Reflections In A Golden Eye

Summer 2018: On the law of long-term time preference and gold ownership

“The Law of Long-Term Time Preference – Those who plan, invest and execute long-term win. Win-win decisions, looking to the long term with short-term work and sacrifice, are historically the tickets to success in all areas of life – short-term sacrifice for long-term benefits, deferred gratification rather than instant gratification. This is the difference between wealth and poverty, between class and trash. Those who make primarily fear-based, ego-based, selfish, win-lose, lose-lose, emotional and/or short-term decisions as their primary mode of operation in life nearly always end up miserable, often as losers in a comprehensive sense in life. Such people are walking tornadoes to be avoided.” – R.E. McMaster, A Layman’s Guide to Golden Guidelines for Wise Money Management [Link]

Successful investors have a philosophy, usually carefully cultivated, that they rely upon in their investment decisions no matter what happens in the markets in the short-run.  Successful investors are rarely shaken by short-term events and, rarer still, guilty of short-term thinking. USAGOLD has always nurtured the belief that gold should not be purchased principally as a speculative investment, but more as an asset accumulated for long-term asset preservation in the form of coins and bullion.  That, in fact, is a viewpoint it shares with the bulk of its clientele. Thus, when we have a sell-off like what occurred this past month, experienced gold investors usually view those events as either buying opportunities or as part of a normal market process.

On getting out of stocks and into gold

"We find the correlations strong enough to allow the use of DSI [Daily Sentiment Index] as a leading indicator and as a timing tool,' [Jake] Bernstein declares. He’s quick to point out that DSI isn’t the end-all, be-all of market indicators. 'DSI is not perfect. However, it does have immense value as a warning system. Perfect or not, the DSI for gold has been sounding a klaxon for more than a month. Small traders have turned bearish on bullion in a big way. Just look at the DSI’s three-day moving average in the chart below. It submerged below 25 in early May and has been under water ever since." – Wealth Management.com/Brad Zigler/7-2-2018

This is an interesting observation/indicator from Jake Bernstein.  For months we have been following the consistent global involvement in the gold market among funds and institutions  as buyers and wondered why private investors remained on the sidelines. Underneath it all, in our estimation, the chief driving factor to the complacency is not so much that the public is bearish on bullion. It is more the belief that modern trading systems will allow a quick exit from the stock market when that particular klaxon rings (as in, for example, a 1987-style market crash). . . . . and an equally quick entrance into the gold market.

Investors should consider that they may be able to get out of stocks, but at what price? And that they might be able to get into gold and silver, but once again – at what price? Modern online trading systems might end up working just fine, but the offered bid and ask prices might be something else again. Back offices will adjust quickly to failing market conditions. The institutions and funds through long experience are well aware of how quickly bids can drop during a general market breakdown and are planning accordingly.  The public, for better or worse, is obviously putting their faith in technologies that in the end will fundamentally still mirror market conditions. . . .and in a New York nanosecond.

On emerging countries new debt crisis and its potential effect on gold demand

Over the past several weeks, a new debt crisis has begun to pick up momentum among emerging countries. It is likely to affect the gold market in two ways. First, it could accelerate demand for gold coins and bullion within those countries among the citizenry. Second, and this is more of a longer-term proposition, it could ignite demand in the developed world should the consequent debt and currency problems spill over to global financial markets. Most of the huge growth in emerging country debt came during the zero percent interest rate era that began after the 2008 crisis.

Argentina and Turkey (see charts below) are now the focal point of financial market interest, but the list of nation-states with similar problems is long and growing longer. Most of that debt is denominated in dollars and tied to U.S. interest rates. "If the U.S. policy becomes tighter and there’s no comparable follow-through by other advanced economies," says Harvard economist Carmen Reinhart, "the dollar strengthens. There you have a double-whammy." Emerging country currencies as a group are down nearly 10% on the year as measured by the JP Morgan EM FX Index. Reinhart, who authored the book This Time is Different, says the weaker nation states economically are in worse shape now than they were before the 2008 crisis.

On the huge growth in COMEX gold volumes since 2008

The collective wisdom on gold has changed since the financial dust-off of 2008. As the culmination to a process that began at the turn of the century, gold has travelled a long and winding road from abandoned orphan and shunned castaway (the 1990s), to grudgingly respected over-achiever (the 2000s), and finally established portfolio stalwart for millions of global investors (the 2010s). That renaissance is amply illustrated by the substantial change in volumes at the COMEX. This ramped-up volume is the product of burgeoning usage of gold globally as a hedge against economic uncertainties among private investors, institutions and funds. It is the latter two that are most responsible for volumes rising to their current record levels over the last few years. Perhaps a move up in the gold price is not far behind.

