-- Published: Tuesday, 15 January 2019 | Print | Disqus
By Craig Hemke
For each of the past several years, we've written January posts that helped to serve as a road map for the year ahead. Though crystal ball gazing is an inexact science, on balance we've done a pretty good job with these forecasts. As 2019 dawns, we thought we should give it another try today.
Let's begin with where we've been...
After the election of Trump in November 2016, a narrative was quickly assembled and shoved down our collective throats. This narrative included a strong dollar, a bursting of the bond bubble, a roaring stock market and falling gold prices. We felt this was mostly garbage, and we wrote about it here: https://www.tfmetalsreport.com/blog/8103/questioni...
Heading into 2018, the establishment theme was a strong dollar that would drive the U.S. economy and stock market forward. Again, this was all supposed to lead to falling gold prices. We didn't buy it, and instead listed three primary themes that would drive events through the year. You can read all about it here: https://www.tfmetalsreport.com/blog/8755/three-the...
So, how'd we do?
Again, on balance we did quite well. Yes, the stock market rose in 2017, but the dollar fell, the bond market bubble did not burst and gold prices gained more than 10%. And last year, despite all of the dollar bullishness that permeated and drove most markets, the dollar index only gained 4.6%, and by late in the year, the Political Risk that was listed as Theme #1 was definitely taking hold and driving the dollar lower. Yes, the price of gold fell in 2018, but in the end, the decline was less than 3%—a far cry from the doom and gloom so many generalists had predicted.
Thus here we are in 2019, and the time has come again to post some long-term projections. What excitement will the year bring, and how will all of this impact gold and silver prices?
Well, if you're a member of this site, then you likely already know where we're headed with this. If you're not, then perhaps the title of this post gives it away. To put it succinctly, the year 2019 will closely resemble the year 2010 in regards to the economy, the dollar and Fed policy. Most importantly, these factors will all combine to drive gold and silver prices to their best year since 2010—when COMEX gold rose nearly 30% and COMEX silver rose by an amazing 83%! We may not be able to duplicate these gains in 2019, but we're going to do pretty well. That's almost certain.
And why do we say this with such confidence? Again, the answers lie in the macro-similarities to 2010. To wit:
- The U.S. economy began 2010 in a recovery mode from The Great Financial Crisis. The mainstream media banged on incessantly about "green shoots", and GDP growth was positive. In fact, Q2 of 2010 saw GDP grow by 3.7%, Q3 was +3.0% and Q4 was +2.0%.
- The Fed had initiated the first QE program to monetize the debt in March of 2009, but it was completed in 2010. It was generally considered a one-off and a success—and also never to be needed or repeated again.
- And the dollar rose, as the U.S. economy was perceived to be recovering faster than the rest of the world. The dollar index posted a 2010 gain of 1.5%.
For the just-completed 2018:
- The U.S. economy was reported to have grown nicely, with gains of 2.2% in Q1, 4.2% in Q2 and 3.3% in Q3.
- The Fed hiked the fed funds rate every quarter to the point where this overnight rate is now at 2.50% and the full yield curve is essentially flat.
- And the dollar rose, as the U.S. was perceived to have the strongest developed economy. As mentioned above, the total gain for the dollar index in 2018 was 4.6%.
Turning back to a decade ago, the U.S. never made it to renewed prosperity in 2011. After peaking in Q2 2010, the U.S. economy began to visibly slow and the dollar began to decline with it. Similarly, a funny thing happened on the way to higher interest rates and balance sheet normalization in 2018. Just as in 2010, the U.S. economy began to slow and the dollar began to decline.
And now here we are, with a sense of deja vu all over again. Under similar circumstances, the Fed reverted to their original intentions in November of 2010 and announced what was dubbed "QE2", a second QE program that promised another $600B in bond buying. This plan allowed the Fed to buy even more garbage securities from their member Banks, as well as monetize an additional $300B in U.S. debt. The market reaction was swift and consequential by late 2010.
