What We Said Then…What We Say Now

December 9, 2019

January 2019 headline article –
Will 2019 be the year of the big breakout for gold?

WHAT WE SAID THEN: “In each of the last three years, gold has gotten off to a strong start only to fizzle as the year moved along.  Will 2019 be the year gold finally breaks the pattern? A good many investors, fund managers and analysts think that 2019 might very well be the year when gold breaks the restraints and pushes to higher ground.”

WHAT WE SAY NOW:  Though we would not characterize 2019 as a breakout year, gold has certainly thrown off the restraints. As a result, it has been a very good year thus far.  Per Friday’s close (12/6/2019), gold is up almost 13.8% on the year even after accounting for last week’s selloff.  Silver is up 13.7% on the year. If the current gains hold through the end of December 2019, it will be gold’s best year since 2010!


Chart courtesy St. Louis Federal Reserve [FRED]
Source: ICE Benchmark Administration (IBA)

February 2019 headline article –
The $12 Trillion Federal Debt Bombshell
“Who on earth, or in global finance, will buy this looming mountain of Treasuries?”

WHAT WE SAID THEN: “The rhinoceros in the room could very well have been how the federal government will go about financing the $12 trillion in debt Goldman’s Beth Hammack earlier brought to the Treasury Secretary’s attention and what role the Federal Reserve intends to play in the process. China and Japan, America’s two largest financiers by far, have withdrawn from the market and there is no certainty as to when they might return. That leaves domestic U.S. private investors and financial institutions to fill the yawning gap and, failing that, the Federal Reserve with a new round of quantitative easing.”

WHAT WE SAY NOW:  Some call it ‘stealth QE.’ Others call it ‘QE Lite.’ The Fed itself will not admit to a new form of quantitative easing, but the numbers speak for themselves. Since September, according to a Bianco Research study, the Fed has injected nearly $324 billion into the monetary system in the form of overnight repo liquidity.  In addition, it is injecting another $60 billion per month in outright purchases of Treasury paper from commercial banks. Those purchases are scheduled to continue at least into the second quarter of 2020. Fed repo operations are on-going with many expecting even greater injections as year-end book squaring comes into play.  As for the national debt, it pushed over the $23 trillion mark in November with budget experts warning that we may be entering an extended period of deficits exceeding $1 trillion annually. All of which brings us back to the rhinoceros in the room, the central bank policies required to deal with it and their potential repercussions in financial markets.


Chart courtesy of Bianco Research

March 2019 headline article –
Gold In The Age Of High-Speed Electronic Trading

WHAT WE SAID THEN: “Because gold does not rely on the performance of another party, it is detached from the matrix of interlocking counter-party risk and occupies a unique place on the financial balance sheet as an asset of last resort and the final arbiter of value.  That is why nation-states and central banks hold large amounts of it on their own balance sheets and why funds and institutions are more and more moving to it as an offset against other trading strategies. Investors have always viewed gold as a reliable hedge against inflation and deflation. In the years to come, they might very well come to know it as an effective hedge against computer-generated financial mayhem as well.”

WHAT WE SAY NOW: In an insightful and entertaining piece recently published at the Daily Reckoning website, James Ricards writes “Stock markets are no longer traded by humans with different perspectives. Stocks are traded by robots, and robots are dumb . . . They act automatically based on source code and algorithms developed by coders and applied mathematicians who don’t necessarily know much about the psychology of markets. Robots buy or sell based on headlines or keywords.”  Though we have yet to experience market mayhem the result of non-human thinking, we do not back down from our previous assessment. “This is a good time,” says Ricards, “to lighten up on equity exposure and reallocate to bonds, cash and gold.”

