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World Central Banks Scramble to Buy Gold in Attempt to Shore Up Economic Viability
David Smith: Pending Trifecta of Love Trade, Fear Trade and Inflation Will Make Today's Metals Prices Look Like Bargain
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up David Smith of The Morgan Report and MoneyMetals.com columnist joins me to discuss the recent stock market volatility and what the future is likely to hold when it comes to equities, and also lays out three potential market dynamics that may all converge at once in the near future to give gold and silver the long awaiting boost that metals investors have been looking for. Don’t miss another wonderful interview with David Smith, coming up after this week’s market update.
A second week of stock market volatility is helping to stimulate gold’s safe haven appeal. The gold market shows a gain of $10 or 0.8% this week to bring spot prices to $1,228 per ounce.
Silver is once again lagging, with prices moving up a slight 0.3% on the week. Silver now checks in at $14.69 an ounce.
Platinum is posting an 0.7% weekly loss to trade at $838. Its sister metal palladium is faring better, up 1.5% this week to come in at $1,089 an ounce.
Metals markets are facing the headwind of a rising U.S. dollar. The dollar gained against foreign currencies this week as data on retail sales and industrial production confirmed continuing U.S. economic strength. However, the reports did show deceleration taking place.
Former Federal Reserve chairman Alan Greenspan said on Wednesday that he sees the economy now “sagging.”
If economic reports in the weeks ahead show a trend of growth petering out, the Fed may reconsider its plans for further rate hikes. But for now a December hike is still on the table and further tightening in 2019 remains a possibility in spite of President Donald Trump’s protests.
This week President Trump’s attention turned to the incoming migrant caravan making its way to the southern border. Trump vowed to send military troops to seal the border if necessary to prevent illegal crossings.
Over the past few years, Europe has been hit with waves of migration from outside the continent. The government of Germany and the European Union are demanding that all European countries take in quotas of so-called refugees – many of whom are obviously opportunists seeking free housing and other welfare benefits.
Some countries are resisting the EU’s demands on migration, notably Poland and Hungary. Countries in Eastern Europe that suffered under Communism seem to instinctively recognize the threat posed by an external bureaucracy bent on undermining national identity.
Hungary has enacted laws aimed specifically at thwarting billionaire currency manipulator George Soros. His network of far-left and pro-globalist organizations are actively involved in promoting and financing the migrant crisis in Europe.
Both Hungary and Poland have been better able than other European countries to resist globalization in part because they have hung on to their own respective national currencies. Neither is on the euro. And recently the central banks of both countries have been accumulating large quantities of gold.
This month the Hungarian National Bank announced an enormous jump in its monetary gold holdings. Hungary’s central bank purchased 28.4 tonnes of gold – nearly 10 times the total amount it held in reserve as of last month. It is the country’s first major gold purchase since 1986. The purchase comes shortly after the European parliament threatened Hungary with financial penalties for refusing to participate in the trans-continental trafficking of African and Middle Eastern migrants.
Poland is responding similarly. In fact, the Polish central bank has steadily accumulated several tons of gold over the past few months, bringing its total reserves up to 117 tons.
Russia, meanwhile, continues to be the world’s most aggressive gold buyer year to date. The Russians are adding about 20 tons to their reserves every month as they liquidate holdings of U.S. Treasuries.
The U.S. pushed Russia into a corner with heavy economic sanctions, so now the Kremlin is turning to gold as a way of shoring up its standing in international trade. Russia’s economy isn’t big enough by itself to threaten U.S. dollar supremacy. But together in an alliance with China, they could certainly strike a major blow against the prevailing dollar-centric system.
Those countries that are building up their gold monetary reserves are ensuring their long-term economic viability. And for smaller countries that lack military strength, gold helps ensure their ability to continue existing as independent nations. Given the fragile state of the Eurozone and the attendant risk of the euro currency ultimately collapsing, national currencies that have some gold backing them may be the last ones standing.
Well now, without further delay, let’s get right to this week’s exclusive interview.
David Smith: I'm very good. It's been a while since we've spoken Mike, and I'm really looking forward to chatting with you again.
Mike Gleason: Well, David, the volatility in the stock markets is dominating the financial news over the past few days and week or so. Lots of metals investors are wondering when we might get the next big correction in stock prices. They've been waiting for a few years now. We've had some significant selloffs and each time we start wondering if the bears might have the upper hand, but markets seem to recover quickly. What do you make of the recent action in stocks? Are the equity markets in real jeopardy here or this is just another bump in the road?
