[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

We generally don’t engage in unprovable/unfalsifiable conspiracy-linked speculation to explain market performance or government policy, but today we are making an exception because we are struggling to come up with a more straightforward explanation for Trump’s recent actions.

Tariffs would be negative for the US economy even if they were not large in percentage terms and were introduced in a measured way, but the haphazard way in which large tariffs have been imposed and changed over the past two months greatly magnifies the economic damage that will be done. Furthermore, another intervention under consideration could be even more damaging than the tariffs that have been threatened/implemented to date. We are referring to the port fee plan discussed in an article posted at lloydslist.com on 11th March. Here is an excerpt:

“The US Trade Representative announced on February 21 that it plans to levy exorbitant port fees — in some cases over a million dollars — for every US port call by Chinese transport operators, Chinese-built ships, all operators that have any ships on order at Chinese yards, and according to one interpretation of the proposal (based on a presidential draft order obtained by Lloyd’s List), all operators with any Chinese-built ships in their fleets.

The USTR plan would also mandate that a portion of US exports be carried on US-flagged and, eventually, US-built vessels.

Respondents had until Monday to submit comments to the USTR if they wanted to testify at the hearing on the proposal on March 24. They responded in droves, overwhelmingly negatively, with several predicting a disaster for importers, exporters and the US economy in general if the USTR did not kill the port fee plan.

Some executives also bluntly asserted that if the plan was approved as written, their companies would go out of business or leave the US.”

If the port fee plan is implemented it will inflict a devastating blow on the US economy, with no potential upside in either the short-term or the long-term. Why, then, is it even being considered?

The port fee plan and the reckless way in which tariffs are being imposed/threatened only make sense if the Trump Administration is trying to ensure that the US economy goes into recession soon. If this is the plan then there is already evidence of success, in that the High Yield Index Option Adjusted Spread (HYIOAS), an indicator of US credit spreads, generated a recession warning signal last week. The signal is the weekly close above the 65-week MA (the blue line on the following chart).

Why on earth would the Trump team want a recession to happen ASAP?

One reason is that a recession this year could be blamed on Biden. In a way this would be appropriate, because the US economy probably would have gone into recession 12-18 months ago if not for the Biden Administration’s use of aggressive deficit-spending and other tools (mainly, issuing a higher percentage of short-term debt as mentioned below) to delay the inevitable until after the November-2024 elections.

Another reason is that a recession would create a financial/economic backdrop in which there was much greater demand for Treasury securities, enabling the US Treasury to ‘term out’ the government’s debt at lower interest rates. By way of further explanation, during 2023-2024 the US Treasury under Janet Yellen substantially increased the use of short-term debt to finance the government’s deficit and in doing so reduced the average term of the total debt. The new Treasury Secretary (Scott Bessent) must now return the average term of the debt to where it should be, which only could be done by increasing the issuance of long-term debt relative to the issuance of short-term debt. This would put upward pressure on long-term interest rates, but if there were a recession then this pressure probably would be more than offset by an increase in the demand for the relative safety provided by long-dated Treasury securities.

A third reason is that if a recession occurs this year, then the economy probably will look fine by the time the mid-term elections roll around in late-2026.

There’s now a high probability that if a US recession is not already underway then it will begin within the next three months. Therefore, if this is happening according to a plan to get the inevitable recession out of the way in 2025, then the first part of the plan is coming together.

[This blog post is an excerpt from a commentary at www.speculative-investor.com]

We haven’t discussed global monetary inflation for a while, mainly because very little was happening and what was happening was having minimal effect on asset prices or economic performance. However, the global money-supply situation is now noteworthy.

First of all, attempts to reflate clearly are being made in some parts of the world. From our perspective, the most significant of these attempts are evident in the following monthly charts showing the monetary inflation rates in Australia and Canada. In both cases, year-over-year (YOY) money-supply growth rates have rebounded strongly from negative territory (monetary deflation territory, that is) to around 7%. These rebounds are setting the scene for economic booms, but we suspect that the booms won’t start until next year and that in the meantime there will be more economic weakness.

However, in the world’s most influential economies/regions there is no evidence, yet, that a concerted attempt to reflate is underway. In particular:

1. The following charts show that although the money-supply growth rates of both the US and the euro-zone have rebounded from the deep deflationary levels of 2023, the current levels (around 2%) are very low by historical standards. The current levels have tended to be associated with recessions and/or credit crises, not booms.

2. The next chart shows that while China’s YOY M2 growth rate remains moderately high by Western standards, it is near a multi-decade low. This means that the monetary stimulus introduced last September in China is yet to have a discernible effect on monetary conditions.

By the way, normally we show China’s M1 growth rate rather than its M2 growth rate, but the PBOC changed its M1 calculation methodology in January-2025 and in doing so made comparisons with previous months/years impossible. As far as we can tell, China’s M1 is roughly unchanged over the past year.

3. Our final chart shows that Japan’s YOY M2 growth rate is near an 18-year low, so the BOJ’s concern about price inflation in Japan is leading to tight monetary conditions. These tight monetary conditions probably will lead to economic weakness, much lower price inflation levels and additional Yen strength over the next 12 months, prompting the BOJ to return to its pro-inflation ways. Like all central banks, the BOJ is adjusting monetary policy based on what it sees in the rearview mirror.

The combination of the malinvestment that occurred in response to the massive monetary inflation of 2020-2022 and the current low levels of monetary inflation in the world’s most important economies increases the risk that the world is heading towards a period of widespread economic weakness.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

The official US gold reserve is 260M ounces and is an asset on the balance sheet of the Fed. Currently the asset is valued at $11B, which equates to only US$42.22/ounce, whereas the actual market value of the asset is around US$770B. There recently has been speculation that the asset would be re-priced to reflect its current market value. What is the chance of this happening and what would be the likely effects? We will deal with the second part of this question first.

If the value of the asset on the Fed’s balance sheet were increased by US$750B, the re-valuation would, we assume, result in the Fed adding $750B to the Treasury General Account (TGA — the federal government’s demand account at the Fed). In effect, the Fed would be creating 750 billion new dollars that the government could spend. Therefore, the revaluation immediately would increase the US money supply by $750B. In addition, as the money was spent by the government, that is, as the money made its way from the Fed to the commercial banks, it would boost bank reserves.

The monetary injection into the economy that would occur as the government spent its newly acquired 750 billion dollars would give the economy a short-term boost. This means that if the revaluation were to happen within the next couple of months it could postpone a recession and provide some support to the stock market. It would not, however, be bullish for gold, unless gold is now a pro-cyclical asset.

Although the initial effect on the economy would be positive, the economic boost would be of a short-term nature only. One reason is that it would result in higher inflation and therefore higher long-term interest rates. A related reason is that it would prompt the Fed to extend its QT in order to absorb the additional money and reserves created by the revaluation.

