Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18
What Happens Next When Small Cap (Russell) Leads the Stock Market - 17th May 18
Negative Signs for EUR/USD? AUD/USD - Battle - 17th May 18
DOW Jones and CRUDE Oil on a Cliff Edge, Waiting for a Nudge! - 17th May 18
Gold Price No More Subtleness – It’s Show Time! - 17th May 18
VIX Cycles Point to Stock Market Correction - 17th May 18
Trump Sounds End Times Armageddon Trumpet for Jerusalem, Israel Evangelical Prophecies - 16th May 18
Our Next Stock Market Dow Fibonacci Price Targets – Get Ready! - 16th May 18
The Coming Copper Crunch - 16th May 18
Stock Futures Are on a Sell Signal - 16th May 18
What to do When the IRS Comes for Your Property - 16th May 18
IS BITCOIN ANONYMOUS? - 16th May 18
Bitcoin Tide Might Have Turned - 15th May 18
UK Online Gambling Market Grows According to UKGC - 15th May 18
Stock Market Study: What Happens Next when Dow Goes Up 8 Days in a Row - 15th May 18
Fibonacci Price Ladder Points to Higher Stock Prices - 15th May 18
U.S. Dollar Rally Is Doomed - 14th May 18
Gloomy Scenarios for the Fed That Should Boost Precious Metals - 14th May 18
US Dollar One Reversal Too Many - 14th May 18
SPX futures are higher, but so is VIX - 14th May 18
Precious Metals and Miners NUGT – The Sleeping Giant Trade - 14th May 18
Is This The Netflix Of Cannabis? - 14th May 18
US Quest for Iran Regime Change: Will EU Sustain the Nuclear Deal - 14th May 18
Stocks Bears Last Stand - 14th May 18
Stocks Bear Markets Don’t Start when Real Interest Rates are this Low - 13th May 18
Stocks and Bonds Still Only 1 of 3 Macro Amigos to Destination - 13th May 18
Silver Forecast 2018 and Beyond, Investing for the $35+ Price Spike! - 13th May 18
Study: Breadth is Leading the Stock Market Higher. A Bullish Sign - 12th May 18
Ways on How to Get An LLC - 12th May 18
Kanye Is Right: Slavery Is A Choice And We're All Slaves Today - 12th May 18
Trump’s Iran-Decision Did-not and Won’t Affect Oil Prices - 12th May 18

Market Oracle FREE Newsletter

Trading Lessons

From Trumped Equities to Gold

Commodities / Gold and Silver 2018 May 08, 2018 - 02:34 PM GMT

By: Dan_Steinbock

Commodities Despite misguided economic policies and rising geopolitical tensions, the long market expansion has prevailed. But times may be changing.

With the Trump fiscal policies and rearmament, America is taking more debt than in decades, even though its sovereign debt now exceeds $21.2 trillion, or 106 percent of the GDP. As fiscal stimulus kicks in (read: Trump’s tax cuts), the deficit will widen.


The US is now the only major advanced economy that’s expected to see a rise in the debt-to-GDP ratio over the next 5 years (almost 10%!). The huge leverage relies on the continued willingness of other countries to finance America’s imbalances, even as US debt held by other countries already hovers around $6.4 trillion.

Meanwhile, the Sino-US bilateral friction continues, along with talks on the North American Free Trade Agreement (NAFTA) with Canada and Mexico, and on tariffs with the EU. In Europe, political winds are rising, despite cyclical recovery. In Germany, Chancellor Merkel’s rule is more constrained politically. Italy is heading to elections in which the old center has been played out. In France, May riots indicate Macron’s liabilities. And volatility is escalating in the post-Brexit UK.

Multiple international geopolitical flashpoints - from the new Cold War against Russia, the unilateral effort to “renew” Iran sanctions, the escalation of violence from Gaza to Syria, the nuclear talks in the Korean Peninsula, and so on - will ensure that geopolitical risks will prevail, along with brickering about the Mueller investigation and mid-term elections in the fall.

And yet, US dollar has strengthened, while Dow Jones remains over 24,200. Is the market mispricing the risks, once again?

Uneasy markets - and gold

Since the Cold War, there have been several conjecture points as investor optimism and booming markets have given way to pessimist sentiments and bear markets, as evidenced by two decades of Dow Jones and gold prices.

In the Clinton and Bush years markets boomed as investor optimism was fueled by the technology bubble, speculation in real estate and finance until 2008. That’s when markets plunged and gold soared until it reached record highs of almost $1,900 in September 2011.

As central bankers in major advanced economies resorted to ultra-low interest rates and rounds of quantitative easing, a new market boom took off with President Trump’s arrival in late 2016 (Figure).

But does this mean that markets have a lot of potential to climb, while gold will remain subdued in the coming years?

Figure  Market Booms and Busts via Dow Jones and Gold, 1991-2018

Subdued gold in the short-term

Such views seem to be supported by the World Gold Council's first quarter data, which suggests that gold demand had a soft start, mainly because of a fall in investment demand for gold bars and gold-backed ETFs. Yet, jewellery demand was steady as growth in China and the US covered for weaker Indian demand. Moreover, central banks bought 117 ton of gold (42% increase year-on-year) and technology demand extended its upward trend.

Gold is again beginning to attract investors, especially those that build on secular trends rather than short-term fluctuations. Some believe that gold prices have broken their downtrend line, but others think that these fluctuations reflect longer-term secular trends.

In long term, secular stagnation is broadening across the major advanced economies, which cannot be disguised by monetary injections, huge leverage and overpriced markets. While the Fed is tightening, central banks in Europe and Japan continue quantitative easing and record-low interest rates. Historically, periods of low rates - or negative rates - tend to correlate with gold returns that are significantly higher than their long-term average.

With increasing global jitters, investors are seeking out traditional havens from geopolitical risks. Yet, Treasuries are no longer the obvious choice as central banks have turned the bond market into a bubble territory.

... While secular trends support gold

Several emerging economies, which today fuel most of global growth prospects, are intrigued by the idea of re-coupling gold with a multilateral currency basket to avoid excessive exposure to US denominated energy and commodity markets. As the China-supported One Belt One Road (OBOR) initiatives advance, new arrangements are bypassing US dollar.

While advanced economies, such as the US (8,134 tons) and Germany (3,374 tons), still own most global gold reserves, they are either keeping their current levels of gold or reducing reserves. In contrast, while the large emerging economies, including Russia (1,858 tons) and China (1,843 tons), own less gold, they are increasing their gold reserves far, far faster. 

In the past decade, the US has increased its gold holdings by only some 0.5 ton, while Germany has cut its reserves by almost 50 tons. In contrast, China has tripled its reserves, while Russia has nearly quintupled its gold, despite rounds of sanctions.

As some 90 percent of the physical demand for gold comes from outside the US, gold is on the right side of the future.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

© 2018 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules