Cumberland Advisors Market Commentary – Clams Or Gold Responses

We received several comments from readers concerning some of the key points in our recent commentary “Clams or Gold.[1] Below is an abbreviated version of the questions, to which responses are then supplied.

Cumberland Advisors Market Commentary - Clams or Gold

Comment: You may have seriously misled readers because both the purity of the official gold bullion and measurement of ounces have remained constant, or at least they have been for the period of your nineteen-year study. As both the quantity and quality of gold have remained constant over these nineteen years, it is not that gold has inflated by nine percent, but those pesky fiat currencies, i.e. the USD in this case, have lost value by nine percent per year.

Reply: The issue here is not the measurement, quality, or purity of gold. The evidence suggests that other forces besides the value of the dollar have affected the price of gold more over time. Data show that the dollar has not inflated to the same degree that the price of gold has changed. Moreover, since we are looking at only the dollar price of gold, the movement in the price can’t be due to fiat currency value changes. Gold is scarce and people want it. (Note that 52% of all gold mined is used for jewelry.) Gold is priced in a world market, but we are not looking at the price of gold in other currencies, just in dollars. So the main point is that the price of gold is and has been more unstable than the value of the dollar. More detail to illustrate this point is contained below.

Comment: Consider that the cost of postage has increased by 9.2 percent over a 44-year period. Housing, oil, land, etc. also cost more. These are generally more difficult to quantify, but the energy in a barrel of oil today, i.e. BTUs, is probably the same as say in 1970 when oil was about $2 per barrel; now it is $60. Have oil, gold, or land, postage, etc. become unstable or are fiat currencies unstable? Perhaps I misunderstood the main point in the article, but my 10,000 fiat dollars that bought a brand-new car in 1989 will not even come close to buying a new car today. It is the fiat currency that has lost value, not the car, gold, land, haircut, etc.

Reply: What we need to look at here is the nominal value of certain goods compared to their real value and adjust for the fact that not only have prices changed over time but also our incomes have changed as has the quality of the goods we consume. In the case of oil, the main demand in the US is for gasoline, which cost about 36 cents per gallon in 1970, as compared with a national average price today of about $2.80. But clearly we cannot compare the nominal price of a gallon of gas in 1970 with the nominal price today, when we know that supplies (and incomes) then were not nearly what they are today. We all know about OPEC and how it has artificially manipulated oil prices over time. The point is that oil is a commodity, and both its real and nominal prices have changed due to shifts in supply and demand conditions. Oil’s nominal price has also been influenced by both politics and inflation (the main inflationary period in the US being in the 1970s).

The following chart shows the inflation-adjusted history of gasoline prices versus the nominal price in 2015 terms. You will notice that the real price of gasoline hit a low in 1998. Interestingly, in the 1930s, gas prices in inflation-adjusted terms were not much different from what they are now; but note that movement in inflation-adjusted prices doesn’t always mirror the upward movement in nominal prices that began in the ’70s.

Source: https://inflationdata.com/articles/inflation-adjusted-prices/inflation-adjusted-gasoline-prices/

On top of variations in barrel prices, US gasoline prices have been significantly impacted over time by the imposition of both state and federal taxes, which are also implicitly reflected in the above chart. The federal tax on gasoline has been flat since 1993 at 18.3 cents per gallon, but state and local gasoline taxes have increased steadily. (Pennsylvania now has the highest in the country at an average of 77.10 cents per gallon. The lowest is Alaska, with an average tax of 32.74 cents per gallon.[2])

One last point is that the demand for gasoline is a derived demand, in that we don’t want to keep gasoline in our garage; we demand it for travel. Therefore, we need to consider what the cost per mile is when we think about gasoline prices. We know that fuel economy has increased significantly, putting downward pressure on our travel costs. The average car in 1970 got 13.5 miles per gallon, whereas today the average is 23.6 miles per gallon. So we are getting much more work done with a barrel of oil today than we did in 1970.

Let us consider a different example by posing the question, what would a quality TV cost you today and what would it have cost you in 1954 in today’s dollars? In 2017 a 55-inch LG TV had a list price of $2300, or a price per square inch of $1.78. In 1954, the best TV you could get was a 21-inch Westinghouse for $495, which in today’s dollars is $11,875, or a price per square inch of $110.20. Put another way, if you were to use 1954 dollars to buy today’s LG TV, it would be substantially cheaper than the 21-inch TV. The Westinghouse cost $495, while today’s LG TV would cost $241. [3] Clearly there would be no demand for that Westinghouse TV today, and there are both quality and size differences that make true comparisons difficult. But the point is that goods change, quality increases, and real costs can decline. We could clearly pull out similar comparisons of today’s cars versus yesterdays.

