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Some Are Betting on Red, Some on Blue. I’m Betting on Gold

Summary:
Whether you support President Donald Trump or not, you must acknowledge that one of the bedrocks of his governing style is unpredictability. To some critics, Trump’s behavior and decision-making process may seem erratic, but I believe they make a sort of sense when viewed through the lens of game theory. Take, for example, his hot-and-cold stance on a new coronavirus stimulus bill this week. On Tuesday, Trump unexpectedly tweeted that negotiations with House Speaker Nancy Pelosi would halt until after the election. “After I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Businesses,” he said. That same day, Trump appeared to change his mind—reportedly after he saw how the stock market, and particularly airline stocks, reacted to the news. (I often

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Whether you support President Donald Trump or not, you must acknowledge that one of the bedrocks of his governing style is unpredictability. To some critics, Trump’s behavior and decision-making process may seem erratic, but I believe they make a sort of sense when viewed through the lens of game theory.

Take, for example, his hot-and-cold stance on a new coronavirus stimulus bill this week. On Tuesday, Trump unexpectedly tweeted that negotiations with House Speaker Nancy Pelosi would halt until after the election. “After I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Businesses,” he said.

That same day, Trump appeared to change his mind—reportedly after he saw how the stock market, and particularly airline stocks, reacted to the news. (I often say that he’s the first American president who keeps his eye on the stock market and sees it as a gauge of his success.) “The House & Senate should IMMEDIATELY Approve 25 Billion Dollars for Airline Payroll Support,” he tweeted.

Some Are Betting on Red, Some on Blue. I’m Betting on Gold

Again, to some, this behavior might seem irrational, but in game theory, unpredictability can be an effective tool that leaves an opponent guessing.

In case you’re unfamiliar, “game theory” is the study of how and why people make decisions to achieve a certain outcome. More than one game theorist predicted Trump’s victory in 2016, and I wouldn’t be surprised to learn that some are doing the same in the 2020 contest.

That’s despite Trump trailing Joe Biden in national polls. Meanwhile, PredictIt data shows that betting odds favor a Biden win, with the spread having widened further since Trump’s positive COVID-19 diagnosis. But if you recall, then-candidate Trump was in a similar underdog position against Hillary Clinton heading into the election four years ago.

Some Are Betting on Red, Some on Blue. I’m Betting on Gold

Follow the Trendline, Not the Headline

We’re only 25 days out from the election, and like Trump himself, it’s sure to be unpredictable. It could very well be contested, as there have been reports of both candidates hiring hundreds of lawyers in anticipation of a legal battle.

That’s why I believe it’s best right now to listen to the market rather than the negative political rhetoric, to follow the trendline and not the headline. As I shared with you in August, markets have accurately predicted presidential elections nearly three out of every four times since 1948. This is “Wisdom of Crowds” in action.

It’s also worth being reminded that 80 percent of all stock trading today is driven by quants and algos, which have no political preference. Their models are completely agnostic to who’s in the White House. Similarly, what matters most to us as active money managers are not the political parties but the policies.

Gold Expected to Head Higher on Fresh Stimulus

Speaking of policy, the Wall Street Journal reported today that the White House is preparing a coronavirus stimulus offer valued at $1.8 trillion, despite Trump’s earlier comment on ending negotiations. It’s been seven months since the last relief package, the CARES Act, was signed, and in that time, the number of Americans filing for jobless benefits has remained elevated.

Some Are Betting on Red, Some on Blue. I’m Betting on Gold

With the national debt now topping $27 trillion, such a package isn’t good for the government’s balance sheet, but it’s good for gold. Indeed, the yellow metal traded up as much as 1.8 percent on the news.

And I believe there’s additional upside potential—no matter who wins the election. In 25 days, millions of Americans will be betting on “red,” millions of others on “blue.” I’ll be betting on gold.

