how much gold – if any – should you own?...kyle bass, you know he expects a financial crisis to...
TRANSCRIPT
How much gold – if any – should you own?
The question above lies at the core of Real Vi-sion’s recent series The Big Story: Gold and the Dollar.
The host of this much watched series, Brent Johnson of Santiago Capital, who is a big believer in gold. He leads off the film with a bold statement:
“Gold should be the cornerstone of most people’s – if not everyone’s - portfolios.”
However, in the short-term he believes we’re due for some headwinds.
“While I have no doubts that gold will move to all-time highs in the years ahead… and probably go much higher than many people think is possible, I have it for a slightly different reason than most people in the gold world do. As a result, I’ve been accused of being a strange gold bull from time to time.”
He believes that it’s going to be a strong dollar which causes all the problems which eventually lead to gold’s rise, as opposed to the more traditional view of high levels of inflation due o a deprectiating currency.
In this issue of 20/20, we’ll explore the important drivers of the gold price. We’ll look at the surprising data on the sales of physical gold coins in 2017. And we’ll define the key price level that, if breached, should confirm a gold bull market is underway.
But first… why gold?
Why are we talking about a yellow rock that “just sits there,” as gold hater Warren Buffet is fond of saying?
Speaking with Real Vision recently on the merits of gold, renowned money manager Bill Fleckenstein summed it up succinctly: “Gold is essentially an investment that correlates with lack of confidence in Central Banks.”
Humans have used gold (and silver, its more volatile cousin) as money for thousands of years. It has retained its value through the rise and fall of governments, depressions, and wars. The same cannot be said for paper fiat currencies like the U.S. Dollar, Japanese Yen, or Euro.
It was Aristotle who first described the characteristics of sound money: durability, divisibility, consistency, conve-nience, and having intrinsic value. Gold passes this five-point test. But it also possesses a crucial sixth characteristic: it cannot be created from thin air.
This is where government paper currency falls horribly short.
As you surely know, world governments have created tril-lions of currency units since 2008. Under euphemistic terms like Quantitative Easing, they’ve created this new money to stimulate global economies.
Historically, when governments & central bankers have engaged in currency dilution, their currencies have lost value. Sometimes slowly, like the U.S. dollar’s 97% decline in purchasing power since 1913. Or sometimes rapidly, like the Zimbabwe Dollar’s 66,000%+ inflation rate in 2007. So how much gold you should own?
That depends. How much trust do you have in governments and central bankers?
“It really comes down to simple math. At the end of the day, global debts are just too big. A reckoning day is coming and when that hap-pens I think gold is going to be a beneficiary of it.”
These are the words of Brent Johnson, who takes us on this journey to see if the bear market is really over or not. Many agree that the over-indebtedness of world govern-ments was a key cause of the 2008 financial crisis. But since then, government debts have only gotten worse.
According to data from the World Bank, global debt to GDP has nearly doubled since 2007. Data from Pew Re-search shows that the governments of advanced countries have increased their borrowing the most. Since 2006, US government debt to GDP is up 67%... France’s is up 52%... and the U.K.’s is up an incredible 117%.
But government mismanagement is not the only driver of the gold price. Demand for physical gold is also important.
Joining Johnson on Real Vision’s “Gold and the Dollar” series was Simon Mikhailovich, Co-Founder of Tocqueville Bullion Reserve. He came armed with surprising data on the U.S. Mint’s gold coin sales. It paints a clear picture: business is horrible for U.S. gold coin dealers right now.
From 2011-2016, Simon points out, gold coin sales were stable. The mint more or less sold 1.2 million single ounce gold coins per year in that time.
But in 2017, gold coin sales have fallen off a cliff. Through the end of September, the U.S. mint has sold only 310,000 1 oz. gold coins. About half of those sales occurred in January. In recent months, buying has totally dried up. The U.S. mint sold just 6,000 1 oz. coins June.
“Not only are people not buying coins… they’re selling them back” to coin dealers, Simon noted.
The statistics published by the World Gold Council confirm that investors’ appetite for physical gold is unusually weak. In the first 6 months of 2017, overall investment demand for physical gold is down 34% year-over year. And the demand for gold ETF products is down 76% in the same time.
