Share this page with your friends:

Print

Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Billionaire Investor: "Gold Has Everything Going For It"
June 17, 2019

Billionaire Investor: “Gold Has Everything Going For It”

Last week was a strong one for gold, which managed to eke out its fourth straight week of positive gains. The price of the yellow metal broke above $1,350 an ounce last Friday, while gold miners, as measured by the NYSE Arca Gold Miners Index, tested their 52-week high.

Investors sought safe haven investments on a number of geopolitical risks, including protests in Hong Kong over the now-delayed extradition bill and an attack on two oil tankers near Iran and the Strait of Hormuz, the world’s busiest sea lane through which a fifth of global oil consumption passes. After placing the blame on Tehran, President Donald Trump now faces a tough decision on how to respond, if at all.

gold miners are testing one year high
click to enlarge

Billionaire investor Paul Tudor Jones, founder of and hedge fund manager at Tudor Investment Corp., said in a Bloomberg interview last week that geopolitical disruptions have made gold his favorite trade in the next 12 to 24 months.

The yellow metal “has everything going for it,” he said, adding that if it can reach $1,400 an ounce, it will push to $1,700 “rather quickly.”

The biggest catalyst for such a move, Jones believes, is the ongoing U.S.-China trade war and the broader implication of shrinking global trade. After 75 years of globalization and free trade, we’re seeing a return to the use of tariffs and other protectionist policies.

Remember, it was the 1930 Smoot-Hawley tariff “that helped send the U.S. and world economy into a decade-long depression,” according to a 2015 article by now-National Economic Council Director Larry Kudlow and former Federal Reserve Board of Governors nominee Stephen Moore. Just last month, global manufacturers contracted for the first time since 2012 due in large part to trade tensions. World trade volume has also sunk the most since the financial crisis.

Meanwhile, Trump is threatening to impose tariffs on $325 billion in imports from China, in addition to the approximately $200 billion that are already being taxed. Trump and China’s president Xi Jinping are expected to meet later this month at the G20 summit in Japan, where hopefully the two leaders can hash out a resolution to the trade war.

Says Jones, this reversal in globalization “would make one think that it’s possible we go into a recession. It would make one think that rates in the United States go back down to the zero-bound level. Gold in that situation is going to scream. It will be the antidote for people with equity portfolios.”

Gundlach and Dalio Also Bullish on Gold

Jones isn’t the only billionaire hedge fund manager who thinks gold looks attractive right now. In a recent investor webcast, DoubleLine CEO Jeffrey Gundlach said that he’s “long gold.” His call is based on the belief that the U.S. dollar will be substantially lower by the end of the year. (Want a sure way to push the dollar down? Wipe out all $1.5 trillion in student loan debt in the U.S. Senator and presidential hopeful Elizabeth Warren will reportedly introduce a bill intended to do just that. What’s next—mortgages?)

And then, of course, there’s Ray Dalio, the world’s most profitable hedge fund manager. Dalio is a true believer in the 10 Percent Golden Rule, and according to Bridgewater’s SEC filings, he maintains significant positions in gold across all tiers in the industry.

Yield Curve Flashes a Warning Sign—Another Catalyst for Gold?

Last week the yield curve inversion between the five-year and three-month Treasury yields passed a key threshold that, in the past, has telescoped a recession. In a tweet dated June 13, Bloomberg’s Lisa Abramowicz shared a chart of the yield inversion and commented: “Cam Harvey, the economist who first linked an inverted yield curve to economic declines, pinpoints the 3-month/5-yr curve as a key recession indicator once it inverts for a full quarter. It officially finished a full quarter of being inverted yesterday,” meaning last Wednesday.

The three month slash five year treasury yield curve has been inverted for a quarter
click to enlarge

As for when we can expect a recession, Gundlach says he now believes there’s a 40 percent to 45 percent chance of one occurring within six months, a 65 percent change in the next year.

Oil Prices Jump on Tanker Explosions, but Don’t Overlook Norway

The big news involving oil last week was, as I mentioned earlier, the attacks on the two tankers near the Strait of Hormuz, among the world’s most important strategic chokepoints. Every day, as many as 17.2 million barrels of oil pass through the strait, if you can believe it. Because it’s the only way into and out of the Persian Gulf, both Saudi Arabia and the United Arab Emirates (UAE) have proposed building pipelines in order to bypass the historically dangerous shipping route.