This makes the gold comparison interesting because there are no quality issues associated with gold. As a reader pointed out, a bar produced today is virtually indistinguishable from one produced in 1920. But as I argued above, gold’s price has been much more variable and has increased much more than our rate of inflation. The chart below shows the nominal and inflation-adjusted price of gold in 2018 dollars.[4] The chart demonstrates that the real price of gold, when we net out the influence of inflation, is not only volatile but also that volatility is not due to variations in fiat currencies, including the US dollar. Note too that since the financial crisis there has been very little difference between the nominal and inflation-adjusted prices, suggesting that something besides inflation is driving the price of gold.

Comment: Economists should start talking about “Net Worth,” not GDP, and how much nations’ and individuals’ “Net Worth” are changing. The reason this world is in such an economic mess is that we only look at GDP, the credit side of the ledger.

Reply: GDP is not a nominal measure but a real measure of our economy’s output. As such it is a very relevant measure of what is being produced and can be compared over time to assess real growth, productivity, and how well the economy is doing. Moreover, it focuses on domestic production and not total production, which is captured in gross national product, GNP. If the main criterion for assessing our economy is how people’s net worth is increasing, then that is a whole different issue. The difference is wealth versus output. One is a stock, and the other is a flow. I might also add that wealth measures don’t help us understand employment or what segments are contributing to growth and employment.

Comment: I also question your argument about the unsustainability of gold mining. The price of gold can be inflated to match GDP, Net Worth, etc. A constant quantity of gold could also be inflated to mirror the world aggregate GDP, Net Worth, etc.

Reply: The statement about the unsustainability of gold mining is related to available information about the real current mining and resource costs involved in extracting an increasingly scarce commodity versus what miners can sell the gold for. The comment about sustainability reflects the calculation that the real costs of extraction will exceed the real value of the gold mined after adjusting for price changes.



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Cumberland Advisors Market Commentary – Rocky Mountain Summit

Four states – CO, WY, ID, UT – in six days; private professional meetings, a few public gatherings, two Chatham House roundtables, and one half-day with a fly rod.

My longtime friend Bill Dunkelberg and I brought nearly 40 trout to the net for release. An equal number escaped the net during the fight. Here we are after the four-hour marathon.

David Kotok & Bill Dunkelberg
The location was Trout Ranch in Idaho, a few miles from Afton, Wyoming. Hosting was the Bronze Buffalo Club. They partner with the Global Interdependence Center for the Rocky Mountain Summit. The public presentations at the Summit are posted on the GIC website, https://www.interdependence.org/ . Below is this photo of a spawning rainbow trout (notice the shape of the jaw along with the glorious coloration), I will bullet the takeaways from the Chatham House discussions.

David Kotok & Fish
Before I get to money and markets, let me quote one paragraph from Kyle Westway’s weekend missive #283:

“Imagine a world in which priests only make their money by selling access to what you said in the confession booth? That’s basically Facebook / Google’s business model. Except in this case, Facebook is doing that with 2 billion people and has a supercomputer that’s actually predicting the confessions you’re going to make before you make them. And it’s stunningly accurate. AI has been shown to predict our behavior better than we can. It can guess our political affiliation with 80 percent accuracy, figure out you’re homosexual before even you know it, and start suggesting strollers in advance of the pregnancy test turning pink. As each track leads to profit maximization, companies must become more aggressive in the race for attention. First it was likes and dislikes, making consumers active participants, causing them to feel as if they have personal agency within the platform. They do, to an extent, yet as the algorithms churn along, they learn user behavior, creating ‘two billion Truman Shows.’ Watch Tristian Harris – former Google design ethicist – speaking at a Congressional hearing (ironically on YouTube).”

I strongly recommend the 17-minute YouTube of Tristan Harris’s US Senate testimony. The link is at the end. Think of this two ways: What it indicates for society and social behavior, and what it means for regulation, supervision, and legal changes applied to social media businesses.

Here is the link to his testimony: https://www.youtube.com/watch?v=WQMuxNiYoz4 .

