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Gold: The Unimpeachable Commodity Investment

Summary:
It’s official: Donald Trump has become only the fourth president in U.S. history to be the subject of a House impeachment inquiry. I won’t say much on this, as the details of the inquiry are still unfolding. Plus, it’s an extremely divisive topic. Less than half of Americans support Trump’s impeachment, even after the news broke of his call with Ukrainian president Volodymyr Zelensky. I will say one thing. If history is any guide, it’s highly unlikely that Trump will be convicted of any impeachment charges, especially with Republicans in control of the Senate. The only two presidents who have ever faced such charges, Andrew Johnson and Bill Clinton, were both acquitted. Richard Nixon, as you know, resigned before articles of impeachment could be drawn up. I don’t believe investors have

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It’s official: Donald Trump has become only the fourth president in U.S. history to be the subject of a House impeachment inquiry.

I won’t say much on this, as the details of the inquiry are still unfolding. Plus, it’s an extremely divisive topic. Less than half of Americans support Trump’s impeachment, even after the news broke of his call with Ukrainian president Volodymyr Zelensky.

I will say one thing. If history is any guide, it’s highly unlikely that Trump will be convicted of any impeachment charges, especially with Republicans in control of the Senate. The only two presidents who have ever faced such charges, Andrew Johnson and Bill Clinton, were both acquitted. Richard Nixon, as you know, resigned before articles of impeachment could be drawn up.

I don’t believe investors have too much to worry about in the short term, despite Trump’s warning that “markets would crash” if he were impeached. “Do you think it was luck that got us to the Best Market and Economy in our history,” he tweeted this week. “It wasn’t!”

The sample size is small, but history shows that impeachments have had minimal impact on markets, and outcomes have been inconsistent. Stocks slid in the months following the start of Nixon’s impeachment inquiry, but far more important factors were at play, including the collapse of the Bretton Woods monetary system, the 1973 oil crisis and the start of the 1970s recession. In Clinton’s case, stocks ended up nearly 40 percent 12 months after the House announced its plans to impeach. But again, context matters. The U.S. economy was strong in the late 90s, and we were at the tail end of one of the longest equity bull markets in history.

Gold: The Unimpeachable Commodity Investment

The scenario today looks very much the same. The U.S. economy—though it may be showing some cracks—is still going strong. Stocks have so far shrugged off threats of impeachment. Going forward, I would place the blame of any potential market weakness on other factors, from the global economic slowdown to ongoing trade tensions between the U.S. and China.

Germany on the Cusp of Recession

Indeed, if we look overseas, there’s much more that could rattle markets than U.S. political theater. Germany, for instance, may be on the cusp of recession, if it has not already entered one. The preliminary purchasing manager’s index (PMI) for September shows that the manufacturing sector in the world’s fourth largest economy is contracting at its fastest pace since the depths of the global financial crisis a decade ago. The flash PMI registered 41.4, an alarming 123-month low.

Gold: The Unimpeachable Commodity Investment

“The manufacturing numbers are simply awful,” commented Phil Smith, principal economist at IHS Markit, which produces the monthly report. “All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books.”

Car sales have been slowing across Europe for months now, as I’ve written about before. In August they were down a whopping 8.4 percent year-over-year, according to the European Automobile Manufacturers Association (ACEA). This has been a drag on Germany’s important automotive manufacturing industry, Europe’s largest and the world’s fourth largest by production.

Suppliers are feeling the pain as well. Continental AG, the Hanover, Germany-based manufacturer of auto parts, said this week that as many as 20,000 jobs were at risk over the next decade as plants will be closed not only in Germany but also Italy and the U.S.

Nervous investors have run for cover in the German bond market, where yields across the entire yield curve are currently trading in negative territory.

Helicopter Money Ahead?

A record $17 trillion in global debt now carries a negative yield, which is equivalent to about 20 percent of world GDP, according to a recent report by the Bank for International Settlements (BIS). The bank notes that the growing acceptance of negative yields has become “vaguely troubling.”

Just as troubling is the expanding level of global debt, which is now the highest it’s ever been in peacetime, according to Deutsche Bank’s recent analysis of 12 major economies. These dozen economies collectively have an average debt-to-GDP of 70 percent, the highest level in 150 years outside of a world war.

Gold: The Unimpeachable Commodity Investment

Jim Reid, the report’s lead author, warns that we may see central banks continue the sort of unconventional market interventions that have propelled record levels of borrowing in the first place.

“The multi-trillion dollar question is whether governments can successfully and consistently issue the holy grail of funding—zero-coupon perpetual bonds. If they can do that, spend the money, and central banks buy the bonds, then that is pure helicopter money,” Reid writes.

In its simplest terms, “helicopter money” refers to a rapid surge in money-printing, the hope being that it will spur economic output.

An inevitable consequence to this, of course, is runaway inflation. See: Weimar Germany, Zimbabwe and, more recently, Venezuela.

