This week was a decisive time in the markets. It was the first big data month since the Fed’s ill-guided interest rate hike. Investors are now considering which way stocks will move next and whether or not the gold pullback is over.
On the domestic data front, the nonfarm payroll jobs number missed horribly (posted 160,000; expected 200,000-215,000). The slowdown from the first quarter of 2016 (last week Q1 GDP came in at 0.5%) does not appear to be over yet.
Companies such as PacSun, SunEdison, Peabody Coal, Quicksilver, and Wet Seal have all filed for bankruptcy. Even INTEL reported it will be cutting 11% of its workforce. Expect more of the same to follow.
The jobs number, if read between the lines, tells a grim tale. The high-paying manufacturing sector is dying and the low-paying service sector is booming. The loss of those high salaried oil fracking jobs, along with the business they created, is going to show sooner rather than later.
Is this sustainable?
With the GDP anemic at just 0.5% and business activity stalling, investors are finally realizing that lower rates (this author believes negative rates) will be ahead in the United States.
Gold eclipsed $1,300 this past week for the first time in two years. Silver climbed towards $18.00, before dropping back to $17.50. The US Dollar Index has broken below 94 and is poised to drift lower. Now that dismal economic data is making Wall Street question the Fed’s decisions going forward, expect gold to continue its upward movement.
As the idea of a rate hike has dissipated, the dollar (orange) has fallen as investors turn to gold (blue)
As gold continues its path upwards (which this author expects will continue much higher), mining equities will follow and continue to generate leveraged gains.
In April, as the chart shows, the 3 largest mining ETF’s outperformed the GLD by 4.5x. The longer gold simply stays around the modest $1,250-1,300 price range, the more cashflow companies will make – warranting higher valuations.
The Fed’s Dilemma
The Fed’s dilemma is that GDP can only grow one of two ways: increase production or increase the working population. These are structural problems – not cyclical. Structural problems are, for example, what Japan has dealt with since the early 1990’s. No amount of monetary easing (a cyclical cure, as John Maynard Keynes stated) has revived their demographics or growth. Quite simply, the Fed can not print youth.
The U.S. is well below its long term productivity rate of 2.1%.
And with the only shining light for the Fed to raise rates now growing dim, domestic employment numbers, one cannot see any justification for further hikes in the discount rate.
The train of thought since mid-2014 was predominantly that the economy is getting better and growth is coming, therefore the Federal Reserve will raise interest rates (take the training wheels off). And as they raise interest rates, cash will soon yield a return. Thus, there is no point in owning gold but a strong case for holding dollars instead.
Economic historians will scratch their heads when reading of these times.
Ironically, this very premise caused the dollar to strengthen to levels that the underlying US economy could not justify, which is now slowing growth (remember, as the dollar strengthens, so do dollar denominated debt burdens). The Fed has feared deflation over inflation, and with the economy stalling from all fronts, expect them to turn course – cut rates – and even turn on the printing press once more.
Important Gold News from This Week:
1. The Fed Has No Idea Where its Taking All of Us
A few weeks ago, the last four Federal Reserve Chairmen were gathered together for a roundtable discussion. Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen all answered various questions about the economy and the US dollar. As usual, they used open ended answers and propagandized that US domestic economy is all well. The room got quiet when the moderator had asked Ben Bernanke how exactly does the Fed plan to unwind its massive $4.5 trillion portfolio that was used to subsidize growth?
Bernanke: “Well, fortunately, I don’t have to do it.”
He turned to Janet Yellen, our current Fed Chairman.
Yellen: “He left that to me.”
The audience erupted in laughter at the quips. Ignorant to the fact that the laughs now will be cries later. Fortunate for Bernanke indeed as printing the money and cutting rates to nothing was easy. The extremely difficult, most likely impossible, will be reversing his actions without opening Pandora’s Box. Follow this link to read more from the roundtable and problems the Fed will face – sooner rather than later.
2. Another Billionaire Investor Goes Long Gold
Stanely Druckenmiller, legendary billionaire investor, recently at an investment conference told attendees to dump their equities. With skepticism in stock markets valuations, the choices of the Fed and a slowing Chinese economy, he is bearish on the economic outlook and expects more wasted stimulus.
“The conference wants a specific recommendation from me. I guess ‘Get out of the stock market’ isn’t clear enough,” said Druckenmiller from the conference stage in New York. Gold “remains our largest currency allocation.”
Click Here to read more from Druckenmiller and his bearish outlook and why he advocates owning gold.
3. Jim Grant Wonders When The Crowd Will Realize The Fed Has Lost Their Marbles
Jim Grant, Editor-in-Chief of Grant’s Interest Rare Observer, boldly stated that the “government’s money is a short sale.” Said simply: be bearish on the US dollar, which otherwise means be long gold.
With so much debt accumulated, domestically and internationally, it is stealing from future growth at the expense of growth now. A dollar borrowed today for consumption in the present will have to be paid for (plus interest) in the future. Example: an individual can forego saving his money to make a purchase and instead buy a car today through financed debt. Future income will now go towards paying for the car (plus interest) which leaves him with less to spend in the future on other goods. Thus, everyone financing cars today at historic low rates will not buy a car next year – curbing future demand.
As the saying goes, there is no free lunch. The Fed has pushed rates down to force consumption in the present for near term growth at the expense of long term growth.
Click Here to read Jim Grant’s outstanding article on the case for being bearish on the US dollar and future growth – along with the insanity of Fed policy and recommendation to buy gold.
4. China Setting the Foundation for a Gold Standard System
As of April 19th, the Shanghai Gold Fix (a pricing mechanism designed to price gold in Chinese Yuan) began. This is threatening to the long standing of the London Gold Fix – the West’s dominant hold on the gold market. The most interesting aspect of the Shanghai Exchange is that it has immediate physical delivery of its gold, contrary to the COMEX and its paper gold contracts.
- The first step by the Chinese was to accumulate gold, which it is doing in droves.
- The second step was to price the gold in their domestic currency, the Yuan, which separates them from the absurd Western paper gold manipulations.
- The third step can be speculated upon because of such words by Dr. Zhou Xiaochuan, Governor of China’s Central Bank, from an essay written in 2009: “There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system… Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply..“
What happened after the recession of 2008? Gold soared. Is it possible the Chinese are aware of their own housing bubble? If the inevitable bursting of this bubble can’t be safely avoided at this point, are they trying to get gold in their citizens hand’s for offsetting the coming bust? If Chinese real estate and stocks fall, but gold rises, that will protect purchasing power and asset collateral. Follow this link to read what China has done and possibly plans to do with the gold market right under the nose of Western powers.
5. Gold & Silver Miners – Crushing Earnings Expectations
Since January 2016, gold has rallied over 20% and silver over 25%, along with platinum and palladium following. But the real story has been with precious metals mining companies. The last 4 years have left gold investors bruised and battered along with mining companies on life support.
Thus, companies trimmed their fat or in a wave of corporate Darwinism, the weak shall perish (default) or be eaten (acquired). And because of this, many that were left standing are operating with more efficiency and have adapted for making money within a $1,000 gold environment. Imagine what they can do at $1250 or $1,500 gold.
This is the first full quarter (3 months) of rising metal prices in recent history. With many miners having cut costs, finished construction of mines, and cleaned up their balance sheets during the bear market, how have they fared this far? Click Here to read last week’s earnings of major mining companies, how they topped analysts estimates and what investors can expect going forward.
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