Almost anything can be a good investment or a bad investment — it all depends on the price. Relative to the prices of other commodities the gold price is high by historical standards and in dollar terms gold is nowhere near as cheap today as it was 15 years ago, but considering the economic backdrop it offers reasonable value in the $1200s. Furthermore, considering the policies that are being implemented and the general lack of understanding on display in the world of policy-making, there’s a good chance that gold will be much more expensive in two years’ time.

The policies to which I am referring are the money-pumping, the interest-rate suppression and the increases in government spending that happen whenever the economy and/or stock market show signs of weakness. These so-called remedies are actually undermining the economy, so whenever they are applied in response to economic weakness they ultimately result in more weakness. It’s not a fluke, for example, that the most sluggish post-recession economic recovery of the past 60 years went hand-in-hand with history’s most aggressive demand-boosting intervention by central banks and governments.

It’s a vicious cycle that can aptly be called the ‘Keynesian death spiral’. The Keynesian models being used by policy-makers throughout the world are based on the assumption that when interest rates are artificially lowered and new money is created and government spending is ramped up, the economy gets stronger. The models are completely wrong, because falsifying price signals leads to investing errors and therefore hurts, not helps, the overall economy, and because the government doesn’t have a spare pile of wealth that it can put to work to create real growth (everything the government spends must first be extracted from the private sector). However, the models are never questioned.

When a sustained period of economic growth fails to materialise following the application of the demand-boosting remedies, the conclusion is always that the remedies were not applied with sufficient vigor. More of the same is hence deemed necessary, because that’s what the models indicate. It’s akin to someone with liver damage caused by drinking too much alcohol being guided by a book that recommends addressing the problem by increasing alcohol consumption. A new dose of alcohol will initially make the patient feel better at the same time as it adds to the existing damage, just as a new dose of demand-boosting intervention will initially make the economy seem stronger at the same time as it gets in the way of genuine progress.

The upshot is that although gold is more expensive today than it was 15 years ago, the level at which gold offers good value is considerably higher today than it was back then because we are now much further along the Keynesian death spiral.

When the central bank lowers interest rates in an effort to prompt greater current spending it brings about a wealth transfer from savers to speculators of various stripes. While this is unethical, in economics terms the ethical problem isn’t the main issue. The main issue, and the reason that monetary stimulus doesn’t work as advertised, is TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). At a very superficial level (the level at which all Keynesian economists operate) the interest-rate suppression policies appear to provide a free, or at least a very cheap, lunch, but the bill ends up being much higher than it would have been if it had been paid up front.

The likes of Bernanke, Yellen, Draghi and Kuroda admit that their so-called “monetary accommodation” hurts savers in the present, but they claim that the benefits to the overall economy outweigh the disadvantages to savers. Central bankers are apparently — at least in their own minds — endowed with a god-like wisdom that enables and entitles them to determine who should become poorer and who should become richer, all with the aim of elevating the economy. For example, here’s how the ECB justified its interest-rate suppression policy in June of 2014:

“The ECB’s interest rate decisions will…benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”

And:

“A central bank’s core business is making it more or less attractive for households and businesses to save or borrow, but this is not done in the spirit of punishment or reward. By reducing interest rates and thus making it less attractive for people to save and more attractive to borrow, the central bank encourages people to spend money or invest. If, on the other hand, a central bank increases interest rates, the incentive shifts towards more saving and less spending in the aggregate, which can help cool an economy suffering from high inflation. This behaviour is not specific to the ECB; it applies to all central banks.”

It’s now two years later and the ECB is heading down the same policy path despite the complete absence of any success. The benefit that savers are supposedly going to get “in the end” appears to be even further away now than it was back then, although it is fair to say that European savers have definitely got it ‘in the end’.

Only the final sentence of the above excerpt is true (it’s true that the ECB is just as bad as other central banks). In order to believe the rest, you must have a poor understanding of economic theory.

‘Time’ is the most important element that central bankers deliberately or accidentally ignore when they make the sort of statements included in the above ECB quote. Increased saving does not mean reduced spending; it means reduced spending on consumer goods in the present in exchange for greater spending on consumer goods in the future. By the same token, reduced saving does not mean increased spending; it means increased consumer spending in the present in exchange for reduced consumer spending in the future.