I’m far from the only one. Leon Cooperman became just the latest billionaire investor to buy gold. In a recent interview, the Omega Advisors chairman and CEO said: “I bought gold for the first time in my life a week ago. I understand the case for gold. We’re on the way to some banana republic situation. Nobody’s worrying about the debt that’s being created.”

Meanwhile, ETFs backed by physical gold climbed to a record amount this Monday, touching 111.05 million ounces. According to the World Gold Council’s (WGC) September report, global gold ETFs saw their 10th straight month of inflows last month. For the first time ever, such funds added more than 1,000 tonnes of gold so far this year, the equivalent of $55.7 billion.

Some Are Betting on Red, Some on Blue. I’m Betting on Gold

Gold Miners to Report “Most Unbelievable Margins”

Then there’s gold mining stocks. Companies in the NYSE Arca Gold Miners Index put in a strong showing on Friday, finishing the session up 4.2 percent, its best single-day jump since August 17. For the week, the group advanced more than 4 percent.

Like the metal they mine, gold producers could see an even bigger jump when they begin to report third-quarter earnings. With gold having averaged $1,911 an ounce during the quarter, and hitting its all-time high of $2,070 in early August, producers generated some of the highest revenues they’ve ever experienced, not to mention margins.

That was the message of my friend Pierre Lassonde, speaking to Kitco News last month. The legendary co-founder of Franco-Nevada said that “gold miners have never had it so good,” explaining that the “margins they are producing are the fattest, the best, the absolute unbelievable margins they’ve ever had.”

An explosion in exploration activity could take place as a result, according to Pierre. “I think the budgets will be up more likely by 50 percent to 75 percent” in 2021, he said.

It’s not too late to participate!

Luxury Stocks Have Been Resilient During the Pandemic

On a final note, I’m very pleased to see how well luxury goods companies as a whole have held up during the pandemic months. Since the market bottom in mid-March, the S&P Global Luxury Index has increased more than 84 percent, close to double the return of the S&P 500. Giant multinational LVMH Moet Hennessy Louis Vuitton is up nearly 54 percent as of today.

Some Are Betting on Red, Some on Blue. I’m Betting on Gold

With the single largest weighting in the index, Tesla has had an incredible year, returning 418.7 percent. Other stocks that we like have also performed well, including Lululemon Athletica (up 49.5 percent), Remy Cointreau (41.4 percent) and Hermes International (14.3 percent).

I maintain my call for $4,000 gold in the next three years due to record stimulus spending and money-printing, which may lead to extreme currency debasement. Get my full thoughts by watching my interview with CNBC below, and make sure to like and subscribe to our YouTube channel!

Gold Market

This week spot gold closed at $1,930.40, up $30.56 per ounce, or 1.61 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 4.17 percent. The S&P/TSX Venture Index came in up 3.34 percent. The U.S. Trade-Weighted Dollar fell 0.89 percent.

Date Event Survey Actual Prior
Oct-9 Initial jobless Claims 820k 840k 849k
Oct-13 Germany CPI YoY -0.2% -0.2%
Oct-13 Germany ZEW Survey Expectations 74.0 77.4
Oct-13 Germany ZEW Survey Current Situation -60.0 -66.2
Oct-13 CPI YoY 1.4% 1.3%
Oct-14 PPI Final Demand YoY 0.2% -0.2%
Oct-15 Initial Jobless Claims 820k 840k
Oct-16 Eurozone CPI Core YoY 0.2% 0.2%

