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If Inflation Is the Trick, Gold Is the Treat

Summary:
October 30, 2020 Want to hear something really scary? Inflation, the scourge of the modern economy, may be running much faster than we’re led to believe. I’ll use consumer spending on Halloween as an example of what I mean. Total Halloween spending has fallen for the past three years and is projected to fall yet again this season, to billion from .8 billion last year, according to recent data from the National Retail Federation (NRF). No surprise there. With many people still avoiding large gatherings due to the pandemic, and health officials calling trick-or-treating a “high-risk activity,” less is going to be spent on candy, costumes, party decorations and other Halloween-related items. Indeed, spending on costumes is forecast to plunge a not insignificant 0 million compared to

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October 30, 2020

If Inflation Is the Trick, Gold Is the TreatWant to hear something really scary? Inflation, the scourge of the modern economy, may be running much faster than we’re led to believe.

I’ll use consumer spending on Halloween as an example of what I mean.

Total Halloween spending has fallen for the past three years and is projected to fall yet again this season, to $8 billion from $8.8 billion last year, according to recent data from the National Retail Federation (NRF).

No surprise there. With many people still avoiding large gatherings due to the pandemic, and health officials calling trick-or-treating a “high-risk activity,” less is going to be spent on candy, costumes, party decorations and other Halloween-related items.

Indeed, spending on costumes is forecast to plunge a not insignificant $600 million compared to last year, from $3.2 billion to $2.6 billion.

Given this, you might suppose that on a per-person basis, Halloween spending would also be down. And yet that’s not the case, according to the NRF’s survey. Average spending per consumer is expected to increase almost 7 percent, from $86.28 to $92.12.

If Inflation Is the Trick, Gold Is the Treat

So what’s going on here?

There may be a number of possible explanations for this phenomenon, but I believe the most convincing is also the simplest: Inflation.

And as I’ve said before, the real inflation may be much higher than the official consumer price index (CPI) issued monthly by the Bureau of Labor Statistics (BLS).

Earlier this month, the BLS reported that consumer prices were up only 1.4 percent in September compared to the same time last year. If we remove volatile food and energy prices, they were up slightly more, at 1.7 percent.

How can this be, when consumers are spending 7 percent more on candy and costumes this year, despite total Halloween spending declining?

The truth is that the CPI has undergone several changes in methodology over the years. At one time, it was a genuine cost of goods index (COGI). Today, however, it’s more of a cost of living index (COLI). So when you see that inflation is up 1.4 percent year-over-year, you can be sure it’s actually higher—potentially much higher.

How much higher? Economist John Williams, who runs the popular website ShadowStats.com, uses the 1980 methodology for measuring inflation. According to this gauge, consumer prices are up closer to 9 percent than 1 percent.

The implication, of course, is that inflation could be eating your lunch faster than you realize. And that’s truly scary, whether you’re still in your wealth building years or retirement.

Positioning Your Portfolio for Treasury Secretary Elizabeth Warren

There’s reason to believe that the rate of inflation could get a boost next year, particularly if we see additional multi-trillion-dollar stimulus packages. I’ll discuss the election more in-depth below, but I’ll say upfront that it’s being reported that Massachusetts senator Elizabeth Warren is seeking an appointment as Treasury secretary should Joe Biden win on Tuesday.

This is the same Elizabeth Warren who, while still a presidential candidate, said her Medicare-for-all health care plan would cost a staggering $52 trillion.

I’ve written before about modern monetary theory (MMT), the controversial economic thought that says governments with complete control over their own currencies can spend as freely as it wants. To a proponent of MMT, a $52 trillion price tag means nothing. Just print more money.

Currently the system is just that—a theory—but with the possibility of a Treasury Secretary Warren, MMT may become a reality sooner than we expected.

That said, get ready for unrestricted money printing—and, as a result, hyperinflation.

Last week, I shared with you Goldman Sachs’ forecast of higher inflation next year. The investment bank recommends commodities, raw materials and other hard assets, which would benefit in a high-inflation environment.

Many big-name money managers are urging investors get exposure to gold. Speaking at the Robin Hood Investors Conference this week, billionaire family office manager Stanley Druckenmiller said he believed a “blue wave” would hurt equities long-term and that bond yields and gold prices would rise.