Due to the short-term nature of any positive effect on the economy, from a purely political perspective it would make more sense to implement the revaluation during the final year of the Presidential term (2028, that is) rather than during the first year. This suggests to us that the probability of the revaluation happening this year is low. Furthermore, in an interview last Thursday (20th February) Scott Bessent, the US Treasury Secretary, stated that revaluing the official gold reserve was not what he had in mind when he recently mentioned the possibility of monetising the balance sheet, although he wouldn’t be drawn on whether revaluing the gold was under consideration.

We suspect that if the official US gold reserve is revalued it will happen as part of a stimulus package during the next recession or it will be done to give the economy a short-term boost during the lead-up to the next Presidential election. It’s not likely to happen within the next few months.

[This blog post is an excerpt from a commentary published last week at www.speculative-investor.com]

The war between Russia and the NATO-supported Ukraine that began almost exactly three years ago with Russia’s invasion of its neighbour, is one of the more stupid and unnecessary wars of the past century involving the US and/or Europe. It’s likely that this war never would have begun had there been formal acceptance on the parts of the major Western powers that Ukraine would remain neutral, that is, that Ukraine would never be part of NATO. Instead, the push to make Ukraine part of NATO that began in 2008 continued, with the result that millions of Ukrainians have been killed or lost their homes and a lot of Ukraine’s infrastructure has been destroyed. With negotiations now underway between the US and Russia governments, what are the chances that this unnecessary and devastating conflict will end within the next few months?

The short answer is that we can’t quantify the chances, but it’s clear that while it won’t be easy to arrive at a settlement there are strong incentives for both sides to end the fighting. The incentives for Ukraine and NATO are:

1) Stop the loss of Ukrainian lives and property.

2) End the costly transfer of military support to Ukraine — support that is achieving nothing other than prolonging the agony.

3) Prevent Russia from gaining more of Ukraine than it already has, the reality being that the longer the war goes on the more Ukrainian territory will be lost and the closer Ukraine will be to a complete military collapse.

4) Prevent Russia from becoming a bigger military threat to Europe. A large part of the official justification for NATO’s involvement in the war was to prevent Russia from threatening other parts of Europe, but at the outset of the war it was clear that Russia posed no military threat whatsoever to NATO. This was evidenced by the incompetence demonstrated by Russia’s armed forces during the first six months of the war. However, one of the unintended and ironic consequences of this war is that it has resulted in Russia’s military becoming much larger and more capable than it was, that is, it has resulted in Russia becoming a much bigger threat than it otherwise would have been. Furthermore, it’s likely that the longer the war continues, the stronger Russia will become militarily.

5) For the Trump Administration, there is the incentive of making good on a campaign promise and the fact that if the war were to continue beyond this year it would become as much Trump’s war as Biden’s war.

The Russian government also has incentives to bring the fighting to an end. They are:

1) End the massive transfer of resources from the broad economy to the war effort. Although Russia’s government has taken steps to keep a lot of the war-related costs off its own books, the war is creating major problems for the Russian economy. The most visible of these problems is rapid price inflation, which is causing the central bank to maintain its targeted interest rate at 21%. The longer the war goes on, the greater will be the wealth destruction within Russia. Putin almost certainly realises this.

2) End the sanctions that are making it more costly for Russian companies to export and limiting Russians’ access to imports.

3) Reduce the political risk for the current leadership. The longer the war goes on and the more distorted Russia’s economy becomes as a result, the greater the risk to Putin.

The incentives are there, but ending the war still will be difficult because the only deal that will be possible now will be worse, from a Ukrainian/Western perspective, than the deal that was rejected by Ukraine, at the behest of the US and the UK, a month after the war started. Increasing the degree of difficulty is that the bulk of the analysis of the war disseminated by the Western media is unrealistic. According to much of what is seen/read in the West, if ‘we’ can keep the costly military support for Ukraine going for a little longer, then Russia may be defeated. If not, then the Russian expansion won’t stop with Ukraine.

For the West, we think that being realistic involves accepting that:

1) Ukraine will never become part of NATO.

2) There will be no NATO ‘peacekeeping’ troops in Ukraine.

3) Most of the Ukrainian territory that has been taken by Russia up to now will stay with Russia.

And for Russia, we think that being realistic mainly involves accepting that Ukraine, as an independent country, will be free to elect its own government and maintain its own military. Also, although Russia will not accept Ukraine being in NATO, it may have to accept Ukraine being in the EU.

Hopefully the war, and along with it the bloodshed and destruction, will end within the next few months. Shortly after it does end, the rebuilding of Ukraine will begin. The rebuilding effort will, we think, be bullish for most industrial commodities.

[This blog post is a brief excerpt from a recent commentary at www.speculative-investor.com]

We get the impression that some major sentiment extremes are close. In particular, we appear to be at/near peak optimism about the US stock market and the US dollar, peak pessimism about the US T-Bond market, and peaks in the expected effects of Trump’s policies on US economic growth and inflation. These sentiment extremes are inter-related, in that the very popular view that Trump’s policies will drive US economic growth and inflation upward has magnified the decline in the T-Bond price (the rise in the T-Bond yield), which has, in turn, magnified the rally in the US$.

In the T-Bond market, an intermediate-term reversal is likely during the next month. Possible catalysts for the reversal are more evidence of weakness in the US labour market, a surprisingly low CPI or PCE number, a downside breakout in the oil price, an announcement by the Fed that it is ending QT and a steep pullback in the stock market, but note that with such a high level of general bearishness about the T-Bond’s prospects it won’t take much to bring about the initial ‘turning of the tide’.

At around the same time as or soon after the T-Bond price reverses upward, the US$ should begin to weaken on the foreign exchange market. Further to the comment we made above, this is because it was the rise in the T-Bond yield that extended the US dollar’s rally from its September low to the point where it recently made multi-year highs against most other currencies.

The US stock market (the SPX) also could make an intermediate-term reversal soon, although for two reasons there is a realistic chance that the stock market’s inevitable reversal will be delayed despite the apparent sentiment extreme. One is that the stock market could be given a boost by declining interest rates after the T-Bond price begins to trend upward. The other is that the passive investing funds that now dominate the stock market will continue to support equity prices as long as there is a net flow of money into these funds, and there probably will be a net flow of money into these funds until the economy becomes significantly weaker.

The upshot is that the stage is set for some important trend reversals in the financial world. What we are now awaiting is evidence of reversal in the price action.

[Below is a brief excerpt from a commentary published at www.speculative-investor.com on 22nd December 2024]

Interest rates are always among the most important determinants of currency exchange rates, but over the past two years they have dominated. We cite the following two charts as evidence.