Isn’t it obvious that this tradeoff between current and future consumer spending will happen most efficiently and for the greatest benefit to the overall economy if it is allowed to happen naturally, that is, if interest rates are allowed to reflect peoples’ actual time preferences? To put it another way, isn’t it obvious that if people are in a financial position where it makes sense for them to increase their saving (reduce their current spending on consumer goods) in order to repair balance sheets that have been severely weakened by excessive prior consumer spending, then the WORST thing that a policymaker could do is put obstacles in the way of saving and create artificial incentives for additional borrowing and consumption?

It obviously isn’t obvious, because monetary policymakers around the world continue to do the worst things they could do.

(This post is an excerpt from a commentary published at TSI late last week. Note that an explanation of why a hike in the Fed Funds rate no longer entails monetary tightening can be found in a March-2015 post at the TSI blog.)

In early-November of last year we predicted that a tradable gold rally would begin near the mid-December FOMC Meeting as long as the Fed did what almost everyone was expecting and implemented its first rate hike in more than 8 years. Our reasoning was explained as follows in the 4th November Interim Update:

“Looking beyond the knee-jerk reactions to the news of the day, we see a gold market stuck in limbo. In this no-man’s land between a definitively-bullish and a definitively-bearish fundamental backdrop for gold, the US$ gold price works its way higher during periods when it seems that the start of the Fed’s rate-hiking is being pushed out and works its way lower during periods when it seems that the start of the Fed’s rate-hiking is being brought forward.

To get out of this ‘limbo’ and into a situation where a more substantial gold rally is probable, it appears that one of two things will have to happen. Either the Fed will have to take the first step along the rate-hiking path, or the economic/stock-market situation will have to become bad enough that additional monetary easing will be the Fed’s obvious next move. In other words, the Fed will have to stop vacillating and move one way or the other.

Although counterintuitive, there are two good reasons to expect that a Fed rate hike would usher-in a more bullish period for gold. The first reason is that it would potentially be a “sell the rumour buy the news” situation. We are referring to the fact that when a market sells off in anticipation of ostensibly-bearish news, the arrival of the actual news will often lead to a wave of short-covering and an upward price reversal. The second and more interesting reason is that it would spark the realisation that in the current circumstances a Fed rate hike does not entail monetary tightening.”

As it turned out, the Fed went ahead and implemented its first rate hike in mid-December and a strong upward trend in the gold price got underway less than 48 hours later.

The reason for bringing this up isn’t to brag about getting something right; it’s to point out that gold now appears to be stuck in a similar situation to the one we described on 4th November. As was the case back then, to ignite the next tradable gold rally it appears that the Fed will have to stop vacillating. Either the Fed will have to take its second step along the rate-hiking path or the economic/stock-market situation will have to become bad enough that all thoughts of a 2016 rate hike are wiped out.

On 19th April the Shanghai Gold Exchange (SGE) began quoting a twice-daily gold-price ‘fix’ in Yuan terms. Some pundits claimed that this would give the gold price a large and sustained boost. My view was that beyond short-lived fluctuations driven by the vagaries of speculative sentiment, it was irrelevant*. It was, in my opinion, just another in a long line of distractions from gold’s true fundamental drivers.

I went on to marvel, in a blog post on 26th April, at the inconsistency of those who regularly complain about gold-market manipulation by banks and also cheered the news that the Chinese government and its subservient banks had implemented a “Yuan gold fix”.

Is the manipulation-fixated pro-China camp totally oblivious to what happened over the past 10 years? It would have to be to not realise that modern-day China has been one of the greatest forces for global price distortion the world has ever known. The idea that China could be responsible for honest price discovery for any commodity gives stupid a bad name.

Anyhow, there is no evidence that the gold price is lower than it should be considering this market’s true fundamental price drivers. Of course, to know that this is the case you have to know what the true fundamentals are. You can’t, as many gold commentators do, blindly assume that gold’s fundamentals are always bullish regardless of what’s happening in the world. If you want to be logical you also can’t determine anything useful about the gold price by analysing the shifts in gold from one location to another.

If the implementation of the “Yuan gold fix” had been followed by the price explosion that some promoters were forecasting it would have been a lucky coincidence. As things turned out, the gold price has dropped a little over the past month, which is not surprising considering the fundamentals that matter.

