September, 2017 - Week 1 Edition

Melania Trump and Gold Pitch-Perfect in Lake Charles, Louisiana

When the Trumps first travelled to Texas last week, the media savaged the First Lady with criticism over her high-heeled shoes and a Louis Vuitton bag she used to carry her change of clothes. The photographs of Melania in high-heels with a brand-name bag were taken and blown up. She was widely criticized for being “insensitive,” but nobody pointed out that she changed to a more practical pair of $60 white Adidas sneakers by the time she arrived in the flood zones. The national media focused on her high heels when leaving town, but not on her plain white tennis shoes when getting off the plane in Texas.

In a second trip to the flood zones last Saturday, the Trumps arrived in my home town of Lake Charles, Louisiana, where Melania wore green sneakers and a green baseball cap with a Louisiana state emblem on it. You probably haven’t heard about her Louisiana baseball cap, since I haven’t seen any press reference or photograph of it, but my wife and I saw it first-hand. Her apparel choices were “pitch perfect.” I wish the press didn’t spend so much time commenting on her wardrobe, but since they have done so, why aren’t they fair and balanced?

The press hasn’t yet pointed out that Melania Trump was far more present for storm victims in Texas than First Lady Michelle Obama was during Hurricane Sandy in 2012.  Instead of visiting victims, Michelle held campaign fund-raisers for her husband’s re-election.  Earlier, in 2009, while helping out in a food bank, Michelle was seen with $540 Lanvin sneakers.  When the press questioned her, she said, “they’re just shoes,” and the press dropped the subject. I wish they would extend Melania Trump the same courtesy.

Gold broke strongly through $1,300 per ounce last week and then kept rising, reaching $1,334 over the Labor Day weekend, up 16% for the year so far.  Silver breached $18 per ounce on the Tuesday after Labor Day, up from a low of $15 in early July.  There are many causes – a weak dollar vs. the euro after the Fed’s Jackson Hole meeting in late August, escalating war threats from North Korea, the crisis in southeast Texas after Hurricane Harvey and the looming showdown in Washington, DC, over the debt ceiling and the budget crisis.  And, all of a sudden, Wall Street is warming up to gold – tardy, as usual!

Wall Street is Suddenly Bullish on Gold

We’ve seen it happen dozens of times before.  On every minor swing in metals prices, Wall Street turns negative on gold after the price has already retreated, and then they turn bullish after gold has recovered strongly. By doing so, momentum traders tend to sell too late and buy too late, missing the early gains.

Over the Labor Day weekend, after gold had already spent a week above $1,300 per ounce, Barron’s asked several market experts, “Where are Gold Prices Heading?”  Most were bullish, including Simon Mikhailovich, managing partner of Tocqueville Bullion Reserve, who said “In this environment, physical gold represents a cheap insurance policy that has stood the test of time.” Michael Harris of Bedell Frazier Investment Counseling, added: “Gold should hit a minimum of $1,500 in the next 12 months.  We’re entering a new bull market for gold, as investors seek new places to earn return and protect capital.”

The previous week, we heard from several other major investment firms that are predicting $1,400 gold:

Bank of America Merrill Lynch said that a breach of the $1,300 barrier is within reach and a price surge to $1,400 by early next year is possible. In a Bloomberg interview, Francisco Blanch, global head of commodities research for the mega-bank, said a higher euro provides a new “tailwind for gold.”

Evgeny Ananiev, head of precious metals at VTB Capital JSC, a unit of Russia’s second-largest lender, predicted gold could hit $1,400 by year-end on North Korean tensions and buying from India and China.

Steve Hanke, Professor of Applied Economics at Johns Hopkins University, said that $1,400 could be breached before the end of 2017: “One always wants to have some gold and I think particularly now in troubled times.” Hanke added, “The Fed is just on the wrong course.  Governments are completely lost.”

In addition, as we reported, prominent financial gurus including billionaire Ray Dalio and financial publisher Dennis Gartman recommended that investors have at least 10% of their portfolios in gold.

…But Wall Street Still Doesn’t Understand Gold!

Despite the turnaround in gold prices over the last month, Wall Street still doesn’t understand gold. On Friday, August 25, The Wall Street Journal printed an article which seemed bullish for gold on the surface, but they used some bizarre charts and comparisons to try to show that stocks are better than gold in the long-term – carefully selecting their beginning dates and percentage benchmarks to fit their case.

One chart was particularly bizarre, saying that “In only four of the past 40 years has gold finished ahead of the S&P 500 and Dow when all were up at least 9%.”  That 9% benchmark was a tortured attempt to fit the current 9% gain in the S&P 500 into the historical record of “years like this.”  But, even to the casual observer, it’s not important which investment goes up the most when all three are going up.  What’s more important is what gold does in years in which the stock market goes DOWN.  The stock market declined significantly (by double digits) in 1973, 1974, 1977, 2002 and 2008. Gold was up strongly in those years.

Why didn’t the Journal include a chart like this?  Why didn’t they include a long-term comparison of gold and stocks – like we do here each week – showing that gold is up 350% vs. just 66% to 90% for stocks since 2000.  At the end of their article, they did admit that gold outperformed stocks in the years before and after the terrible 2008 crisis, the worst since the 1930s: “Stocks gained 23% and gold 24% in the crisis-recovery year of 2009, and 2010 told a similar story, with stocks up 13% and gold up 30%.”

If you put all those numbers together, gold gained 68% in 2008-2010, while stocks fell 9% in 2008-2010.

The Journal’s main chart was also misleading, saying “Gold this year is rising faster than the S&P 500 for the first time since 2011, as investors resort to an investment that offers no claim on profits and yields no periodic return, reflecting rising perceived uncertainty.”  Wow!  “No profits” and “no periodic returns”?

Gold is up 360% since 2000 (and silver is up 236%). In a world of ultra-low interest rates, it is irrelevant to say that gold offers “no interest income,” since short-term money in the bank offers microscopic yields with none of the capital gains potential of gold and silver.  As for “perceived uncertainty,” that is only one of gold’s many roles in the world.  Wall Street loves to color gold as a “metal of fear,” when about half of all demand comes from jewelry, by which newly-wealthy people buy beautiful gifts for their loved ones!

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