April 2018 - Week 4 Edition
Higher Inflation and Interest Rates are Coming – and That’s GOOD for Gold
Gold’s biggest bull market came from 1976 to 1980, when inflation and interest rates were soaring to their highest levels in the 20th century. Gold’s second biggest bull market came from 2001 to 2011, during a time when the Fed raised short-term interest rates 17 times, from 1.0% to 5.25%. Even though there was a short-term, knee-jerk reaction to a stronger dollar this Monday morning, the dollar does not usually gain strength when inflation and interest rates are both rising. The dollar lost strength rapidly from 1971 to 1978, when interest rates rose, and the U.S. dollar also was tanking from 2001 to 2011 as rates rose.
The rate of inflation is warming up this year. The latest data shows that the Producer Price Index (PPI) rose 0.3% in March and the core PPI, excluding food, energy and trade, rose 0.4% (nearly a 5% annual rate). The PPI has risen 0.4% for each of the first three months of 2018, so it’s an established trend now. In the past 12 months, the PPI has risen 3% and the Consumer Price Index (CPI) is up 2.4%. Both of them are well above the Fed’s desired limit of 2%. One reason the PPI is rising faster than the CPI is that crude oil is up from about $60 per barrel at the start of the year to almost $70 now, with more increases likely.
The Dutch international bank, ING, says, “Higher inflation is coming,” and their gold strategist Oliver Nugent sees a gold breakout coming: “Our bullish gold call centers on the belief that precious metals markets are still underpricing the full potential for inflation to pick up this year. Whilst this also raises the likelihood of a further three rate hikes in 2018, it will be the front-loading of inflation data that could spur gold’s long-awaited breakout, along with a little help from continued weakness in the US dollar and equity volatility. Establishing itself cleanly above $1,350/oz is proving gold's biggest hurdle, but when it is done, gold stands its best chance to capture further flows from funds stuck on the sidelines.”
When inflation rises along with interest rates, the “real” return is at or below zero, so the dollar is not as attractive as it would be if inflation were lower. That’s why it is likely the dollar will NOT rise as rates rise. For this reason, it is likely that gold will rise during this Federal Reserve interest rate-rising cycle.
Rising Demand Could Push Gold Above $1,400 This Year
In 2017 and so far in 2018, there has been a strong and consistent rise in global demand for gold-backed exchange traded funds (ETFs). Last year, gold ETFs enjoyed a net 9% inflow, and so far this year the net inflows are over 5% higher than at the same time last year. ‘Market Realist’ says that demand in Germany and China is particularly high: “According to Deutsche Bank AG, ‘People have become nervous in Germany so they were buying gold.’ China’s Bosera Gold ETF also attracted $610.8 million in 2018… on course for the biggest annual inflow since it was listed in 2014.” In addition, Juan Carlos Artigas, director of investment research at the World Gold Council, said “Inflows in the U.S. and China reflect broader market uncertainty related in part to geopolitical risks such as global trade tensions in March.”
Some gold price projections for 2018 are now topping $1,400: Steffen Grosshauser, senior operations executive and head of the German-speaking market at BullionVault, sees gold rising this year, possibly peaking at $1,450. Metals consultancy Thomson Reuters GFMS earlier this year forecast a 2018 average gold price of $1,360, with a peak above $1,500 per ounce, writing: “Our forecast discounts three Fed rate hikes, although a potential overheating from the effect of [Trump's] new tax reform could lead to more aggressive tightening, limiting gold's upside.” Also, the Dutch bank ABN Amro is sticking with its rather downbeat year-end forecast of $1,250, but with a one-time rise to $1,400 sometime during the year.
In addition, a new annual report co-authored and issued jointly by the China Gold Association, World Gold Council, and UK’s Metals Focus consultancy predicts a positive outlook for gold in the second half of 2018. “Despite the minor fluctuations, which are predicted to last till the end of the second quarter, gold prices are forecasted to increase in the third quarter, following the weakening of the U.S. dollar, fluctuating stock markets and dented confidence in global economic performance.” The report says that global gold demand is expected to climb by 1.5% on the basis of increased jewelry sales, industrial applications and physical gold investments. Song Xin, director of the China Gold Association, added this about China demand: “With the growth of high-end consumption and the development in second- and third-tier cities, the Chinese market will show its substantial demand, mostly unexplored, for physical gold, as more and more people start to realize gold's stored and retaining values in the long term.”
Rising gold prices are important to our business since they tend to bring in new customers responding to advertisements for gold bullion coins. Historically, this leads some of those customers into rare coins, which helps to bid up prices in the rare coin market, due to the limited number of specific rare gold coins.
RIP, Barbara Bush (1925-2018)
Only one other woman in American history was both a mother and wife to a President of the United States, and that happened 200 years ago at our nation’s founding when Abigail Adams was the wife of our second President, John Adams, and mother of our sixth President, John Quincy Adams.
Last Saturday, at St. Martin’s Episcopal Church in Houston, 1,500 guests, including family and friends and former presidents and first ladies bid farewell to Barbara Pierce Bush, who was married 73 years to George Herbert Walker Bush, our 41st President, and mother of George W. Bush, our 43rd President.
In her 1994 memoir, Mrs. Bush wrote “Long ago, I decided in life I had to have priorities. I put my children and husband at the top of my list. That’s a choice I never regretted.” She also said that she admired any woman who made her career in academia, politics, the law or business, but then added, “At the end of your life, you will never regret not having passed one more test, winning one more verdict, or not closing one more deal. You will regret time not spent with a husband, a child, a friend or a parent.”
Throughout her 92+ years on earth, she mostly devoted her life to others. One of her primary passions was literacy, something my wife and I are also devoted to in our charitable efforts and spare time. Barbara Bush’s 1990 book – told from the perspective of her English springer spaniel, “Millie’s Book” – raised over $1 million for the Barbara Bush Foundation for Family Literacy. She expressed her belief this way:
“Believe in something larger than yourself… Get involved in some of the big ideas of our time. I chose literacy because I honestly believe that if more people could read, write and comprehend, we would be that much closer to solving so many of the problems that plague our nation and our society.”
We will honor the leadership and impact of Barbara Bush’s long life of service by carrying on her work.
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