Following the attack on Thursday, oil prices jumped as much as 4 percent.

Two oil tankers attacked and US blames Iran

But unless this incident escalates into something else—a U.S. military response, for instance—I see it as merely a short-term boost to oil.

A much more meaningful, long-term impact on oil and oil stocks is Norway’s divestiture from fossil fuels. The Scandinavian country’s sovereign wealth fund, known as the Norwegian Government Pension Fund, is the largest such fund in the world, valued at more than $1 trillion. Established in 1990 to invest in the profitable North Sea oilfields, the fund also invests heavily in international stocks, bonds and property in nearly 80 countries.

In the first quarter of this year, the fund delivered returns of $85 billion, its best quarter ever.

But following a recommendation from the country’s parliament, the fund will sell off some $13 billion of stocks in companies involved in the exploration and production of fossil fuels, including oil, gas and coal. The move is a huge step toward shifting assets into renewable energy.

The divestiture won’t have much of an impact on large-cap companies such as Royal Dutch Shell and Exxon Mobil, but it could have consequences for some mid-tier firms such as Anadarko Petroleum, Occidental Petroleum and EOG Resources.

Combined with OPEC’s recent forecast for weaker global oil demand, Norway’s decision—perhaps needless to say—is expected to be a headwind for the fossil fuel energy industry as whole.

All Eyes on Hong Kong

On a final note, I wish to express my support for the 7.4 million people in Hong Kong, especially the estimated 2 million who have took to the streets to protest an amendment that would allow suspected criminals in Hong Kong to be extradited to mainland China.

The former British colony, now autonomous territory, is one of the world’s great success stories. For more than 20 years, it has ruled itself with its own government, currency and police force, and thanks to economic liberalization, it’s risen to become one of the top three financial hubs following New York and London. It consistently ranks among the most competitive places on earth, as well as one of the best to conduct business in.

Every nation wishes to have the freedom to make its own decisions with respect to its laws, economy, security and more, without interference from another sovereign state. That wish is at the heart of Brexit and, frankly, the election of Donald J. Trump. At the same time, it’s important to remember that government policy is a precursor to change.

At the moment, the bill has been delayed "indefinitely." Let’s see if the protestors can manage to get it turned over permanently.

Congrats, Toronto Raptors!

Before I leave you, I want to congratulate the Toronto Raptors on their very first NBA Finals win. As I mentioned earlier, they are now the most valuable sports franchise in Canada, even above the Maple Leafs.

It really is incredible to see not just an entire city, but an entire country, get behind this team. Two of its superstars, as many of you may know, previously played for Gregg Popovich of the San Antonio Spurs – Kawhi Leonard and Danny Green.

I’ve been in San Antonio during a Spurs championship win and naturally the excitement was widespread. The enthusiasm in Toronto, however, even a day after the win, was just as grand—if not more so. Fans from all over took trains to the stadium to purchase championship t-shirts and flags. Lines of people literally wrapped around the stadium.

The joy of winning truly does create economic value.

Looking for someone to make sense of the markets? Subscribe to Frank Holmes’ award-winning Frank Talk CEO blog!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (03/31/2019): Royal Dutch Shell Plc, EOG Resources Inc.

Share “Billionaire Investor: "Gold Has Everything Going For It"”

What a U.S. Rate Cut Could Mean for Gold Prices
June 11, 2019

Stocks surged last Friday following a U.S. jobs report that, to put it mildly, fell far below expectations. At first this might seem counterintuitive. Shouldn’t signs of a slowing economy act as a wet blanket on Wall Street?

Not necessarily. Investors, it’s believed, are responding to the expectation that the Federal Reserve will have no other choice than to lower interest rates this year in an attempt to keep the economic expansion going. Earlier this month, Fed Chair Jerome Powell himself commented that he was prepared to act “as appropriate” should the global trade war risk further harm. President Donald Trump has also renewed his attacks on Fed policy, calling last December’s rate hike a “big mistake.”

So a rate cut looks more and more likely in 2019, perhaps as soon as this summer. And investors rejoice.

