6 Reasons to Bet on the U.S. Dollar in 2018

I love the gold bugs!

They’re steadfast in warning that you can’t live on perpetually-expanding debt… or money printing… or zero interest policies. Mainstream economists have been lulled into believing such things don’t have serious consequences, while history clearly says otherwise. Gold bugs aren’t fooled.

But that’s where my love for gold bugs ends.

They have two fatal failings.

The first is that they believe gold is always a storehouse of value… and mostly in inflationary times like the 1970s.

It is NOT outside of such strong inflationary periods, as I’ve explained in numerous previous issues of Boom & Bust, The Leading Edge, and Ahead of the Curve Webinars;and practically all of my best-selling books, and even the gold eBook I wrote to explain exactly this point.

The second is their… I can only call it “seeming ignorance”… about the U.S. dollar.

They’re smart people, so I just don’t understand how they can’t better understand the value and power of the world’s reserve currency.

And, quite frankly, it was laughable recently when Peter Schiff, who I have often debated, accused ME of not understanding the dollar. Ha!

That’s why, in the first Boom & Bust issue of 2018, which subscribers received earlier today, I explain why the U.S. dollar is the real ultimate safe haven (and in so doing prove that Peter’s comment was an unqualified pot shot).

The reality is that I’ve been right about both gold and the dollar since the 2008 crisis. He and his fellow gold bugs have maintained that gold prices would soar to the moon, and dollar prices tank, as the greatest money printing scheme in history unfolded.

However, gold collapsed after peaking in late 2011, and has remained stuck in a low range ever since… and is heading much lower in the next few years.

In the meantime, the dollar has mostly appreciated since early 2008, and as I showed paid readers, I have reason to believe that it’s going to have a substantial rally again in 2018 before it finally becomes more fairly valued. After that it could be more up or down, but still could lean towards the upside.

Really, gold bugs get three very important things dead wrong:

  1. They think that because we have been printing money at unprecedented rates, the dollar will crash; likely dropping close to zero. Either they’re smoking some good pot or they don’t understand that currencies trade relative to each other, and therefore cannot drop to zero, unless they fail like in Zimbabwe – which is rare.
  2. They believe money printing at such high rates will cause hyperinflation at some point, especially when central banks continue to escalate their efforts exponentially during the next financial crisis. The trouble with that is, it’s been nine years since QE and unprecedented stimulus efforts began, and countries the world over have barely been able to stave off deflation! That’s because we’re in a deflationary period of declining money velocity from the aftermath of the greatest debt bubble in history. And if we fall into an even deeper crisis (as they and I predict), especially after such massive money printing, it will be a sign that none of it works.

    Tell me, how are central banks going to sell their plan to Joe Public to go from printing $ 12 trillion globally to $ 100 trillion to stave off the next crisis after the last $ 12 trillion failed? There’s just no way!

  3. And perhaps the most egregious of all: They think that governments are on a never-ending inflation campaign to devalue the dollar and make their debts cheaper to pay off. I’ll grant you, there is an element of truth to that. After all, who wouldn’t want to make their debts cheaper? But the fact of the matter is that the dollar hasn’t been devalued to the extent they expound.

    They’re always throwing around the classic chart that shows that adjusting the dollar for the expansion of dollars since 1900 has resulted in the green back being devalued 97%. It’s all utter tripe!

    They don’t understand – and neither do most economists – that the very productive process of rising urbanization and greater specialization of labor requires much more delegation of tasks and hence, much greater financial transactions by consumers – meaning more dollars relative to GDP – through physical currency and credit. Such productivity greatly outweighs the inflation of the money supply. If it didn’t, our standard of living adjusted for inflation wouldn’t have gone up more than eight times adjusted for inflation since 1900!

As I said, I’ve belabored points two and three in numerous places, so for the January issue of Boom & BustI focus on the one that’s gotten the least attention. And Charles Sizemore, our Boom & Bust Portfolio Manager, is positioning readers in a very interesting play that will profit from the strong year the dollar will have in 2018.

If you haven’t read your issue yet, do so now.

Harry

P.S. As this is the last working day of 2017, I’d like to take this opportunity to thank you for your time and support throughout this year. Happy New Year to you and your family. I warn that 2018 could be a rough year for the markets, for many reasons that I’ll elaborate on in the next few weeks, but with us by your side, I’ve no doubt it’ll be yet another profitable one for the books.

 

The post 6 Reasons to Bet on the U.S. Dollar in 2018 appeared first on Economy and Markets.

Harry Dent – Economy and Markets ()




A Collapsing Dollar Will Trigger The Next Big Move In Gold And Silver

When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. – from “Atlas Shrugged”

Sorry MAGA-enthusiastics, it’s all a lie.  The tax legislation just passed will lead to higher Government spending deficits, a near-parabolic acceleration in Government debt issuance and a possible collapse of the dollar.  The U.S. is in systemic collapse.  Perhaps the biggest manifestation of this is the grand money-grab by the elitists enabled by blatant political corruption.

Alasdair Macleod published an essay that I highly recommend reading as you gather together your thoughts heading into 2018. 2018 will possibly see the next stage in the collapse of the dollar. I disagree with Alasdair’s attributing the control over the formation and implementation of economic and geopolitical policy to Trump. Notwithstanding this disagreement,  I believe Aladair’s analysis of monetary events unfolding during 2018 deserves careful perusal.  This includes his delineation of the rise in the petro-yuan as a precursor to the demise of the dollar, an acceleration of dollar-derived price inflation and an escalation in the price of gold.

The general public in the West is hardly conscious of these developments, only being vaguely aware that more and more products seem to be imported from China. They are certainly not aware that America has already lost its position as the world’s policeman, the guarantor of economic freedom and democracy, or whatever other clichés are peddled by the media. And only this week, President Trump in releasing his National Security Document, and pledging “America would reassert its great advantages on the world stage”, showed the American establishment is similar to a latter-day Don Quixote, unaware of the extent of change in the world and the loss of its power.

Like a monetary embodiment of Cervantes’ tilter at windmills, the world’s reserve currency is rapidly becoming an anachronism. And for China to realise her true destiny, it must dispense with dollars, and if in the process it crushes them, then so be it.

You can read the rest of Macleod’s brilliant essay here:   2018 Could Be The Year For Gold

Contrary to the views expressed by recent crypto-currency proselytizers, I believe that if gold heads higher in the next year then silver will soar.

Investment Research Dynamics




Alternative Money Mania Coming with New Inflationary Cycle; David Smith: Cryptos Bringing Broad Attention to All Dollar Alternatives

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear another terrific interview with David Smith of The Morgan Report and MoneyMetals.com columnist. David weighs in whether crypto-currencies and precious metals can coexist and talks about what we can glean from the current mania in the cyrptos as it relates to the upcoming mania in precious metals. Be sure to stick around for my conversation with David Smith, coming up after this weeks’ market update.

Now that Republicans have passed their tax cut package, investors are trying to position themselves in what they think will be the big winners as the new law takes effect next year.

Broadly speaking, the new law is a big win for U.S. corporations. Their tax rate will drop from 35% down to 21%. President Trump believes lower taxes on businesses will lead to more factories being built, more jobs being created, and stronger economic growth. He’s probably right – at least to some extent.

On Thursday, the Commerce Department announced GDP growth for the third quarter coming in at a robust 3.2%. Economists are now projecting close to 4% growth next year as the tax cut stimulus kicks in. Of course, with our government’s serial under-reporting of true inflation rates, these economic growth numbers are overstated in real terms.

But the conventional wisdom is that U.S. stocks will continue to charge ahead. This week saw some notable divergences develop in markets, however, and that could be foretelling major trend changes. Bonds, along with interest-rate-sensitive sectors such as real estate and utilities, sold off. Meanwhile, oil and natural resource stocks rallied strongly.

Investors appear to be reacting to the potential inflationary side effects of stronger economic growth that’s fueled by deficit-financed tax cuts. Yes, the tax cut package is expected to grow the deficits by as much as $ 1.5 trillion over the next decade.

Metals markets responded this week by moving higher. Copper prices rose 3% to near a 3-year high. Palladium ticked up to a 16-year high, while its sister metal platinum gained over 3% this week to pull out of its recent slump.

As for gold and silver, they are posting modest advances. Gold prices are up by 1.4% this week to trade at $ 1,273 and spot silver trades higher by 1.6% to come in at $ 16.36 an ounce as of this Friday morning recording.

If metals markets continue to show strength into 2018, they may well be signaling a larger inflationary trend set to take hold. Any significant increase in consumer price levels would be disastrous for the bond market – and spell trouble for some or even most sectors of the stock market.

Higher rates of inflation are bad news for most financial assets… but good news for most hard assets. Precious metals markets tend to thrive when the inflation rate is rising faster than interest rates – in other words, when interest rates are trending negative in real terms.

There is the potential threat of Federal Reserve rate hikes pushing rates positive in real terms. But you can bet President Trump’s incoming handpicked Fed chairman will back off at the first sign of serious trouble for the stock market. Trump is on record favoring higher asset values and a weaker dollar – which effectively means he favors higher rates of inflation.

The government itself has powerful incentives to promote price inflation. The IRS gets to tax the nominal gains on assets artificially boosted by inflation. And the Treasury Department gets to see the real value of its massive debt obligations steadily eroded.

But the biggest inflation trick the government employs is understating it. Using manipulated inflation gauges such as the Consumer Price Index enables the government to artificially hold down cost of living adjustments for Social Security. Understated inflation also generates stealth tax increases.

One “inflation tax” hazard for investors is winding up in higher tax brackets due to nominal increases in income. Wages or investment income that rise merely at pace with inflation can push taxpayers into higher rates of taxation.

The problem of “bracket creep” is supposed to be offset by annual increases in the bracket cut-off levels based on the Consumer Price Index. But a provision buried in the GOP tax bill passed by Congress this week changes the inflation gauge to “chained CPI.”

The difference between chained and unchained CPI is small in any given year. But according to the Joint Committee on Taxation, the obscure little change to “chained” will generate $ 30 billion in additional tax revenue through 2026. That’s because chained CPI usually comes in lower than regular CPI.

Inflation is an insidious threat to investors in more ways than one. And while gold and silver markets aren’t guaranteed to keep pace with inflation every single calendar year, the precious metals often massively outperform official inflation rates during periods when they flare up.

Well now, without further delay, let’s get right to this week’s exclusive interview.

David Smith

Mike Gleason: It is my privilege now to welcome back David Smith, Senior Analyst at The Morgan Report and regular contributor to MoneyMetals.com. David, Merry Christmas, and thanks for joining us again. How are you?

David Smith: Very good Mike, and thank you and the very same to you and yours.

Mike Gleason: Well, as we start out here, David, let’s talk first about the setup as we finish up 2017 and move into the new year. There are a lot of similarities to last year, maybe the year before. We’ve had the Fed just announce a rate hike. The move was well telegraphed and all the selling in the metals happened prior to last week’s FOMC meeting. Open interest in the futures got pretty extended about a month ago, and as often happens in that scenario, the speculative long buyers were taken out to the wood shed and punished as the bullion banks cashed in on their shorts. Now we’re seeing a bit of a rally in the metals, so the situation in these regards is very similar to a year ago. What are you expecting from the metals markets in the weeks and months ahead? Are you looking for a rally to match last year’s?

David Smith: I really think that we could be looking at a very similar set up to 2016 where the metals actually bottomed in December, and the mining stocks tried to put a lower low in in mid-January. And I’ll never forget it, January 19th, and on an inter-day basis, they turned around, and then it was up and away for the metals and the miners for the next six months.

Then between then and now they gave back about 50% of it, which is what you’d expect on a retracement, and nobody can predict the future exactly, but I really feel pretty strongly that we’re going to see a very strong, right out of the box, in January, on the metals and miners, and it may even turn before the new year, but there’s so many technical indicators themselves, that when you add them all up, they become something larger, and so I think if a person is waiting to purchase their metal, they shouldn’t be waiting too much longer if they had the same view I do.

And not only that, as you know, when the demand starts ramping up pretty quickly, the premiums go up too, so you would have a double whammy against you, buying at a higher price and paying a higher premium if you wait until a lot of other people kind of get the same idea.

Mike Gleason: Yeah, certainly a buyers’ market right now, both in terms of low spot prices, and also the premiums, as you mentioned. And the last couple years, we have had pretty strong, right of the gate, moves there in the metals and the miners, and maybe 2018 is going to have the same thing.