On a Gallup Poll finding that 17% still choose gold as the best long-term investment

According to an April, 2018 Gallup poll, gold remains a popular choice among American investors with 17% choosing it as the best option for long-term investment. Real estate finished first at 34% and stocks second at 26%. Gallup conducts the poll annually. In 2011, gold ranked first among favorite investments at 34%. Real estate polled second at 18% and stocks third at 17%. Sentiment and popularity go through cycles. It would not come as a surprise to see those number flip flop once again at some point in the future.

In a separate Pew Research poll finding released at the end of 2017, only 18% of Americans believe that the government can be trusted to do what is right just about always or most of the time – a record low. Working on the front line of America’s discontent, we at USAGOLD understand the relationship between that number and gold's consistent, long-term appeal. ...[T]rust in government," says Pew, "declined through the later stages of Bush’s presidency, during the Iraq War and the financial crisis, and has never recovered. It has been a decade since as many as 30% of Americans have said they can trust the government just about always or most of the time."

On investors losing faith in global economic upswing

“Investors’ confidence in the global economic upswing is fading but this has not yet fed through into their expectations for financial assets, according to new research.” – Kate Allen, Financial Times

There is a clause in the new social contract which reads that the stock market will not be allowed to fail under any circumstances.  Just ask the Trump administration. . .That clause has been included in past contracts, but for some inexplicable reason the market failed anyway – 1929, 1937, 1962, the 1970s, 1987, 1990, 2000, 2008.  Some breaches have been worse than others, but now analysts are saying the next one will be the Big One – that we should circle 1929.

Clive Maund, a pretty good technical analyst, is one of them. "According to our interpretation" he says, "the final peak of the long bull market occurred late in January, and the current situation is 'the calm before the storm', with the majority being clueless that the bull market is dead, but they’ll really start to grasp the concept once the index breaks down through the support at the apex of the Triangle and in so doing breaks down through its moving averages which will quickly turn down. The breach of these important support levels will be what triggers the crash phase.” He sees the first target bottom in the S&P Index as the 700 level. The equivalent target on the Dow Jones would be about 7000.

If you happen to be among those who have an unshakable belief in the stock market, the thought of the S&P dropping to 700 from its recent high at over 2800 might seem preposterous.  In the years following the crash of 1929, though, stocks dropped 90% and did not return to the pre-crash highs for 25 years.  Something to think about. . . . . . . As always we are not suggesting that you dump your stocks in toto and buy gold; we are simply saying that a diversification might be prudent in case Clive Maund's analysis is correct.

On rising oil and the sudden push in the inflation rate above central bank targets

Central bankers from Europe, Japan, and the United States have one big goal in their sights these days – kick-starting inflation. Having been in the gold business for the better part of 45 years, it seems surreal that central banks would want to ignite the one thing they have spent decades fighting, but here we are. For the first time in six years, the inflation rate, according to the Fed's preferred indicator, exceeded the central bank's 2% goal (the PCE Index, 2.3%). Within 48-hours, the Financial Times ran an article reporting that the eurozone inflation rate had also pushed above the European Central Bank's target of 2% – a development it attributed to rising oil prices. Oil has been a tear over the past few years – doubling since 2016 and up 14% so far in 2018. Most of that inflation has not yet fed through to other prices, or the gold price for that matter. The recent break above target rates, though, in both Europe and the United States, might be the first signs that the genie has escaped the bottle.

A reminder:

"If history teaches anything, it is that government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment and the conscience of the politicians. (That is the situation in this country today.) Especially in an economic crisis or a war, the pressure to inflate becomes overwhelming. Any alternative may seem politically disastrous. Whether it be the Roman emperors repeatedly debasing their coinage, the French revolutionary government printing a flood of assignats, John Law flooding France with debased money, or the Continental Congress issuing money until it was literally 'not worth a Continental,' the story is similar. A government in financial straits finds its easiest recourse is to issue more and more money until the money loses its value. The entire process is accompanied by a barrage of explanations, propaganda and new regulations which hide the true situation from the eyes of most people until they have lost all their savings." – Scientific Market Analysis

Gold and the purchasing power of the U.S. dollar, 1971-present

A final thought for this month's issue from Alan Greenspan, former chairman of the Federal Reserve:

“Significant increases in inflation will ultimately increase the price of gold. Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection. I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counter-party signature. Gold, however, has always been far more valuable per ounce than silver. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counter-party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.”

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