The thing about rate cuts, though, is that they’ve often telegraphed a recession, as you can see in the chart below. The blue line represents the New York Fed’s probability of a recession 12 months out, based on the spread between the 10-year and three-month Treasury yields. In the past, this probability spiked about a year following the beginning of a rate cut cycle. Today, as monetary easing is widely expected, the chances of a slowdown one year from now stand at just under 30 percent.

global manufacturing PMI contracts for the first time since 2012
click to enlarge

No one seems particularly certain a rate cut will succeed in thwarting a potential recession. In a note to clients this week, Morgan Stanley equity strategist Michael Wilson wrote that “Fed cuts may come too late. Fed could cut as soon as July but it may not halt slowdown/recession.”

And because the Fed waited so long to begin raising rates in late 2015, it has noticeably less gun powder, as it were, to address recessionary risks compared to past instances. Historically, rates have been lowered between 500 and 550 basis points on average to head off an economic slowdown. With the federal funds rate at around 2.4 percent right now, such a decrease just isn’t possible.

Unless, of course, negative rates were introduced here in the U.S. as they have been in the European Union (EU), Japan and elsewhere. These policies effectively punish people and businesses that save, in effect motivating them to spend.

Five-Year Anniversary of Negative Rates in the EU

This week, in fact, marks the fifth anniversary since the European Central Bank (ECB) lowered rates into negative territory. Since that time, European banks have paid as much as 21.4 billion euros ($24.2 billion) in revenues to the ECB, CNBC reports.

According to the report, German banks account for a third of all deposit charges, followed by French and then Dutch banks. The Swiss National Bank (SNB) is also expected to maintain negative rates through 2021.

Curious to know what effect this might have on fixed income? Take a look at the yield on the 10-year German bund. On Friday it hit an all-time low of negative 0.257 percent, meaning investors were paying the government for the pleasure of holding on to its debt. Adjusted for inflation, that rate was even lower.

U.S. Manufacturing Job Growth Has Been Slowing for Nearly a Year
click to enlarge

Gold Has Thrived in a Negative-Yield Environment

So will we see negative rates here in the U.S.? There’s no indication of that right now, but again, in the event of an economic slowdown, the Fed will be very limited in its capacity to loosen monetary policy before other measures must be considered.

If you believe negative rates are a real possibility, an allocation to gold and gold stocks might make a lot of sense right now. In the past, gold prices have surged when real yields fell into negative territory. (The real yield is what you get when you subtract the annual inflation rate from a government bond yield.)

This is why I always recommend a 10 percent weighting in gold, with 5 percent in gold bullion, the other 5 percent in gold stocks, mutual funds and ETFs. Remember to rebalance at least annually!

 

 

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

Share “What a U.S. Rate Cut Could Mean for Gold Prices”

Put Your Trust in Gold
June 10, 2019

Put Your Trust in Gold

Americans’ trust in institutions, from the federal government to banks to the news media, has been deteriorating for decades. Sixty years ago, three quarters of Americans expressed faith in the government to do the right thing “most of the time” or “just about always.” Today, only one in five people, a near-record low, believes our leaders make decisions in the country’s best interest.

The news media fares just as poorly. A new survey finds that Americans believe “fake news” is a bigger problem right now than violent crime, illegal immigration and terrorism.

Just take a look at the chart below, based on Gallup polling data going back to 1973. Whether it’s newspapers, television news or, more recently, online news, Americans’ faith is steadily eroding. Last year, the percent of Americans who said they have a “great deal” or “quite a lot” of confidence in newspapers stood at a near-record low of 23 percent. Trust in television and online news was even lower.

Americans trust in news media has been slipping for decades
click to enlarge

So where can you still put your trust in today’s often cynical world? Friends and family. Our churches and other religious organizations. Our jobs.

As an investor, I continue to have great faith in gold as a store of value during times of economic and geopolitical uncertainty. It’s behaved precisely as I expect it to. In response to heightened global trade concerns and weakening economic indicators, investors have piled into the yellow metal, pushing its price up for a remarkable eight straight days as of last Friday. We haven’t seen such a winning streak since June 2014, when gold traded up for 10 straight days.

Late last week, it was within striking distance of its 2019 high of about $1,356 an ounce, which should spur even more investors to get off the sidelines and participate.