Let’s get to takeaways from the week in the West, where we encountered publicly and privately owned businesses and wealth running to trillions of dollars. Many of the decision makers who participated in our gatherings have 8- or 9- or 10-figure personal wealth. All conversation was conducted under the Chatham House Rule.

Bullets

1. Trade war – No one is able to predict outcomes now, so capital investment is being deferred. Some tariff cost passthrough has started. The lead-to-lag timing of trade war effects is about a year, between a Trump sabre rattle and an actual outcome. What we see today in sales, prices, and other trade war impacts is the result of last year’s trade and tariffs policy. This delayed impact portends poorly for the next year or so.

2. China – Most folks see the unfolding generation as one of protracted adversity. They characterize the US-China negotiations as a modern version of the Cold War of yesteryear.

3. The Fed – Never have I heard so much criticism and ridicule of the central bank. Voices that are direct but polite in public are intense and negative in private. Paul McCulley’s keynote alluded to rewriting the Federal Reserve Act. Richmond Fed President Barkin was a keynote, too. He sat politely through the other presentations. My guess is that he has a message to carry back to the Fed, which will include the need for the Fed to improve communication. I believe that improvement is essential, and my takeaway is that the Fed as we know it is at risk and that the peril from a political intervention by Congress is high and rising.

4. Negative interest rates – Negative rates in Europe and Japan are universally viewed as poison. Nearly all believe this experiment ends badly. No one knows when, and so all must speculate about how it ends as they make portfolio decisions.

5. Investments – Portfolio options discussed included real estate, timber, farmland, gold, other hard assets, tactical stock market plays, private equity, royalties, and some exotic structures, plus privately owned operations. Bill Dunkelberg reminded everyone that there are 30 million businesses in the US and only 20,000 trade on the stock exchanges. Half the US nongovernment economy is privately owned. A chunk of that half populated these meetings.

6. Politics – My guess is 70% or more of the group believes Trump will be re-elected. Few like him or his behavior, but most are willing to overlook it because of his policy outcomes on taxes and deregulation. Trade war escalation and a recession would change this. Most believe Trump knows that and will avoid those pitfalls. Most believe the Democrats haven’t produced a viable alternative to Trump. If one does emerge, many would consider that option. In one forum of 25 people, only two thought Biden would be the nominee. Some noted how at this stage in the previous election Hillary Clinton was not yet on many people’s radar screens, and Trump was dismissed as impossible. A few mentioned de Blasio or Castro as possible emerging names. Harris comes into the Super Tuesday fight with a California basket of delegates. Anyway, lots of speculation, and the only majority view was that Trump gets re-elected.

7. Stores of value – The last takeaway is about money, whether euro or dollar or yen. All agree it is still functioning as a medium of exchange and a unit of account – we pay and receive fiat money, whether via paper or electronic paper or interpersonal Venmo transfers. But many believe the store-of-value characteristic of money does not reside with fiat currencies. The debate does not concern whether this is true, but instead where store of value does reside. Gold is an increasingly acceptable option. Bitcoin has little history. SDR anchorage hasn’t caught on. Few respect a small group debating monetary policy around a table in the Marriner Eccles Building as a reliable way to ensure that fiat money stores value.

On this last point the world’s central bankers are failing. They ARE clearing payments. They ARE facilitating government deficits, and they ARE trying to avoid recessions and default meltdowns. But in so doing, they ARE losing the trust and confidence of their constituents. In my view that trade-off is dangerous. The store-of-value characteristic of money started with the Athenian “owl” 2400 years ago. History shows that things ended badly every time a monetary authority lost sight of that store-of-value attribute.

Thank you to the Global Interdependence Center and the Bronze Buffalo Club for an enlightening week.

Final note. All fish were released. All hooks were barbless.

Lastly. Cumberland has some cash reserve. Our US ETF portfolios include an overweight position in the gold miner ETF.

David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentary – Clams or Gold

Johnny Hart, the creator of the comic strip BC, created an economy in which clams served as currency. Clams were plentiful, so no one ran out of currency, except that an occasional clam had cartoon legs and opted for a different career. A currency in the form of a good is of course nothing new in the history of world economies, but one good – gold – seems to have legs that have endured the test of time, or so we are led to believe. The argument is that a gold-backed currency provides a stable store of value and discipline when compared to fiat currencies.