Now in your most recent article that we published this week in MoneyMetals.com, you make the case for physical metals and cryptocurrencies to coexist. Now we think that is a vitally important idea right now as people are working through questions about what the advent of Bitcoin and other cryptocurrencies will mean for gold and silver. It would be pretty easy for people to look at price charts and leap to the conclusion that metals are quickly becoming irrelevant. The reality is that the times we live in are desperately calling for honest money and that both cryptocurrency and metals both have important roles to play. They have very different strengths and weaknesses, however, so talk for a minute, David, about how these two asset classes are likely to coexist.

David Smith: Well, the majority of the buying right now worldwide in gold and silver is in the Far East, and it’s been that way for a while… probably 65-70% of the volume. Things have tailed off a little bit in the United States, but elsewhere in the world, that’s not the case. In fact, Germany came out of nowhere to be, I think one of the, if not the largest country buyer of the last few months of gold. And a year ago, their volume was almost nothing, so Turkey is I think number 3 in the world now.

So these areas are all becoming more and more important demand pieces for gold, even as gold and silver look to be tailing off in terms of production. It’s getting more expensive to do it… the grades continue to drop in both gold and silver in many of these mines. So, we’re going to be seeing more demand and relatively less supply and that’s going to put upward pressure on the prices. And as you’ve mentioned before, we’re talking about gold and silver having been money for thousands of years.

They’re going to continue to occupy that stage, and not only that, a lot of the people that are in Bitcoin are actually buying metals with the Bitcoin, so the price has gone up and they get to buy more gold, and they get to buy more silver, before it drops again. And we’ve been seeing these huge, huge swings. It’s nothing to see bitcoin drop $ 5,000 in a couple days, and so far it’s been able to recoup most of those, but I mean, that’s a tremendous amount of volatility. It makes mining stocks look like they’re designed for widows and orphans compared to the cryptocurrencies right now.

Mike Gleason: Yeah, you are one of many gold bugs who has become interested in Bitcoin and cryptocurrencies, and it isn’t just about the price appreciation, though the action in those markets is definitely a spectacle, as you mentioned. You, like many of us, can see the potential for crypto to change the world. People are starting to imagine something like Bitcoin becoming a major world currency, and a very real threat to banks, including central banks. There are even some who think the current price explosion is signaling that this sea change is already upon us.

Now we happen to think that is a bit premature, Bitcoin for example, is not ready yet for prime time. The network is horrendously backlogged with transactions, taking hours to confirm. Fees have risen dramatically. It is nowhere near being able to serve as a major world currency. The network would need to handle tens of thousands of transactions a second, not the current limit of less than 20.

Now, there are solutions being proposed to these scaling problems, but it will be some time before anyone can say with confidence they will work. So, in the light of that, we’re wondering if price hasn’t already moved ahead of capability for Bitcoin. What are your thoughts there?

David Smith: It’s really possible, and the thing is, as you mentioned, the issues that Bitcoin has about the state of execution and scalability, but there are a number of other altcoins, you might say, that are trying to do something similar, and even Bitcoin Cash, which is a spinoff fork – since August of this year it has really been trading because it moves transactions much more quickly. And then of course, there is Monero and Litecoin and Dash, and so, there are a number of other similar coins that are doing similar things and there’s no way to know which one will end up becoming top dog. It might be something other than Bitcoin, but right now it has the first mover advantage.

But one of the things that I think that is very positive for gold and silver and people who believe in it, is that, Doug Casey made this argument, and I think it’s a very powerful one. He said, “The interest in Bitcoin is stimulating people to ask, ‘what is money?'” They hadn’t really been talking about that so much anymore, I mean, the hardcore gold bugs and silver bugs have always felt that way, but the average person on the street never asks themselves, “what is money, and what does it mean to have it deteriorate in value?” And so, the money in their pocket buys about 3 cents from what it did, say, as far back as 1960. So, this is going to, when people really ask that question, and they say, “what has been considered money for centuries and millennia?” They’re going to go “Oh, you know, it’s been gold and silver.” And so, I think it’s going to introduce a lot of new people to the precious metals that maybe hadn’t ever held it, so that is a salutary advantage of what’s going on with all the chaos that’s going on in Crypto Space, in my view.

Mike Gleason: We’ve had a huge influx of folks buying metals with Bitcoin this year, and especially over the last 2 or 3 months. And aside from being an outlet for people to spend their crypto profits, we are one of the only national dealers out there who also has the ability to pay people in crypto, whether it be Bitcoin, Litecoin, Etherium, etc, when customers are selling to us. So, we’re seeing a lot of coexistence between these two asset classes for sure, at least from our perspective as somewhat of a leader in terms of doing metals for crypto transactions both ways.

Now, another aspect that I wanted to touch on between the amazing developments that have taken place, and are currently taking place in the Crypto Space, and comparing it the potential for precious metals, is this incredible volatility that can accompany a mania phase for an asset class. Now that mania is in full force for the crypto world right now, but perhaps that day will be coming soon for metals as well. Talk about that for a minute because we could see a foreshadowing here of what might happen in gold and silver markets once people start to pile into physical ownership of the metals. Talk about what we might be able to glean from this crazy situation in Bitcoin that we’re in the midst of. How might a mania in the metals look similar and how might it look different?

David Smith: I think that we will see in a few years a mania in the metals, and it’ll be similar in terms of the velocity of money moving around and the spikes up and down, and the price of the metals. And the reason for that is because communication is so quick nowadays, it’s instantaneous, and that’s the reason people all over the world … This is the first time in world history where people all over the world are invested in an asset class at the same time, for many different reasons actually, but that’s why I think the people that were calling for a Bitcoin mania in January, when it was $ 900 and then all the way through the year, then when it was $ 2,000 or $ 3,000, $ 4,000, and they’ve been spectacularly wrong, and nobody knows. Maybe the top was registered a couple days ago, but it wouldn’t surprise me to see it go much higher, with big swings up and down at the same time.

But when people move into the metals in a big way, which they inevitably will, you’re going to see the same type of a thing when the supply/demand ratio gets out of kilter. And people are going to be striving to find metal at any price, at some point. And they’re going to be able to have that same level of communication around the globe and trying to do that, that people are doing now with their cryptocurrency. So, it does share that one element in common, plus human nature never really changes, does it?

Mike Gleason: No, certainly not, and obviously one of the issues that we’re dealing with right now is that with these low prices, the producers, especially the primary silver producers are not terribly profitable at these types of prices, so there’s not a lot of new exploration. Thus, supply is going to continue to dwindle. If we go with the data that tells us that maybe 1-2% of Americans actually own an ounce of precious metal.

If, all of a sudden, that doubles during a mania phase. It takes a while for that supply to come online, as you well know, studying these miners. It’s not a switch that you can just flip, and automatically have a bunch of new ounces being pulled out of the ground. It takes years in many situations to get a mine up and running… go after those exploration projects and so forth. So that really could potentially drive that mania and make it go even quicker than we were expecting if you truly can’t get your hands on the metals. Speak to that.

David Smith: That’s really true because they’re not making any really large discoveries anymore. The article I wrote last month, quoting Pierre Lassonde. He just said, “We’re not finding anymore 15 million ounce gold discoveries and we’re finding just a few 3 million ouncers.” And so all the companies that are producing today, regardless of the metal they’re producing, they are wasting assets. Unless they find ways to bring in more ore on stream, they are producing ounces that aren’t going to be replaced and then that means the value of their company goes down, and what they can produce. And so, this is going to be something that’s going to weigh on the whole industry big time going forward. It’s just not very likely that you’re going to see any more mega-discoveries, like were fairly common 30 years ago.

Mike Gleason: Sticking with the mining industry here for a moment, what is your intel showing in terms of the state of the industry? How are they doing? Are you expecting more consolidation as the prices remain suppressed here? What’s the situation with the mining industry?

David Smith: A number of the better run companies are doing reasonably well. They’re producing at a reasonably good profit. There’s going to be more consolidation in the industry because the medium-sized ones are going to get swallowed up by the larger ones. It’s a lot cheaper for a big company to go out and buy a project that’s already been permitted and maybe even having production going on, than to go through the permitting process. I visited a company in BC this year that took almost 20 years to get through all the environmental permits and the agreements with First Nations, and, not to mention, to keep delineated enough of a resource to turn it into reserves.

And so, it’s just a whole lot cheaper to buy a company that’s already figured it rather than to go out and find it on your own. And as that happens of course, that’s not adding anything new to the total amount of gold and silver that’s available to be produced. It’s just shuffling the card deck, so to speak. So, it isn’t like they’re buying a new project that’s never been put into production before. Some of that’s going on, but a lot of it’s already buying companies that are already in the pipeline and then they just add that mill or that mine to what they’re already doing.

Mike Gleason: Getting back to your article, you lay out all the reasons why it’s important to stay the course and not let the noise get in the way of your investment plan. Recap that a bit here for our listeners and talk about the dangers that the average investor faces these days given the over saturation of information that’s constantly bombarding us with the 24/7 news cycles and all the talking heads constantly giving their opinions on anything and everything in the investment world.

I mean, in terms of precious metals, the fundamentals that made it a wise investment a few years ago, and the very things that probably peaked our interest about owning it as a hedge and as insurance against financial turmoil, is still just as relevant today as ever despite the price kind of languishing, so you have to just phase out all of that noise and resist getting tempted by alternatives or swayed by this opinion or that opinion, don’t you David?

David Smith: You really do because it’s hard for all of us to maintain our bearings when all this information’s coming in, and we have to look at each piece of it and try to determine if that is valid or if that changes our thesis. And the thing is, as you said, all the reasons for holding the metals are as valid as they ever were, in fact if not more so. And the fact that the metals haven’t gone up sharply as we’re talking doesn’t mean that they’re invalid, it just means that it’s taken a little longer than we expected.

I look at the uranium market as a classic example. This thing went on, people said, a year and a half ago, “Well, we’ve never seen a market that’s been in the bear markets for six years, the odds that it’s going to turn around very quickly.” Well, it took another 18 months, and even now it’s still just getting started. But the thing is, once it makes that turn, and once the smart money is starting to position itself, and once a certain amount of the public get on to the idea, you can have a very, very fast move upward, just like we had in 2016. And it’s very difficult to get on, and on that move, it caught so many people by surprise, both in the physical space and also the mining shares space, that the vast majority not only didn’t get on – because they were waiting for a retracement that never really came – but they also sometimes got out too quickly. They thought “Oh, well, this’ll be a couple months and it’ll be over, just like it has been the last four years.” Well, it didn’t turn out that way. It went for seven months with hardly any kind of a correction.

And these prices today, the better companies and, of course, the metals themselves, are still above where they were when that turn was made, so if you wait a little longer, you’re going to find yourself buying at prices higher than they were when they were in 2016. So, if a person believes in it, they should start accumulating in tranches, or buying into weakness, or buying on a dollar-cost averaging, or whenever they have the extra money to budget for, rather than trying to pick the exact low. Try to buy 30 cents lower and then end up paying a 40 cent premium, that you wouldn’t have had to pay then, plus maybe 40 cents higher… the old “penny wise, pound foolish” theorem.

Mike Gleason: Yeah, certainly letting the emotions get the best of us in the investment world has taken down many people over time. Well finally, David, as we begin to wrap up here, maybe talk about some of the key support or resistance levels you’re watching here in the metals, in terms of the charts and so forth. And then anything else that you’re focused on in the metals or financial world that we maybe haven’t hit on yet as we wrap up the year and look forward to 2018.

David Smith: Well, I think in silver, we want to see silver get above $ 17 and of course, it would be very, very positive psychologically and chart-wise to get above $ 20. And then you have a real solid base start to be built there. That would be very important.

In terms of gold, getting well above $ 1,300 and staying there, $ 1,325, $ 1,350. There are a lot of respected economists and analysts that feel that we’ll see $ 1,450 to $ 1,500 gold this (next) year, even without some major issues.

So, I think that the risk/reward is really turning in the favor of a cautious investor who decides on how much to put in, and then does it, rather than trying to wait for even more ducks to line up because Mr. Market seldom waits until everybody understands the story before it moves. And by the time you feel comfortable about it, it’s going to probably be moved quite a bit a ways away from where we are talking about it today.

Mike Gleason: Yeah, very well put, obviously we’re seeing a lot of this type of situation play out in the crypto world. A lot of people I’m sure are kicking themselves for not having gotten into Bitcoin $ 10,000-$ 15,000 ago on the price charts, but we could be looking at something very similar in metals. If you’ve got a conviction and you know that precious metals are the place that you need to be long-term to protect yourself, by all means, go by that conviction and make your moves.

Well, David, thanks so much for your time today and for enlightening us with your wonderful insights once again. I’ve certainly enjoyed having you on this past year, and wish you and your family a very Merry Christmas, and I look forward to catching up with you in the new year. Take care, my friend.