WGC: Gold Is Still Under-Represented

I see gold as a solution to many of the issues I’ve laid out, whether it’s recessionary spillover from Germany, high debt levels or helicopter money.

I’m not alone in thinking this. In a September report, the World Gold Council (WGC) calls the yellow metal “the most effective commodity investment,” adding that “allocations of 2 percent to 10 percent in a typical pension portfolio have provided better risk-adjusted returns than those with broad-based commodity allocations.”

However, the WGC says, gold is under-represented in most commodity indices, meaning investors are underexposed.

“Investors who access commodities via a broad-based index often assume they have an appropriate allocation to gold. In fact, most broad-based commodity indices have a very small allocation,” the WGC analysts write.

Consider the S&P GSCI, which tracks 24 commodities. West Texas Intermediate (WTI) oil and Brent oil make up nearly half of the index with a combined weighting of 45 percent. Gold, meanwhile, represents only 3.73 percent of the index.

This underexposure can be seen in a recent review of global family offices’ asset allocations. UBS’ Global Family Office Report 2019, released this week, shows that gold represents as little as 0.8 percent of portfolios on average. Equities in developed markets are the top position, representing a full quarter of portfolios, but some managers say they are trimming their exposure in preparation for a potential recession. A full 55 percent of family offices believe a recession will make landfall by 2020, according to the study.

Gold: The Unimpeachable Commodity Investment

The good news is that, of the 360 family offices surveyed—which collectively manage approximately $5.9 trillion—17 percent said they were planning to increase their gold position in 2020. More than three quarters said they were keeping it the same. Only 5.3 percent said they would be decreasing their exposure.

Increasing their gold exposure, I believe, would be rational and prudent at this time. As I told Kitco News’ Daniela Cambone at last week’s Denver Gold Forum (DGF), the longer yields stay negative around the world, the better the chances are of gold rocketing up to $10,000 an ounce. You can watch the entire interview by clicking here.

Congratulations to the U.S. Global Marketing Team!

On a final note, I wish to congratulate our marketing team for the recognition they received this week from the Investment Management Education Alliance (IMEA), which promotes knowledge-sharing and investor education among marketers who work in the financial industry.

At this year’s event in Chicago, our team picked up two STAR awards, for Best Newsletter and Best Product Education Campaign, as well as special recognition for its community volunteering. U.S. Global now has 88 STAR awards to its name.

These accolades would not be possible without you, our readers and subscribers, so thank you!

If you’re still not subscribed to my CEO blog, Frank Talk, you can do so by clicking here.

Until next week, happy investing!

U.S. Global Marketing Team Wins Distinguished Awards from IMEA Investment Management Education Alliance

Gold Market

This week spot gold closed at $1,497.05, down $19.85 per ounce, or 1.31 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 3.45 percent. The S&P/TSX Venture Index came in off 3.53 percent. The U.S. Trade-Weighted Dollar rose 0.61 percent.

Date Event Survey Actual Prior
Sep-24 Conf. Board Consumer Confidence 133.0 125.1 134.2
Sep-25 New Home Sales 659k 713k 666k
Sep-26 Hong Kong Exports YoY -7.4% -6.3% -5.7%
Sep-26 GDP Annualized QoQ 2.0% 2.0% 2.0%
Sep-26 Initial Jobless Claims 212k 213k 210k
Sep-27 Durable Goods Orders -1.1% 0.2% -2.0%
Sep-29 Caixin China PMI Mfg 50.2 50.4
Sep-30 Germany CPI YoY 1.3% 1.4%
Oct-1 Eurozone CPI Core YoY 1.0% 0.9%
Oct-1 ISM Manufacturing 50.3 49.1
Oct-2 ADP Employment Change 140k 195k
Oct-3 Initial Jobless Claims 215k 213k
Oct-3 Durable Goods Orders 0.2%
Oct-4 Change in Nonfarm Payrolls 140k 130k

Strengths

  • The best performing metal this week was palladium, up 2.57 percent as hedge funds increased their bullish positioning to an eight-week high. Gold traders and analysts were split between bullish and bearish on the yellow metal this week in the Bloomberg survey despite the metal’s price swings. On Monday, ETFs added 498,162 troy ounces of gold to their holdings, the most in three months, according to Bloomberg data. Then on Thursday, ETFs added another 130,610 troy ounces of gold, marking the ninth straight day of inflows. Hedge funds boosted their bullish positions in gold to the most bullish on record with data going back to 2006.
  • Turkey’s central bank gold holdings rose $903 million from the previous week to bring total holdings to $25.9 billion. The nation’s reserves are up a whopping 45 percent year over year.
  • Even as gold prices had a very bad day on Wednesday, falling 1.8 percent, demand for gold-backed ETFs spiked. Holdings jumped the most since June. Bloomberg writes that this suggests some investors have been waiting for a pullback in order to buy the dip. Where is all this money coming from? Perhaps from divestment in the S&P 500. Bloomberg reports that the SPDR S&P 500 ETF Trust lost $8.7 billion to withdrawals last week and that the SPDR Gold Shares ETF saw $950 million in inflows, the most in three months.