What to make of this? It’s clear that the public isn’t interested in owning physical gold right now. This in stark contrast to 2011, when investors were enamored with all things gold. You may remember the TV and radio commercials urging people to sell their gold necklaces and bracelets for cash.
That intense public interest turned out to be a contrarian indicator. Gold peaked in the summer of 2011, and its ten year bull market came to an abrupt end.
Will the public’s indifference to gold today also prove to be a contrarian indicator? It’s certainly possible. The public will often lose patience with an investment at the exact wrong time. Since gold coin sales fell at the beginning of 2017, the gold price is up around 12%, outperforming the stock market.
As legendary trader and frequent Real Vision guest Peter Brandt points out, this price action has led to a critical question. Was the bearish 2011-2016 price action a temporary correction in a primary bull market? Or is the bullish price action since late 2016 just a temporary rally in a primary bear trend? Only one of these two can be true.
Brandt, who is one of the best traders alive today, calls gold the “purest charting market of all.” Gold produces no cash flows, so cannot be valued like a stock or bond. Its price is purely a function of people buying or selling it, which makes it ideal for chartists.
With that in mind, Brent Johnson welcomed accomplished chartist and trader Mike Oliver to Real Vision’s “Gold and the Dollar” series. Oliver emphasized that, based on his momentum models, gold is already in a bull market. However, he points out that many investors may not realize this until gold clears the important $1,350 level. For this reason, gold should “launch,” Oliver says, after a weekly close above this level.
Also bullish on gold – but slightly more cautious in the short term – is Ronald Stoeferle from Incrementum Advisors. He believes we’re at the beginning of a new bull market for gold. However, he’s “not extreme-ly bullish” for the rest of the year.
The action in the gold/silver ratio is a main reason behind his cautious stance. According to Stoeferle:
“The gold/silver ratio is a great indicator for the future price of gold. In a strong gold bull market, silver should be outperforming gold.”
This isn’t happening yet. The gold/silver ratio continues to hover near its highs of 80. If you’re waiting for an “all-clear” signal to buy gold, this is an indicator to watch.
Finally, although he’s not a raging gold bull yet, Stoeferle shared his current strategy. He’s “keeping his powder dry,” and using price weakness to accumulate mining stocks, especially silver miners and junior miners.
“Mining stocks are the most inflation sensitive asset class around,” Stoeferle says. “I’m feeling pretty confident with this strategy. Nobody is really prepared for an inflationary crisis.”
We’ll leave you with a fascinating thought. One of the chief arguments against gold is that it doesn’t yield anything. But as master investor Kyle Bass has pointed out on Real Vision:
“With the entire world going to negative rates, on a relative basis, gold is probably one of the better currencies to own.”
We never thought we’d see the day when a 0% yield was a selling point…
See you next week.
The shares outstanding has exploded higher, far in excess of the drop in volatility. Much of this is “short interest”. Volatility has become the asset, rather than simply the derivative of the underlying asset. Does the tail now wag the dog?
This past Tuesday marked the end of Chinese “plenum,” the annual meeting of China’s highest ranking Communist Party Officials. Big decisions are often made during this glorious gathering of bureaucrats. As just one example, the Chinese government decided to end its infamous “one child policy” at the 2015 plenum. This year’s plenum ran from October 18 – 24. This spotlight on politics meant the markets in China were quiet. The politicians prefer it that way. They don’t want the pesky pseudo-free market distracting from important state business.
Now that plenum is over, it wouldn’t be surprising to see renewed volatility in the Chinese markets. In fact, if you’ve been watching our series with master investor Kyle Bass, you know he expects a financial crisis to hit China soon.
Bass is betting that the Chinese government will devalue its currency, the Yuan. Exports account for a huge 40%+ chunk of China’s economic activity. A cheaper Yuan would relieve economic pressure by making Chinese goods cheaper abroad.
But so far, China has kept this weapon holstered. In fact, the Yuan is up around 5% in 2017.
President Trump will not be pleased if China devalues the Yuan. A weaker Yuan means Chinese goods will be cheaper in the U.S., potentially crowding out U.S. competitors. Trump has repeatedly blamed China for stealing U.S. jobs by weakening its currency.
However, he can’t seem to fully make up his mind on China. While campaigning, he promised to put China on the naughty list of “currency manipulators.” So far, he has not kept this promise.