Strengths

  • The best performing precious metal for the week was silver, up 5.97 percent, perhaps related to Goldman Sachs suggesting investors go long with the boost seen from a greater expansion of solar energy. Gold rose for a second straight day on Thursday on hopes that Congress will provide another round of stimulus for the economy. The yellow metal was then up 2 percent on Friday morning on a weaker U.S. dollar.
  • Investment demand for gold was strong in September even as gold prices saw their sharpest decline in four years. New data from the World Gold Council (WGC) shows that holdings in ETFs backed by gold grew by 68.1 tonnes last month. This latest surge in inflows has pushed global holdings for the year above 1,000 tonnes – a new record high. The value of these assets under management is also at a record high of $235 billion for 2020.
  • Goldman Sachs Group said silver stands out as an “obvious beneficiary” from government stimulus programs that lean toward renewable energy, which boosts demand for the metal used in solar panels. Analysts said in a note that global solar installations will increase by 50 percent between 2019 and 2023. Goldman’s forecast is for silver to rise to $30 an ounce – about 26 percent higher than current prices.

Some Are Betting on Red, Some on Blue. I’m Betting on Gold

Weaknesses

  • The worst performing precious metal for the week was platinum, but still up by 1.30 percent. Hedge funds increased their bearish outlook on platinum by raising their net short positon to a 14-month high. An index of South African gold miners fell 1.1 percent on Monday after the country’s main stock index fell on lower gold prices.
  • Ghana suspended plans to raise $500 million in an IPO for its gold royalty fund after a state prosecutor began an investigation into the sale over a lack of transparency. The sale was scheduled to begin in September and the fund would be structured to pay dividends from the government’s income from gold operations.
  • Alliance Altyn, part of Russian Platinum Group, said it has shut its Kyrgyzstan gold mine after an attack. The country is facing violent uprisings over a disputed election result. A group of local citizens have tried to enter the production facilities of several gold mines.

Opportunities

  • Northern Star Resources is buying smaller Australian rival Saracen Mineral Holdings. Bloomberg reports the deal will create a new top 10 global gold producer with a market valuation of $11.5 billion. After adding Saracen’s assets, Northern Star will be on track to produce 2 million ounces a year from 2027. Goldman Sachs says the merger would combine the “two best organic growth profiles in the Australian gold sector.”
  • Barrick Gold CEO Mark Bristow says the gold industry needs more consolidation to increase exploration and boost reserves. Bloomberg reports that gold mining deals worth around $14 billion have been completed or agreed so far this year compared with $26 billion completed in 2019. Bristow said at a virtual conference this week that “Canada still needs more work on consolidation.”
  • Union Bancaire Privee (IBP) says gold could reach $2,200 an ounce by December 2021 due to deeply negative inflation-adjusted U.S. interest rates. According to a report by authors including Michael Lok, gold miners position investors to benefit from the resumption of the long cycle bull market expected in early 2021 and the near-term earnings catalyst of increased output and the long-term driver of rising dividends.

Threats

  • A British appeals court ruled in favor of the Venezuelan government of Nicolas Maduro, saying the legal battle over the country’s $1 billion in gold in the Bank of England vaults should be reconsidered. Bloomberg reports the appeals court reversed a lower court ruling that recognized opposition leader Juan Guaido as the interim president. This ruling gives Maduro another chance at getting his hands on the gold, which he would likely sell in order to support the struggling South American nation.
  • Boston Federal Reserve President Eric Rosengren said on Thursday that high leverage points to a slow recovery from the pandemic recession, reports Reuters. “The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, maker economic downturns including this one more severe. There are issues that I and others spoke about quite extensively in the years before the pandemic hit.”
  • Coronavirus cases continue to rise again in the U.S., and in some areas globally, leaving investors concerned over potential new lockdown measures. President Trump contracted the virus last Friday and it has spread to other White House and top officials.

The 5 M's of mining for picking Gold Stocks - Click to watch the video!

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 3.27 percent. The S&P 500 Stock Index rose 3.74 percent, while the Nasdaq Composite climbed 4.56 percent. The Russell 2000 small capitalization index gained 6.34 percent this week.
  • The Hang Seng Composite gained 3.49 percent this week; while Taiwan was up 2.97 percent and the KOSPI rose 2.75 percent.
  • The 10-year Treasury bond yield rose 7 basis points to 0.772 percent.

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