold. Our Fed, for one, has never raised interest rates in an election year, so a rate rise is off the table until December at the earliest, and, in any event, will not be a material influence whenever it happens.

It should be clear to all that our convictions have not changed. We are always available for your questions/concerns.