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Seven Things that Drove Gold News in 2017

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On Dec. 31, 2016, the price of gold stood at 1,156.00. Today, it is knocking on the $1,300 mark. The yellow metal is on track to gain about 12% in 2017, its best year since 2010. Gold has made these gains despite a number headwinds that we would expect to put a significant drag on gold.

Here are seven major themes that have driven gold news over the past year.

Geopolitical risk

Over the last year, we’ve talked a lot about geopolitical risk. Could turmoil around the world now be the new normal?

Some analysts think so.

The focus has primarily been on tensions between the US and North Korea. But there have been plenty of other risk factors popping up around the world, including ongoing uncertainty about Brexit, the secession movement in Catalonia, war in the Middle East, terror attacks,  tensions between the US and Russia, various elections, a coup in Zimbabwe, and more.  On top of that, outside of the US, a lot of people think Americans should be looking at the geopolitical risks right here at home due to political divisions and uncertainty in Washington D.C.

Historically, geopolitical turmoil is good for the yellow metal. Investors buy gold as a hedge to protect themselves against such risk. Some analysts now believe geopolitical uncertainty may be the new normal.

Debt

The US federal government is spending money like a drunken sailor. In November alone, the US government reported a $139 billion deficit. Pause for just a moment and think about what that actually means. Last month, the government spent $139 billion (billion – with a B) more than the revenue it took in. In other words, it put $139 billion on a credit card.

Through the fiscal year to date, the US government has run up a $202 billion deficit, compared to $183 billion in the comparable period for fiscal 2017. You might be thinking, oh, well that’s not too bad for the whole year. But you have to remember the fiscal year for the US government starts in October. So that’s $202 billion in two months. The total national debt has eclipsed $21 trillion and is in the neighborhood of 105% of total GDP. That’s the highest level in history except for a two-year spike at the end of World War.

The US government isn’t alone in this pool of red ink. US household debt has surged this year. Corporate debt has continued to grow. And China has an even bigger debt problem than the US. Analysts say it could threaten global financial security. All of this debt has significant ramifications. Many analysts believe debt will be the trigger that kicks off the next economic crisis. Mint Capital strategist Bill Blain predicted that “the great crash of 2018 is going to start in the deeper, darker depths of the credit market.”

D.C. Politics

The Trump era got off to a rough start with two failed attempts to repeal and replace Obamacare, and the administration was dogged by “Russia collusion” stories, but the passage of a tax cut package was a crucial victory for Republicans.

There is significant tax relief in the bill, but there is no government relief. In the absence of spending cuts, the plan will add another $1.5 trillion to an already ballooning national debt. Debt puts a drag on growth. Promises of economic expansion due to the tax cuts simply don’t ring true. Studies have shown GDP growth decreases by an average of about 30% when government debt exceeds 90% of an economy.

And as Peter pointed out in a previous podcast, incentives matter. And the incentives in this bill will likely decrease revenue even more than projected. That means an even bigger deficit than expected.

The weakening dollar

The dollar index has dropped more than 9% this year, putting it on track for its biggest annual slide since 2003. Peter has argued that the dollar is entering a long-term bear market and the next crisis will be a currency crisis.

I think this one is going to be the mother of all dollar bear markets, and I think the dollar is going to fall much further than it did in any prior bear market.”

The ballooning US debt will almost certainly impact the dollar. With tax cuts squeezing revenue, where does the government get the money? It will have to borrow more from the Fed. Peter said that means the dollar is going to fall through the floor.

There are other pressures on the dollar as well. In fact, some analysts say the world is creeping toward de-dollarization. Earlier this year, the Chinese announced the launch of a gold-backed, yuan-denominated oil futures contract. The move potentially creates a way for oil exporters to circumvent US dollar denominated benchmarks by trading in yuan. The contracts will be priced in yuan, but convertible to gold. More broadly speaking, Russia and China seem to be setting the stage to set up an alternative the international US dollar system. Many analysts believe the two countries are buying gold specifically to minimize their dependence on the US dollar. Russia and China are also reportedly moving closer to developing a broader gold-based trading system.