But more recently, Trump has threatened to place tariffs on Chinese imports to the U.S. A significant Yuan devaluation would greatly increase the odds of tariffs. And tariffs always carry the possibility of starting a trade war…
Should economic warfare breakout, China holds significant leverage over the U.S. As we covered a few weeks ago, China is the second largest holder of U.S. Treasuries, trailing only the Federal Reserve. Importantly, the Fed is now a net seller of Treasuries after it recently begun unwinding the massive purchases it accumulated during Quantitative Easing.
China has long been an important buyer of U.S. debt. But with the Fed stepping back, it now holds even more sway. If Trump slaps a tariff on Chinese goods, watch for China to retaliate by dumping Treasuries.
New data suggests the U.S. is increasingly vulnerable to Chinese selling of Treasuries. According to Bloomberg, the U.S. government posted a $666 billion deficit for its just-ended fiscal year – its worst deficit since 2013.
This is in large part due to tax receipts coming in lower than expected. Trump’s tax cuts, if they’re ever passed, would make this shortfall even worse. None of this is shocking news; the U.S. has been spending more than it takes in for decades. But the simple fact is it must borrow (by issuing Treasuries) any amounts it can’t gather through tax revenue.
With Chinese buying potentially drying up and the U.S. needing to issue more debt, U.S. interest rates are at risk of being squeezed higher from both the demand and supply side.
The U.S. could be staring down the barrel of its first significant increase in interest rates in many years. All else equal, higher rates attract investment into a country. So it’s a good bet that surging U.S. rates would lead to a surging U.S. dollar. And a stronger dollar would exacerbate any weakness in the yuan…
As you can see, there are many angles to this economic chess match. It’s possible that the Chinese government wants to see a stronger dollar, since it would result in a weaker yuan without the Chinese government having to take overt action.
In any case, these are by far the two largest economies in the world, and any conflict would reverberate through world markets. We’ll be watching closely.
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CASH HELD BY US NON-FINANCIAL COMPANIES TOTALED $1.84 TRILLION AT THE END OF 2016 (MOODY’S INVESTOR SERVICE JULY 19TH 2017)
CASH AND DEPOSITS FOR JAPANESE NON-FINANCIAL FIRMS SURGED TO A RECORD 255 TRILLION YEN ($2.3 TRILLION) AS OF END-MARCH (REUTERS JULY 20TH 2017)
US MKT CAP = $24TRNJAPAN MKT CAP = $3.6TRN
questionanswer
Milty, Be straight with me, are we going to see another massive fall in the markets?
The answer is always ‘Yes’. The real question is ‘when?’. Crashes happen a lot more frequently than people believe but that doesn’t mean we are due for one immediately. Our recent Edge of the Cliff piece shows that many of our contributors are nervous about extended valuations but that doesn’t mean a correction is coming tomorrow. What it does mean is that you need to be aware of the rising possibility that the amazing bull run we have seen over the last several years comes to an abrupt halt. Somebody once said that you can predict what will happen but you should never say when it will happen and I’m smart enough to heed those words. All I will say is that there will definitely be another crash in my lifetime - of course, with me being made from 100% prime Redwood, my life expectancy is in the hundreds of years so that’s not much help - and you’d better have a plan for what to do when it happens so you don’t get caught flat-footed. Download the free Edge of the Cliff chart pack to get a few ideas and opinions from guys much smarter than me.
Milton
What’s hot on Real Vision this week…
WHO
WHAT
WHERE
WHEN
WHY
HOWThe esteemed Dr. Harald Malmgren, who has been a Senior Advisor to four U.S. Presidents
Dr. Malmgren shares his experiences in the highest levels of government during the crucial hours of the Cuban Missile Crisis
On Real Vision’s Adventures in Finance podcast
October 12 on Real Vision
With the U.S. and North Korea threatening one another, the risk of nuclear conflict hasn’t been this high since the worst days of the Cold War
Dr. Malmgren was a key member of JFK’s team tasked with dealing with the Russian nuclear threat. Drawing on this experience, he suggests what actions the U.S. should take against North Korea, surmises what North Korea’s true motivations might be, and speculates on how North Korea could directly attack the U.S. homeland.