David Smith: Okay, take care, Mike, and I’ve enjoyed speaking with you too.

Mike Gleason: Well, that will do it for this week, thanks again to David Smith, Senior Analyst at The Morgan Report and regular columnist for MoneyMetals.com, and the co-author, along with David Morgan of the book, “Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shock Wave”, which is available at MoneyMetals.com and Amazon. Pick up a copy today.

And check back next Friday for our next Market Wrap Podcast. Until then, this has been Mike Gleason, with Money Metals Exchange. Thanks for listening and Merry Christmas everyone.

Precious Metals News & Analysis – Gold News, Silver News




Rentech, Druck On Bitcoin, & The Way Of The Dollar

Alex here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at alex@macro-ops.com and I’ll share it with the group.

 

Recent Articles/Videos —

A Repricing In The Oil Market — We reiterate our bullish call for the energy space.

Fox, Disney, and Netflix — AK covers the deal that just went through and what it means for Netflix. He also thoroughly expresses his love for Bob Iger…

 

Articles I’m reading —

The New Yorker put out a really great long form piece on Jim Simmons, the founder of the secretive money machine, Renaissance Technologies. The article focuses more on Simmons’ current philanthropy work and less on his trading background or information about Ren-tech, but it’s a fascinating read nonetheless.

When reading the article it becomes very apparent how much smarter Simmons is than you (at least that was my take away) which is why he’s worth $ 18.5B. But I’ve always been fascinated by Ren-tech and how a hedge fund, staffed by physicist and linguists (not MBAs), has continuously produced one of the best performance records in the business. Apparently, they do this by looking for relationships in all types of esoteric data, or what they call “ghosts” in the system. I can’t remember where I read it, but one example they’ve given was looking at how the weather in Paris at the time of the market open effected stock prices in NYSE or something… Interesting stuff.

Here’s an excerpt from the piece and the link.

On a wall, Simons had hung a framed slide from a presentation on the Chern-Simons theory. He helped develop the theory when he was in his early thirties, in collaboration with the famed mathematician Shiing-Shen Chern. The theory captures the subtle properties of three-dimensional spaces—for example, the shape that is left if you cut out a complicated knot. It became a building block of string theory, quantum computing, and condensed-matter physics. “I have to point out, none of these applications ever occurred to me,” he told me. “I do the math, they do the physics.”

High-level mathematics is a young person’s game—practitioners tend to do their best work before they are forty—but Simons continued to do ambitious mathematics work well into adulthood. In his sixties, after the death of his son Nick, who drowned in Bali in 2003, he returned to it. “When you’re really thinking hard about mathematics, you’re in your own world,” he said. “And you’re cushioned from other things.” (Simons lost another son, Paul, in a bike accident, in 1996.) During these years, Simons published a widely cited paper, “Axiomatic Characterization of Ordinary Differential Cohomology,” in the Journal of Topology. He told me about his most recent project: “The question is, does there exist a complex structure on the six-dimensional sphere? It’s a great problem, it’s very old, and no one knows the answer.” Marilyn told me she can tell that her husband is thinking about math when his eyes glaze over and he starts grinding his jaw.

If you want to learn more about Simmon’s background, Numberphile has a solid interview with him which you can find on Youtube, here.

Not sure where I came across this one (maybe someone on twitter shared it?) but it’s a paper Michael Mauboussin did years ago titled The Economics of Customer Businesses. I try to read everything by Michael but I don’t think I had seen this one before. It’s good.

Here’s the link and an excerpt.

Not market related, but here’s a cool article where the author uses statistical analysis, similar to the sabermetrics used in baseball, to determine who’s the most effective battlefield general in history. Any guesses? (Hint: he’s French). Here’s the link.

Lastly, here’s an interesting pitch deck by @Find_Me_Value where he shares some of his stock selection process and presents a bull thesis for CMCSA and CHTR (link).

 

Video I’m watching —

The GOAT aka Stanley Druckenmiller went on CNBC this week to talk markets, tax reform, and bitcoin. Here’s the link to the full 30 minute video, it’s worth watching in its entirety.

Here’s what I found to be the most interesting takeaways:

  • Druck remarked that he thinks the Senate’s version of the tax plan would be more bullish for markets in 2018 than the House’s version. This is because the corporate changes wouldn’t take effect until 2019 versus 2018, which would drive a boom in CAPEX next year because businesses could then expense these investments in 19’, under the proposed changes.
  • He noted how he finds it ironic that crypto bros are made up of mostly environmentalists but within the next two years the bitcoin network will require over half the US’s annual energy consumption just to maintain its network. Not exactly a green currency.
  • He likes the FANGs and made the interesting point that despite AMZN’s high stock price it’s only selling at 3x revenues, which when compared to its growth, is fairly reasonable. And FB, for example, is trading at a PEG of 1x. He argues that people shouldn’t be focusing on their PE multiples but instead their future earnings potential because these companies are under-earning intentionally as they invest in growth and in widening their moats.

 

Book I’m reading —

I recently finished reading The Way of the Dollar by John Percival. It’s one of the best trading books I’ve come across in a while. It’s out of print and I couldn’t find a hard copy anywhere, and I looked (let me know if you know of a place where I could get one). The only version I could find was a digital one on hung up on some website. Here’s a link to a landscape view of the book which you can just print out, like I did, or read it on your computer.

John was the man behind Currency Bulletin (CB) which was a popular FX newsletter back in the day. The book is primarily about CB’s methodology for trading the currency markets but it’s filled with timeless trading wisdom that apply to traders of any market, such as this cut:

In all markets, price extremes are usually attended by a consensus that the trend, be it up or down, will continue; and by a peak of speculation in line with the trend. Hence the excruciating paradox of financial markets, that sentiment is most bullish at the peaks when prices have only one way to go which is down; and most bearish at troughs vice versa: at the top there’s no-one left to buy, and at the bottom no-one left to sell.

This paradox is absolutely central to the working of all financial markets and we need all the help we can get to understand it so thoroughly that it becomes part of our nature. The more bullish things are, the more bearish they are. Bullishness is born as hope in the midst of despair. Hope swells to confidence and confidence swells to euphoria, and the process contains the seed of its own destruction and the birth of its opposite, fear. Fear is nurtured by falling prices and the two feed on themselves until they swell to despair. And so the cycle is completed and ready to begin again with the birth of hope. This is both the way things are and the way they have to be. We haven’t understood the process until we have grasped that. The despair creates the price trough: the price trough creates the despair. The price extreme is the definition of the extreme of despair, which is in turn, by definition the moment when hope comes to prevail; hope feeds and is fed by rising prices until the peak of price and euphoria leave prices with only one way to go, which is down.

This circular process underlies every price fluctuation in free markets from the smallest one measured in seconds or minutes to the largest measured in years or decades. So it has always been and so it will always be, because it must be. The ancient Chinese symbol called T’Ai-chi T’u or “symbol of the ultimate reality”, more commonly known as the yin yang symbol, is delightfully appropriate to the way markets are — and uncannily appropriate to the way currency markets are.

It’s a quick read and well worth your time.

 

Chart(s) I’m looking at —

This is a chart showing the calendar monthly returns for the S&P 500 going back to 1987. If you look at the top row, showing this year, you’ll notice that it doesn’t look like any of the other years — there’s no red. The market has already set a record for the most consecutive up months and if it closes in the green in December it’ll mark the first calendar year where there were no losing months.

This is pretty amazing, especially when you consider the near total absence of volatility. The index has now gone something like 70 days without even a 1% swing in price. This is abnormal…

And what’s even more interesting is that these “good times” aren’t unique to the US.

Look at this chart showing sector returns across the world. Nearly EVERY THING IS GREEN. And not by a little, but a lot. In that CNBC Druck interview, Druck recalled how one market commentator had said “this year, all you had to do was get out of bed and you made money” to which Druck replied, “well, I guess I got out of the wrong side of bed” (he’s had one of his worst trading years, ever).

It’s been a tough market for macro traders. But… like all things in life, there’s a season for everything, and this period of volatile-less melt up won’t persist forever. And as Percival wroteHope swells to confidence and confidence swells to euphoria, and the process contains the seed of its own destruction and the birth of its opposite.”

 

Trade I’m looking at —

I’ve been waiting for an entry into Square (SQ), the payments tech company run by Jack Dorsey. The stock is off 25% from its highs and is battling with its 50day moving average, which has been a key level of support in the past.

Here’s TTM revenues and free cash flows. Sidenote: this chart is from KoyFin which is a great new financial data platform created by a buddy of mine. Check it out, it’s free.

This is a momentum swing trade. I want to see price strongly close above both the 50 and 10-day moving averages before putting on a position. And we may see one more sharp move lower before that happens.

 

Quote I’m pondering —

I’ll leave you with two quotes; one timely and one timeless.  

At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without any understanding of the processes involved… swindlers and catchpenny schemes flourish. ~ Charles Kindleberger

And

The Perfect speculator must know when to go in; more important he must know when to stay out; and most important he must know when to get out once he’s in. ~ Jay Gould

 

 

The post Rentech, Druck On Bitcoin, & The Way Of The Dollar appeared first on Macro Ops.

Macro Ops




Using Gold To See Where The Dollar Will Move Next

I’ve written a lot about how the US dollar is the fulcrum of the global financial system.

Commodities are priced in dollars. Global trade is done in dollars. And the majority of international funding is in USD.

The dollar is important. Dollar trends impact markets and assets around the world in various ways. Hence why the dollar is the fulcrum.

But if the dollar is the fulcrum then gold is the foundation on which that fulcrum sits.

I should make clear, I’m no gold bug and have no special affinity for the yellow metal.

But when it comes to analyzing assets and markets we run into a measurement problem. That measurement problem is due to the fact that things that are priced in US dollars, or any currency, fluctuate according to the price of the currency in addition to the good’s underlying supply and demand fundamentals (ie, the price of oil is impacted by the relative price of a US dollar).

And the price of dollars can fluctuate a lot.

You can see how this makes things difficult. When you analyze goods priced in USD you have to also assess the US dollar as well.

Gold is a useful tool helping with this measurement issue.

Perhaps due to gold’s long history as a store of value it has a special place in the market’s psyche. Since gold is priced in USD but has little intrinsic value (ie, little productive use and no cash flows) it acts as a good barometer to gauge the changing relative value of $ 1 USD of account or the price of 1 unit of USD liquidity (USD assets).

When international demand for USD liquidity exceeds supply, gold tends to perform poorly. And vice-versa when USD liquidity exceeds global demand for that USD liquidity.

Make sense?

Because of this, when I’m trying to discern the probabilities of where the dollar is headed next, I always start with gold. Even though gold is priced in dollars, it often leads at major turning points because the fundamentals are similar for both assets but for whatever reason those fundamentals often show themselves in gold first.

Of course, this isn’t always the case (there’s no such thing as a perfect indicator). But even in the cases when it doesn’t lead it still serves as a good confirming or disconfirming signal for the dollar.

Below are some charts. They’re a little messy but I think they get my point across and show how useful gold can be as a leading and/or confirming signal for the dollar and hence the dollar priced commodities.

This chart shows gold inverted (black bars) and the US dollar (red line) on a monthly basis.

Notice how gold failed to confirm the dollar’s bear move from 94’-96’ when the dollar sold off but gold traded sideways in a range. This is a disconfirming signal for the dollar which suggested the move was a corrective one and not the start of a new trend.

But then in 96’ both the dollar and gold (inverted) began trending upwards together. This signalled that this was the start of a new trend. The macro fundamentals also supported the case. The world was hungry for US dollar liquidity (assets) and demand outstripped supply which was bearish for gold but bullish for the dollar.

Then go to 01’ where  inverted gold peaked and began making lower lows and lower highs. While at the sametime the dollar made one more new high. Gold gave a leading signal that the bull market in the dollar was over.

Now check out this chart.

Here’s the current dollar bull market (red line) on the weekly. The dollar made lower new highs and coiled into a tight range from 13’-14’. At the same time, inverted gold trended higher, not confirming the lower move in the dollar which suggested building pressure in USD demand.

And then again from 16’ to 17’ inverted gold moved lower while the dollar made a new cycle high that gold did not confirm. This gave a sell signal on the dollar and USD shortly turned over thereafter.

Of course, there’s instances where the indicator gives false signals and using it is as much an art as it is a science. It alone shouldn’t be used as a reason to go long or short the dollar but rather as a key input into one’s macro decision making process.

Now let’s quickly look at where gold and hence the dollar may be headed in the near future. Many of the charts are suggesting a coming explosive move in one direction or another.

Below is gold on the monthly timeframe showing a coiling pattern. This type of price action typically precedes large moves.

And I’ve been pointing out over the last month how numerous dollar pairs are at large critical junctures and a coming significant move is likely.

Below are AUDUSD, GBPUSD, and EURUSD on a monthly basis.

Now let’s take a closer look at gold and see if it’s telling us anything.

In this chart, gold (inverted) and marked by the black line failed to confirm the dollars most recent new pivot low. But the disparity isn’t that great so this doesn’t give us much confidence.

Another thing I like to do is to look at the momentum structure of gold to see if momentum is building in one direction or another.

The chart below shows gold (black line) and gold’s momentum relative to its 3-year mean. It signalled the end of the bull market in gold well beforehand. But right now, it’s not tipping the scales in one direction or another. It’s slightly positive to neutral.

So unfortunately it’s tough to get a good read at the moment. My bias is that US stocks are about to start outperforming the rest of the world soon. And this is going to help reverse capital flows which will put a bid back under the dollar and start a new leg higher in the greenback.

There are other macro dynamics such as changing international trade rules, raising of the debt ceiling, and US tax and monetary policy which are supportive of this hypothesis.

And I believe that gold is setting up to signal one way or another soon so I’ll be keeping a close eye on it.

In a future piece I’ll lay out a fundamental macro model I use that shows one way of looking at the big picture USD liquidity supply and demand picture. This is a useful tool for seeing where the attractors are for gold on a cyclic level.

PS — If you’d like more of this type of research, then check out the Macro Intelligence Report (MIR) here.

 

 

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Macro Ops




Napoleon’s Dream Will Ultimately Drive the Dollar

The European Community is a stultified, lumbering mass of bureaucracy. It’s fitting that the organization operates from Belgium, a country frozen in time because of political infighting.

The European Community, which aims to bring economic integration among its member states, is also something else – a resounding success.

It started in 1957 with founding members Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany, and eventually 12 nations were incorporated into the European Union in 1993.

They stopped killing each other, live under common rules, and many share a currency. This was Napoleon’s dream about a century and a half earlier, even though he couldn’t make it happen.

But now the weak links in the chain, like Spain, Italy, and Greece, are starting to give way. Eventually they will fail, even as member nations and the transnational organization spend time and treasure to keep the group intact.

As that happens, the euro will lose some of its luster, driving investors back to the buck.

The Napoleonic Wars began in 1803 and lasted more than a decade, drawing in many European nations on both sides. While the Americans were busy establishing their new country and fending off the British in the War of 1812, the Europeans played unwinnable war games that left everyone damaged and in debt.

There were so many large-scale wars during this period that historians don’t name them all. They simply refer to them as successive versions with different coalitions. The years of continental war ended with the seventh coalition at the battle of Waterloo, which led to the Treaty of Paris in 1815.

But for a brief moment in time, Napoleon ruled most of Europe. He de-emphasized the Catholic Church and fiefdoms, enforced the rule of law, and increased trade. He brought ideas of individual rights to areas of Eastern Europe. But he still did it through force, and was still a foreigner, so it was bound to end.

After the Napoleonic Wars, Europeans continued to squabble. Using Wikipedia, I counted 21 different wars involving at least two European nations from 1815 through 1899. Even though they’d begun to consider individual rights and liberties, they were still killing each other.

And that’s before the World Wars.

Cooler heads prevailed in 1951 when the next Treaty of Paris was signed. It created the European Coal and Steel Community, providing a multi-country framework for trade involving two of the main resources needed for reconstruction. The treaty also tied together the economic fortunes of France and Germany, greatly reducing the chances of war.

The next step in European cooperation was the Treaty for European Economic Community in 1957, which put the region on the path to where it is today, a conglomeration of 28 countries that allow for the free flow of people, capital, and goods, where most also share a common currency.

The drums of war are faint. No one thinks the Germans are entertaining ideas of taking territory from France, and the Italians aren’t looking to pick a fight, either.

Today the arguments come down to one thing – money.

The Germans think they share too much of the economic burden of the group, while the Greeks believe they have good reason to repudiate their debts. The Italians and the Spaniards are hoping no one looks too closely while their banks lumber along with bad debts that arguably outstrip their capital.

And that’s just on the international level.

Internally, as has come to the fore recently, the Catalans want to leave the Spanish fold and the Lombards and Venetos want greater autonomy from the Italian central government.

The common cry is that these wealthy regions pay more into the federal system than they get in return. Even the Flanders are getting feisty in Northern Europe.

The current calls for greater independence show just how far the Continent has come.

Small regions have no fear of invasion or oppression if they gain true autonomy.

Their government officials only seem concerned with trade and capital, implying we’ve reached a point where divisions are reduced to matters of commerce.

Maybe, maybe not.

There’s still security in large numbers, and combining forces with those of similar (although not identical) cultural norms and views remains the best way for preserving our different ways of life.

But back to the Europeans…

As they travel farther down their different roads, ever diverging from the singular path, they erode some of the power amassed by joining together. Trade and travel arrangements will become more cumbersome, and they will chip away at their international standing.

The biggest potential loser is the euro, which was conceived to fight the dollar. As nations in the economic bloc pull away from the center, fracture internally, or both, the common currency will lose some cache.

The greenback will be there to pick up the slack.

In a way, the incredible security felt across Europe, which feeds demands for greater independence and local control, will eventually lead to weaker ties and a diminished economic standing, complete with a tarnished currency, compared to the dollar.

Rodney Johnson
Follow me on Twitter @RJHSDent

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Rodney Johnson – Economy and Markets ()




Oil For Gold – Real Or Imagined?

By having control of the physical market for gold, China can threaten to use it to destabilize the dollar, without destabilizing the yuan. As such, it is potentially devastating, and used carelessly could trigger an economic collapse in Western capital markets, wreaking financial and economic havoc in America and other advanced nations. China will never be wholly independent from trade with these nations, and severe financial and economic damage to the advanced economies will rebound upon her to some extent. For this reason, she has so far held off using gold as an economic and financial weapon, while she continues to insulate herself from periodic crises in Western economies.   – Alasdair Macleod (Oil For Gold)

In response to questions about when China would finally cast aside the dollar and run the price of gold up, I’ve always replied that China would be shooting itself in the foot if it tried to replace the dollar too quickly.  Don’t forget, China holds about $ 1.2 trillion in the form of Treasuries. Note: this ratio does not include the market value of its gold holdings, the actual amount of which is unknown outside of a small circle of Chinese officials.

When the idea of a gold-backed yuan-denominated oil futures contract surfaced, it became en vogue for those unable to analyze their way  out of a paper bag to issue commentary refuting the idea.  For some, if an event has not already occurred, they are unable to “see” it.

This article from Alasdair Macleod is a must-read for anyone who wants to understand the path leading up to the ability to convert oil sold in yuan or gold by China’s largest oil suppliers.  Judging by the various recent oil trading and gold trading agreements between Russia and China, the conversion of oil sales into gold  may well be already occurring in a two-stage process between Russia and China.

The purpose of this article is to put the proposed oil for yuan contract, which has been planned for some time, into its proper context. It requires knowledge of the history of how China’s policy of internationalising the yuan has been developed, and will be brought up to date with an analysis of how the partnership of China and Russia is taking over as the dominant power over the Eurasian land-mass, a story that is now extending to the Middle East. To read the rest click here: Oil For Gold – Macleod

While Alasdair does not overtly acknowledge the idea of a gold-backed oil contract coming from China, I would argue that the article about a gold-yuan oil futures contract  in the Nikkei Asian Review – a highly regarded publication – was likely floated intentionally by the Chinese Government. If you read through Alasdair’s article, it’s difficult not to come away with the impression that China has been methodically and patiently putting together the pieces to support the ability to convert oil sold China – benchmarked by the yuan – ultimately into gold.

Yes, the fact that China does not currently permit gold to be removed from China in large quantities needs to be addressed.  Analysts using this to refute the oil/yuan/gold notion seem to conveniently overlook the fact that regulations can be revised.  I would suggest that “footprints in the snow” are leading to this eventuality. It’s now possible to sell oil to China in dollars or rubles or rials then  convert the proceeds into offshore yuan and buy gold in China’s Free Trade Zone.  As Alasdair himself points out:  “Gold futures contracts in yuan are now available to international dealers in Hong Kong and Dubai using the SGE gold price as benchmark.”

Furthermore, the Commercial Bank of China (State-owned) is the sponsor of a gold futures contract offered by the London Metals Exchange.  Seems pretty obvious that an oil seller can ultimately convert the proceeds of oil sold to China into gold using three transactions.  Why not consolidate that process into one contract?  I would suggest that a gold-backed yuan-denominated oil futures contract is inevitable.  Just maybe not one the timeline preferred by the western gold investing community.

Investment Research Dynamics




Congress May Eliminate State Tax and 401(k) Deductions; Axel Merk: Problems Ahead for the Dollar

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear a wonderful interview with Axel Merk of Merk Investments and the Merk Funds. Axel describes why he believes the “buy the dip” mentality has overtaken mainstream financial advisors, warns about the danger of buying into conventional wisdom and also chimes in on gold and the potential rise of rise haven assets. Don’t miss this must-hear conversation coming up after today’s market update.

As investors eye a potential tax reform deal on the horizon, they are mostly overlooking precious metals markets. Gold and silver prices retreated this week, with gold posting a 0.8% decline to bring spot prices down to $ 1,271 an ounce. Silver is off 2.0% on the week to trade at $ 16.75 as of this Friday recording. The platinum group metals are staying relatively quiet this week, with platinum posting a 0.5% decline to $ 921 an ounce, with palladium off 1.2% to trade at $ 965.

On Thursday, the House of Representatives approved a budget resolution that paves the way procedurally for tax reform to be passed by the Senate with a bare majority.

The House budget deal was not without controversy. Several Republicans from high-tax blue states including New York and New Jersey opposed the GOP plan because it threatens the deductions for state and local taxes.

Meanwhile, members of the House Liberty Caucus blasted the bill for essentially ditching efforts at spending restraint. The group of fiscally conservative lawmakers complained that the budget will add $ 5.5 trillion to the national debt over the next decade.

Investors are concerned that 401(k) and other qualified retirement accounts will get tinkered with in order to “pay for” tax rate reductions. On the table is a proposal to reduce contribution limits. That’s bad for people who are trying to sock away retirement savings tax free.

From a free market perspective, though, it would be nice if Congress would just stop trying to socially engineer retirement savings. If Congress scrapped all the arcane rules governing contributions and withdrawals from various accounts, stopped taxing gains on precious metals at a higher rate than stocks, and just treated all savings and investments the same with one low rate, few investors would complain.

A final version of the GOP tax plan is expected to be released next week. And as soon as next Friday, President Trump could announce his decision on who will succeed Janet Yellen as the nation’s top central banker.

Some reports late this week indicated that Yellen is no longer in the running to be the next Fed chair.

Bloomberg Report: Politico reported that Janet Yellen is out of the race for the next Federal Reserve Chair. That would leave Fed Governor Jerome Powell, and Standard Professor, John Taylor, still in the running for her position.

Michael McKee: The Politico report was carefully nuanced. It said one source was telling them that she was out. Another source said she was still in. And then he noted that the president went on television last night and said he liked her. That was followed by a Washington Post story that suggested three sources had told them that she was out. But both the Politico story and the Washington Post story were careful to add “but the president frequently changes his mind and so nobody really knows”.

Wall Street is now betting that Fed Governor Jerome Powell will get the job, though other candidates are in the mix. Powell would be a politically safe establishment choice.

If Trump decides to go with more of an outsider and change agent, he can pick economist John Taylor. He is known as the champion of the “Taylor rule” – which would tie interest rate decisions to a formula and remove much of the arbitrariness from monetary decisions.

A Taylor pick would send monetary policy in a more hawkish direction than favored by either Yellen or Powell. That could upset the stock market – something President Trump isn’t likely to want to do. Then again, Trump enjoys being unpredictable and will sometimes buck the conventional choice he’s expected to make. Either way, we’ll soon find out.

In any event, current Fed chair Janet Yellen will have an opportunity to give something of a parting shot in December, when she is widely expected to sign off on a rate hike. The U.S. Dollar Index has been rising in recent weeks in anticipation.

The risk to metals investors is that the dollar keeps rising into the Fed’s December meeting. The opportunity is that the announcement could be a “sell the news” type event – much like the Fed’s December 2015 rate hike. That marked the start of a major rally for gold and silver prices. And despite recent weakness they are still holding well above those December 2015 lows.

Well now for more analysis on the upcoming Fed Chair decision and what it’s likely to mean for metals and the markets, let’s get right to this week’s exclusive interview.