The stock market bubble

The stock market is a great big, fat, ugly bubble. Everybody knows it. The only question is when will it burst?

The latest fund-manager survey by Bank of America Merrill Lynch found that a record 48% of investors say the US stock market is overvalued. Meanwhile, 16% of investors say they are taking on above-normal risk. BoA chief investment strategist Michael Hartnett called this “an indicator of irrational exuberance.”

Even the government has taken notice, acknowledging asset prices are floating in dangerous bubble territory. The Office of Financial Research (OFR) recently released its 2017 Annual Report. According to its analysis, market risk is flashing red.

But people continue to buy stocks. The raging bull market has undoubtedly put a drag on gold. In fact, it has arguably put gold in an “anti-bubble” as Peter explained during an interview earlier this summer.

You have the opposite of a bubble in gold. Certainly, if you look at the United States, Americans are buying less gold now than they’ve done since the bull market began in 1999 – 2000.  Sales from the US Mint have collapsed. At SchiffGold, we just had our weakest quarter since the company has been in existence. And it’s not just my firm. It’s industry-wide. Americans are not buying gold, even though gold prices year-to-date are up more than the S&P 500. But the people who typically buy gold in America voted for Trump, and they’re no longer worried about the economy. So they’re not buying gold. They’re buying stocks instead, and I think they’re making a big mistake. They should be selling their stocks and buying even more gold.”

The Fed

You can’t talk about gold without talking about the Federal Reserve.

The central bank pushed forward with interest rate normalization this year, nudging interest rates up three times. More significantly, it launched quantitative tightening in October.

By next April the Fed will be shrinking its balance sheet at an annual rate of $360 billion and by $600 billion per year as of next October. By the end of 2020, the Fed will have dumped $2 trillion of bonds from its books. David Stockman puts this into perspective.

So the net of it is this: The Fed will sell more bonds in the next 3-4 years than had been accumulated by all of the central banks of the world in all of recorded history as of 1995!”

This very well could be the pin that pricks the above-mentioned bubble.

A lot of analysts say rising interest rates are bad news for gold. But as we’ve explained, this simply isn’t the case.

Consider this: the Fed started raising interest rates two years ago. With the rate a full 100 basis points higher than it was in December 2015, gold is trading at nearly $200 per ounce higher than it was then. That’s more than a 15% increase.

Last summer, Peter explained why the current rising rate environment is good for gold despite the conventional wisdom.

Central banks use two primary rationales to justify rate hikes – strong economic growth and a healthy inflation rate. As Peter explained, inflation is key when it comes to gold.

Rising interest rates are not negative for gold. I mean, the main reason that interest rates are rising around the world is because inflation is picking up around the world. Higher inflation is positive for gold. I mean, it is the most bullish thing for gold. And in fact, when inflation rates are rising, that means money is buying less, right? The purchasing power of money is going down. And that’s when you want to own gold.”

Cryptocurrency

Bitcoin has surged through the roof. And crashed. And surged again.

Cryptocurrency mania is in full force.

When I get to my desk in the morning, the first thing I do is check the latest gold news. But lately, when I google the word “gold,” I mostly get Bitcoin news.

A lot of people see Bitcoin as a replacement for gold. We think that’s a mistake. Gold and crypto are two different things. They share some similarities, but there are some fundamental differences. Those differences make gold a less risky, more stable asset.

In a world of expanding wealth, there is certainly room for more than one kind of asset. You can have both Bitcoin and gold. In fact, it might be a good idea to have both.

At SchiffGold, we recommend a diversified approach to investing in Bitcoin. Buying gold and silver is a great way to diversify your cryptocurrency portfolio. You can even buy gold and silver with Bitcoin. In the world of investing, it’s never wise to put all of your eggs in one proverbial basket. Diversifying your cryptocurrency portfolio with precious metals can help mitigate some of the potential downsides and put you in an overall stronger financial position.

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