InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
FEBRUARY 15 , 2017
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
We continue our focus, in this issue of IntelDigest, on The Economy and Investing in the “New World Order.” Today, we discuss the prospects for Gold this year. Next week, we will concentrate on Equity investing for 2017, and discuss preparing our portfolios for the 2018-19 Credit Crisis.
We have written on the case for Gold on several occasions in the past year, and the basic premise has not changed, despite the election surprise.
Fundamentals
We addressed the fundamentals of Gold investment in both the July 26 and November 9 issues. Feel free to review the archive copies of those issues on our websites.
The basic arguments are:
1. Weak economic fundamentals in many countries around the world, ultra-low … even negative … interest rates, and enormous amounts of public and private Debt, all propel investments in Gold.
2. Gold is a traditional safe haven in times of insecurity; it can provide insurance against cyber and political risks.
3. Demand for Gold is growing in the marketplace, from Russia and China to western markets, while supply has been dormant because new mining projects were delayed or closed down over the last few years, when the gold price was receding from its 2011 highs.
4. Only a strong U.S. Dollar has kept the value of Gold and Silver from rocketing higher in the last two years. When the Dollar declines … and the Trump Administration is in favor of a softer Dollar … the price of Gold could shoot over $2,000 per ounce.
5. Historically, Gold has done well when “real” interest rates have fallen. “Real” interest rates refers to the return one can receive when inflation is factored in. For example, in the 1970s and 2000s, inflation was high, essentially wiping out any return from normal interest rates on fixed income investments, as well as yields on equities. Gold performed very well then, because the return from normal investments dropped to zero or went negative.
International Factors
We have also looked at three important international developments in the Gold market, which should propel the Gold Market this year.
The first is the Shanghai Gold Exchange.
China is the top consumer, importer, and producer of Gold in the world. China probably has the largest Gold reserves of any country, as it has acquired massive amounts of Gold in the last decade, much of it secretly. But, government actions are opaque, so outsiders can only make estimates of the reserves.
China is set on dominating the Gold market. It established the Shanghai Gold Exchange in 2002, and would now like to make it the center of Gold trading and pricing for the world. China has proposed that the Shanghai market would set the price on the basis of ACTUAL PHYSICAL GOLD, not on paper futures contracts.
Increased activity in the Shanghai Gold Exchange would be a significant factor in propelling growth in the Gold market.
The second development is a change in Islamic law which would allow massive investments in Gold by Muslims around the world, who number 1.6 Billion.
Some interpretations of Islamic law prevent Muslims from investing in trades considered “immoral,” such as alcohol and tobacco; this ban has included investment in Gold bullion as a tradeable commodity for the last few decades. As a result, approximately 23% of the population of the world has stayed out of the Gold market.
Now, however, the Accounting and Auditing Organization for Islamic Financial Institutions is working with the World Gold Council to set a standard allowing Gold trading by Muslims. If the pent-up demand by this group of investors is unleashed, Trillions of Dollars could soon pile into the Gold market!
Finally, the third international development in the Gold market is Peak Gold, the theory that the production of new Gold is shrinking around the world. Declines in new Gold discoveries have coincided with a surge in the costs of mining exploration. This has resulted in a reduction in mining operations and a steady decrease in Gold production.
Goldman Sachs has warned that there are “only 20 years of known mineable gold reserves.” Blackrock, the largest asset manager in the world, has also warned about “Peak Gold,” and asserts that Gold production is likely to decline by 20% per year for the foreseeable future.
There is no way to predict if Peak Gold is a concept which will last for years, or if new technologies or discoveries will change the dynamic. But, for now, the production of Gold is decreasing at the same time that Gold demand is about to soar!
Political Factors
As we discussed in the November 30 issue of IntelDigest, the Gold Market in 2017 will hinge on the actions of the new President and The Federal Reserve. We wondered what type of President would reside in the Oval Office, and the early indications are that it is the same Donald Trump who slashed his way across the country over an 18-month-long campaign.
The uncertain nature of Administration actions and policies will push many people into further Gold investment.
What of Trump’s legislative agenda, i.e., significant tax cuts and Federal spending on Infrastructure? If The Federal Reserve is accommodative to massive spending programs and higher federal deficits, we can expect much higher inflation in the near future and exacerbation of the Debt Crisis. Gold investments should perform well in this environment.
On the other hand, if The Fed raises interest rates too much and too often, to keep ahead of inflation, it would push the Dollar higher and set off a stock market fall and a recession in the U.S. Raising rates would make U.S. goods and services less competitive, resulting in lower profits and damaging our long, slow economic recovery.
This is NOT what The Fed intends, so it will NOT be able to raise interest rates very much or very quickly. Many long-term investors realize this, and continue to buy Gold to protect their wealth.
We believe that Gold and Cash act as excellent portfolio insurance against the uncertainties of both the Trump Administration and Federal Reserve policy.