Axel Merk

Mike Gleason: It is my privilege now to welcome in Axel Merk, president and chief investment officer of Mark Investments, and author of the book Sustainable Wealth. Axel is a highly sought-after guest at financial conferences and on new outlets throughout the world, and it’s great to have him on with us again. Axel, thanks for joining us today.

Axel Merk: Good to be with you.

Mike Gleason: To start out here, I wanted to ask you about the exuberance in the stock market that just can’t seem to be derailed by anything. For instance, we have Wall Street seemingly accounting for the fact that the GOP Congress, along with Trump and the White House are going to get everything done when it comes to health care reform, tax reform, spending cuts, et cetera. But in reality, none of this has happened yet, and it’s far from certain that anything meaningful will get done on the legislative front, but the markets seem to be pricing this is. What are your thoughts there?

Axel Merk: I think that this is just a symptom of the time we’re in, and we’ve had similar things in the late ’90s, and in the mid-2000s, and it’s the buy-the-dip mentality that’s become a self-fulfilling prophecy.

We talk a lot to investment professionals, and in order to preserve their job and not lose their clients, they have changed their strategies. Think about anybody who has been quote-unquote diversified. They still have a bunch in so-called risk assets, and that means on the way up they have underperformed, because the diversified stuff underperformed, and on the way down, because the risk assets are still a big chunk, they’re losing money. And so the clients are saying, “Hey, on the way up I’m not keeping up with the indices. On the way down I’m losing money. Why the heck am I with you. Stocks go up all the time anyway,” and so that drives everybody to be in that sphere that they buy the dip, buy the dip, and everybody I talk to, even the pessimists, are invested in the market, and the feedback I’m getting is, “I don’t want to be the first one to sell here; it’s okay to wait,” and that very much reminds me of 2000, and I don’t know how many of your listeners were around then, but in 2000, it wasn’t all that obvious that we had the peak of the market in March 2000. Six, nine months later, many people still thought buying the dip is the right thing, and so those folks who are waiting might be waiting a long time, and lose a lot in the process.

Mike Gleason: Trump is expected to make an announcement regarding who will be appointed Fed Chair some time in the next couple of weeks. We learned last week that Janet Yellen is very much a contender. Trump was very critical of Yellen as a candidate for president, but now, less than a year into his term he says he, “really likes her a lot.” First off, why do you think he’s done this about-face, and then do you care to make any guesses about who will wind of running the Fed?

Axel Merk: Sure. A couple of updates on that. There have been stories out that by November 4 we’ll hear it. The latest I heard was November 3. Politico just released that Yellen is out of the running, and yesterday it was said that Cohn is out of the running. But let me make a broader point before I go into some scenarios here.

If you are a good salesperson, the stuff that you like you’ll talk down, and the stuff you don’t like you’ll praise. Think about it. You want to buy a car, if you want to have that car, you’ll say it’s a piece of crap, because then the price is lower, whereas if you don’t want that car anyway, it is no problem to praise it, and so it doesn’t cost Trump anything to praise Janet Yellen, because, “Hey, you’re a lovely woman, you’re fantastic, and now go to hell,” type of thing, and then of course he’s not quote-unquote buying something, except of course you’re buying a Fed Chair in this instance, so-to-speak, so I am absolutely not surprised that he is providing flattering comments to people he would never consider hiring.

Now that said, the runners that are in the game right now are J. Powell, who is a current governor, and then John Taylor, and Kevin Warsh. I know the latter two personally.

Powell is a lawyer, and by all means we do not need to have a PhD economist to run the Fed, but a lawyer, a lawyer’s job is to please people, and I hope I’m not offending too many lawyers who might be listening here, but J. Powell, he doesn’t have any views on monetary policy. He’s completely agnostic. He was appointed by Obama as a financial regulator, and gave a speech, said, “Oh maybe we have to dismantle some banks and break them up,” and since the Trump administration has been in, he has been working on deregulating banks, so he does what the boss, so-to-speak, tells him to do. Regarding monetary policy, yeah, some people say he has this or that view, but he’s just echoed whatever the Chair’s position was at the time. And so some people will say, “Oh that means he’s going to do whatever Trump is going to do if he becomes the Chair.”

Mnuchin, the Treasury Secretary, really would love to have Powell. My view is that the guy is intelligent, I have no grudge against him, but because he doesn’t have any view on monetary policy, somebody else will be the most important person. I happen to think that in this case it’s going to be the Vice Chair. Historically the Vice Chair at the Fed is a purely ceremonial role, but it is likely to be either Taylor or Warsh. Of the two, different sort of scenarios can happen.

Warsh is somebody who really wants to clean up the Fed, doesn’t like the way it’s run, and I think Warsh would love to have the job, and he could do that. Taylor is an accomplished person in his own right, has very strong views, and I don’t know whether he wants to be the second in command. He might be convinced if he thinks he can control Powell, and he would be the quote-unquote more hawkish choice of all of the bunch.

Mike Gleason: There is little doubt the Fed’s extraordinary stimulus over the past decade has achieved some of the results they wanted. We’ve got higher asset prices, and even some economic growth, but to us and a lot of other Fed critics, the question was never whether a few trillion dollars of quantitative easing and zero interest rates would produce result, the question was whether there would actually be real economic growth, or if the Fed would simply blow up another bubble, creating even bigger consequences when the bubble pops. Perhaps the question is about to get answered. The Fed is in the middle of a modest rate-hike cycle. Do you think officials there are serious about normalizing rates, and if they do jack up rates a whole lot more, how do you expect the markets will react to this?

Axel Merk: If Janet Yellen were serious, she would tell us where we’re going. She hasn’t said where she wants to take the balance sheet, because the FOMC has no clue, and she has no clue, so in that sense it’s very important who is going to succeed. Powell won’t have a clue either. Both John Taylor and Kevin Warsh do not like to have excess reserve in the system and would unwind the balance sheet probably faster than others. So it is incredibly important who is going to succeed Yellen, and in that sense, if it’s Powell, it’s very important who’s going to be the Vice Chair.

By the way, there’s another scenario that just some technocrat at the staff of the Fed is going to become very important and influence things, because ultimately all these lawyers who are on the governing side of the Fed, not the regional presidents, they have no clue about monetary policy, they don’t have their own staff, so they just look at all of the presentations during the FOMC meeting and then do whatever the Chair say, and so it’s possible that some back-office person gains influence, but back to your question.

QE, the one thing it has achieved, in my view, it has compressed risk premia. That means risk assets, everything from junk bonds to equities, have a very low risk premium. That means junk bonds don’t yield much. That means volatility in the market is very low, and the stock market is very low, and when you have quantitative tightening, and it is not, even under the program suggested by Yellen, the one that we are about to embark on, it is not watching paint dry on the wall.

Risk premia, to me, almost by definition, has to expand. That mean volatility is going to go up, and that provides a headwind to risk assets. That means everything else equal, prices are lower, and that’s one of the reasons why even with the quote-unquote tightening, I’m positive, at least on the precious metals, on gold in particular, because there is less economic component on that side, and so it’s a more pure reflection of the monetary conditions, and if financial conditions tighten, and that’s by the way the definition of raising rates or quantitative tightening, then equity prices are at risk, and something like gold may do quite well in that sort of environment.

Mike Gleason: Kind of leads me right into my next question, and I’ll ask you to expand a little bit there on that last part of your answer. One of the challenges in the metals markets right now is that U.S. retail investors just aren’t buying a lot of safe havens, as you mentioned. Either there isn’t much perception of risk, or perhaps people can see risk but discount it because they expect the Fed will step in with their magic money machine if problems arise. In any event, it looks like the metals markets are waiting for some catalyst to introduce the notion of risk to the markets. Do you see anything developing right now that might shock the markets to give metals a boost?

Axel Merk: A big voice in the gold market mentioned to me the other day, “Why should retail buy gold anymore? America’s going to be great again.” Ever since Trump go elected, a big segment of the retail sector lost interest. What I have seen, and I can’t really talk to that, what is have seen is that on the professional side, the interest has increase substantially, and the reason it has increased is that if you think about what are you going to do with your money? Everything is expensive, and are you just going to hold your nose and continue buying the stuff? And some people do, and obviously many people do to a significant extent, but how do you diversify? Now, cash is one thing, but if you’re professional, you don’t earn any money on cash, and so you’re not going to use cash. So, gold is just the easiest diversifier, and I emphasize easy rather than best.

I like gold, by all means, but there are other things you can use to diversify. It’s easy because it’s easily understood, and the correlation of gold to other assets is, to the S&P in particular, is zero over the long term, and then I mentioned, as risk premia go up, gold may do very well, so from that point of view, professional investors increasingly use it to diversify. As far as retail is concerned, obviously they are confused, and if you’re not confused you haven’t paid attention.

My view is the Fed is behind the curve, at least under Yellen, and will continue to be behind the curve. If we get someone like John Taylor, who is considered to be more hawkish, the odds are rates are going to move higher. Ultimately, it matters where real rates are going to be. In every bear market in stocks since the 1970s, gold has done very well, with the big exception of the early ’80s, where (Fed Chair Paul) Volcker put real interest rates up very much. Now if you think that a John Taylor can do that, by all means stay away from gold.

My take is, the initial reaction of a Taylor is likely to be that maybe bonds will sell off. That means yields will be higher. Maybe that’s a negative for gold, but very quickly thereafter, and I don’t think it may be months, it could be minutes, people are going to realize, “Oh my God, that tightening is going to be bad for risk assets,” and what happens, if you have a selloff in equities, if you have a selloff in junk bonds, where does that money go? Well, it tends to go into Treasurys, and so that means the long-term rates are not going to move up. All this, the Fed was trying to explain to you that getting out of the quantitative easing, out of this big balance sheet, is going to raise long-term interest rates. I’m not so sure it will, because I see substantial volatility in the markets, and that will keep those yields lower. So, in that sort of environment, I happen to think, that gold is as good a diversifier as ever.

Remember, historically gold has done well. People are always worried about what it’s going to do tomorrow. The truth of the matter is gold doesn’t really do anything, because gold doesn’t change.

Mike Gleason: Right. Exactly. It’s the fiat money that changes value. At the end of the day, gold is really an anti-dollar investment, and since you’ve made a name for yourself over the years as a guy who follows the currency markets probably as closely as anyone, let’s talk about the U.S. dollar here a little bit more. Now metals fared pretty well during the first half of the year as the greenback slipped to multi-year lows. In recent weeks however, the dollar has perked up and metals have stalled. Have we seen a short-term bottom in the dollar, or is this rally likely to fail?

Axel Merk: The dollar bulls will never shut up. Let’s put it this way, and just as we’re talked European central bank just had a meeting, and there wasn’t a big surprise. Mr. Draghi said he can do more if he wants to. That said, even Mr. Draghi is, starting October 2018, later than here obviously, is expected not to print any more money. That means the printing presses are grinding to a halt throughout the world. It’s happening in stages, and there are some changes happening.

Remember, when the Fed first started talking about tapering, they talked and talked and talked and didn’t do anything, but for years the dollar was grinding higher. And then when they finally acted, the dollar weakened, so now you have the Europeans that are expected to taper, expected to print less money, and the expectation of that has pushed the euro from about 1.05 to 1.17 or so, and so that is going to continue to happen.

The short of it is that in the U.S. we’re much further along, in fact I think in the U.S. we are closer to the end of the tightening cycle, and in Europe we’re in the beginning of the tightening cycle, and so yes, there are people that say, “Hey, in the US we’re going to have a hawkish Fed person,” and this and this, I would never bet on the conventional wisdom that that’s exactly how it’s going to happen, and going to translate.

If we’re going to have a risk-off environment, treasuries are going to rally. People have this conception that the dollar is going to rally in the risk-off environment, which happened in 2008, but if you look at the last two years, whenever we’ve had a risk-off environment, we didn’t have a substantial one, I grant you, the euro rallied, and the reason the euro rallied is because the euro has become a funding currency. People borrow in euros because interest rates are negative, they’re so darn low, and so it’s acting much more like the yen. And so, these correlations are morphing, they’re not stable.

I would be very hesitant to say that, especially with the budget deficits that going to blow out in the U.S., potentially anyway, that the dollar is the one that’s really going to rule the day here. So, I’d be very, very cautious about jumping on the bandwagon of the conventional wisdom here.

Mike Gleason: Well finally, as we wrap up here, any final thoughts you want to leave us with? Anything that you’re focusing on specifically over the short term?

Axel Merk: Well, I happen to believe that investors should stress-test their portfolios, that if and when the buy-the-dip mentality is over, that they’ll be okay with that. I happen to think diversification is not that you move from one sector to the other, but you actually think about how to generate uncorrelated returns in other ways, and then one of the things we’re digging into quite deeply are just what’s going to happen here, both on the long and the short end of the yield curve, in various countries around the world.