Gold within striking distance of 2019 high
click to enlarge

Indeed, there are a number of warning signs that suggest investors should proceed with caution as the U.S. economic expansion turns 10 years old. Global manufacturing growth reversed for the first time since 2012, with the purchasing manager’s index (PMI) falling for a record 13 months in May.

This weakness turned up in the monthly jobs reports from the federal government and payroll services provider Automatic Data Processing (ADP). The Labor Department reported Friday that U.S. employment edged up only 75,000 in May, far below expectations of 175,000.

According to ADP, the U.S. added 27,000 jobs, making May the weakest month for job gains in more than nine years. I don’t know about you, but I can’t help reading this as a direct negative consequence of the White House’s escalating trade war with China and earlier threat to impose a tariff on all imports from Mexico. The U.S. goods producing sector was hit hardest, with construction losing 36,000 positions, natural resources and mining losing 4,000 and manufacturing losing 3,000.  


US had the smallest monthly job gain since economic expansion began
click to enlarge

The 5 percent Mexican tariff was “indefinitely suspended,” according to Trump Friday evening, in exchange for Mexico doing more to stem the flow of illegal immigration into the U.S.

As I’ve explained elsewhere, tariffs are essentially taxes and, as such, they’re inflationary. This has historically supported the price of gold.

Besides Walmart and Costco, a number of other retailers have been telling customers and investors that prices will be going up thanks to the Chinese tariff. Discount retailer Five Below said it will likely need to raise prices on certain items above $5 for the first time. Dollar General and Dollar Tree both alerted shoppers that they will be “facing higher prices as 2019 progresses.”

Trump Could Be a One-Term President Thanks to Mexican Tariffs

Discussing the trade war, JPMorgan’s Michael Cembalest, who hosts the “Eye on the Market” podcast, reminded listeners last week of an article written back in August 2015 by Trump’s National Economic Council director, Larry Kudlow, and former Trump pick for the Federal Reserve Board of Governors Stephen Moore. In the article, titled “Why Trump’s protectionist ways will hurt the economy,” Kudlow and Moore compared then-candidate Trump unfavorably to Herbert Hoover, the last Republican “trade protectionist.”

“Does Trump aspire to be a 21st century Hoover with a modernized platform of the 1930 Smoot-Hawley tariff that helped send the U.S. and world economy into a decade-long depression and a collapse of the banking system?” the two asked.

For better or worse, we may end up getting an answer to this question in the coming weeks and months.

What the Gold/Silver Ratio Is Telling Us

Another sign of slowing economic growth is the gold/silver ratio. This ratio tells you how many ounces of silver it takes to buy one ounce of gold. Last week it crossed above 90 for the first time in 26 years, meaning silver has not been this undervalued relative to gold since the first year of Bill Clinton’s first term.  

Gold to silver ratio at highest level since 1993
click to enlarge

The reason this is important is that half of silver demand comes from industrial applications. When the demand cools, the price of silver falls. One of the metal’s primary uses is in semiconductors, sales of which have been slipping. According to the Semiconductor Industry Association (SIA), global sales were $32.1 billion in April, a 14.6 percent decrease from the same month last year. This is the deepest plunge since the financial crisis.

Buying silver, then, could be a contrarian play, but I recommend also that you maintain a 10 percent weighting in gold. Although the yellow metal’s price surged last week, it’s still not quite in overbought territory when you look at the 14-day relative strength index (RSI). There could be further upside potential, especially if Trump revisits the Mexican tariff.

Will inflationary tariffs finally boost gold? Watch my latest interview with Kitco’s Daniela Cambone by clicking here!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2019.

Share “Put Your Trust in Gold”

DOUBLE WHAMMY: Fed Policy and the U.S.-China Trade War
May 28, 2019

Markets were decisively in “risk-off” mode last week. Following weak manufacturing news last Thursday, the yield on the 10-year Treasury sunk to its lowest level since October 2017. The spread between the 10-year yield and three-month yield, in fact, inverted once again, with the shorter-term bond yield higher by 6 basis points. As such, the “boring” yet mostly reliable utilities sector rotated to the top.

I’m not going to use the R-word here. All I’m going to say is that it might be time for investors to brace for a significant correction—especially with debt at record levels and the Federal Reserve left with very little firepower to combat a full-blown crisis.

Let’s take a look at what the smart money is doing.