*In a report posted at TSI on 17th April I wrote: “…the Yuan gold fix will have no effect on gold’s true fundamentals and will therefore have no effect on gold’s intermediate-term or long-term price trends. It shouldn’t even have an effect on gold’s short-term price performance, although whether it does or not will largely depend on the vagaries of speculative sentiment.”

The following chart shows that the US$ oil price, the Canadian Dollar and the Yuan (represented on the chart by the WisdomTree Yuan Fund – CYB) have tracked each other closely over the past 15 months. When divergences have happened, they have always been quickly eliminated.

An interesting divergence has been developing over the past few weeks, with the Yuan having turned downward in mid-April, the C$ having turned downward at the beginning of May and the oil price having continued to rise. Either the currency market is wrong or the oil market is wrong. My money is on the oil market being wrong.

One reason to suspect that the oil market is wrong and that the divergence will therefore be eliminated by a decline in the oil price is recent history. In the second quarter of last year the C$ turned downward about 6 weeks ahead of the oil price and in the first quarter of this year there was an upturn in the Yuan followed by an upturn in the C$ and lastly an upturn in the oil price. That is, the currency market has been leading at turning points.

“Nobody Knows Anything” is a new book written by Bob Moriarty, the proprietor of the 321gold.com web site. It’s close to the book that I would write about investing, but Bob is a better writer than I so it is just as well that he wrote the book before I got around to it.

Achieving good returns by trading/investing in the stock market and other financial markets isn’t complicated. While a certain amount of information gathering and historical knowledge is required, achieving good returns has a lot to do with common sense. However, this doesn’t mean that it is easy. The problem is that we are most comfortable when running with the herd, but herds never have common sense and the investing herd always ends up losing money.

In the chapter on contrarian investing, Bob rightly points out that one of the keys to long-term investing success is not following the herd as it careens from one wealth-destroying blunder to the next.

Many people want to be told what the markets are going to do in the future and especially want to be given specific information about future crashes and spectacular price rises. This creates money-making opportunities for self-styled gurus.

As Bob explains in his book, there are no gurus. Nobody knows exactly when prices will rise, fall, peak and trough, but there is no shortage of people who will happily take your money in exchange for pretending to give you this extremely useful information. What these people are actually giving you are guesses dressed up to look like scientific analyses.

The fact is that in order to consistently buy low and sell high you don’t need to know, or even have an opinion about, when and at what level a market will peak or trough, but advice that helps you manage money prudently will not attract new readers/followers anywhere near as quickly as a big forecast such as “the market will peak on Date X and then plummet by 50%”. As I’ve noted in the past, there is an asymmetric risk/reward to making the big, bold forecast, because failed forecasts are soon forgotten whereas a single correct forecast (guess) about a dramatic market move can be used for promotional purposes forever.

There are many real-life examples in Bob’s book that are directly or indirectly related to the veritable industry that has grown up over the past 18 years around gold and silver manipulation. After explaining that all markets have always been manipulated, Bob delves into some of the silly stories that have been concocted and the terms that have been invented to promote the idea that the gold and silver markets have been subject to a successful multi-decade price-suppression scheme. Because it’s a fact that all financial markets are always manipulated to some extent, it is not difficult to find information that can add a ring of plausibility to a manipulation story that is not only wrong, but would be irrelevant to an investor or trader even if it were right.

Read the book to find out what Bob thinks about the “gold derivatives time bomb”, the possibility of a “commercial signal failure” in the gold market, the risk of a COMEX default, the notion that the “commercials” in the gold futures market are constantly trying to limit up-moves in the price, “naked shorts”, gold-plated tungsten bars, and the story that the 1998 Fed bailout of Long Term Capital Management (LTCM) was at least partly due to LTCM’s short position in gold.

The most important chapter in the book is probably the one titled “When to Sell”, because failing to take money off the table at an appropriate time gets many investors into trouble. Even in cases where an investor does a good job with the buy side of the equation and gets into a position where he has a large profit, dreams of the even greater profits to come will often prompt him not to sell. Instead, he hangs on…and hangs on…until eventually the large profit turns into a loss.

Bob draws on his experiences in the military (he was a fighter pilot during the Vietnam War) and in casinos to illustrate some of the points he wants to make about investing. These personal reminiscences from outside the world of investing are colourful and relevant.