Cumberland Advisors' Bob Eisenbeis

Such a currency requires a government standing ready to convert the currency into gold at a fixed price – the government cannot increase the supply of money without having enough gold to meet its redemption obligations. A similar argument lies behind cryptocurrencies like Bitcoin, whose production, like that of gold, is dependent upon mining – in the case of Bitcoin through the use of computers to solve a mathematical problem. In both cases, real resources, combined with a limit on the outstanding quantity of those resources, natural or otherwise, are needed to increase the amount of gold or Bitcoins outstanding. They do not depend on reliance upon governments to responsibly manage the supply of fiat money.

The stability arguments for such arrangements, however, are not borne out by history, especially when we look at the events surrounding the Great Depression, where adherence to the gold standard led to a collapse of the US money supply and a worldwide economic slump. Because of Europe’s need to finance World War I, it incurred substantial deficits to the US in purchasing war-related goods. Gold flowed into the US; and to offset the increase in the money supply that the inflows implied, the Federal Reserve sold bonds in an attempt to sterilize the inflationary pressures. When the Great Depression hit, the inflows of gold required the Fed to contract the money supply instead of expanding it to stimulate the economy. Friedman and Schwartz claim that the money supply declined by one-third, exacerbating the economic decline.

As another example, the price of gold at the end of 2000 was $272.65 per oz., as compared to $1392.35 as of July 9, 2019, which represents an implied compound rate of inflation of about 9% per year, as compared with the average change in the CPI of 2.1% per year over that period. At a rate of increase of 9% per year, it would take only about eight years for the price level to double. Hardly an endorsement for the stability of gold as a benchmark to which to tie our currency.

While some push the benefits of the gold standard, it may be worthwhile to take a look at some key questions before we opt to potentially turn over a key component of our monetary base to outsiders. Since a return to a gold standard would tend to benefit those who have the gold, it is fair to ask who owns the existing gold stock, where known deposits of gold are yet in the ground, who stands to gain the most from mining their existing stocks, and how long mining might continue until the known stocks are exhausted.
In terms of ownership of the existing gold stock, EU governments and central banks are the largest holders of gold, with about 9,817 metric tons, worth about $445 billion at current prices, an amount that represents about 32% of all government and central bank holdings of gold. The US is second with 8,122 metric tons, worth about $369 billion, which is about 26% of the world total. Interestingly, the IMF is in third place with 2,814 metric tons, worth about $128 billion, or 9% of the world total. China and Russia follow, each holding about 6% of the total.

But world holdings of gold are only part of the picture. Going forward, it is important to know who the key producers are and where the known reserves are located. The biggest mines in order of size are in Indonesia (Grasberg mine), South Africa (South Deep mine), Papua New Guinea (Lihir mine), Russia (Olimpiada mine), Dominican Republic (Pueblo Viejo mine), and Australia (Boddington mine). The following table shows the countries that are the key producers of gold and what their estimated in-ground reserves are.

Not all the gold produced goes into currency reserves. In fact, typically only 25% of annual production goes into gold bars and currency, while another 5% is absorbed by central banks. Jewelry accounts for about 52% of production, with the only other significant use being in the manufacture of certain electronics.
In terms of US production, our 221 metric tons per year would be valued at about $10.9 billion per year. To put that number in context, between 2017 and 2018 the Fed had to increase its balance sheet by about $100 billion, just to accommodate the increase in currency demand. That’s an amount about nine times the value of the gold reserves available to be mined in the US. This means that were the US currency to be backed by gold, the Fed would have to purchase about two-thirds of the world’s production annually at current output levels. Furthermore, if only the US were to go on the gold standard, this move would create a windfall for those countries with large gold reserves and would also put the US money supply at the mercy of Russia, China, and a few other countries who are not our strongest allies at the moment.

Finally, given that world’s economies are continuing to grow, the demand for whatever commodity was used to back government money supplies would also need to grow at pace. If currencies are backed by gold, supply would need to keep up with demand or the price would skyrocket. Provident Metals has reported that, based upon known supplies of gold in the ground and assuming that about 3,000 metric tons of gold are mined every year, it is likely that mining would become economically unsustainable by about 2050.
Given the limited supply of gold reserves, the lack of price stability, the fact that the large known in-ground reserves are located outside the US in some not-so-friendly countries, and the fact that over 52% of existing production is absorbed by jewelry demand, gold may be one commodity that is better used for decoration and jewelry than to support currencies and financial markets. What is equally clear is that we don’t want to base our money on clams located on someone else’s beach.