Gold: The Unimpeachable Commodity Investment

Weaknesses

  • The worst performing metal this week was silver, down 2.61 percent as hedge funds cut their net-long position to a five-week low. In negative economic news, U.S. home price gains in 20 cities decelerated in July for a 16th straight month. The S&P CoreLogic Case-Shiller index of property values increased 2 percent from a year earlier, which is the slowest since August 2012. U.S. consumer confidence saw the biggest drop since the start of 2019, falling to 125.1. This demonstrates that expectations for the economy are worsening, which poses a risk to household spending.
  • Sibanye Gold Ltd. announced that it plans to cut 5,270 jobs at its Marikana platinum mines in South Africa as deadlocked wage negotiations with workers brought a strike closer, reports Bloomberg. The company is restructuring operations that it acquired when purchasing Lonmin Plc earlier this year that made it the world’s biggest platinum miner.
  • Discounts on gold in India have widened significantly due to muted retail demand and higher unofficial imports, according to the World Gold Council Market Intelligence Group. The gold discount was $28 in July and then widened to $55 an ounce in August. Gold demand out of India, the world’s second largest consumer, has weakened due to higher prices but could rise in the coming month as Diwali approaches.

Opportunities

  • In a stock deal implying equity value of around C$338 million, Osisko Gold Royalties has entered into a definitive agreement to buy the remainder of Barkerville Gold Mines, reports Bloomberg. According to the article, the purchase is a premium of 26 percent over the Barkerville September 20 closing price. On the topic of gold names, Citigroup says that the latest signs are “strongly suggesting” that uptrends in precious metals are resuming after consolidating for the past few weeks. If you recall, earlier in the month the group said gold could rally to a record above $2,000 an ounce in the next two years. Similarly, Overseas China Banking Corp. agrees that gold should be supported in the short term, and could advance toward $1,600 an ounce.
  • A deficit in palladium could widen amid a lack of mine investment, reports Bloomberg. That is according to MMC Norilsk Nickel, which controls around 40 percent of global palladium output. The Russian company explains that the supply shortfall for palladium will be 600,000 ounces this year due to tougher environmental regulations underpinning demand. Palladium set another record on Wednesday after gaining over 30 percent this year, Bloomberg continues.
  • Conviction in gold’s uptrend is strengthening, according to UBS’s Global Precious Metals Comment for the week. As Joni Teves writes, as gold gains further upward momentum, UBS believes other areas in the market can become more active and support the next leg higher. “Participation out of China, the private wealth community, and retail investors has scope to pick up ahead, granted the supportive macro narrative remains intact,” she continues. Bloomberg ads in another article this week, which due to insufficient exploration spending, gold reserves have depleted significantly. This alone looks to be enough supply-side impetus to perk up the yellow metal.

Threats

  • According to AGF Investments, investors should be more concerned about the increasing prospects of Elizabeth Warren as president of the U.S. than the Donald Trump-Ukraine phone call scandal. The firm says that the Ukraine controversy is unlikely to affect stock markets and that President Trump should instead be attacking Warren as the main competition. According to Jefferies LLC, a 2020 election that pits Trump against Warren could finally crack the U.S. dollar’s multiyear rise by creating a massive spend fest, reports Bloomberg. Brad Bechtel, global head of foreign-exchange, says, “Warren and Trump’s tone would be different but the end result would be the same, massive blowouts of the U.S. government budget.”
  • Bloomberg reports that the repo market could be heading for trouble on Monday even as the market calmed this week. Last week the overnight repo rate soared to a record high of 10 percent amid a funding crunch that drew scrutiny to the size of the Fed’s balance sheet, writes Alexandra Harris. Thomas Cook collapsed this week, but not everyone was a loser. Hedge funds have been betting that some companies will fail by buying credit-default swaps. Bloomberg reports that more companies are set to follow Thomas Cook’s path as Europe’s economy slows and a growing number of companies are under stress.
  • The Minerals Council of Australia (MCA) has warned that gold companies could face mine closures if the Victorian government moves ahead with a 2.75 percent royalty on gold production. Australia is one of the largest miners of the metal. The MCA says that the projected $16 million in revenue the government would see from the royalty pales in comparison to the $300 million spent by Victorian gold mines in 2018 on wages, goods and services, taxes and community grants, the Financial Times reports.

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Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 0.43 percent. The S&P 500 Stock Index fell 1.01 percent, while the Nasdaq Composite fell 2.19 percent. The Russell 2000 small capitalization index lost 2.52 percent this week.
  • The Hang Seng Composite lost 2.15 percent this week; while Taiwan was down 0.92 and the KOSPI fell 1.99 percent.
  • The 10-year Treasury bond yield fell 3 basis points to 1.68 percent.

You can read the remaining of this article at www.usfunds.com/investor-library/investor-alert/gold-the-unimpeachable-commodity-investment/

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September 27, 2019

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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