Also this week, I had the pleasure of co-hosting a webcast with my friend Kevin O’Leary, “Mr. Wonderful.” Kevin said he was maintaining a 5 percent weighting in gold, split between physical bullion and shares of SPDR Gold Shares (GLD). Gold, he said, is “all about hedging against inflation.”

Missed the webcast? Email me at [email protected] to get a copy of the replay!

Gold Investment at Record Highs

The yellow metal’s traditional haven status has definitely strengthened this year. The World Gold Council’s (WGC) summary of the third quarter shows that total holdings in gold-backed ETFs hit a record high of 3,880 tonnes, having added 272.5 tonnes in the three months ended September 30.

Physical gold investment also hit a new all-time high. Gold bar and coin purchases increased an incredible 49 percent year-over-year through the end of the third quarter, reaching 222.1 tonnes. Largest volume increases were seen in Western markets, China and Turkey, the WGC says.

If Inflation Is the Trick, Gold Is the Treat

Final Comments Before the Election

Speaking of breaking records… As I write this, it’s being reported that a record 80 million Americans have participated in early voting. Here in my home state of Texas, more than 9 million people have voted early—which exceeds the total number of Texans who went to the polls in 2016.

What this suggests is that voters this cycle are galvanized like never before.

But we already knew that. For what it’s worth, Biden has raised more money than any other presidential candidate in U.S. history. As of October 12, his war chest stood at a head-spinning $952.2 million, which is one and a half times as much as President Donald Trump has raised over the same period.

If Inflation Is the Trick, Gold Is the Treat

The market also appears to be pointing toward a Biden victory. In August, I shared with you that when the market was up from July 31 to October 31, it historically favored the incumbent party. And when the market was down, it favored the challenger.

As I write this, the S&P 500 is down about 0.40 percent from July 31. What’s more, this week has been the worst for stocks since mid-March.

What’s working in Trump’s favor right now? Certainly stellar economic growth in the third quarter. GDP expanded at a record pace of 7.4 percent quarter-over-quarter and 33.1 percent annualized.

If Inflation Is the Trick, Gold Is the Treat

Also, manufacturing activity has been incredibly positive. The U.S. ISM Manufacturing PMI has been in expansionary mode for the past three months. And this week, the manufacturing index for the Federal Reserve Bank of Richmond shows factories growing at a record pace. The index hit 29.0 in October, the highest reading going back to 1992.

Nothing is set in stone, obviously, and there’s always the possibility that election results will be contested. However things turn out, be prepared for heightened volatility.

Have a happy, safe Halloween, and I’ll see you on the other side of the election!

 

Gold Market

This week spot gold closed at $1878.81, up/down $23.24 per ounce, or 1.22 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 3.26 percent. The S&P/TSX Venture Index came in off 4.78 percent. The U.S. Trade-Weighted Dollar rose 1.21 percent.

Date Event Survey Actual Prior
Oct-26 New Homes Sales 1025k 959k 994k
Cct-27 Hong Kong Exports YoY 0.2% 9.1% -2.3%
Oct-27 Durable Goods Orders 0.5% 1.9% 0.4%
Oct-27 Conf. Board Consumer Confidence 102.0 100.9 101.3
Oct-29 Initial Jobless Claims 770k 751k 791k
Oct-29 GDP Annualized QoQ 32.0% 33.1% -31.4%
Oct-29 ECB Main Refinancing Rate 0.000% 0.000% 0.000%
Oct-29 Germany CPI YoY -0.3% -0.2% -0.2%
Oct-30 Eurozone CPI Core YoY 0.2% 0.2% 0.2%
Nov-1 Caixin China PMI Mfg 52.8 53.0
Nov-2 ISM Manufacturing 55.6 55.4
Nov-3 Durable Goods Orders 1.9%
Nov-4 ADP Employment Change 688k 749k
Nov-5 Initial Jobless Claims 746k 751k
Nov-5 FOMC Rate Decision (Upper Bound) 0.25% 0.25%
Nov-6 Change in Nonfarm Payrolls 600k 661k

Strengths

  • The best performing precious metal for the week was spot gold, but still off 1.22 percent. UBS raised its price forecast for palladium to $2,500 an ounce by the end of December, up from $2,400 an ounce. Analysts at the bank say palladium imports from China have hit a record high on strong domestic car sales and tighter emission standards. Spot prices are up nearly 22 percent year-to-date. Impala Platinum says demand for platinum-group metals has remained strong as its output rose in the third quarter, reports Bloomberg. Platinum output from the top producer totaled 408,000 ounces compared with 281,000 ounces the same quarter last year.
  • Newmont reported all-time high revenue of $3.17 billion in the third quarter, thanks to record high gold prices. CEO Tom Palmer said, “I am confident that our world-class portfolio is best positioned to generate industry-leading value and returns for our shareholders.”
  • Brixton Metals and High Power Exploration agreed to a joint venture of $44.5 million for exploration at the Hog Heaven silver-gold-copper-lead-zinc deposit in Montana. High Power is a privately-owned mineral exploration company led by Ivanhoe Mines founder Robert Friedland.