Bob

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio


EDITOR’S NOTE: A follow up piece was written by Robert Eisenbeis, Ph.D. which includes replies to comments and questions submitted by you, our community and audience. Read it here: Clams Or Gold Responses


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John Auther’s Points of Return

Excerpt from Bloomberg.com article,

Points of Return

by John Authers
July 11, 2019

If the Federal Reserve does not cut its target for the federal funds rate by at least 25 basis points at the end of this month, many in the market will feel entitled to sue the central bank for breach of contract. Wednesday’s congressional testimony by Fed Chairman Jerome Powell and the publication of the minutes to the central bank’s last monetary policy meeting were the last chance to walk back the widespread assumption that a July rate cut is a certainty. Powell made no attempt whatever to do so.

Cumberland-Advisors-David-Kotok-In-The-News

Kotok invokes the relevance of the gold standard:

“The reference to Mundell and the trinity provoked a thought as I saw the Chinese continue to acquire gold and pursue what seems to be a gold for USD substitution. China is not alone as we see others like India and Russia pursuing something similar. So my question involves how a gold substitute for USD alters the Mundell construction.

“The recent expansion of negative rate sovereign debt to $14T only adds to the question as gold forward contracts have positive yield. Thus a country using gold as a part of its reserve allocation is incentivized to bias away from fiat currency and add to gold. This is a speculative assertion, of course, but the rising gold price seems to be reflecting the global downward march in interest rates. In a world where 95% of all high grade sovereign debt now yields below the fed funds rate and that rate is expected to fall, shouldn’t we question the Mundell construction? And if we do, isn’t gold reserve accumulation a force which might dampen the stress of Mundell’s trinity?

“Magnus doesn’t consider this option. We ponder the question. Any Thoughts?”

I have a lot of thoughts, although they are not yet well organized. Kotok is right that China is transferring to gold and has stepped up its purchases of late, but this is still on a very small scale. Its official gold assets are now $87 billion, according to the People’s Bank of China. This is a lot of money, but still a tiny proportion of total Chinese reserves of more than $3 trillion

Read the full article by John Authers at the Bloomberg website: www.bloomberg.com


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Cumberland Advisors Guest Commentary – Gold & NIRP

Peter Boockvar, a Camp K fisherman and a super-sharp analyst, sent the note and chart below. We thank him for giving us permission to share his note below.

Market Commentary - Cumberland Advisors - Gold

It is logical that gold would outperform $14 trillion of negative-interest-rate sovereign debt issued by creditworthy governments like Germany and Switzerland. Remember: Gold counts as a monetary reserve. Gold is bought by many central banks. Only desperate nations like Venezuela sell gold and only as a last resort. Gold is measurable and finite. Nearly all the gold ever extracted is known, counted, and hoarded, except for that used in jewelry. Gold has thousands of years of history.

Central banks cannot print gold. And gold lease rates and swaps have positive returns in today’s markets.

Cumberland has a position in the gold miners ETF.

Now here’s Peter.


“Subject: Gold and NIRP

“As gold is a positive-yielding asset when compared with those assets that penalize its owners (aka, negative-yielding bonds), here is a visual of gold in white and the dollar amount of negative-yielding bonds in orange.”

Note: Cumberland Advisors has produced the following chart in-house to reflect current conditions as of 4pm June 25, 2019 and to avoid any possible copyright issue. It accurately tracks Peter Boockvar’s comments and original visual usage.

Gold vs. NIRP


Peter Boockvar is the Chief Investment Officer at Bleakly Financial Group Group, a financial planning and wealth management firm, and a CNBC contributor. The Boock Report provides summaries and commentary on macro data and news pertaining to investments. Learn more about Peter, his newsletter, podcasts, and his weekly summary at https://boockreport.com/.

More on NIRP:

-See David R. Kotok’s Nov 25, 2019 commentary on NIRP: https://www.cumber.com/cumberland-advisors-market-commentary-nirp-lagarde-trump-dickens-holidays/

-David R. Kotok talks on Nov 27, 2019 about negative interest rates, NIRP, and says the European Central Bank’s (ECB) Christine Lagarde has a difficult task right now. He also discusses China, the pork shortage, and the impact of viruses on the global food supply. Running time 25:02, David is introduced at the 10:45 mark – Play Episode:  https://www.bloomberg.com/news/audio/2019-11-27/surveillance-negative-interest-rates-with-kotok-podcast

 


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The Currency Wars Are Starting to Flare Up Again