The first chart compares the US$/Yen exchange rate (the black line) with the yield on the US 10-year T-Note (the green line). This chart only illustrates the strong positive correlation between these two markets over the past two years, but the relationship has existed and has been tracked at TSI — normally via a chart that compares the Yen with the price of the 10-year T-Note — for much longer.

The second chart compares the Dollar Index (the black line) with the yield on the US 10-year T-Note (the green line).

These charts show that over the past two years the US$ has strengthened against other fiat currencies whenever the US 10-year T-Note yield has risen and weakened against other fiat currencies whenever the US 10-year T-Note yield has fallen. The relationship operates on a trend basis rather than a daily or weekly basis, although it was evident last Friday when a slightly lower-than-forecast Personal Consumption Expenditures (PCE) Index prompted a dip in the T-Note yield, which, in turn, prompted a pullback in the US dollar’s exchange rate.

The overarching message being sent by the above charts is that for the US$ to continue strengthening, the US 10-year T-Note yield will have to continue trending upward. This is unlikely, because we probably are now seeing a sentiment peak related to the expected inflationary effects of Trump’s policies, US economic strength, US stock market outperformance and Federal Reserve ‘hawkishness’. What we haven’t seen yet are any signs in the price action that the trends of the past 2-3 months have ended.

[This blog post is an excerpt from a recent commentary published at www.speculative-investor.com]

The phrase “Drill baby drill” has been around for a long time, but Trump embraced it during his recent campaign to describe the approach to drilling for oil that would be taken by his administration. What will be the likely effect on the oil price of this approach to oil industry regulation? The short answer is: The effect probably will be minor. For a longer answer, read on.

One reason that the effect of this new approach won’t be substantial is that for all its words to the contrary, the Biden Administration did very little to hinder oil drilling. Therefore, the Trump Administration’s “Drill baby drill” approach will not constitute a major change.

The second and most important reason is that in the absence of regulatory roadblocks the actions of the oil industry will be determined mainly be the oil price. It’s reasonable to expect that drilling activity would ramp up if the oil price were to make a sustained move above $90/barrel, but it’s also reasonable to expect that drilling activity would be slowed if the oil price were to make a sustained move below $60/barrel. Therefore, Trump’s opinion that in the absence of regulatory obstacles the oil industry will drive the price down to very low levels is not plausible.

The reality is that although the oil industry is notoriously undisciplined, due to what transpired over the past ten years the one thing that will instil discipline in the future is a low oil price. In the future, an oil company CEO who continues to expand, or more likely fails to cut, production in response to sustained weakness in the oil price probably won’t keep his/her job.

It’s therefore likely that the future response of US-based oil producers will act to keep the oil price in a wide range. That is, it’s likely that in the absence of other influences the future supply response of the US oil industry will create both a ceiling and a floor for the oil price.

Of course, there will be other influences, one of the most important of which will be the actions taken by OPEC+. OPEC+ has about 5 million barrels/day of spare capacity that could be brought on line relatively quickly and cheaply. This represents a bigger threat to the oil price than the “drill baby drill” policy in the US.

In all likelihood, OPEC+ will act similarly to the US oil industry and only increase its production in response to a sustained rise in the oil price to a much higher level. However, there are plausible scenarios under which OPEC could ramp-up its production despite weakness in the oil price. It has done so in the past with the aim of creating financial problems for its competitors in the West and forcing these competitors to reduce production. It could do so again for this reason or because the Saudi leadership does a deal with the Trump Administration that involves guarantees of security/weapons in exchange for a price-suppressing boost to oil production.

Our view at this time is that a much higher oil price is a realistic possibility for 2026-2027, but that the oil price will spend the next 12 months in the $60-$90 range. Furthermore, whereas it probably would take a war-related supply disruption to push the oil price well above the top of the aforementioned range, a move to well below the bottom of the range could result from either OPEC ramping-up production for the reasons mentioned above or a severe recession.

[This blog post is an excerpt from a commentary published last week at www.speculative-investor.com]

Jurisdictional risk materialises with no warning

Jurisdictional risk is any additional risk that arises from doing business in a foreign country. The problem with this type of risk is that when it materialises, it does so without warning.

As exemplified by two recent events, jurisdictional risk for gold mining companies is relatively high among the countries of West Africa (the countries highlighted on the following map). The first of these events was a statement in early-October from the president of Burkina Faso that the government may withdraw existing permits for gold mines. This statement affected a number of Western gold mining companies, including TSI stock selection Fortuna Mining (FSM). FSM currently generates about 25% of its gold production in Burkina Faso.

The aforementioned statement by Burkina Faso’s president caused a 10% single-day plunge in the FSM stock price. The company put out a press release that soothed fears and the stock price quickly recovered, but the risk remains and could move back to centre-stage at any time.

The second of these events occurred early this week when Australia-listed Resolute Mining (RSG.AX), which is not a current TSI stock, advised that its CEO and two other employees had been detained by the government of Mali due to a disagreement over the government’s share of revenue from RSG’s Syama gold mine. In response to this news the RSG stock price immediately dropped by around 30% and, as illustrated by the following daily chart, is down by more than 50% from last month’s high. At the time of writing the employees are still being held hostage by the Mali government, which apparently is demanding a $160M payment.

In response to the RSG news, the stocks of some other gold mining companies with substantial exposure to Mali were hit hard. The hit to the B2Gold (BTG) stock price was relatively mild, however, even though the company’s most important currently-producing mine (Fekola) is located in Mali. We assume that this is because the company negotiated a new agreement with the Mali government only two months ago.

When nothing untoward happens in a country with high jurisdictional risk over a long period, investors tend to forget about the risk and the risk discount factored into the stock prices of companies operating in that country becomes small. As mentioned at the start of this discussion, the problem is that when this type of risk materialises, which it eventually almost always does, there is never any warning and therefore never time to get out prior to the price collapse. This is not a reason to avoid completely the stocks of companies operating in high-risk countries, but it is a reason to only buy such stocks when the risk discount is high and to manage the risk via appropriate position sizing and scaling out into strength.

Balance sheet risk materialises WITH warning

Unlike jurisdictional risk, balance sheet risk doesn’t suddenly appear out of nowhere. The signs of trouble are almost always obvious for a long period before the ‘crunch’. If management doesn’t take decisive action soon enough to recapitalise the company, there will no longer be an opportunity to recapitalise in a way that doesn’t destroy a huge amount of shareholder value. On Wednesday of this week the shareholders of i-80 Gold (IAU.TO) learned this lesson.