At around 120 pages the book is short, but at the same time it is long on practical information. It is a stream of investing common-sense interspersed with historical examples and personal experiences. I think it would be an enjoyable read even if you aren’t involved in the financial markets, but it should be an especially enjoyable and useful read for anyone who speculates in the shares of junior gold, silver and other natural-resource companies.

This blog post is a modified excerpt from a TSI commentary published a week ago.

Among other things, good money management involves trading around a core position, with the core position being in synch with the long-term trend. In particular, during a strong intermediate-term rally it involves 1) maintaining core exposure in line with the long-term bull market and 2) methodically scaling back to core exposure as prices move sharply upward.

BOTH of the aforementioned tactics must be used to mitigate the risk of suffering a large loss AND the risk of suffering a large opportunity cost. For example, if you don’t sell anything during a strong rally then you are guaranteed to suffer a large loss once the inevitable ensuing decline occurs and you won’t have either the financial or the emotional capacity to take advantage of future buying opportunities. For another example, if you sell everything when you think that the market is close to a top then it will just be a matter of time before you find yourself on the sidelines with no exposure as prices move much higher than you ever thought possible.

In more general terms, good money management involves embracing the reality that while it is possible to measure — by looking at sentiment and momentum indicators — when a market is stretched to the upside or the downside, it is not possible to RELIABLY predict market tops and bottoms. It is not even possible to reliably identify important market tops and bottoms at the time they are happening. Fortunately, and contrary to what some self-styled gurus will tell you, achieving well-above-average long-term performance does not require the reliable prediction of tops and bottoms.

With regard to my own money management, this year’s rally in the gold-mining sector was the first rally in years that was strong enough to prompt scaling back all the way to ‘core’ (long-term) exposure. This entailed selling almost half of my total position.

I might do a small amount of additional selling if there’s another leg higher within the next few weeks, but I have built up as much cash as I want so my next big move will be on the buy side. However, I will not do any buying into extreme strength. I will, instead, wait as long as it takes for the market to reach a sufficiently depressed level, secure in the knowledge that my core exposure covers me against the possibility of ‘surprising’ additional short-term strength.

Here are a few of the charts that currently have my attention.

1) The Canadian Dollar (C$). The C$ usually trends with commodity prices, so the owners of commodity-related investments should view the C$’s recent performance as a warning shot.

2) The Dow Trucking Index. The huge rebound in this index from its January low is a little strange given the evidence that the trucking industry is in a recession that is a long way from complete.

3) The gold/GYX ratio (gold relative to industrial metals). This ratio is a boom-bust indicator and an indicator of financial crisis. In January of this year it got almost as high as its 2009 peak (its all-time high) and remains close to its peak, so its current message is that an economic bust is in progress and/or that a financial crisis is unfolding.

I think that gold will weaken relative to industrial metals such as copper for at least 12 months after the stock market reaches a major bottom, but in the meantime a new all-time high for the gold/GYX ratio is a realistic possibility.

4) The HUI with a 50/20 MA envelope (a 20% envelope around the 50-day moving average). Although I think that the current situation has a lot more in common with the first half of 2001 than the first half of 2002, the way the HUI has clung to the top of its MA envelope over the past few months looks very similar to what it did during the first half of 2002.

5) The HUI/SPX ratio (the gold-mining sector relative to the broad US stock market). Over the course of this year to date the performance of the HUI/SPX ratio has been similar to its performance from November-2000 through to May-2001.

6) The S&P500 Index (SPX). The SPX is standing at the precipice. The probability of a crash within the next two months is almost zero, but a tradable decline looks likely.

7) The SPX/USB ratio (the broad US stock market relative to the Treasury Bond). Notice the difference between performance following the 2014 peak and performance following the major peaks of 1999-2000 and 2007.

A TSI subscriber recently reminded me of an indicator that I regularly cited in ‘the old days’ but haven’t mentioned over the past few years. The indicator is the bond/dollar ratio (the T-Bond price divided by the Dollar Index).

The bond/dollar ratio not only does a reasonable job of explaining trends in the US$ gold price, it does a much better job of explaining trends in the US$ gold price than does the Dollar Index in isolation. As evidence, here is a chart comparing the bond/dollar ratio (USB/USD) with the gold price followed by a chart comparing the reciprocal of the Dollar Index with the gold price. The first chart indicates a closer relationship than the second chart.