Weaknesses

  • The worst performing precious metal for the week was palladium, down 7.59 percent on no specific news, although palladium has been the biggest gainer in prior weeks. Gold fell this week on worsening coronavirus outbreaks and a stronger U.S. dollar. The yellow metal is set for a third consecutive monthly drop – its longest run of declines since early 2019 – as investors continue to favor the U.S. dollar as a haven ahead of the presidential election.

If Inflation Is the Trick, Gold Is the Treat

  • Gold-backed ETFs had two consecutive weekly outflows for the first time this year, reports Bloomberg, with 145,533 ounces in withdrawals. Analysts say investors could be taking profits before next week’s presidential election.
  • Central banks were net sellers of gold for the first time since 2010 in the third quarter. Net sales totaled 12.1 tons, compared with purchases of 141.9 tons a year earlier, according to World Gold Council (WGC) data. Countries are taking advantage of record high gold prices to soften the blow from the economic impact of the coronavirus.

Opportunities

  • Demand for gold in China, the world’s top consumer, could continue to rebound as the country recovers economically from the coronavirus. WGC data shows China’s jewelry demand fell 25 percent year-over-year in the third quarter but was up 31 percent from the prior quarter. Gold bar and coin demand rose 35 percent year-over-year in the quarter to 57.8 tons.
  • Suki Cooper, precious metals analyst at Standard Chartered Bank, said in a report dated October 23 that the macro backdrop is favorable for gold, and there could be more upside if a “blue wave” occurs. “Even though polls continue to indicate a Biden victory and a Democratic Senate, gold price action has stalled, despite this election scenario potentially posing the greatest upside risk for the metal,” she said. Copper added that negative real rates, expectations for a weaker dollar and stimulus package are all bullish for the yellow metal.
  • Jake Klein, executive chairman of Evolution Mining, says now is the best environment for gold in the past 15 years. In a Bloomberg TV interview, Klein said due to massive money printing “fiat currencies generally are on the decline against a hard asset like gold.” Klein notes gold has been trading range-bound and could see a pop after the U.S. presidential election.

Threats

  • Gold jewelry demand in India usually picks up in the last three months of the year during festival and wedding seasons. This year due to coronavirus and weak economic growth, sales are likely to fall below last year’s 194 tons to the lowest quarterly numbers since 2008, according to Metals Focus. WGC data shows purchases of gold jewelry, coin and bars fell by half from a year earlier in the first nine months through September.
  • The fate of oil drilling in the Arctic and the Pebble gold mine in Alaska hang in the balance of the presidential election, writes Bloomberg Green. Trump is pushing for development of the region while Biden has pledged to protect the natural resources. For the Pebble gold mine project in particular, the Trump administration has scrapped Obama administration pollution restrictions blocking the mine and Biden has promised to block the project if he wins, calling the area “no place for a mine.”
  • Although the S&P 500 Index is trading near historic highs, all might not be well with the market. Bloomberg reports that through the third quarter, 25 companies in the index reported liabilities exceeding assets, the most in 25 years. This is more than double the high of 12 companies with negative equities during the Great Recession.

Index Summary

  • The major market indices finished down this week. The Dow Jones Industrial Average lost 6.47 percent. The S&P 500 Stock Index fell 6.16 percent, while the Nasdaq Composite fell 5.51 percent. The Russell 2000 small capitalization index lost 6.67 percent this week.
  • The Hang Seng Composite lost 1.83 percent this week; while Taiwan was down 2.73 percent and the KOSPI fell 3.97 percent.
  • The 10-year Treasury bond yield rose 3 basis points to 0.873 percent.

You can read the full article at http://www.usfunds.com/investor-library/investor-alert/if-inflation-is-the-trick-gold-is-the-treat/

Frank Holmes

U.S. Funds

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