The IAU stock price was down 58% to a new all-time low on Wednesday 13th November in reaction to the company reporting its financial situation, operating results and a new development plan. In a nutshell, it was an acknowledgement that the company is under severe financial stress. However, this should not have come as a big surprise given that the company reported a working capital deficit of US$60M more than three months ago and has a loss-making business, meaning that the working capital deficit was bound to increase in the absence of new long-term financing.

A strong balance sheet is especially important for gold mining companies that either are in the mine construction phase or have commenced production but are not cash-flow positive. That’s because such companies need a sizable ‘cash/financing cushion’ to stay in business. For exploration-stage companies, having such a cushion is not as critical because these companies can survive by either temporarily stopping their exploration work or doing the occasional small equity financing.

The crux of the matter is that close attention should be paid to the balance sheet, which forms part of the information that public companies issue on a quarterly basis.

[This blog post is an excerpt from a commentary published at www.speculative-investor.com last week]

This is our annual reminder that gold mining stocks should always be viewed as short-term or intermediate-term trades, never as long-term investments. If you want to make a long-term investment in gold, then buy gold bullion.

The reason is illustrated by the following weekly chart. The chart shows more than 100 years of history of gold mining stocks relative to gold bullion, with gold mining stocks represented by the Barrons Gold Mining Index (BGMI) prior to 1995 and the HUI thereafter. The overarching message here is that gold mining stocks have been trending downward relative to gold bullion since 1968, that is, for 56 years and counting.

We’ve explained in the past that the multi-generational downward trend in the gold mining sector relative to gold is a function of the current monetary system and therefore almost certainly will continue for as long as the current monetary system remains in place. The crux of the matter is that as well as resulting in more mal-investment within the broad economy than the pre-1971 monetary system, the current monetary system results in more mal-investment within the gold mining sector.

The difference between the gold mining sector and most other parts of the economy is that the biggest booms in the gold mining sector (the periods when the bulk of the mal-investment occurs) generally coincide with busts in the broad economy, while the biggest busts in the gold mining sector generally coincide with booms in the broad economy. The developed world, including the US and much of Europe, entered the bust phase of the economic cycle in 2022 and the bust is not close to being over. This means that we are in the midst of a multi-year period when a boom should be underway in the gold mining sector.

To date, the gold sector’s upward trend from its 2022 low hasn’t had boom-like price action. The main reason is that the current economic bust is progressing more slowly than is typical, largely because of the efforts of the US government to boost economic activity via recession-like deficit spending and the parallel efforts of both the Treasury and the Fed to boost financial market liquidity. A related reason is that during the economic bust to date the broad stock market has performed unusually well. This has meant more competition for the attentions of speculators and investors. The gold sector has been generating good operating results and stock market performance, but so have many other sectors.

We expect that over the next 12 months the gold mining sector will continue to demonstrate strong earnings growth while most other sectors see flat or declining earnings as the economy slides into recession. This contrast should lead to boom-like price action in the gold sector. In fact, we think that the HUI could trade north of 600 next year while remaining in its long-term downward trend relative to gold bullion.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

Both Kamala Harris and Donald Trump are espousing policies that will be bearish for the US$ and bullish for gold. This means that regardless of what it turns out to be, the outcome of the November-2024 Presidential Election will be consistent with our view that the US dollar’s foreign exchange value will continue to trend downward and the US$ gold price will continue to trend upward for at least another 12 months. However, apart from having similar ramifications for the longer-term trends in the currency and gold markets, there are substantial differences between the candidates’ main policies. Let’s delve into some of the details.

Harris has talked about raising the capital gains tax rate and introducing a tax on unrealised capital gains to ensure that very wealthy taxpayers pay a minimum tax rate of 25%. If implemented, these changes would have the effect of reducing investment and therefore economic progress. Also, they would be a boon to the IRS and the private tax planning/reporting industry, because the additional complexity introduced by incorporating calculations of unrealised capital gains into taxable income would require substantial extra resources in both the government and the private sector. These extra resources wouldn’t just be non-productive, they would be counterproductive.

As an aside, when politicians introduce new taxes they usually make the assumption that the world will continue as before except with more money being paid to the government. However, taxes change behaviour, sometimes to the extent that new or increased taxes lead to a reduction in government revenue. This is exemplified by the fact that almost every country that has imposed a wealth tax has ended up scrapping the tax because it led to the exodus of capital, resulting in a weaker economy and lower revenue for the government. The reality is that while a promise to extract more money from the extremely wealthy can sound good to many voters, the wealthier a taxpayer the more mobile their wealth tends to be.

Although she has attempted to soften her stance on energy-related issues (for example, she claims to no longer favour a ban on fracking and she has stopped talking about the “Green New Deal” that she once supported), under a Harris regime it’s likely that, as part of a general increase in the amount of government regulation of business, it would be more difficult to get approvals for oil and gas projects. Also, it’s almost certain that the government would direct a lot more resources towards intermittent energy (sometimes called renewable energy). These actions would drive up the price of energy and increase the risk of energy shortages, with knock-on negative implications for the US economy.

Lastly, a Harris administration probably would prolong the Ukraine-Russia war, with devastating additional consequences for Ukraine — and potentially for all of Europe if the war is allowed to escalate — in terms of lives and infrastructure, as well as negative consequences for the US government’s budget deficit. A Trump administration, on the other hand, would be more likely to negotiate a settlement that ends the senseless destruction.

Trump is advocating lower taxes, which would be a plus if he were also advocating government spending cuts to offset the associated reduction in government revenue. However, it seems that no meaningful spending cuts are being considered. Therefore, the tax cuts would accelerate the rate of increase of the federal government’s debt, leading to higher interest rates and private-sector debt being ‘crowded out’ by government debt.

Trump also is advocating tariffs on all imports, with huge tariffs to be imposed on any imports from China. Furthermore, he has stated that he will use tariffs as a weapon against any country that acts in a way that he deems unacceptable, including against any country that attempts to move away from the US$-based international monetary system.

Tariffs that are imposed on US imports are paid by the US-based importers and would get passed on to US consumers, so an effect of the tariffs would be a sizable increase in the US cost of living. Another effect would involve the start of a process to change supply chains and relocate manufacturing in response to the sudden government-forced changes in costs. This process would be long and expensive.

There is no doubt that the Trump tariffs would lead to retaliation from other governments, with predictable effects being smaller markets and smaller profit margins for US companies exporting from the US or operating outside the US. Also, it’s likely that international trade blocs would form that excluded the US.

Most significantly from a long-term perspective, the tariffs and the threat to use tariffs as a weapon to punish governments deemed by the President to be recalcitrant would reduce the international demand for the US$ and could bring forward the demise of the current global monetary system (the Eurodollar System discussed in the 12th August Weekly Update). This is not primarily because the tariffs would lead to less international US$-denominated trading of goods and services, although they certainly would do that. Instead, it is because the non-US demand to hold US dollars is based on the US having large, liquid, open and secure markets. The US financial markets will remain large and liquid for the foreseeable future, but the international demand for the US$ will decline to the extent that these markets are no longer perceived to be open and secure.