I don’t think that the low rates in the Eurozone are sustainable, despite what Mr. Draghi’s trying to tell us, and so there will be some repricing of risk, and by the way, even though the exact opposite is in the news, of course, today, as we talk anyway, with the European Central Bank sticking where they are – if they are going to be more assertive, ultimately, because Mr. Draghi’s term is also going to be up at some point, he’s going to stick around for a little while longer – then there’s going to be a repricing there, and so again, things are not going to evolve the way that everybody’s telling you.

I’d be very cautious about risk assets. I would not bet that the dollar is going to be the big winner. I would not bet that Treasuries are going to sell off too much, and not because I don’t think that deficits are not going to blow it up, or maybe the quantitative tightening will, but that the risk-off environment, the volatility is going to push money into Treasuries, and so those waiting for this big Treasury selloff may have to wait, and then with regards to broader commodities, a lot of it depends on China, that we haven’t talked about, and that’s, of course, a big wildcard because who knows what’s going to happen there.

Mike Gleason: We’ll leave it there for now. Thanks for the fantastic insights Axel. It was great to have you back on, and we really appreciate your time today. Now before we let you go, please tell listeners a little bit more about your firm, and your services, and then also how they can follow you more closely.

Axel Merk: Sure. Come to our website, MerkInvestments.com, follow me on Twitter or on LinkedIn. I’m Axel Merk, as you find me on Twitter, on LinkedIn, wherever you want. We have a newsletter. Live tweeting is really the best way you can get the direct interpretation of the news. Anybody can curate their own news channel on Twitter, but folks who don’t like it, LinkedIn is okay as well. It’s a little bit more in-depth for those sort of things. We do have some investment products focused on currencies and precious metals. Look it up on the website. So browse around on the website, but by all means engage by following my on Twitter, LinkedIn, or even Facebook.

Mike Gleason: Great stuff. Thanks again Axel. We look forward to checking back with you down the road, and get more of your thoughts on these ever-changing markets. Take care and thanks for joining us.

Well that will do it for this week. Thanks again to Axel Merk, President and Chief Investment Officer of Merk Investments. Manager of the Merk Funds. For more information, be sure to check out MerkInvestments.com.

And check back here next Friday for our next weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

Precious Metals News & Analysis – Gold News, Silver News




Archimede’s Dollar Smile

Give me a place to stand,
and a dollar that’s trending,
and I can move the world
~ Archimedes

Archimedes, the Greek tinkerer, knew of the US dollar’s importance to global macro well over 2200 years ago, decades before Fed Chair Yellen was born. A man ahead of his time.  

If you’re one of the very few who read my work then you know that I refer to the dollar as the world’s fulcrum.

This is no exaggeration. The US dollar is that important to global markets.

The deeper you get into the global macro game the more you realize nearly every trade is a derivative of a long or short dollar position.

Long Brazilian equities? You’re short the dollar.

Long airliners? You’re making a macro call on oil and thus the dollar.

Long volatility? You’ve got an embedded dollar call there.

Short inflation through duration? Then you’re long the dollar.

The dollar is important.

Why is this?

Short answer is the dollar is the world’s reserve currency. It’s what commodities and goods are priced in for global trade, and it’s the dominant global funding currency. The dollar is pervasive and it’s everywhere which is why the Fed swings the biggest stick of them all.

If you can figure out the path of the dollar then you’re starting from an advantaged point in assessing where the other major macro trades are headed.

It’s always my starting point when analyzing any market.

That’s what I’m going to spell out quickly here today. We’re going to run through some basic models for thinking about the dollar and then we’ll jump into the bearish thesis, the bullish thesis, and conclude with where in the argument I sit.

And just to make clear my current biases. Our team at Macro Ops has been short the dollar against AUD, CAD, since June 27th, until this last week when I closed out for profit.

I took these trades with the belief that they were countertrend moves. I was in the cyclical dollar bull camp but was bearish over the intermediate term, with the expectations of a 10% pullback due to technical, sentiment, and macro reasons.

Now that the move has played out, I need to update my view.

Some dollar models.

I’ve shared a more in depth piece on the way I think about FX that you can find here. In it, I hash out Soros’ arrows and the core/periphery model.

Today we’re going to talk about the “dollar smile” concept put forth by Stephen Jen of Morgan Stanley because it’s relevant to our conversation.

The theory is simple. It states that the dollar tends to outperform when the US economy is very strong (on the left side of the smile) or very weak (right side). And it does poorly when the US economy is just muddling through (middle of the smile).

Dollar Model

Why is this?

Well the logic is straightforward.

The US trades at a  “safety premium” relative to other countries.

Some might snarl at that and there’s a lot of gold bugs who think the US government’s debt blowup is imminent. But the reality is that relative to the rest of the world, the US has one of the most dynamic economies, highly liquid markets, (relatively) stable governments, decent rule of law, and again, we’re the world’s reserve currency.

When the US economy is performing well, investing in the US is a no brainer. And since well over 80% of the moves in the FX markets are due to speculative flows, this fact matters.

And when the US economy is very weak, the dollar performs well because it gets a safety bid. Money gets pulled back from overseas to within safer borders.

Most international funding is done in USD dollars. And when volatility increases and markets are perceived as more risky, these dollar loans are called back and Brazilian Reals or whichever, get converted into USD to cover the dollar debt thus putting upward pressure on the dollar.

But when the economy is in the middle of the “smile” and just muddling through, the dollar tends to perform poorly… why?

Well, the primary reason is that mediocre growth and low inflation is bullish for risk assets because it keeps the Fed steady and prevents them from raising rates too quickly.

So a steady Fed keeps interest rates low. These low interest rates suppress volatility and pushes investors further out the risk curve in search of returns. They go overseas to high growth emerging markets to play in their fertile fields.

Low growth and low rates lead to speculative outflows from the US which drive the dollar down relative to where the capital is flowing to.

There’s a reflexive relationship in these FX flows that starts to dominate.

This is because currencies make up the largest pie of the total return picture when investors put money into foreign markets.

So when speculative capital leaves the US because of low rates and slow growth, and then flows into, say, Latin America. It depreciates the dollar while appreciating the Latin American currencies. This drives up the total return of those investments in these EMs which then attracts more speculative flows (ie, reflexivity).

Here’s a short snippet from Soros on the mechanism.

To the extent that exchange rates are dominated by speculative capital transfers, they are purely reflexive: expectations relate to expectations and the prevailing bias can validate itself almost indefinitely… Reflexive processes tend to follow a certain pattern. In the early stages, the trend has to be self-reinforcing, otherwise the process aborts. As the trend extends, it becomes increasingly vulnerable because the fundamentals such as trade and interest payments move against the trend, in accordance with the precepts of classical analysis, and the trend becomes increasingly dependent on the prevailing bias. Eventually a turning point is reached and, in a full-fledged sequence, a self-reinforcing process starts operating in the opposite direction.

This is why currencies tend to trend for long periods of time once they get going. See the seven year USD cycle below.

Dollar History 7-Year Cycles

Strong US growth = outperforming dollar. A very weak US economy = strong US dollar. And a muddling US economy = weak dollar.

I should point out an important point that I’m not sure Stephen Jen mentioned when he introduced this concept. But all of this is relative. We don’t care about the US’s economic growth on an absolute basis. We care about its economic picture relative to that of the rest of the world’s (ROW).

If the US is muddling at sub 2% growth but emerging markets are a dumpster fire, like they were following the GFC just up until this last year, then that’s still dollar bullish.

The idea is that investors have to perceive risk to be low and the reward to be well above the US’s premium, in order for capital to leave our beautiful shores and invest in a Chilean poultry producer.

The chart below shows this dollar smile relationship at work. Blue line shows the US’s growth relative to the rest of the worlds (ROW) and orange line is the USD.

US Growth and the Dollar

It works because if growth in the US is strong relative to the ROW’s then it means that the Fed is likely leading developed markets in raising interest rates. This makes the US real interest rate spread more attractive. And vice versa when the US is performing well below the ROW.

And as Soros said, the “expectations relate to expectations” that drive FX trends far from their “fundamental equilibriums”. This is why we always need to be trying to understand the markets expectations around future relative growth and rates.

Once we understand the embedded expectations we can compare them to the likely outcomes and see if there’s a divergence between the two.

If there is, then we can identify potential catalysts that would reprice these expectations to be more inline with reality. And then we have a trade.

The dollar bull market that began in 2011 was driven by strong relative US growth (seen in the chart above) and the Fed signaling tighter monetary policy relative to its developed market peers.

This created a reflexive loop which kicked off in 2014. Stronger growth and signaling of tighter policy drove the dollar higher along with US equities. This brought in further speculative flows and kicked that reflexive process into gear.

US Vs ROW Relative Equity Momentum

But by 2016 market expectations for US outperformance and tighter relative monetary policy began to exceed likely outcomes.

Long dollar positioning had become crowded and the trend extended.

Europe and emerging markets on the other hand were recovering from very low bases and horrible sentiment, as well as benefitting from improving global economic growth.

This set up a reversion in expectations.

The market began repricing the Fed’s rate path lower while pricing in tighter monetary policies for other DM central banks.

This  caused the huge unwind in the dollar, which is currently the greenback’s worst year on record (chart via Bespoke).

The market is now overweight the eurozone and emerging markets while underweight the US.

And expectations are high for Europe and EMs, while neutral for the US.

Most Favourable Profit Outlook

There have also been signs that DM central banks have been coordinating policy and using forward guidance to move exchange rates, letting FX markets do the heavy lifting for them in their monetary policy goals.

Learning from 14’-15,’ where diverging monetary policy drove the dollar higher and risked pushing the global economy over the edge. Central bankers started managing expectations in order to subdue the dollar while the Fed moves to become the first to begin reducing its balance sheet.

I wrote about this signalling by the Game Masters (the central banks) in a Brief that went out July 24th. For reference, I’ve included the excerpt below.

Basically, Brainard stated how a country with a large existing trade deficit (ie, the US) should choose to tighten its monetary policy in a way that puts the least amount of pressure on its currency (the USD) and its exporting sector.

The opposite is true for a central bank of a large surplus region (ie, Germany/ECB), which should tighten in a way that helps bring its economy into better external balance.

Lael argues that tightening by increasing the policy rate has a bigger impact on the exchange rate than tightening through balance sheet reduction. Therefore, the US should tighten through balance sheet reduction while the ECB should tighten through interest rates. And if the two coordinate, they can reduce the potential for instability (ie, large china yuan deval or a blowout in Italian yields).

Now what’s currently happening in the land of central banks?

The Fed has recently come out as dovish on hiking but signalled it intends to start letting its balance sheet runoff. And other major central banks, like the ECB, have come out surprisingly hawkish, indicating that the beginning of rate normalization is upon us.

I believe this is a large reason the dollar has sold off. Most countries are better off with a slightly weaker USD and tighter local interest rates, than they are with ever diverging rate paths and a strengthening dollar leading to tighter global liquidity.

Everybody is focusing on interest rate spreads and dollar debt — which do matter, just less so at this time —  while failing to factor in the new intentions of central bank coordinated policy. The CBs don’t want a repeat of what a stronger USD did to global markets in 2015. They’ve wised up (a little bit at least).

The price action of DXY definitely seems to be confirming this, finishing near its lows for the week and breaking through a significant line of support. The chart of DXY below is on a weekly basis and I think it falls down to at least its 200-week moving average (the blue line) and likely even a bit further before finding a significant bid.

The last nine months we’ve been in the middle of the dollar smile curve. The US economy has been muddling through while the ROW has rebounded off its lows and DM central banks have played catch up to the Fed.

This is what the bear case for the US dollar is based on, that we’ll continue to stay in the middle of this curve.

Here’s a summation of the thesis from Nomura.

And Mark Dow also summed up the case well, writing:

On balance, a weaker USD. The US shifting to the balance sheet from rates as the front-burner tool, and global CBs ‘catching up’ to the Fed are the major drivers. EUR, AUD, EM all good. The positioning/psychology in the USD doesn’t strike me as too extreme, so USD weakness doesn’t have to be dramatic.

The question that I’m most interested in when looking at the dollar now is: How long is this ROW outperformance and DM central bank catch up likely to last relative to what is already priced into markets?

EM Sovereign Rally

And it’s here’s where I have trouble buying fully into the continuation of the dollar bear thesis.

When looking at credit spreads and EM debt, you can see that risk is increasingly priced out.

That means that the embedded expectations are high.

This tells me there’s an exceedingly narrow path of outcomes that the future needs to meet for this trade to continue to work.