Excerpt from Bloomberg

The Currency Wars Are Starting to Flare Up Again
06/18/2019 By Robert Burgess

Cumberland-Advisors-David-Kotok-In-The-News

NEGATIVE YIELDS KEEP EXPANDING
Draghi’s dovish comments did wonders for the sovereign bond market, sparking a rally that pushed yields lower almost everywhere around the world. French 10-year note yields fell to zero for the first time after Swedish and Austrian benchmarks turned negative, according to Bloomberg News’s Sid Verma. There’s a good chance that the next time it updates, the Bloomberg Barclays Global Aggregate Negative Yielding Debt Index will show that for the first time since mid-2016, more than $12 trillion of bonds have yields below zero. At the last update Monday, the amount totaled $11.8 trillion. “Fifty years I’ve been in this business, and never in 50 years did I think $12 trillion would be negative interest rates,” David Kotok, chairman of Cumberland Advisors, said on Bloomberg TV. On the surface, it makes no sense for investors to pay governments to lend them their money. But it’s not that simple. For some investors, those negative yields turn positive when hedged into dollars, generating yields that are similar to or even higher than U.S. Treasuries, according to Bloomberg Intelligence.

Read the full article at the Bloomberg’s Website


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Gold Is Surging. How to Play It With ETFs

Excerpt from Barron’s

Gold Is Surging. How to Play It With ETFs
06/21/2019 By Evie Liu

Cumberland-Advisors-David-Kotok-In-The-News

While gold doesn’t offer yield like bonds do, this matters less in a world where rates on many fixed-income assets are at historic lows. Investors also expect the Federal Reserve to cut its target rate later this year, which could cause the U.S. dollar to fall. A cheaper greenback could help gold gain even more traction because gold prices tend to move in the opposite direction of the dollar.

Gold could also benefit as countries diversify their reserves away from dollar-denominated assets, says David Kotok of Cumberland Advisors. Global central banks have been accumulating gold over the past decade, with China tripling its gold reserves since 2009 and Russia increasing its by four times, according to World Gold Council data. “What they’re doing is to substitute gold in an increasing amount for U.S. Treasury holdings,” explains Kotok, “If China broadens its gold holdings further to match other countries, such an appetite will cause an upward movement in the gold price.”

Read the full article at the Barron’s Website


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Gold’s Surge Has Been Disguised by the Strong Dollar

Excerpt from Barron’s

“Gold’s Surge Has Been Disguised by the Strong Dollar”

By Evie Liu Feb. 12, 2019

Cumberland-Advisors-David-Kotok-In-The-News

Gold seems to be out of favor, but that’s only compared to the U.S. dollar.

Over the past two decades, the commodity has actually seen a widespread, strong, and sustained value appreciation around the globe against 72 currencies, according to Ross Norman, CEO of London-based bullion broker Sharps Pixley. That basket of currencies includes developed countries such as Canada, Australia, and Japan, as well as emerging markets including Brazil, India, and Iran. “Using the dollar gold price, as most of us do, has disguised what is actually quite a powerful bull market,” Norman wrote in a note last week.

Admittedly, the real return on gold over the past century has been much lower than other risk-free assets such as Treasury bills. But T-bills today may be less safe now, Fraser-Jenkins wrote.

Global government debt has risen to a near-record level since World War II, posing an increasing risk of inflation through additional capital in the market. The U.S., for example, has seen its national debt relative to gross domestic product grow 86% from 2000 to 2017, noted David Kotok of Cumberland Advisors. And that’s not the highest compared to developing countries such as China at 109%, Mexico at 135%, and Iran at 233%.

Read the full article at Barron’s (subscription required).




Gold

What do 72 countries – including developed nations such as Canada, Australia, Japan, and Sweden; emerging giants such as Argentina, Brazil, Mexico, Nigeria, India, Iran, and Russia; and small countries such as Burundi, Haiti, Myanmar, Syria, and Tonga – all have in common?

Market Commentary - Cumberland Advisors - Gold

Not much, you might say; they differ vastly in such metrics as population, GDP per capita, inflation rate, income inequality, and political stability. Yet these 72 nations do share one surprising feature: The price of gold is at an all-time high in the currencies of all these countries. Furthermore, the price is not far from its historical zenith in terms of the British pound, the Chinese yuan, the Swiss franc, the euro, and even the US dollar.