Many successful, ultra high-net-wealth individuals (UHNWIs) favor municipal bonds, not only because they’re tax-free at the federal and often state and local levels, but also because they’ve managed to perform well even during equity bear markets. According to the first-quarter asset allocation report for Tiger 21, a peer-to-peer network for UHNWIs, members had an average weighting of 9 percent in fixed income, which includes muni bonds.

As many of you know, U.S. Global Investors is known for gold and natural resource investing, but we also have longstanding experience in muni bond investing.  

Speaking of gold, Ray Dalio said back in 2015 that “if you don’t own gold… there is no sensible reason other than you don’t know history or you don’t know the economics of it.” Time hasn’t changed Dalio’s mind. The billionaire hedge fund manager, the most profitable in U.S. history, just added to his gold holdings in the first quarter, according to SEC filings.

If you’re not doing the same, why not? The U.S. economy looks rock-solid with a strong jobs market, but there are some worrisome signs lurking under the surface.

Could U.S. Manufacturers Contract in 2019?

Case in point: May’s “flash” index of U.S. manufacturers registered a sharp decline to 50.6, down from 52.6 in April. This is only a preliminary reading, but if it turns out to be accurate—we’ll know early next month—it would mark the slowest growth in the domestic manufacturing industry since September 2009, according to IHS Markit. Then again, it could fall below 50.0, which would indicate contraction.

Is the Bank for International Settlemenst BIS suppressing teh price of gold?
click to enlarge

Nearly all of the underlying economic data weakened from the previous month, including output, employment and inventories. New orders actually fell in May for the first time since August 2009, meaning U.S. manufacturers had a net negative number of orders. Business expectations sunk to a seven-year low.

As I’ve explained many times before, we see the manufacturing PMI as a leading indicator of future demand for energy and raw materials. But it also has obvious implications for earnings per share (EPS) growth and gross domestic product (GDP) growth.

IHS Markit’s report doesn’t comment on why manufacturers are in this position right now, but two big culprits jump to mind: the Federal Reserve and the U.S.-China trade war.

The Historical Fallout of Tightening Credit

Earlier in the month I shared a chart with you showing that every major slowdown in the U.S. manufacturing industry going back to the 1950s was preceded by a Fed tightening cycle. The way things are headed, this cycle looks to be no different. Fed Chair Jerome Powell has hinted that there will be no more interest rate hikes in 2019, but the “damage” has already been done, so to speak.

In a recent report, analysts at research firm Cornerstone Macro wrote that they believe the U.S. manufacturing index “will eventually break below 50.0 in 2019 as it HAS AFTER EVERY FED TIGHTENING CYCLE.”

What Usually Happens After the Fed Tightens Rates?
Tightening Cycle Began In: U.S. Manufacturing PMI Fell Below 50 EPS Recession GDP Recession
1954 YES YES YES
1958 YES YES YES
1961 YES YES NO
1967 YES YES YES
1972 YES YES YES
1977 YES YES YES
1980 YES YES YES
1983 YES YES NO
1988 YES YES YES
1994 YES NO NO
1999 YES YES YES
2004 YES YES YES
Hit Rates 100% 92% 75%
Source: Cornerstone Macro, U.S. Global Investors

This is significant because it’s one of the final things to happen in nearly every business cycle of the past several decades. After the index dips below 50.0, we start to see employment weaken. (We’re already starting to see some of this. Ford alone has cut some 7,000 positions, with many more expected.) Around 92 percent of the time, an EPS recession followed manufacturing pullbacks, according to Cornerstone. After that, a GDP recession has occurred three quarters of the time.

China Digging In for the Long Haul

And then there’s the U.S.-China trade war, an end to which might still be some time away. Last week Chinese president Xi Jinping told crowds that the country was “now embarking on a new Long March,” interpreted as a sign that he could be preparing for a protracted engagement.

The skirmish has already “severely damaged” international trade volumes, according to the International Air Transport Association (IATA). Air cargo was down 2 percent in the first quarter of 2019 compared to the same period a year ago, while air freight rates between Hong Kong and North America have spiked.