Secondly, and maybe even more importantly, it appears the low growth, low inflation narrative has been fully adopted, not just by the market but also by the Game Masters themselves.

Fed President, Bill Dudley, said this in a speech recently:

While some of this year’s shortfall can be explained by one-off factors, such as the sharp fall in prices for cellular phone service, its persistence suggests that more fundamental structural changes may also be playing a role.  These include the increased ability of prospective buyers to compare prices across different sellers quickly and easily, the shift in retail sales to online channels of distribution from traditional brick-and-mortar stores, and the consequences of these changes on brand loyalty and business pricing power.

A finance friend of mine recently attended an investors conference where the main subject was inflation. And he mentioned that this was the first time, in the many years he’s attended, where the crowd wasn’t expecting higher inflation.

The Low Level Of Inflation

Instead, everyone was talking about how the phillips curve is dead and how technology has brought on a new secular trend of permanent low inflation, with much thanks to Amazon.

This popular narrative is priced into all areas of the market. And it has been somewhat true up until recently.

But I chuckled when I heard this because for the first time in a long time I’m seeing data that says inflationary pressures are building and higher prices are right around the corner. I covered this in our most recent MIR.

The market is pricing in a much lower hiking schedule than the Fed’s already shallow projected path (see chart below). Fed fund futures aren’t pricing another rate hike until June of next year.

Expectations For Fed Tightening

With inflationary pressures building, it seems to me that there’s a large possibility that the market is on the wrong side of the inflation trade. And therefore, is on the wrong side of the dollar and EM trade, as well.

And if we do enter an inflationary environment, do you think Europe will be able to stomach a repricing of rates higher, better than the US?

Count me as skeptical.

Interest Rate Spread and EUR USD

However, there are a few outcomes where the dollar bear case becomes more likely and they’re centered around the Fed.

With the recent and unexpected departure of Fed vice chairman Stanley Fischer, the Trump administration now has five Fed seats it can fill should it choose to replace Janet Yellen.

There’s a lot of speculation that Trump will install loyal puppets and we’ll return to a dollar crushing era similar to that of the Nixon-Burns partnership of the 70’s.

This is possible and I don’t have an edge in predicting who the President will choose, so I’ll have to react to that when the time comes.

But I do have a hunch that we’ve hit bottom in the Trump Presidency and that things are likely to improve from here (at least somewhat).

With the divisive influencers out of his cabinet and former Marine General Kelly now effectively steering the ship, it seems to me that we’re seeing and hearing less from the Commander in Chief, especially on Twitter, which is a good thing.

And with all likelihood of positive economic policies such as tax cuts and infrastructure spending priced out of the market, it seems like an opportune time for some positive surprises to the upside in the US.

Plus, the recent devastation from hurricanes Harvey and Irma are likely to quell infighting within Congress, at least for a little while…

The US appears ripe for a period of positive expectation revisions.

US Dollar and Citi Economic Surprise Index

The way I see things currently, is that for the dollar bear case to continue to play out, a large number of things have to unfold to match the expectations that are priced into markets.

  • Volatility needs to remain low
  • Investors need to remain in risk-on mode
  • Inflation needs to remain low
  • The Fed’s hike path needs to come down to meet the market’s expectations
  • DM central banks need to continue to signal tighter policy ahead
  • The US needs to continue to muddle through while the ROW goes on a tear

All the dollar bull case needs is just for anyone of these things to not happen.

The dollar bear case needs to walk a shaky tightrope to continue to play out while the dollar bullish case can spawn from any number of outcomes.

In addition, when you throw in the Fed’s likely coming balance sheet reduction (likely to start this month) and the Treasury’s cash normalization — which due to the debt ceiling debate being moved to December, now won’t be happening until early next year — you have some large liquidity drains that will begin to open in the coming quarters.

Draining liquidity leads to the repricing of risk. And with risk priced out of current markets (especially credit markets) there’s the likelihood that this repricing will become jet fuel for the dollar.

The good folks at Nordea Markets have covered this more in depth, and you can read about it here.

The longer dated EURUSD basis swaps are beginning to price this in, while the near market is not.

EURUSD Basis Swaps

As of right now, I put the odds in favor of the dollar bull thesis.

I don’t know when this dollar selloff will end. Though positioning and bearish sentiment are reaching extreme levels.

US$  Valuation and Trade Weighted Index

I’ll be patient and wait for higher inflation numbers. Then see how the Fed responds.

I’d also like to see sentiment become more negative on the dollar than it is, but I’m not sure we’ll get that.

I continue to use the late 90’s analog for the macro environment and have found it extremely helpful to understanding the possible outcomes for today. It’s far from perfect but helpful, nonetheless.

So, of course… strong convictions, weakly held.

The trading game is not about forecasting, being right, or showing everybody how smart you are… It’s about making money.

I’ll be quick to rerate my probabilities if new disconfirming evidence comes in, such as inflation falling further or Trump replacing Yellen with Alex Jones.

Until then, pay attention to the dollar smile and look for comparative growth relative to expectations.

 

 

Macro Ops




Trump’s Democrat Deal Hits Dollar; David Smith on Precious Metals Supply

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up David Smith of The Morgan Report and regular contributor to MoneyMetals.com joins me for another enlightening conversation. David tells us how much longer he thinks the upside move will last in the gold and silver markets and also weighs in on Bitcoin and the crypto-currencies. Make sure you stick around for my interview with David Smith, coming up after this week’s market update.

As a massive storm bears down on Florida, concerns about political and financial storms emanating from Washington D.C. are helping drive precious metals markets higher.

This week Democrat leaders convinced President Donald Trump to kick the can down the road another three months on raising the debt ceiling. So, in December Congress will have to come up with another funding scheme that will undoubtedly punt again and add hundreds of billions of dollars more to the national debt.

This current half-baked debt ceiling deal was spurred by bipartisan urgency to pass an aid package for victims of Hurricane Harvey. Of course, the billions in new spending won’t be offset by cuts to programs that are less urgently needed.

No, the extra spending will just be added to the government tab, as Senator Rand Paul noted in a speech berating his fellow lawmakers for their fiscal irresponsibility. Senator Paul introduced an amendment to pay for Harvey aid by cutting foreign aid. Yet even as he championed his “America First” amendment, he knew it wouldn’t go anywhere.

Sen Rand Paul: I will proffer this amendment and in all likelihood, the swamp, the establishment, will vote this down because they never want to cut a dime of spending. They’re always compassionate, they have big hearts. They’re willing to give away everybody else’s money, but they’re never, ever willing to pay for it.

We as a country have a $ 20 trillion debt, we borrow a million dollars every minute, and yet we are putting forward a bill to allocate $ 15 billion to those who are suffering under Harvey, or from Harvey, without paying for it, without finding the money anywhere. We’re just simply adding it to our tab, adding it to our $ 20 trillion bill. How did we get to $ 20 trillion in debt? Big hearts, small brains.

The fiscal irresponsibility in Washington is contributing to downward selling pressure on the U.S. dollar. On Thursday, the Dollar Index dropped to a new low for the year, helping to push gold prices to a new high for the year at $ 1,350 an ounce.

As of this Friday recording, the yellow metal trades at $ 1,345, up 1.4% on the week. Silver shows a weekly advance of 1.3% to bring spot prices to $ 18.02.

Owning hard money in the form of gold and silver should certainly be part of everyone’s emergency preparedness. Even if you don’t live anywhere near the path of a hurricane, there are plenty of other disaster scenarios that could disrupt your personal or financial life without warning.

Most people take their credit cards and bank accounts and internet connections for granted. But the digital economy isn’t as reliable or secure as banks and government regulators would like you to believe. Credit bureau Equifax just admitted that hackers broker into its databases on 143 million people. Credit card numbers, Social Security numbers, names, addresses – all now potentially in the hands of digital thieves. 143 million people is basically every American who has applied for credit.

Earlier this week, digital crypto-coin markets were rattled by a new regulatory crackdown in China. Chinese authorities banned markets for so-called “initial coin offerings.” Bitcoin proceeded to plunge 15% in value, with smaller crypto-currencies hit even harder. They could soon face other regulatory threats in Europe and the United States. Some regulators want to see Bitcoin transactions treated like securities transactions on stock exchanges. Others want to go even further and treat all crypto-currency transactions as illegal money laundering.

How far the war on crypto-cash goes remains to be seen. Holders of digital coins will have to be willing to assume heightened risk compared to asset classes that have well-established supply and demand fundamentals and well-established markets for determining price.

Precious metals markets aren’t as free and fair and transparent as they should be. They have often been subject to manipulation. But gold and silver markets do have the advantage of being tied to tangible underlying assets that have been traded for centuries and will continue to be. Gold will always command a dear price that reflects its intrinsic value, regardless of whether it’s quoted in dollars or yuan or bitcoins or something else that comes along.

Nobody knows what a bitcoin will be worth in 10 years. Maybe much more than it’s worth today, maybe much less. With U.S. Federal Reserve notes, we know they’ll lose value in the years ahead. The only question is whether they’ll be worth moderately less a decade from now or much less.

The dollar’s fate will be determined in part by President Trump’s decisions on Federal Reserve appointments in the months ahead.

This week Federal Reserve Vice Chairman Stanley Fischer announced he will resign from the Board of Governors by mid October. That will leave four out of the seven seats on the Board vacant.

President Trump will be able to put his stamp on the central bank in a big way, especially if he chooses to replace Fed chair Janet Yellen after her term expires in February.

On the campaign trail, Trump talked up his support of Rand Paul’s “Audit the Fed” bill. But since assuming office, Trump has surrounded himself mainly with Goldman Sachs and deep state types who are intent on maintaining the current monetary order.

So the chances of Trump charting a new direction for the Fed are slim. The central bank may get some new faces in the months ahead, but it won’t get a new philosophy. The Keynesian philosophy of perpetual credit expansion will continue to enable all spending excesses out of Congress. More spending means more debt…which means more currency supply growth…which means ultimately a weaker dollar.

Well now, without further delay, let’s get right to this week’s exclusive interview.

David Smith

Mike Gleason: It is my privilege now to welcome back David Smith, senior analyst at The Morgan Report and regular contributor to MoneyMetals.com. David, thanks for joining us again and how are you?

David Smith: I’m just fine, Mike. It’s great to be back.

Mike Gleason: Well, David, not too long ago you wrote an article for our site about how gold and silver were getting ready for an historic run you called it. So, before we start discussing some of the market action here recently, fill our listeners in on why you believe things were set up and are set up for us to see a good run in the metals here.

David Smith: Well, we’ve had a very trying period since 2011 when a lot of people have been really worn out and torn out and left the market because the prices have declined substantially and what is really a normal reaction in a very large bull market, what we call a cyclical reaction within a secular bull market. The prices, if you look at other times in history where this has happened, the prices did not decline more than what you would expect but it’s pretty hard when you see prices drop by 40 or 50% over five years.

Last year kind of started to turn things around and then we had a correction from that. And now we’re building this very large sideways space, which all sorts of indicators are indicating that we’re now ready to launch into the next part of the bull market, which will be as David Morgan has always taught it will be the most profitable part of the whole thing and we’re looking at probably three to five years of advancing prices and maybe more in gold and silver as this thing gets under way. So we’re building this base. It’s moved about $ 1,300, gold as you know last week and held there. So things are going to be going a very positive way for the bulls going forward here.

Mike Gleason: So the metals have been showing some good signs of life here. We’ve got gold at its high for the year. Silver is still lagging a bit and hasn’t reached its high for the year yet. Now, I’m not sure if you’re thinking the same thing, but things are feeling a little bit different this time in terms of the advance that we’re seeing and the set up that you just alluded to. Do you think silver will finally start outperforming? And how much of a run do you see in silver prices in the next say six to 12 months?

David Smith: Silver will at some point start outperforming. It’s a metal that surprises people. They’re looking at it now, and they say well why isn’t it stronger in relationship to gold? Over time there’s about an 85% correlation. In other words, if gold is moving up, silver will too, but it doesn’t do that on a daily basis or even a weekly basis. And what it likes to do is to make people think it’s going to stay weak for a long time and then all of a sudden there’s a price explosion. So, one of these days, we’ll wake up and silver will be up 75 cents on the day and people will go “where did that come from?” When the reality is what’s going on under the hood all along and it was taking its time. Then all of a sudden they go into the upside.

These different things that are going on with big money moving in some hedge funds into the metals space and the mining stocks being more strongly supported and the incredible demand, which just keeps on growing and going from China and India and now Turkey. Turkey’s become the third largest importer of gold now in the world. All of these things augur very positively for the precious metals. That doesn’t even discuss the supply concerns that are starting to accrue.