The shift away from the US$ would occur over many years, because currently there is no alternative. However, the introduction of Trump’s tariffs would increase the urgency to establish an alternative and could have noticeable effects on the currency market as soon as next year.

By the way, although it was ineffective the Biden administration’s decision in 2022 to ban Russian banks from using the SWIFT system possibly was viewed as a ‘shot across the bow’ by many foreign governments, corporations and wealthy individuals. If Trump gets elected and does what he has said he will do with tariffs, it would be a ‘shot directly into the bow’.

Summarising the above, a Harris administration would attempt to establish higher tax rates, which would lead to reduced investment and a weaker US economy. Also, the price of energy would be higher, more resources would be directed towards inefficient sources of energy and the Ukraine-Russia war probably would either grind on or escalate. A Trump administration wouldn’t make these mistakes, but via aggressive and far-reaching tariffs it would raise the cost of living and throw the equivalent of a giant spanner into the international trading and investing works. One thing that Harris and Trump have in common is that their planned actions will ensure that the US government’s debt burden continues to increase at a rapid pace.

It’s almost as if both sides of the US political aisle have a weaker dollar and a higher gold price as unofficial goals.

The US yield curve is considered to be a good leading indicator of US recession, with an inversion of the curve invariably occurring prior to the start of a recession. However, the Wolf Street article posted HERE questions the yield curve’s reliability. The article notes that part of the US yield curve recently ‘uninverted’, which is true. What’s not true is the claim in the article that since 1998 the US yield curve failed twice by warning of recessions that didn’t occur.

According to the article, the yield curve’s 2019 inversion was a failure because even though there was a recession in 2020, the recession was the result of a pandemic and not a business cycle downturn. This is strange reasoning, to put it mildly.

The only way that you could argue logically that the yield curve’s 2019 inversion was a failure would be if you could re-run history to show that in the absence of the COVID pandemic there would not have been a recession. Since this is not possible, the 2019 inversion should not be viewed as a failure. Either it was a success or it should not be counted.

Also according to the article, there was a yield curve inversion in 1998 that was not followed by a recession.

The problem here stems from interpreting a multi-day spike into inversion territory as a recession signal. This problem goes away if you base your analysis on monthly closing or monthly average prices, which generally is what should be done with long-term indicators.

Here is a monthly chart showing that since the late-1960s every inversion of the US 10year-3month yield spread was followed by a recession. Consequently, if this cycle’s yield curve inversion does not lead to a recession then it will be the first failure of this type (the first false positive) in more than 50 years. Note, though, that the monthly chart of the 10year-3month yield spread shows that there was no yield curve inversion prior to the 1990 recession, so this could be viewed as a false negative.

Regardless of whether or not this cycle’s yield curve inversion leads to a recession, a yield curve inversion/uninversion clearly isn’t a useful trading signal. The time between the warning signal and the projected outcome is simply too long and too variable.

There are many problems with the calculation methodology of the Consumer Price Index (CPI) and with the whole concept of coming up with a single number to represent the purchasing power of money. Interestingly, however, if we calculate the inflation-adjusted (‘real’) gold price by dividing the nominal US$ gold price by the US CPI, which is what we have done on the following monthly chart, we see that the result has peaked at around the same level multiple times over the past 50 years and that the current value is around this level. Does this imply that gold’s upside is capped?

It adds to the reasons that we should be cautious about gold’s short-term prospects. These reasons include the size of the speculator net-long position in gold futures, the August-September cyclical turning-point window for the gold mining sector, the likelihood of a reduced pace of US federal government spending during the months following the November-2024 election, the fact that gold’s true fundamentals are not definitively bullish, the high level of the gold/GNX ratio (gold is expensive relative to commodities in general), the extent to which the financial markets have discounted Fed rate cuts (four 0.25% Fed rate cuts are priced-in for 2024, creating the potential for a negative surprise from the Fed), and the high combined value of gold and the S&P500 Index relative to the US money supply. However, we expect that within the next 12 months the gold/CPI ratio will move well into new high territory, mainly because:

1) The US economy finally will enter the recession that has been anticipated for almost two years and that has been delayed by aggressive government spending, leading to efforts by both the Federal Reserve and the federal government to stimulate economic activity.

2) Despite the rise in government bond yields over the past few years, it is clear that neither of the major US political parties nor their presidential candidates have any concern about the level of federal government indebtedness. Putting it another way, currently there is no political will to reduce government spending. On the contrary, both presidential candidates are going down the well-worn path of trying to buy the votes of influential groups while ‘turning a blind eye’ to the government’s debts and deficits.

3) Using our own method of adjusting for the effects of inflation*, which generally will not be accurate in the short-term but should be approximately correct over periods of several years or more, the current ‘real’ gold price is a long way below its 1980 and 2011 highs (our method indicates inflation-adjusted highs of around US$5000/oz in 1980 and US$3400/oz in 2011). Refer to the following monthly chart for more detail.

So, while the proximity of the gold/CPI ratio to its long-term resistance adds to the short-term risk, this resistance probably won’t act as a ceiling for much longer.

*The theory that we apply can be summarised as follows: The percentage reduction in a currency’s purchasing power should, over the long-term, be roughly equal to the percentage increase in its supply minus the percentage increase in the combination of population and productivity.

By our reckoning, during the first half of 2022 the US economy entered the bust phase of the economic boom-bust cycle caused by monetary inflation (rapid monetary inflation causes a boom that inevitably is followed by a bust as the receding monetary tide exposes the boom-time malinvestments). The bust phase almost always culminates in a recession, although it doesn’t have to.

So far, the performances of commodity prices in both US$ terms and gold terms are consistent with an economy in the bust phase, in that last week the GSCI Spot Commodity Index (GNX) tested its cycle low in US$ terms and made a new 3-year low in gold terms. The following daily chart shows GNX in gold terms, that is, it shows the commodity/gold ratio. Booms and busts are defined by the commodity/gold ratio, with booms being multi-year periods during which the commodity/gold ratio trends upward and busts being multi-year periods during which the commodity/gold ratio trends downward.

Note that it is not unusual for the stock market, as represented by the S&P500 Index (SPX), to trend upward for a considerable time after the start of an economic bust. For example, an economic bust started in October of 2018 but the SPX didn’t peak until February of 2020. Therefore, the fact that the SPX made a new all-time high as recently as last month is not inconsistent with the US being in the bust phase of the economic cycle.