Is the Bank for International Settlemenst BIS suppressing teh price of gold?
click to enlarge

Tariffs are also hurting the competitiveness of American companies operating in China, a survey conducted earlier this month has found. Responding to the American Chamber of Commerce in the People’s Republic of China (AmCham), as much as 75 percent of China-based U.S. firms, and 81.5 percent of U.S. manufacturers, said that tariffs were having a negative impact on their business. More than 40 percent indicated they planned on relocating outside of China to avoid tariffs, but of those, only 6 percent said they were considering returning to the U.S.

But conditions here in the U.S. can be just as constricting for some companies, thanks to higher tariffs. In a report last week, UBS estimated that as many as 12,000 U.S. stores could close this year because of tariffs, putting some $40 billion of sales at risk. The U.S. is already “over-stored,” according to the report, but so many store closures in a single year would be a major squeeze on the broader economy with mass job losses.

Goldman Sachs: Inflation Will Surge

What I have my eye on most, though, is inflation. Tariffs and other trade restrictions are naturally inflationary.

In a recent note to investors, analysts at Goldman Sachs revised up their estimates of the impact tariffs might have on U.S. inflation. Look at the chart below. Although prices for total consumer goods—as measured by the consumer price index (CPI)—have declined over the past few years, prices for as many as nine separate categories hardest hit by tariffs have surged since the U.S.-China trade war began in early 2018.

Is the Bank for International Settlemenst BIS suppressing teh price of gold?
click to enlarge

Earlier this month, Trump raised tariffs from 10 percent to 25 percent on $200 billion worth of Chinese imports. If tariffs were imposed on an additional $300 billion, which Trump has threatened to do, inflation would rise “noticeably” above 2 percent next year, Goldman says. This would “slightly increase the likelihood” that the Fed would hike interest rates.

It should be pointed out that such tariffs are not generally paid by Chinese exporters. Instead, they are paid by U.S.-based importers, which often pass the extra expense on to the end consumer.

Cornerstone Macro weighed in on the subject in a note dated May 21, writing that tariffs are just one part of the inflation story right now—the other being rising fuel costs.

“Tariffs, coupled with rising gasoline prices, represent a double whammy for U.S. consumers,” the firm writes. It projects prices for gas and consumer goods to be up some 5 percent year-over-year in the second half of 2019.

Higher Inflation Has Historically Meant Higher Gold Prices

The good news in all this is that higher inflation has historically been supportive of the price of gold. In the years when inflation was 3 percent or higher, annual gold returns were 15 percent on average, according to the World Gold Council (WGC).

When gold hit its all-time high of $1,900 an ounce in August 2011, consumer prices were up nearly 4 percent from the same time the previous year. The two-year Treasury yield, meanwhile, averaged only 0.21 percent, meaning the T-note was delivering a negative real yield and investors were paying the U.S. government to hang on to their money. This created a favorable climate for gold, as investors sought a safe haven asset that would at least beat inflation. Go gold!

Missed my interview with Chris Powell of the Gold Anti-Trust Action Committee (GATA)? Click here to read it now!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually. A basis point is one hundredth of one percent, used chiefly in expressing differences of interest rates.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2019.

Share “DOUBLE WHAMMY: Fed Policy and the U.S.-China Trade War”

How to Unrig the Gold Market, According to GATA's Chris Powell
May 21, 2019

In an earlier post, I gave you a sneak preview of my interview with Chris Powell, secretary/treasurer at Gold Anti-Trust Action Committee (GATA). For 20 years now, Chris and others at GATA have made it their mission to expose collusion by international financial institutions to control the price and supply of gold.

Below are highlights from the interview. I have to say that during much of our conversation, my jaw was on the floor. I don’t want to say much more than that! Read on, and remember to share widely.

Tell us about GATA’s background and what it does.

GATA was founded in 1999 to expose and litigate against the longstanding Western central bank policy of suppressing the price of gold. At first we weren’t even sure if it was Western banks that were doing it. But after a year or so of research and investigation, we concluded that the bullion banks were operating surreptitiously as brokers for governments, giving cover to their intervention in the gold market. At the time, we had a law firm advise us that this rigging was very likely authorized by the Gold Reserve Act of 1934, as amended since then, and as such, there may not be grounds to sue the government directly over gold price manipulation.

We went ahead and filed suit in 2001 anyway, in the U.S. District Court in Boston. We had a consultant, a Harvard-trained lawyer and gold investor, who brought a case against the Bank of International Settlements (BIS), the U.S. Treasury and various bullion banks.