David Smith: I subscribe to the view that has been very clearly articulated, I think more than by anyone else, by Steve Sjuggerud of Stansberry Research, and this is the way I'm going to play it, even though I have most of my investment money in the resource sector. But his view is that we are going to see a much higher, high before this lengthy bull market is over. And even though we're going to see a lot of volatility and we can see sharply lower prices from where we are here, over the next few weeks or so, but at some point there will be a bottom and then we're going to see new all-time high prices in the Dow and the S&P and the triple Q's. And that will lead to something like a (year) 2000 moment where we really get speculation and people all jumping in because they don't want to miss out, and we'll have a bull market top at some point, perhaps some time next year. Maybe 2020, but very probably I would think, next year.
There will be a high in the market that will last for a number of years, maybe a decade and we'll see a number of years of sub-par performance like we did after 2000, where the markets degrade by several percentage points every year for 8 or 10 years and that will affect a time, accounts and everything else. But before we get to that point there will be a blow off top and if you are a droid enough to get on and then get out in time, you can make quite a bit of money as we go to new all times highs, so that's the view that I've subscribed to in terms of the general market condition.
Mike Gleason: I also wanted to get your take on what we should expect from the Fed in the months ahead. Now they’ve been getting a lot of criticism here recently, especially from the President. We know that our nation’s central bank is anything but altruistic or independent but we don't know whether the officials there will bow to the pressure that is beginning to mount on multiple fronts. It is starting to look like the next few hikes are going to be a lot tougher than the last few.
Markets look ready to start rebelling and that may not be good for Jerome Powell's job security. There is another argument which says the Fed is an integral part of the deep state and if Trump is truly at war with the deep state the official there might be willing to finally let markets correct and see if they can stick the blame on the President. So, we would not be shocked to see the Fed start capitulating pretty soon on rate hikes and try to keep markets juiced nor will we be surprised to see officials stay the course on tightening. How about you care to guess on which way Fed policy might be headed?
David Smith: I think all the above are kind of elements in a mix, which in a lot of ways is a toxic sewage, because the Fed has let rates drop to the point of the last decade or so that has become almost, in some cases, negative interest rates. So they're now draining the punch bowl so to speak and they're pulling money out on a monthly basis. And so that means there is less money sloshing around for investments and speculation and this type of a thing and getting mortgages at 1 or 2 percent and now they are up to 4 or 5 percent. I think this draining of money each month from the Fed is a function, indirectly of rising interest rates, because by definition there is less money to loan out. All those things are going to create warps and weaves.
The Fed has never gotten it right. If you look back through history, they've always done the wrong thing at the wrong time. So whatever they do probably won't be very helpful. I think it will create a lot of uncertainty in the market. And I think that uncertainty will spill over into people saying, you know I think I need to have some precious metals here to bring certainty back and predictability. And that will be just one of many elements that I believe will help people move more forcefully into the metals than they have in the recent years.
Mike Gleason: We don't normally delve too deeply into politics here but in the current era it is getting harder to separate politics and the market. So, we'll put you on the spot and get your predictions about the coming midterms elections. It looks like polling favors the Democrats in a number of races. But the polls have been pretty unreliable of late. You have to account for the clear bias towards the left in the conventional media. So, will Democrats get control of the House and Senate, David, what do you think?
David Smith: You know, Mike, I think it's a coin flip in here. My sense is that it is certainly possible that they could regain House and perhaps even the Senate. I think the odds because it was such a strange 2016 election where hardly anybody believed what happened could happen. I think that could happen again and if that does, for example, the Republicans maintain control of the House and the Senate. I think it's going to create a massive civil issue on the streets because the left is already gone really proleptic about having a couple of Supreme Court Justices nominated that they maybe didn't agree with. That would mean that there would be a third one that would most certainly come during the next couple of years. High probability of that and that's going to cause all sorts of angst on the left. Near where I live in Portland we've seen some really disgusting types of clashes between both sides of the fence here.
On the other hand, if the Republicans lose control of one or both of the House or the Senate, then you're going to see more and more of the same, with the idea that the President's that currently elected is illegitimate, and that he should be impeached, which may or may not involve him leaving office. Probably not. But it's just going to create more and more discord and deepen the division that both sides of the country face. I think either way we're in for a lot more civil issues, more than we've seen the last couple years, and that kind of uncertainty again, is going to cause people to want to have some level of certainty. Especially after the stock market tops, perhaps in the next year.
So, I think the intermediate is a longer-term case for the metals, is becoming brighter than it has been, really since 2011, with the possible exception of that 6-month run we had in January 2016 that ran until that June, which caught most people by surprise, and most people disbelieved it all the way through. So, I think we're looking at that possibility again, something like that only maybe more durable than what we saw in 2016.