What is inconsistent with the bust phase are credit spreads, which prior to the turmoil of the past 1.5 weeks were at their boom-time lows. However, the relatively low average level of US credit spreads does not mesh with the relatively large number of corporate bankruptcies, so it’s likely that credit spreads are sending a misleading signal.

The misleading signal could be the result of junk-rated corporations delaying their re-financings for as long as possible in the hope that if they wait long enough, they will be able to re-finance at lower interest rates during the next Fed rate-cutting cycle. The problem that many of these companies will encounter is that a Fed rate-cutting cycle probably will begin near the start of a recession and a multi-quarter period during which interest rates fall on high-quality debt while rising rapidly on low-quality debt.

In a blog post earlier this year we wrote that the conflict between the signal from the commodity/gold ratio and the signal from credit spreads would have to be resolved either by credit spreads widening substantially in response to evidence of economic weakness or by the prices of industrial commodities rising substantially in response to evidence that a new boom had been ignited. Our view then and now is that the former is by far the more likely outcome. In fact, there’s a good chance that last week’s rise in the credit-spreads indicator shown on the following daily chart marked an important turning point.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

In a blog post in February-2017, we discussed an age-old relationship between interest rates and prices. The following chart-based comparison of the T-Bond yield and the commodity/gold ratio is a pictorial representation of this relationship. At least, it was until about two years ago when a major divergence began to develop between two quantities that previously had been positively correlated. Does this mean that the age-old relationship no longer applies?

The answer is that the age-old relationship hasn’t changed. It can’t change, because it is firmly rooted in economic reality. What’s changed is that the following chart has stopped being a good way to depict the relationship.

The fundamental basis for the underlying relationship is what Keynesians call “Gibson’s Paradox”. We won’t revisit Gibson’s Paradox in this discussion except to point out that it was the name given to the observation that interest rates during the gold standard were highly correlated to wholesale prices but had little correlation to the rate of “inflation”. For a more thorough explanation, please refer to the above-linked blog post.

This excerpt from our blog post explains how the above chart relates to Gibson’s Paradox:

“The commodity/gold ratio is the price of a broad-based basket of commodities in gold terms. In essence, it is a wholesale price index using gold as the monetary measuring stick. Although gold is no longer money in the true meaning of the term (it is no longer the general medium of exchange), it is still primarily held for what can broadly be called ‘monetary purposes’ and in many respects it trades as if it were still money. According to the age-old relationship discussed above and labeled “Gibson’s Paradox” by a confused JM Keynes, the commodity/gold ratio should generally move in the same direction as risk-free interest rates.

The risk-free US interest rate that is least affected by the direct manipulation of the Fed is the yield on the 30-year T-Bond, so what we should see is a positive correlation between the commodity/gold ratio and the T-Bond yield. Or, looking at it from a different angle, what we should see is a positive correlation between the gold/commodity ratio and the T-Bond price. That’s exactly what we do see.”

Well, that was exactly what we WERE seeing until about two years ago, when the T-Bond yield began to trend upward in parallel with a downward trend in the commodity/gold ratio.

As stated near the start of this discussion, the age-old relationship between interest rates and prices (“Gibson’s Paradox”) hasn’t changed. Furthermore, the nature of gold hasn’t changed over the past two years, so the commodity/gold ratio still should be positively correlated with the risk-free interest rate, which, in turn, is determined by economy-wide time preference. What has changed is that the T-Bond yield has stopped being a good indicator of the risk-free long-term interest rate.

Looking from a different angle, the fact that the commodity/gold ratio has trended downward tells us that societal time preference (the determinant of the risk-free interest rate) has been falling, that is, that people are becoming more inclined to save and less inclined to spend. This is a global phenomenon, not a US phenomenon, but evidence in support of this can be found in the following chart of US retail sales. The chart shows that nominal (that is, not inflation-adjusted) US retail sales were only about 3.5% higher in May-2024 than they were two years’ earlier. Over the same period the US CPI rose by 7.5%, so in real terms the dollar value of US retail sales has fallen over the past two years.

The commodity/gold ratio tells us that the risk-free interest rate has fallen since the second quarter of 2022; however, the T-Bond yield is now much higher. This can’t be explained by rising inflation expectations, because the market prices of Treasury Inflation-Protected Securities (TIPS) tell us that inflation expectations have fallen since the second quarter of 2022.

The only way to explain the rise in government bond yields in the face of a falling risk-free interest rate and flat-to-lower inflation expectations is declining confidence in government and/or increasing fear that the rate of growth in the supply of government debt is going to become a major problem in the not-too-distant future. That is, trends in the T-Bond yield no longer reflect trends in the risk-free interest rate due to an expanding risk premium in the T-Bond yield associated with an increasingly profligate government. This, by the way, is one of the reasons why anyone who predicts that Treasury yields are going back to anywhere near their 2020 lows will be wrong.

We now have a market analysis challenge because there is no longer an indicator of the risk-free interest rate that is independent of the gold price. At least, we can’t identify one at the moment. We can use the commodity/gold ratio to provide information regarding the interest rate that underlies all other interest rates, but we don’t have a separate indicator of the risk-free interest rate that can be used to assess whether gold is too expensive or too cheap relative to commodities.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

With regard to the topics that we write about regularly, over the past year we have been most wrong about the stock market and the US economy. It’s true that the average stock has not fared particularly well, but we have been consistently surprised by the strength of the S&P500 Index and other large-cap-focussed indices for about 18 months now. Also, we thought that the US economy would be in recession by the end of last year and would be very weak during the first three quarters of this year, but while the US economy certainly slowed during the first half of this year it clearly has not yet entered recession territory. These mistakes are linked, in that major bearish trends in the stock market tend to encompass recessions. Today we’ll discuss, in broad-brush terms, a likely consequence of both the stock market and the US economy performing much better than we expected up until now.

In our opinion it’s not the case that the US economy has avoided a recession, but rather that the current cycle has been elongated.

We use the commodity/gold ratio (the Spot Commodity Index (GNX) divided by the US$ gold price) to define booms and busts, with booms being multi-year periods during which the ratio trends upward and busts being multi-year periods during which the ratio trends downward. The vertical lines drawn on the following GNX/gold chart mark the trend changes (shifts from boom to bust or vice versa) that have occurred since 2000.

It’s not essential that the bust phase of the cycle contains a recession, but it’s rare for a bust to end until a recession has occurred. Usually, the sequence is:

1) The commodity/gold ratio begins trending downward, marking the start of the economic bust period.

2) The economic weakness eventually becomes sufficiently pervasive and severe to qualify as a recession.

3) Near the end of the recession the commodity/gold ratio reverses upward, thus signalling the start of a boom.

Note that it is not unusual for the stock market to continue trending upward after the bust begins, but the stock market always peaks prior to a recession getting underway. For example, an economic bust began in October-2018 but the SPX continued to make new highs until early-2020.