One particular hearing I attended that year produced a remarkable admission from an assistant U.S. attorney. In short he said that, while the government was not admitting to the complaint, it nevertheless had the power and authority to do all the things the suit complained of—manipulating the price of gold, in other words. I made a record of this admission and put out a press release. The lawsuit was ultimately dismissed by the judge on technical jurisdictional grounds.

Having lost a little hope of suing the government directly, we determined that the best course of action going forward was to try to publicize our findings. We’re convinced that the Gold Reserve Act gives the U.S. government, particularly the Treasury Department and the Exchange Stabilization Fund (ESF), the unrestricted authority to intervene in and secretly rig any market in the world. Our work now is simply to expose this policy to as large an audience as possible.

On a practical level, how does manipulation like this occur on such a global scale?

It’s done largely in the futures markets. It’s also done in the London over-the-counter (OTC) market. The mechanisms are gold swaps and leases between central banks and bullion banks, and through the sale of futures contracts.

We’ve seen a number of flash crashes in the price of gold, but lately they’ve been happening every few weeks. Somebody will dump a billion dollars or more of gold futures contracts in New York. That can be achieved only by someone with infinite resources and money, who also has a powerful interest in suppressing the price of gold. Nobody interested in making good money would dump that much gold all at once. He would sell it gradually over a period of time. I think these flash crashes are irrefutable evidence of price suppression.

the gold futures flash crash of January 6, 2014
click to enlarge

Are there any public records that point to all of this?

Yes. There’s all sorts of material in the Treasury Department and Federal Reserve archives about gold price suppression being U.S. policy. Jelle Zijlstra—the former president of the Netherlands’ central bank, who simultaneously served as president of the BIS—wrote in his memoirs that the gold price has always been suppressed at the behest of the United States through international action. You can go back to the years of the London gold pool in the 1960s, where the control of the gold price through international action was a matter of public record, operating through the Bank of England (BoE).

A very remarkable transcript exists of a meeting in April 1974 between Secretary of State Henry Kissinger and Thomas Enders, the assistant under secretary of state for economic and business affairs. Enders explains to Kissinger that U.S. government policy is to drive gold out of the world’s financial system and prevent European governments from remonetizing the metal in any way. The purpose of this policy is to support the U.S. dollar as the world reserve currency, and if not the dollar, then the International Monetary Fund’s (IMF) special drawing rights (SDR).

The most compelling evidence, I believe, are letters sent by Representative Alex Mooney of West Virginia to the Federal Reserve, Treasury Department and U.S. Commodity Futures Trading Commission (CFTC). Mooney asked the Fed and Treasury to identify which markets they’re secretly trading in, and to explain the purposes of this trading. Fed Chair Jerome Powell essentially refused to answer the question, as did the Treasury. Mooney asked the CFTC to state whether manipulation trading in the futures markets undertaken by the U.S. government or its agents or brokers is subject to the CFTC’s jurisdiction, or whether such manipulation is actually legal or exempt from ordinary commodities law. The CFTC refused to answer the question.

I think these agencies’ refusal to answer Mooney’s questions is quite revealing. And notably, mainstream financial journalists don’t find any of this curious. They have a rule never to put a critical question to any central bank about anything. Theoretically, somebody could do it. It’s being attempted by alternate news agencies and research organizations, but you can’t get an answer. That’s a good indication, I believe, that central banks are doing things they don’t want the markets to know about.

My next question has to do with central banks and their consumption of gold. They’ve been net buyers since 2010. The United States continues to be the single largest holder of gold of any institution on the planet. How do we reconcile that? If they own all this gold, wouldn’t it go against their self-interest to suppress its price?

global central banks have been net buyers of gold since 2010
click to enlarge

That seemed to be a paradox to GATA some years ago, but we don’t believe it is any longer. To suppress the price of gold, you need a certain amount of inventory to knock the market down. You can’t do it entirely through the naked shorting that they do in the futures market. You always need to be bleeding a certain amount of the metal into the market to maintain the appearance of a gold market. You can’t just be trading paper all the time—it’s not enough.