Through 2011, the dollar fell sharply and a crisis of confidence grew to the point where in August 2011, U.S. gridlock, government shutdown and debt ceiling debates led to the first S&P downgrade of U.S. credit quality in history.
As you'll recall, the dollar prices of gold and silver skyrocketed. As 2010 began, COMEX gold was trading near $1100 per ounce. By early September 2011, it reached $1920. COMEX silver was even crazier. It began 2010 near $17 and was still just $18 in early August. However, the crisis of confidence brought about by the reversal of Fed policy (QE2) and an epic short squeeze of The Banks in early 2011 led to a peak of $48 by late April 2011. Yes, that was a gain of nearly 150% in about eight months.
Can this happen again? Of course it can. A better question is: will it happen again? And now we get to the point of this post.
As laid out above, economic conditions and Fed policy as we begin 2019 are very similar to what we experienced in 2010. This alone should get your attention. However, consider all of the additional extenuating circumstances at present:
- Political discord in the U.S. is at levels unseen for decades, with the very high likelihood of congressional investigations and even impeachment of the president. Not only will this serve to create massive legislative gridlock, it will also derail any hope and confidence the American consumer may have for the year ahead.
- Falling consumer and business confidence will lead to economic slowdown, lower tax revenue at all levels and falling home prices.
- All of this leads to an exacerbation of U.S. government debt levels. With trillion dollar deficits projected through the next decade (and these are based upon 2+% economic growth!), the U.S. national debt will explode, along with the interest costs to service this accumulated debt.
- And this will matter in 2019. The total debt in 2010 was just $12B, and there was hope that the U.S. could "grow out of it". The next recession will finally bring with it the realization that that's not possible.
Ultimately, The Fed will be forced to reverse their current policy of rate hikes and balance sheet reduction. Will they hike the fed funds rate again in March? I have no idea, and frankly, I couldn't care less. They will either not hike in March and begin a move toward rate cuts and QE by later this year OR they will hike fed funds in March and begin a move toward rate cuts and QE by later this year. So what's the difference?
COMEX gold and silver have already begun to decipher the situation, and THIS is the reason they have begun to move higher after bottoming for good back in November. Oh sure, the stock market weakness of December helped with a few extra bids, but that influence was minor compared to the awakening that gold and silver have had to the pending Fed changes and fiscal crises of 2019.
We've often stated recently that the calendar year of 2019 will see COMEX gold and silver post their best gains since 2010. Of this, we are completely certain. Will these gains be 30% for gold and 80% for silver? Maybe, but probably not. We were early by about six months in projecting the economic turn last year, and we may be early by six months in projecting the Fed's turn in 2019 too. However, what IS certain is that The Fed will eventually be forced to reverse course, just as they did in 2010, and when they do, the reaction in COMEX gold and silver will be even greater than it was in 2011.
Why? Because this time there will be no reversal of course and confidence. The Bernanke Fed was able to convince the world that the $1T of QE3 in 2013 would be beneficial, and lead to a stronger dollar versus the ECB's euro and the BoJ's yen. Confidence in the dollar returned, and the metals fell dramatically. Not this time. Eight years down the road have led us to a place where, once the realization sets in that the central banks have no broad plan and that all they can do is create fiat currency, the COMEX metals will soar and then remain on an upward trajectory for the foreseeable future.
Of course now, don't go thinking that this will be easy and that The Banks will simply stand down and allow prices to run. Experience has taught us that this will NEVER be the case! Instead, expect COMEX precious metal prices to resume the typical bull market pattern that we witnessed from 2002-2011. Price will move two steps forward while Specs accumulate longs and Banks issue shorts, and price will fall one step back as the inevitable "Spec Wash and Rinse" occurs. However, the overall trend and momentum will be undeniably higher for all of the reasons laid out in this post.
So, go now and begin to plan accordingly. Diversify your portfolio by following the lead of the Chinese, the Russians and many other sovereigns with dollar reserves. Perhaps you might accumulate a few mining shares, after doing some thorough research and due diligence. And, most importantly, add to your stack of physical precious metal while you still can and while prices remain at these affordable levels.
Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.