Mike Gleason: Expanding the point here a little bit, setting aside the political ramifications, what outcome do you expect would be better for gold investors? It would be easy to say that the Democrats returning to power in Congress would be bad for traditional markets, and good for metals. But we can also see gridlock in Washington, which we might expect given a Republican President, and a Democratic Congress, being good for Wall Street. Stocks, for example, often perform well when agendas are stalled in Washington D.C. As a metals investor, and again setting aside political ideology, which outcome in November do you think will be better for the gold price in the near term?
David Smith: Well, I think that either outcome is going to be reasonably positive for the metals. And there are issues that go far beyond just internal politics, because we have the issues of the potential of the crumbling Saudi Arabian alliance with the petrodollar. There could be an assassination there, which would throw the Kingdom into chaos, and the war is not going well for Saudi Arabia in Yemen, with the problems with Iran. The Iranian government could actually fall. There's all sorts of issues in the wider area of the world that could have effects on the metals, and that's why, I think, one of the reasons we've seen countries like Hungary, that increased their gold holdings by 10 times this month. The first holdings that they've added since 1968, and it takes their holdings back to the level of 1949, in the central bank. They said, this gives us stability, and it's one of the least risky assets you could own. This is the central bank talking. Other countries like Poland are adding to their reserves, or they're repatriating their gold that's been held in New York for them over the years, or in London.
And so, there's this massive shift going on… and Russia and China and India continue to buy more gold than they did the last month. So, we're moving toward a situation where the petrodollar, which is U.S. dollars established outside the U.S., which is about 80 percent of the transaction in the world commerce, I believe now. I think that's going to becomes more questioned, and I believe that the U.S. dollar will always be first among equals for quite a while. But if you look at where we have been, where we could print any number of dollars to finance things that we didn't really pay for, and other countries would soak it up. But if we move from 80 percent of the transactions to 70 or 65 or 60, because of the use of the yuan, and the use of gold, in exchange in the One Belt, One Road in China and India, and Iran… that would mean it would really put us in a crimp in terms of our ability to issue unlimited dollars.
We'd have to become a little bit more fiscally accountable. So, all of those things which are really, in a sense, moving in the same direction of discord that we see for different reasons in the United States, I think is going to create a very, very toxic mix of uncertainty and question on the part of people to hold paper assets, and they want something that's got a backing. And gold, silver, platinum, and palladium are the answer to that. They always have been and I think they're going to continue to be the answer for part of that equation.
Mike Gleason: Dave, switching gears here, I know you've been examining recently the idea of how dollar cost averaging, or buying in tranches can be a great investment strategy, in that you don't absolutely have to luckily catch the bottom of a market in order to win big. Talk about that, if you would, because I know many metals investors might be trying to pick that bottom and holding out for a drop further from here and I know you've got some good advice on that topic. Share that, if you would please.
David Smith: Well you know, it's so easy to see what happened the last couple weeks; gold was up $35 one day, and I think it's down about $10 now altogether, after the last few days, and think "Oh well, I can't afford it now." But if you have the bigger picture and if you believe, as I do, that we're seeing a major change in turn here, and this may be the bottom, or it may not be the bottom. But it's so close in relationship to what's been in recent years, that the risk-reward had really shifted heavily in the favor of people who accumulate precious metals, especially the gold and silver.
I think the big mistake that anybody makes when they finally decide to do it, or they decide "Oh, I should do it now." Is to do what some people call a price plop; where they take every cent that they're going to put into it, and they buy today. Well, maybe that'll work out, if tomorrow gold is up a hundred dollars, you'll be a hero. But the odds are that we're going to see backing and filling, and after strong days like we saw, we're going to see the markets give back half of it. If you buy in tranches or portions, I have found it's the easiest way to turn the psychology of fear and greed on their head.
So what happens is, if you buy a third or a fourth of what you want to buy right now, if you've decided to do that. Or if you're going to make an addition, you add a fourth to it. Then you say, “Well, if it goes up tomorrow I'll wish I had bought a little more. But if it down tomorrow, I'm actually hoping for this so I can buy another quarter of it. Or I'll buy it next week when it's lower.” And you keep cheering for lower prices so that your goal is to get the whole thing filled at progressively lower prices, because you've decided this is a good value place to do it. But if you buy at higher prices, or you buy too much at one time, you get scared and you get knocked out of the market, and you start reading all these negative things and go "I shouldn't have bought it, it's going to make new lows. We're going to see a thousand dollar gold. And you get out, and it turns right around just the day you get out.