The U.S. economists Paul Brodsky and Lee Quaintance wrote a paper a few years ago that floats a plausible hypothesis of what’s going on. The two hypothesized that the policy in recent years has been to redistribute world gold reserves among central banks so that those banks that have been overweight in U.S. dollars and Treasuries could hedge themselves in anticipation of an inevitable devaluation of the dollar and revaluation of gold. Central banks, the two allege, intervene together in the futures market to drive the nominal price down to facilitate easy acquisition of gold. They would prefer to keep the public out of acquiring the metal.

Full disclosure, I don’t have any particular evidence from government sources that confirms Brodsky and Quaintance’s hypothesis. But it certainly fits the facts as we understand them.

As you likely know, a JPMorgan trader is awaiting sentencing right now for his participation in gold price rigging. What’s your reaction to this?

His sentencing has been delayed twice now. It was delayed again the other day for another six months.

I’m not sure what to make of it, to be honest. There’s some confusion here because a few years ago, the chief executive of JPMorgan, Jamie Dimon, and the woman who was running its commodities desk at the time, Blythe Masters, both gave interviews saying that JPMorgan has no position of its own in the monetary metals markets. They were trading them only for clients. Of course, nobody in journalism followed up by asking Dimon or Masters who the clients were. I would have wondered if the bank was acting as the broker for the U.S. or Chinese government. That was certainly implied from the answers they gave.

Now this trader, John Edmonds, apparently had to admit that he was rigging the gold and silver markets while trading at JPMorgan. He was allegedly doing it with the knowledge and counsel of his superiors, and if it were done on behalf of the government, presumably it’s legal under the Gold Reserve Act. But as Charles Peters, former editor of the Washington Monthly, used to say: “The scandal is never what’s illegal. The scandal is what’s perfectly legal.”

So why is Edmonds being prosecuted? Because he was front-running government trades? Was he doing it just for himself? I can’t imagine the Justice Department would be prosecuting him if his trading was being conducted on behalf of the U.S. government.

Where do you think gold prices would be right now if not for this manipulation? What’s the true value of gold?

The true value of gold is whatever our free market wants it to be. Our attitude toward money is very libertarian. Let there be free markets and currencies, and if governments are intervening, they should be transparent about what they’re doing.

Having said that, the disparagement of gold for years is that its price has not kept up with inflation. Everything keeps up with inflation. That in itself is pretty powerful evidence of government intervention. It’s not keeping health insurance costs and medical care prices down. It’s not keeping college tuition down. It’s not keeping grocery prices down. How come gold is the only thing that doesn’t keep up with inflation? Silver, too? All of the traditional ratios of monetary metals values compared to stock market levels and other prices have been thrown off in recent years because of government intervention.

global central banks have been net buyers of gold since 2010
click to enlarge

So what would those prices be if the traditional ratios were enforced again? I can’t say for sure, but obviously they would be far, far higher than they are today. And the government knows this. If the government ever got out of the futures market and abandoned its manipulation scheme, metal prices would remonetize in as little as a week.

I’ll add that if you want the gold or silver price to go up, you’ve got to buy real physical metal. Take it out of the banking system and weaken the futures market, which is where the manipulation takes place.

If readers are interested in learning more, where should they go?

They can go to our site, GATA.org. In the upper right-hand side, visitors can subscribe to our daily newsletter, the “GATA Dispatch.” That’s absolutely free. On the left, in the “Articles” section, you’ll find a link to “The Basics” and “Documentation.” All of the documentation of gold price suppression and secret intervention in gold markets by governments is contained there. And if they’re searching for anything in particular, I’d be happy to help them or refer them to someone who can. They can just email me at cpowell@gata.org.

Thank you for your time, Chris! It was a pleasure.

The pleasure was all mine.

For more on the gold market, subscribe to our award-winning Investor Alert.

 

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Share “How to Unrig the Gold Market, According to GATA's Chris Powell”

Net Asset Value
as of 06/17/2019

Global Resources Fund PSPFX $4.43 No Change Gold and Precious Metals Fund USERX $7.28 0.07 World Precious Minerals Fund UNWPX $2.65 -0.01 China Region Fund USCOX $8.31 -0.07 Emerging Europe Fund EUROX $6.91 0.01 All American Equity Fund GBTFX $24.14 -0.09 Holmes Macro Trends Fund MEGAX $16.59 No Change Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change