In the current cycle the commodity/gold ratio has been trending downward since the first half of 2022, meaning that the US economy has been in the bust phase of the cycle for a little more than two years without entering recession. While this is much longer than average, it is comparable to what happened during 2005-2009. During 2005-2009, a bust began (the commodity/gold ratio commenced a multi-year downward trend) in Q4-2005, but a recession did not begin and the stock market did not peak until Q4-2007.

Evidence that the US economy is slowing is becoming clearer almost by the week, but a recession probably won’t start any sooner than September of this year and could be postponed, with help from the government and the Fed, until late this year or even early next year. This means that the coming recession probably won’t end any sooner than the second half of 2025 and could even extend into 2026, which has implications for all the financial markets. It’s the implication for the gold market that we are concerned with today.

The US$ gold price tends to peak on a multi-year basis after it has fully discounted the economic, fiscal and monetary consequences of a recession. This usually happens in the latter stages of a recession but before the recession has ended. Therefore, whereas a year ago we were thinking along the lines of the cyclical gold bull market climaxing in the second half of 2024, the current economic cycle’s elongation and the postponing of a recession probably mean that gold’s cyclical bull market will continue until at least the second half of next year.

[This blog post is a modified excerpt from a recent commentary published at www.speculative-investor.com]

The purpose of this piece is to address the misconception that the stocks of small, exploration-stage mining companies offer leveraged exposure to changes in metal prices. The reality is that they offer zero leverage to changes in metal prices. What they offer is leverage to changes in the general desire to speculate.

To explain, take the hypothetical example of a publicly-listed company that owns a project with a defined gold resource that it is attempting to grow via exploration. If everything goes well and the project can be drilled/engineered/permitted to the point where it makes sense to enter the mine construction phase, it most likely will be 5-10 years before the project is generating any revenue from gold production. Consequently, changes in the price of gold this year are irrelevant. What matters is what the price of gold and the cost of mining gold will be in 5-10 years’ time, which, of course, are complete unknowns.

The reason that the stocks of exploration-stage juniors are often viewed as providing leverage to metal prices is that the general desire to speculate tends to rise during upward price trends and fall during downward price trends. In particular, the further an upward price trend progresses, the greater will become the propensity for market participants to take risk in their efforts to profit from the trend. And consequently, the greater will become the popularity of relatively risky stocks.

“Market participants” in the above paragraph refers not only to the general public, but also to professional traders/investors and the managers of larger companies within the industry. Almost everyone gets more excited as the upward price trend matures, which is why a huge amount of money ends up being wasted (directed towards ill-conceived investments) during the latter stages of booms.

This also explains why many exploration-stage junior mining stocks do very little during the early and even the middle stages of upward trends in metal prices. A gold mining company that is more than 5 years away from producing gold, or more likely will never actually produce any gold, is not worth any more with a current gold price of $2500/oz than it would be with a current gold price of $1500/oz, because the current gold price is irrelevant to its valuation. It is the current producer, not the possible producer many years into the future, that can offer genuine leverage to changes in spot metal prices.

A related point is that if you own shares of a profitable gold producer then you have a stake in a real business, but if you own shares of an exploration-stage gold mining company then what you have is a stake in a story, not a real business. It’s important to understand what you own. If you own a stake in a real business then you potentially could make money from dividends, but if you own a stake in a story then you will only make money if other people become more bullish on the story and therefore become willing to buy you out at a higher price.

We expect that as the cyclical bull market in gold mining stocks becomes more obvious, the general desire to speculate in gold mining stocks will start to ramp up. However, the recent price action suggests that the start of the speculative ramp-up may still be at least a few months away.

[This blog post is an excerpt from a recent commentary published at www.speculative-investor.com]

Gold is no longer money in the true meaning of the word*, but it still trades more like a currency than a consumable commodity and therefore should be analysed as a currency. In fact, in a currency hierarchy we would put gold at the top, then the US$, then a big drop to the euro, then another big drop the other major currencies. Consequently, it makes sense to analyse markets in gold terms as well as in terms of the US$ and other currencies, which is something we do regularly. For example, we pay close attention to the performances of the S&P500 Index (SPX) and the Spot Commodity Index (GNX) in gold terms. Now we are going to look at one aspect of the relationship between commodity prices in US$ terms and commodity prices in gold terms.

The following chart compares the general level of commodity prices in US$ terms (as represented by GNX) with the general level of commodity prices in gold terms (as represented by the GNX/gold ratio). The point we want to highlight today is that since 1995, GNX has made cycle lows in US$ terms and gold terms at the same time. These important lows are indicated by the vertical blue lines drawn on the chart.

Each of the lows in GNX and GNX/gold indicated by the vertical blue lines coincided with a recession and/or some form of debt crisis. Specifically, the April-2020 low coincided with the COVID crisis/recession, the January-2016 low coincided with the climax of the debt crisis in the US shale-oil sector, the late-2011 low coincided with the euro-zone sovereign debt crisis, the early-2009 low coincided with the climax of the Global Financial Crisis, the January-2007 low coincided with the climax of the initial phase of the US housing/mortgage bust, the early-2002 low coincided with the collapse of the dot.com equity bubble and the end of the 2001 recession, and the late-1998 low coincided with the climax of the Russian debt crisis and LTCM blow-up.

If past is prologue, then GNX won’t bottom in US$ terms until it has bottomed in gold terms. So, has GNX bottomed relative to gold?

As mentioned above, in the past the GNX/gold ratio has bottomed in parallel with a recession and/or some form of debt crisis, both of which are likely outcomes within the next 12 months but neither of which has happened during the current cycle. Therefore, there’s a good chance that the bottom for GNX still lies ahead and that the recent commodity rally is a countertrend move within an on-going cyclical decline.

*Money is defined by its function, not its physical characteristics. It is the general medium of exchange or a very commonly used medium of exchange within an economy. This means that if something is money it will be readily accepted by almost everybody in payment for goods, services, debts and assets. Other definitions have been concocted in an attempt to make the case that gold is still money, but all of these definitions are impractical.

[This blog post is an excerpt from a commentary published last week at www.speculative-investor.com.]

In the 11th March Weekly Update we noted that the rise in the US$ gold price in the face of tight US monetary policy and high (by the standards of the past decade) real US interest rates implied concern about what’s likely to happen to the US$ in the future. We went on to write:

“At the moment this concern probably has more to do with the US government’s debt quantity spiralling out of control than the risk of the US economy entering recession in the near future. The underlying cause of concern, we suspect, is that the current administration appears to be willing to borrow/spend with complete abandon in its efforts to retain power, and there is no evidence that limiting the pace of government debt expansion is a priority on the other side of the political aisle.”