July 2019 headline article –
Summer doldrums turned upside down
Gold’s June upturn separates 2019 from the pack

WHAT WE SAID THEN:  “Gold trading usually gives pundits, dealers, and investors a break at some point over the summer,” observes Adrian Ash at BullionVault. “But like 2007, 2008, 2009, 2011 and 2016…this year is proving no time to take your eye off the market. And if 2019 is going to see an old skool summer lull in gold trading, it won’t feel much like a discount up at these prices.” With a range of economic and geopolitical issues preying on investor psychology – particularly at the funds and institutions that have fueled the upside this year – the summer of 2019 might go down as one of those years when we bypass the annual slowdown. Last year, gold hit a low of $1178 in mid-August. By December 31st, it was trading at the $1280 mark.

WHAT WE SAY NOW: At the time the July newsletter hit readers’ e-mail inboxes, gold was trading in the $1385 range. By the end of August, it was trading at $1540 per troy ounce. In the process, we had indeed bypassed the summer slowdown. Since then, things have settled down. Now, as pointed out in last month’s newsletter, we are entering a new phase of the seasonal cycle in which gold prices historically turn to the upside. That upturn begins usually in the second half of December and carries through May of the following year.

(Continued below)


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August 2019 headline article –

Gold Responds To The Trade And Currency War
At all-time highs in six of the world’s top currencies

WHAT WE SAID THEN:The charts posted immediately below [not shown] tell one of the quiet, but perhaps most important stories unfolding in the world of high international finance. Gold has appreciated sharply in the currencies of all of the world’s top economies.  In five of the top eight economies – the United Kingdom, Japan, Canada, Australia, and India – it is priced at all-time highs. In short, as currencies race for the bottom, gold is racing to the top. Investors everywhere are moving to insulate their portfolios against the combined threats of recession, plummeting yields, currency depreciation, and stock market instability. An over-arching nemesis not likely to relinquish its place any time soon has unleashed those four horsemen – the burgeoning trade and currency war.”

WHAT WE SAY NOW:  Though gold is now down somewhat from its peak against the currencies mentioned (as shown in the chart below), the longer-term demand trend remains intact and for the same reasons mentioned above.  Though gold has taken pause, the race to the bottom continues for national currencies and citizen-investors continue to buy gold as a precautionary measure.  As 2019 draws to a close, gold is up 16.6% in Indian rupees; +10.5% in British pounds, +12.7% in Japanese yen; +16.5% in Chinese yuan; +10.6% in Canadian dollars and +18% in euro (all as of December 6, 2019).

Chart courtesy of the World Gold Council

September 2019 headline article –
Bank of England’s Carney delivers dollar shocker at Jackson Hole meeting

WHAT WE SAID THEN: “The dollar at the moment is something of a Humpty Dumpty in the global monetary system – sitting on his wall oblivious and seemingly immune to all that goes on around him.  Whether or not there will someday be a Great Fall remains to be seen, but increasingly, as Carney’s speech illustrates, forces are lining up against it.”

WHAT WE SAY NOW:  In the few short months since posting that observation, we have seen a continued movement among various central banks out of the dollar and into gold and other currencies. The World Gold Council recently reported central bank gold buying at its highest level in fifty years. Though dollar remains something of a Humpty Dumpty oblivious to all that goes on around him, the greenback has been in a minor downtrend since early October, but some believe the downside could gather momentum as we enter the new year. According to a recent Bloomberg report, Goldman Sachs last week advised their clients to diversify their bond holdings with an allocation to gold. “Gold,” it said, “cannot fully replace government bonds in a portfolio, but the case to reallocate a portion of normal bond exposure to gold is as strong as ever.”  The Wall Street investment bank predicts gold will reach $1600 sometime in 2020.

 

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Michael J. Kosares is the founder of USAGOLD and the author of The ABCs of Gold Investing – How to Protect and Build Your Wealth With Gold. He is also editor and commentator for USAGOLD’s Live Daily Newsletter and editor of the News & Views monthly newsletter.

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Michael J. Kosares has over 40 years’ experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News, Commentary & Analysis," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings. Visit his website at www.usagold.com.

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