That, to me, is such a simple way to deal with the fear and greed that we all have to deal with. It doesn't make it a sleep walk, but it does make it so much easier that I really recommend it. I do it myself, and when I don't do it, when I get too carried away, if I buy mining stocks; if I buy too much of one particular one, sure enough it's down for a couple of days, and it kind of frightens me too. I just have to remind myself of what I talk about. And you know they say that the path to excellence is followed by repetition of the basics. I know I've written about this more times than once, you've talked about it, and people say "Well, I've heard that before.", but you know what? If you bring it back into you consciousness and follow it, you will find, I think, it will give you much greater success, and much greater peace of mind than almost any other approach that I can think of.
Mike Gleason: Extremely well put, yes. Very, very good advice. Very valuable advice for people who are going to make any sort of investments. Just take the emotion out of it, too. Like you said, just make your decision about what you're going to do, and proceed with it, and don't let the waves take you and toss you from here to there, it's very valuable.
Now we often talk about the different drivers for precious metals demand, and how those drivers are not necessarily the same depending on which part of the world you're in. For instance, in Asian cultures; China and India, etc., they call it the love trade because there is a generations old cultural affinity for gold. Meanwhile, in the western world, talking about Europe or the Unites States, it's the fear trade that drives precious metals buying; people seeking safety in gold and silver.
There are often other drivers too, such as it being an inflation hedge and so forth. And it seems like we've got the potential, David, to have all of these key drivers going full tilt at the same time. Talk about that, because it could be there perfect storm here, that we've been looking for to finally drive prices higher. Give us your thoughts there.
David Smith: I totally agree with what you're saying, Mike. And if you look back at the beginning of this bull market, going back to 2000, after we had 20 years of declining prices from the 1980 peak. When that started driving, part of that was the fear trade, and then part of it was the love trade, but the inflation trade hardly existed at all. And now we have a situation where we really have a fairly substantial amount of inflation going on, not only officially, but unofficially too. We all know that when we go to the store and just about everything is going up.
In fact, I've read just a couple days ago that the Social Security, which indexes the payments out to the inflation of the preceding year, I believe is going to give out the largest one next year… and I don't know when that cuts in, but at the beginning of the year, or halfway through or whatever… it's going to be the largest Social Security payout, inflation adjusted, in about 7 years. We know officially then, that there's quite a bit of inflation going on. In fact, the Fed actually wants it, but they want to keep it under control. But there's also a lot more that doesn't register as well too. Now we’re nearing the strong season for buying in India and in China for, like you say "the love trade", so that's going on pretty strong.
And the we have the fear trade with all the stuff we just talked about over the last ten minutes, in the Middle East, and civil unrest in the United States, problems in the Eurozone. And I think all three of these are clicking right now, and they’re not going full tilt, but they're going pretty strongly so, it's almost like the tide is reversed, and all the riblets are running in the same direction. There's no tide that's right in the middle, and there's a little bit of current going left and right, and you don't know which way it's going. I think the tide is showing itself to be moving in a very pronounced direction, and I expect all 3 of those elements that we're talking about here to move, demonstrably and visibly, in the same direction going forward for here on in for quite a while.
Mike Gleason: That's certainly going to be very interesting to see, and it could be what we've finally been looking for in terms of higher metals prices if we do in fact get a convergence of all of those things, the love trade, fear trade and inflation hedging all working in unison, that would really boost the metals you would have to think.
Well, finally David, as we begin to wrap up, share with us any final thoughts on the metals that you may have… maybe what you're looking for during the balance of the year and then comment on anything else that perhaps we didn't cover, that you think ought to be on people's minds.
David Smith: I do think that if people wait until what you and I are talking about are front page in the New York Times, if it ever does occur there, when they're on the talk shows and all this, where everybody's kind of agreeing with us, which a lot of people don't right now. Right now we have information risk. We don't have price risk because prices are relatively stable but if you wait until what we believe happens, comes to pass, which I think it will, and we see $1,400 gold next year and $25 silver, you're now going to have price risk. You're going to have the information that's in the market, but you pay for that by paying a much higher price. I think there's a lot to be said for people, if they kind of agree with what we're saying, to start a reasonable acquisition program or add, if they've been waiting. And not wait until the coast is clear because then the coast will be a lot more expensive. So, that's one thing I'd really like to share with people.
Mike Gleason: Yeah, very well put. It's always fun to get your thoughts on these matters because you do have a different perspective, and I love getting that and having you share that with our audience. Thanks so much for your time today, and for enlightening us, I look forward to catching up with you again before long. I hope you have a great weekend, and we'll talk to you soon. Take care, David.
David Smith: Very good, Mike. Thank you and I wish everyone in our listening audience the very same.
Mike Gleason: Well that will do it for this week, thanks again to David Smith, Senior Analyst at The Morgan Report and a 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.