As an example of what was being done to boost his re-election prospects, we mentioned the $10,000 tax credit for first-time home buyers that had just been proposed by President Biden. Here are some additional examples from the past month:

1) A new rule has expanded the definition of a “Public Assistance Household”, which, in turn, expands the number of households eligible for Supplemental Security Income (SSI). The new rule will go into effect on 30th September-2024 (about one month prior to the election) and probably will increase the number of SSI recipients from 7.5M to more than 40M.

2) Government Sponsored Enterprise (GSE) Freddie Mac has put forward a proposal that would enable it to buy second lien mortgages. As explained in the article posted HERE:

“The aim is for Freddie to start buying fixed-rate second liens potentially by this summer, giving borrowers a way to tap an estimated $32 trillion of equity built up in U.S. homes in recent years. If approved, it would open the door for more borrowers to extract cash from their homes, without having to refinance at current 30-year fixed mortgage rates of about 7.2%.”

If Freddie Mac’s proposal goes ahead it could inject as much as $850B into the economy. If Fannie Mae, another GSE operating in the US home mortgage market, were to follow suit then the total amount injected could be close to $2 trillion. Therefore, this is potentially a very big deal.

3) Earlier this week President Biden announced large tariff increases on products imported from China. The tariff hikes, which include an increase from 27.5% to 102.5% (!!) on the tariff applied to China-made Electric Vehicles (EVs), are illustrated by the following graph from the Bloomberg article posted HERE.

Tariffs are paid by the buyers (ultimately US consumers in this case), not the sellers, so the main effect of this week’s tariff increases will be higher prices in the US for some products, especially products associated with the so-called “energy transition”. The hope, of course, is that even though the economic effects of this initiative probably will be negative, the optics will prove to be favourable. In other words, the hope is that the tariff change will create the general impression that the Administration is taking actions that will help the US economy even if the opposite is true. Unfortunately, there is also a lot of support for tariffs on the other side of the US political aisle.

All of the above actions will result in the popular measures of inflation (e.g. the CPI) being higher over the next couple of years than otherwise would be the case, but if it goes ahead the one that will have the biggest effect on the financial markets in both the short-term and the long-term is opening the door for GSEs to purchase second lien mortgages. As mentioned above, this could result in almost $2 trillion being injected into the US economy. The monetary injection would occur over a period of years, but if Freddie Mac’s proposal soon gets approved then the financial world will start discounting the likely effects immediately. The effects would be bearish for the US$ and bullish for most assets and commodities priced in US dollars, including gold.

[Here is a brief excerpt from a commentary published at www.speculative-investor.com on 21st April 2024]

Gold recently became extremely overbought in momentum terms against ALL major fiat currencies. For example, the following daily charts show that based on the daily RSI(14), a momentum indicator included at the bottom of each chart, gold recently became as stretched to the upside as it was at any time over the past 15 years, including at the 2011 major peak, relative to the euro, the Yen, the Swiss franc, the Australian dollar and the Canadian dollar. Looking at it from a different angle, in momentum terms the euro, the Yen, the Swiss franc, the Australian dollar and the Canadian dollar recently became as stretched to the downside relative to gold as they have been at any time over the past 15 years.

Against the US$ gold did not become quite as stretched to the upside in momentum terms, because the US$ recently weakened by less than the other major currencies.

With gold having just hit a rare overbought extreme against all major fiat currencies, the probability is high that the gold price has either just set a multi-month price top or will soon do so. For two main reasons, however, it’s unlikely that the April-2024 extreme will mark the end of the cyclical rise in the gold price (meaning: the end of the cyclical decline in fiat currency).

The first reason is sentiment as indicated by the COT data, which still shows a healthy degree of speculator scepticism. Of particular relevance, despite gold’s spectacular recent price rise the collective net-long position of small traders (the proverbial dumb money) in gold futures remains not far from a 14-month low.

The current sentiment situation suggests that there is still a lot of scope for speculator long accumulation.

The second reason is the high probability that the fundamental backdrop as indicated by our Gold True Fundamentals Model (GTFM) will shift in gold’s favour over the next several months.

The GTFM turned bearish during the week before last due to a rise in the 10-year TIPS yield (a real interest rate proxy), but it returned to neutral last week due to the breakdown in the XLY/XLP ratio mentioned in the Stock Market section of today’s report. It stands a good chance of turning bullish in the not-too-distant future, because 1) a shift within the stock market from risk-on to risk-off has been confirmed, 2) US economic data probably will have a weakening trend, 3) the Fed (meaning: Powell) is looking for an excuse to loosen monetary policy, and 4) the Biden administration will be ‘pulling out all stops’ to make the economy appear healthy during the lead-up to the November-2024 election.

[This blog post is an excerpt from a recent commentary at specuative-investor.com]

We consider gold bullion and the S&P500 Index (SPX) to be effectively at opposite ends of an investment seesaw, with the SPX doing better when confidence in money, central banking and government is rising and gold doing better when confidence in money, central banking and government is falling. As discussed in a few TSI commentaries and blog posts over the past two years (for example, HERE), our investment seesaw concept was part of the inspiration for the Synchronous Equity and Gold Price Model (SEGPM) created by Dietmar Knoll.

In general terms, the SEGPM uses historical data to define a quantitative relationship between the SPX, the US$ gold price and the US money supply. More specifically, it is based on the fact that adding the SPX to 1.5-times the US$ gold price (and applying a scaling factor) has, over the long-term, resulted in a number that tracks the US money supply. Consequently, it indicates the extent to which the combination of the US stock market and gold is currently under/over-valued compared to the money supply and can provide clues regarding likely future price levels for gold and the SPX. For example, a forecast of likely future levels for the SPX and the money supply would project a likely future level for the US$ gold price.

The following monthly chart shows our version of the SEGPM. On this chart, the red line is US True Money Supply (TMS) and the blue line is the Gold-SPX Model (the sum of the S&P500 Index and 1.5-times the US$ gold price, multiplied by a scaling factor).

The Model’s current message is that at today’s levels of the money supply and the SPX, the gold price (around US$2150) is in the right ballpark. A much higher ‘fair value’ for gold would require a larger money supply and/or a lower SPX. For example, if the money supply were 5% larger and the SPX were around 4200 (about 20% lower than it is today), the Model would indicate a ‘fair value’ for gold of around US$3200/oz.

In the middle of last year (the last time we discussed the Gold-SPX Model) we thought that the low-$3000s for the US$ gold price was a plausible target for the first half of this year. While it is not out of the question that this target will be reached during the first half of this year, this is no longer a likely scenario because the SPX has performed much better than we thought it would. However, there is a good chance that the low-$3000s will be reached before the end of this year.