Mike Gleason: I know it’s been maybe a little bit difficult for a lot of the silver bulls out there to see it just kind of go sideways for all this time these last four or five years now. But what is the saying? The bigger the base…

David Smith: The larger the base, the bigger the upside case. It’s kind of an old trading truism. You know, the supply issue, the person on the street will say well wait a minute I can still buy gold and silver at Money Metals at a pretty reasonable price and that’s true. But what’s happening is the supply pipeline is going to be getting thinner and thinner because these projects are not coming online like they used to. The big discoveries aren’t being made. The grades are the ones that are being produced in gold, silver, and copper are declining.

There are more issues with country risk. Last week in Indonesia, one of the largest gold, copper projects in the world was almost taken over by the government. The Grasberg Project had been producing for many years. They had about an 85 or 90% ownership. Now, the government has told them you get 49%. So the government has become the majority owner. These things don’t augur very well for increased production.

So when the next up surge happens, which is in the way of building now, as people come in and they buy more gold and silver physically, then that pipeline is going to be harder and harder to fill. The price will rise and the premiums will rise as well, too.

Mike Gleason: Speaking of supply, that kind of leads me right into my next question. I wanted to get your thoughts on a very interesting tidbit that I read in one or your other recent articles for MoneyMetals.com where you made the point that even with higher gold prices this year, the scrap or recycling of gold is actually down a pretty good percentage, which is very interesting because you would think that people would be more apt to sell their gold jewelry or whatever gold items they may have when the price is rising. But the data shows the opposite. So to me, that either means that the gold has already been recycled and there is less of it out there for scrap or because people realize that maybe I don’t want to get rid of this stuff or perhaps it’s a combination of both. So what do you make of all that, David?

David Smith: I think you’re right on the mark with that. I don’t have a solid statistical figure to prove our view or my view, but I really believe I think first of all I think a big factor is that the supply pipeline from the standpoint of precious metals from jewelry and whatnot and recycling is becoming thinner and thinner. And there’s just been so much of it sold into the market, there’s not that much left anymore. Then as you say, I think, the sharper people that do have some of these things are saying “wait a minute, maybe I should hang on to this.” So those things are kind of coming together. I really don’t expect that recycling will be a huge element going forward in trying to deal with the supply pipeline. I think it’ll be less and less of a factor as we go forward.

Mike Gleason: Yeah. Maybe the weak hands, so-to-speak, have already gotten rid of what they have and now it’s left in mostly the hands of more convicted folks. We’ve talked a lot about the PGMs, the platinum group metals, with you before. We had palladium hit nearly a $ 1,000 earlier this week. It’s now almost caught up with the platinum price, something which is extremely unusual. You’ve been really bullish on palladium for the last three to five years now and you’ve really nailed it. Does palladium have more room to run? Is it time to play the platinum/palladium ratio and favor platinum here?

David Smith: Historically that would be the case when palladium get “overvalued” compared to platinum. I think things may be a little different this time. I’m not saying that there won’t be a realignment in the relationship, but I think palladium will continue to be strong on its own merits because so much of it is produced in Zimbabwe and Russia. And there isn’t any indication that that supply pipeline is going to be refilled anytime soon. And it is much rarer than platinum. I still like palladium a lot better. Platinum certainly has some room to move up, but how and when or if it’ll go back to its premium over gold is really difficult to say. I think the relationship is really undergoing a fundamental change, and we’ll find out all the reasons for that later. But it is something to kind of keep an eye on.

Mike Gleason: Kind of revisiting that palladium conversation that we had, gosh I guess it was two or three years ago, where you favored that as your number one precious metal of the time and, like I said, you’ve totally nailed it. And the advantage of having palladium or any of these PGMs is really as a portfolio diversifier. They’re obviously driven by different fundamentals. Is that fair to say?

David Smith: Both platinum and palladium are primarily used in catalytic converters and then there are other industrial applications, there’s a fair amount of jewelry, especially in the far east, that is made from platinum. So they both go on those merits. We hear a lot about the electrical cars and things like that, and those are coming along. How that will affect the PGMs down the line, probably pretty substantially. But I think palladium has got a pretty good run left in it before we have to start worrying too much about that situation.

Mike Gleason: The U.S. Mint is just now announcing that they’re going to be introducing a Palladium Eagle, which will be interesting. The first time that they’re doing that. We’ll see what kind of demand there is for that item here later this year.

How about the miners, David? They finally started to perk up in the last two weeks as gold finally broke above $ 1,300 again, but they’ve been in the doldrums for the last year after starting out 2016 with a huge move. Is it time to get into the mining stocks again? And if so, what kind of stocks would you suggest people look at?

David Smith: Well, the very fascinating, to me, change that’s taken place and this it’s like one of those things it’s not 100% confirmed yet, but I’d say it’s about 90% confirmed, for up to 20 years the relationship between gold and the mining stocks has been tilted in favor of gold. So in other words, for the last two decades people that bought physical metals did better on a percentage basis with less risk than buying the mining stocks. That is now starting to change. It looks like the mining stocks are going to outperform the metal. They’re both going to do very well. They should outperform because there’s much more risk.

If somebody comes to you and they buy 10 ounces of gold or a 1,000 ounces of silver, the only risk they have from buying it to you after they hold it is the price of gold and silver. Is it going to go up or down? But if you buy a mining stock, you’ve got about dozens of risks. You’ve got nationalization. You’ve got the cost of production. Are they going to run out of the ore that they thought they had? All sorts of things like this. A mine collapse. So those things necessitate that anyone buying a mining stock has to accept greater risk. The only reason that they’ll accept more risk is if there’s more rewards. So that has not been in their favor on a consistent basis over the last 20 years. Although as you mentioned, last year they did outperform.

But now, that’s starting to change. So there’s a lot to be said for a person holding a physical metal as the insurance part and as a profit part, and also holding some very carefully selected mining stocks. I think both are going to do very well going forward over the next few years.

Mike Gleason: Yeah. That’s very well put and you illustrate that very well. Obviously, we’ve said for a long time that mining stocks are not a substitute for owning the physical metal, but it’s more of a supplement to a physical holding that you already have.

Let’s change gears here and talk for a minute about Bitcoin. You see lots of promise in Bitcoin. It has at least the potential to serve as another form of honest money, but it will need to clear some hurdles. One of the big ones we can see coming is regulation. Governments are increasingly aware of the threat posed by Bitcoin both to the fiat currency monopolies they have been running and to their friends in the banking sector. What is your take on whether or not regulators will be able to succeed in controlling cryptocurrencies, David?

David Smith: Regulators are going to have a direct impact on that currency space, there’s no doubt about it. But the blockchain is something that is kind of the genie that’s out of the bottle. It’s not going away. It’s going to fundamentally transform a big chunk of financial exchanges as we know of because it’s peer to peer exchange. In other words, there’s no middle man. So point A to point B goes straight through on the blockchain. It’s a public pronouncement of a transaction and this type of thing.

So the blockchain itself is a fundamental change that will be with us. Which of the cryptocurrencies will be around is anyone’s guess. Of course, right now Bitcoin and Ethereum are a couple of the biggest ones and Ethereum is more of a tool than a currency itself. It was very interesting when China cracked down last week. They outlawed most of the ICOs that have been out there, the initial coin offerings. Some of them are just junk. That’s true in the United States as well, too. But when they kind of stopped that market dead in its tracks, Bitcoin dropped $ 1,000. Well, now it’s back up. It’s gained 600 of that.

So, I think the cryptocurrencies are going to continue to be a significant factor because they deal with money transfer and preservation in a different way than the metals. But for anyone to go all in on the cryptocurrencies, I think, at this point is a very, very risky move. Now, I trade these myself as well. But I do what I call an asymmetric trade where I put a relatively small amount of money into a particular currency idea and if I lose it all, I’ve lost a little bit of money. At the same time, I might be up three or four or five times. So this way no one position knocks me out.

There has been, I think, a competition in the last year between buying gold and silver and cryptocurrencies. I think these big swings that we’re seeing is causing people that are thinking about what they’re doing to be more cautious and say well now would I put my next X amount of money automatically into the cryptocurrencies or would I buy some more gold and silver. And I think from the standpoint of our discussion today, the value proposition in relation to risk and potential improvement in which you buy really rests with the gold and silver and PGMs today for the majority of the new money that you want to put in to either investment or insurance.

Sure, put some money into the cryptocurrencies if you understand them properly and understand that the swings in them. If you think the swings in the mining stocks are profound, it’s nothing compared to the cryptocurrencies. They can literally go from 0 overnight to an 800% the next day and then down 600% the day after that. So they’re the wild west on steroids. So I just would caution people to be conservative. You should learn how these things operate and understand the blockchain, but don’t think that you’re going to just come up with your child’s education here in the next six months and be able to hang onto it. Just be careful.

Mike Gleason: Yeah. Very good point. It can be a little bit of a speculators game, but obviously there’s a lot of value in there. Just the fact that we do have some currency that’s not controlled by governments, I guess, is a good thing at the end of the day. We’ve definitely upped our game when it comes to Bitcoin. We’ve accepted Bitcoin for a long time now for purchases of metal and soon we’re going to be able to pay people in Bitcoin who want to sell their gold and silver back to us.

Well, finally, David, as we begin to wrap up here, talk about some of the key support and resistance levels you’re watching here in the metals as we progress towards the end of the year and into next year. Are we poised to take out some of the overhead resistance levels we’ve seen, especially when it comes to silver or do we still have some work to do before we get too excited about a sustained up move? What are your thoughts there on the technicals as we begin to close?

David Smith: Well, the progressive levels of resistance, in other words the levels of prior selling that kept prices from going higher for quite a while, they’re being attacked pretty vigorously. But I think right now we’ve seen a pretty good run in both metals especially gold and they’ll be back and filling going on. Probably stand above $ 1,300 in gold or if it drops below that, it won’t stay there very long. But these levels are going to be increasingly attacked as we go forward. $ 1,375 is another good-sized level in gold… $ 1,400, $ 1,450. Once you get above that round number of $ 1,400 and moving up toward $ 1,500, that’s going to tell people more and more that hey this gold market is for real. It’s not a flash in the pan. It’s going to go up.

In terms of silver, $ 20 is a psychological point that needs to be bested at some point. Then $ 22 and $ 26. And once those levels are over, then people are really going to be piling in. So we talked about this topic before, but I think it’s important that people remember there’s two types of risk when you have an investment or when you buy for any reason. One is the information risk and the other is price risk. So if you buy something that is “low” in price or perceived to be low in price, what you have there is low price risk in relationship to what’s going on because we don’t have a lot of information as to why the price is at that level.

So when you wait for prices to rise substantially, then more is known about why those prices are going up. And at some point you have lower information risk and you have higher price risk. So there’s no getting around it. You’re going to pay for it one way or the other. Either accept the information risk or accept the price risk or ideally accept something in the middle. So if people want to wait until silver is $ 26 an ounce and that’ll prove that our thesis is correct, that’s fine. But they’ll pay $ 26… actually they’ll pay what $ 27 or $ 27.50 an ounce or maybe $ 28 for that metal, whereas now they can pick it up because the price risk is lower and the information risk is higher, they’ll pick it up for what $ 18. So just decide what you’re going to do, but be aware of why you’re making that decision so that you understand intellectually what you’ve done and why you’re doing it.

Mike Gleason: Yeah. At the end of the day, none of the reasons that made gold and silver worth owning five, six years ago – out of control government debt, fiat currencies being printed all over the world – none of those things have changed at all. The fundamentals are still there and the rationale for why you want to have some financial insurance is very much alive today.

Well, David, thanks so much for your time today and for enlightening us with your wonderful insights once again. Continued success with the book, Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shockwave. We definitely urge everyone to check that out if you haven’t already. David Smith and David Morgan do a great job there. Look forward to catching up with you again before long. I hope you have a great weekend. Thanks, David.

David Smith: You too, Mike. People when they look at this book, they’re going to find out how to hang on to most of what they make as well, too, which nobody really deals with that very effectively. So, it’s one thing to make it and it’s another to keep it and I think that’s the philosophy that you guys have at Money Metals because you do provide a two-way market where you don’t just sell you actually buy back as well, too. So when the time comes that people want to sell some of their metals for a good profit, you’ll be there for them unlike some other entities that maybe won’t be still standing because of their business practices.

Mike Gleason: Well that will do it for this week. Thanks for again to David Smith, Senior Analyst at The Morgan Report and regular columnist for MoneyMetals.com and co-author, along with David Morgan, of the book Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shockwave, a book which is available at MoneyMetals.com and Amazon, pick up a copy today.

And check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening. Have a great weekend, everybody.

Precious Metals News & Analysis – Gold News, Silver News