From a practical speculation standpoint, an inter-market relationship is most useful when it has a lead-lag aspect, that is, when one market usually reverses trend in advance of the other market. Unfortunately, that’s not the case here, in that gold and the bond/dollar ratio usually change direction at around the same time. For example, they both reversed upward late last year. The simple relationship does, however, help foster an understanding of why the gold price does what it does.

At the risk of casting aspersions on a good manipulation story, I note that the first of the above charts points to the US$ gold price generally having done what it should have done each step of the way over the past 10 years.

Now that Donald Trump has managed — against the odds and much to the chagrin of ‘war party’ loyalists — to become the Republican Party’s nominee in the Presidential election to be held in November, it is worth considering what a Trump presidency would mean. Here are some preliminary thoughts.

First, I expect that with the Primary campaign out of the way Trump will start to downplay some of the most hare-brained ideas he has spouted to date, such as building a giant wall along the US-Mexico border and banning all Muslims from entering the US. It’s unlikely that these wildly foolish ideas will ever be turned into actual policies, and in any case even if President Trump tried to implement them it’s unlikely that he would obtain the required parliamentary approval.

Second, I doubt that President Trump would go ahead with his threat to implement hefty tariffs on imports from China, because I don’t think he is stupid enough to believe that imposing such restrictions on international trade could possibly benefit the US economy. My guess is that when he uttered the protectionist nonsense he was pandering to voters who are struggling economically and willing to believe that their problems could be quickly fixed by someone capable of doing smart trade deals with other world leaders. But if I am over-estimating his acumen and he genuinely believes what he is saying on this matter, then President Trump would effectively be pushing for similar trade barriers to the ones that helped make the Great Depression greater than it would otherwise have been.

As an aside, just because someone relentlessly promotes himself as a great deal-maker, doesn’t mean he actually is. Also, the problems facing the US have almost nothing to do with poor deal-making in the past and could not be solved by good deal-making in the future.

Third, I doubt that the result of the November Presidential election will have a big effect on the US economy. The way things are shaping up, whoever gets elected this November will end up presiding over a sluggish economy at best and a severe recession at worst. This is baked into the cake due to what the Fed and the government have already done.

Furthermore, both Trump and Clinton appear to be completely clueless regarding the causes of the economic problems facing the US, which means that economically-constructive policy changes are unlikely over the years immediately ahead irrespective of the election result. For example, Trump has expressed a liking for currency depreciation and artificially-low interest rates, which means that he is a supporter of the Fed’s current course of action even though he would prefer to have a Fed Chief who called himself/herself a Republican. Trump has also said that he would leave the major entitlement programs alone, even though these programs encompass tens of trillions of dollars of unfunded liabilities.

Fourth, it currently isn’t clear that any major financial market will have an advantage or disadvantage depending on who is victorious in November. For example, regardless of who wins in November it’s likely that evidence of an inflation problem will be more obvious during 2017-2018 than it is today, resulting in higher bond yields (lower bond prices). For another example, how the stock market performs from 2017 onward will depend to a larger extent on what happens over the next 6 months than on the election result. In particular, a decline in the S&P500 to below 1600 this year could set the stage for a strong stock market thereafter. For a third example, gold is probably going to be a good investment over the next few years due to the combination of declining real interest rates, rising inflation expectations and problems in the banking industry. This will be the case whether the President’s name is Trump or Clinton.

Fifth, based on what has been said by the two candidates and on Hillary Clinton’s actions during her long stretch as a Washington insider, every advocate of peace should be hoping for a Trump victory in November. The reason is that a vote for Clinton is a vote for the foreign-policy status quo, which means a vote for more humanitarian disasters and strategic blunders along the lines of the Iraq War, the destruction of Libya, the aggressive deployment of predator drones that kill far more innocent people than people who pose a genuine threat, the intervention in Ukraine that needlessly and recklessly brought the US into conflict with Russia, the inadvertent creation and arming of ISIS, and the haphazard bombing of Syria. Based on what he has said on the campaign trail, a vote for Trump would be a vote for foreign policy that was less concerned about regime change, less eager to intervene militarily in the affairs of other countries, and generally less offensive (in both meanings of the word).

Summing up, a Trump presidency would probably be a significant plus in the area of foreign policy (considering the alternative), but there isn’t a good reason to expect that the US economy and financial markets would fare any better or worse under Trump than they would under Clinton. At least, there isn’t a good reason yet.