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’sselloff. 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)
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 China and Japan, America’s two largest financiers by far, have withdrawn from the market and there is no certainty as to when they might return.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 ‘stealthQE.’ 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.
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 atthe 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.”
WHAT WE SAID THEN: “Gold trading usually gives pundits, dealers, and investors a break at some point over the summer,” observes Adrian Ash atBullionVault. “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 inlast month’s newsletter, we are entering a new phase of the seasonal cycle in which gold prices historically turn to the upside. That upturnbegins usually in the second half of December and carries through May of the following year.
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