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Metal Market Report November 2019 - Week 1 Edition

November 2019 - Week 1 Edition

Gold and Rare Coins Typically Rise When Stocks Fall

Even though gold and stocks are both up by double digits this year, gold tends to go down when stocks are setting new highs, and gold tends to rise when stocks are correcting.  Gold had a strong month of August, when stocks were correcting, and now gold is having a rough week while stocks are rallying.

First, on a larger historical canvas, we have seen gold’s biggest surges happen when stocks were suffering, such as the 1973-74 and 1979-80 bear markets for stocks (and bull markets for gold and rare coins), as well as the massive gold and rare coin bull market following the 1987 stock market crash.

Second, we have repeatedly pointed out how impeachment has been historically bad for stocks and good for gold and coins. The House has been slow and erratic in their impeachment proceedings, but if that process ever gets off the ground, we could see a repeat of the 1973-74 Nixon and 1987 close call Reagan impeachment bear markets in stocks, followed by gold and rare coin bull markets, amplified by an often occurring Election Year rally.

Speaking of the election process, Goldman Sachs and other major portfolio managers have predicted that a victory by any one of the major Democratic candidates could easily lead to a major (25% or more) stock market collapse, followed by a recession, possibly a deep recession like 2008, sending the budget deficit skyrocketing. This is based on the hard math of high spending and tax increases. The major Democratic candidates want to repeal the Trump tax cuts, which lowered the top corporate tax rate from 35% to 21%, while lowering personal tax rates for most Americans. After that tax cut, the S&P gained 22% this year and GDP grew by 4.2% in the second quarter, the strongest rate in four years, before slowing to 2%.

Goldman’s portfolio strategy team said repealing the tax cut or raising taxes would lead to a stock market correction. Every 1 percent rise in the corporate tax rate, they say, would lead to a roughly 1% decline in S&P earnings per share. “For example, if the 2017 corporate tax cut is entirely reversed, our baseline 2021 earnings per share estimate of $185 would be reduced by 11% to $165.”  Earnings are the lifeblood of stock market profits. A double-digit decline in earnings would send the stock market sharply down.

And then there are the added spending programs. Leading hedge fund managers Leon Cooperman and Paul Tudor Jones said the stock market would drop 25% in the event of an Elizabeth Warren presidency. The billionaire bond fund manager Jeffrey Gundlach told Fox Business in September that “Elizabeth Warren clearly will increase corporate taxes and almost certainly reverse the Trump cut.”  Candidate Warren says corporations and the super-rich are going to pay: “They’re going to pay for everything.” Warren’s health care plan will cost at least $52 trillion over 10 years – or more than ALL current federal budget plans for the next 10 years, and she says she will do it without any middle-class tax increase.

That math doesn’t add up, which means higher taxes, lower earnings, lower stocks – and higher gold.

Some of this danger may be tempered if a Democrat wins the White House in 2020 and the Republicans regain control of Congress, as that would likely stop some of their more radical plans from materializing.

Gold Has Set an All Time High in Most Currencies in 2019…

During the course of 2019, gold set all-time highs in many of the world’s currencies. Due to the strong U.S. dollar in recent years, this super-bullish gold trend has been “masked” for gold investors in the United States. During August, gold reached all-time highs in several major currencies, including the British pound, Canadian dollar, Australian dollar, Japanese yen, Indian rupee and South African rand. Other currencies saw massive rises to near all-time highs, including the Chinese yuan and the Euro.

Even with gold’s decline since August, the yellow metal remains near all-time highs in many weaker global currencies. Even in U.S. dollar terms, this will likely be gold’s best year since 2012, even if gold’s final 2019 rise is only 11% or 12%. (Through November 6, gold is up 16.3% for 2019.)

…And Central Bank Gold Buying is on Pace for Another New Record High

Central bank gold buying is currently on pace for a record high 675-ton annual rate. Gold central bank buying ramped up to 57.3 tons in August, led by Turkey’s 41.8 tons, followed by 11.3 tons by Russia and 5.9 tons by China. Russia has increased its holdings by 117.4 tons this year, and China has bought gold every month this year.  In all, 14 nations have increased their gold holdings by a net 450 tons through August. These four nations dominate the list, with over 90% of the net central bank gold purchases this year.

Central banks are on pace to accumulate slightly more gold than they did in 2018, when central banks added a record 651.5 tons, with Russia leading the way at 274.3 tons, funded almost entirely by the sale of U.S. Treasuries. It was the fourth consecutive year of Russia selling U.S. Treasuries to accumulate at least 200 tons of gold. Russia has now exchanged over 90% of its U.S. dollar reserves in favor of gold.

This wholesale selling of paper money to accumulate gold is a strong response to (1) negative interest rates being offered throughout Europe and Japan, to the tune of $15 trillion, or one-third of all global government bonds; and (2) a “race to the bottom” in devaluing global paper currencies in order to gain trade advantages. This devaluation of paper money, and low or zero income, make gold more attractive.

 

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