This phenomenon was pointed out to us by Ross Norman, CEO of Sharps Pixley, a London bullion broker, who wrote an article titled “Gold hits an all-time high in 72 currencies” (Jan. 15, 2019; available at https://www.sharpspixley.com/articles/gold-hits-an-all-time-high-in-72-currencies_288506.html).

So what’s going on here? We can certainly point to the drastic appreciation of gold over the last 20 years. Since 1999, gold has risen by the following percentages relative to these nations’ currencies (some figures are approximate):

Australian dollar 298%
Brazilian real 699%
British pound 470%
Canadian dollar 290%
Egyptian pound 2231%
Indian rupee 644%
Iranian real 6103%
Japanese yen 329%
Mexican peso 861%
Nigerian naira 1720%
Russian ruble 612%
S African rand 914%
Swedish krona 419%
Turkish lira 1648%
US dollar 345%

(Data source: https://goldprice.org/gold-price-history.html)

In the span of these two decades we have seen the dot-com bubble and crash (followed by recession), the US housing crash and Great Financial Crisis (and recession), and then the longest bull market in US history. Gold has tended to tread water in most major currencies in the latter period, from March 2009 to present, but it’s clear that a post-millennial flight from risk and into gold has been a powerful and globally consistent pattern. There has simply been more financial, economic, and geopolitical turbulence over the last two decades than there was in the period 1945–2000.

Sovereign debt must be a factor in gold’s ascendance, too. Around the world, nations have responded to the challenges of our era by taking on ever greater debt. From 2000 to 2017, these nations experienced the following percentage growth in debt to GDP:

Argentina 24%
Brazil 33%
China 109%
France 67%
Germany 10%
India -7%
Italy 26%
Iran 233%
Japan 93%
Mexico 135%
S  Africa 23%
Spain 72%
Russia -74%
Turkey -43%
US 86%

(Source for US and other data: https://tradingeconomics.com/united-states/government-debt-to-gdp)

Interestingly, the biggest increases in central bank gold holdings from 2000 to 2018 are found among both nations with the greatest debt growth and those with the least.

Country Gold holdings in tonnes
(Debt/GDP change) Q1 2000 Q3 2018 Percent change
China (109%) 395 1843 367
India (-7%) 358 586 63
Mexico (135%) 7 120 1614
Russia (-74%) 423 2036 381
Turkey (-43%) 116 259 123
US (86%) 8139 8133 -0.1

(Source: https://www.gold.org/goldhub/data/monthly-central-bank-statistics)

Apparently, gold purchases are driven more by central bank policy than by economic factors per se. Gold can, however, be a geopolitical force. Bloomberg reported on Jan. 25, 2019, that the Bank of England – at the urging of US officials – had blocked an effort by the embattled Maduro regime in Venezuela to repatriate $1.2 billion in gold. (See https://www.bloomberg.com/news/articles/2019-01-25/u-k-said-to-deny-maduro-s-bid-to-pull-1-2-billion-of-gold.)

In conclusion we can certainly say that gold has retained its global significance as a store of value, and indeed there has been a widespread, strong, and sustained “flight to gold” in this century.

Cumberland’s US ETF managed accounts hold a position in GDX, a gold miner ETF.

David R. Kotok
Chairman and Chief Investment Officer
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Gold and Defense Stocks Rise as Donald Trump Cancels North Korea Summit

Excerpt from Fortune below:

Cumberland-Advisors-David-Kotok-In-The-News

Following President Donald Trump’s letter on Thursday canceling the summit with North Korean leader Kim Jong Un next month, investors appear to be bracing for more rockiness ahead.

The Dow Jones Industrial Average shed about 100 points by noon to 24,803, while “safe haven” asset, gold, inched up by 1%. At the same time, investors preparing for potentially more aggressive actions bought in the aerospace and defense companies. The iShares U.S. Aerospace & Defense Exchange Traded Fund, which tracks a basket of companies including Lockheed Martin and Raytheon, also ticked upward by 1%.

“We now have an unpredictable escalation path,” David Kotok of Cumberland Advisors wrote in a Thursday note of Trump’s letter. “We have a cash reserve in our Exchange Traded Fund accounts.”

Earlier on Thursday, Trump penned a letter to the North Korean leader, writing: “I feel it is inappropriate, at this time, to have this long-planned meeting. Therefore, please let this letter serve to represent that the Singapore summit, for the good of both parties, but to the detriment of the world, will not take place.”

Read the full article at Fortune.com