Gold Remains the Strongest Hedge Against Increasingly Dangerous Markets

As this article goes to bed in the last week of November 2019, U.S. Stock Indices are just off recent, historic high levels, despite unusual stock-market volatility of the last year, and despite major economic, financial-system, FOMC and political instabilities and uncertainties at hand. 

Increasingly unstable times lie ahead, and physical holdings of precious metals, both Gold and Silver, are likely to provide investors with the continued long-term ability to maintain the purchasing power of their assets. Separately, Democrats controlling the U.S. House of Representatives are promising to impeach Republican U.S. President Donald J. Trump. If he is impeached, and if the markets see a significant risk of his being convicted and removed from office, such would have meaningfully negative impact on the U.S. dollar, the U.S. financial markets and positive impact on precious metals. 
 

NEAR-TERM POLITICAL ISSUES AND UNUSUAL RISKS

My current reading of the circumstance, and of the evidence presented in the hearings to date, is that impeachment by the House is problematic, given the mixed political pressures of the election year ahead. While the process heavily is split along party lines, a freshman Democrat Congressman could be reluctant to vote for impeachment, if the process were not supported widely by the general public. If President Trump is impeached, chances of his conviction in the Republican-Controlled Senate and removal from office appear to be nil.  
 

On a separate political front, U.S. Treasury Debt and the Federal Deficit are ballooning out of control; properly described as “unsustainable” by both U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell. Long-term inflation risks and threats of increasingly rapid dollar debasement promise eventual, massive financial-market, financial-system and political disruptions. Current election year considerations likely will push these issues into the background, once again. Nonetheless, panicked dollar selling, hyperinflation concerns and financial-market instabilities could explode in the context of unfolding domestic political discord; a Federal Reserve that is losing control of its monetary system, including the ability to maintain adequate liquidity in the overnight money markets; and a collapsing economy that has become increasingly immune to monetary stimulus. 
 

PRECIOUS METALS HAVE OUTPERFORMED ‘’BOOMING’’ EQUITIES OF THE LAST YEAR

The popular U.S. Stock Indices hit historic high levels on varying dates around third-quarter 2018. The Dow Jones Industrial Average hit its then historic peak on October 3rd, the S&P 500 doing the same on September 20th and the NASDAQ Composite on August 29th. Those indices then crashed from their record highs by 18.8% (DJIA), by 19.8% (S&P 500) and by 23.6% (NASDAQ) into December 24, 2018, in response to the U.S. Federal Reserve’s Federal Open Market Committee (FOMC) continuing to raise interest rates into December 2018, along with its expressed intentions at the time to hike rates still further in 2019. Over that same timeframe, from stock-market peak to trough, the spot price for Gold rose by 6.5%, with Silver up by 5.2%.

In response to the stock-market crash, Treasury Secretary Mnuchin called in the “Plunge Protection Team” (created in response to the 1987 stock crash), to rally the markets into 2019 with direct intervention, and heavy stock buying from major banks. The FOMC also put its planned rate hikes on hold, and later eased three times through its October 2019 meeting. It then signalled on October 30th that rate cuts were on hold, in the context of Fed policies having generated “sustainable moderate economic growth” in the U.S. economy. The FOMC had accomplished no such thing, where the data at the time, and reporting subsequent to that meeting, showed rapidly slowing growth in a number of series, particularly including the Fed’s own Industrial Production survey. 
 

Nonetheless, the stock indices rallied to new highs, hitting all-time peak levels on November 15, 2019, now having backed off minimally. Against the historic high levels of third-quarter 2018, the November 15th historic high stock indices had gained by 4.4% (DJIA), by 6.5% (S&P 500) and by 5.3% (NASDAQ). In contrast, over the same timeframe, spot prices gained by 22.4% for physical Gold and by 18.3% for physical Silver.
 

FOURTH-QUARTER 2019 REAL GDP LIKELY WILL SHOW A CONTRACTION 

Key U.S. economic indicators have just confirmed a deepening monthly downturn in headline October 2019 (initial fourth-quarter 2019) economic reporting, specifically Industrial Production (Manufacturing and Mining), Real Retail Sales and the CASS Freight IndexTM. Along with softening economic projections from the Atlanta Fed’s GDP Now forecast model (currently at 0.4% for fourth-quarter GDP) and my forecast for a second consecutive negative Holiday Shopping Season, oncoming headline monthly data broadly remain consistent with what otherwise has been an ongoing U.S. recession from a fourth-quarter 2018 economic peak, albeit not yet confirmed.  
 

I have been writing about this “new recession” and ongoing U.S. economic downturn over the last year, although much of the underlying headline weakness has been masked by data distortions from the December 2018 to January 2019 shutdown of the U.S. government. That included the shutdown of much of the Commerce Department, which surveys and reports major U.S. economic series, including the GDP, Retail Sales, New Orders for Durable Goods, the Trade Deficit, Construction Spending and Housing Starts. The related July 26, 2019 GDP benchmark revisions were woefully shy of reality, lacking benchmarking or reliable benchmarking data from key underlying series. Nonetheless, the formal 2019 GDP benchmarking institutionalised many guesstimated and over-stated missing numbers that will not be corrected until the July 30, 2020 GDP benchmarking. Timing of the current recession should be pushed back to fourth-quarter 2018 at that time. 
 

Separately, subsequent “missing” benchmarkings of underlying series, such as Construction Spending, have confirmed the ultimate sharp downside benchmark revisions pending for the 2020 GDP overhaul, as did the preliminary downside 2019-benchmark revision to Payroll Employment, which deleted 20% of the previously estimated annual jobs growth. Once all data are in hand, headline U.S. economic activity should be deemed to have peaked in November 2018, the monthly onset of the new and current recession.
 

A FLUMMOXED FOMC WILL HAVE LITTLE CHOICE BUT TO RESUME EASING, SOON 

As the revised economic data surface, and where the current headline monthly numbers also continue to show consistent patterns of ongoing downturn, the FOMC will be forced to back off its “perfect economy” claim, and to resume a more-accommodative stance, including cutting interest rates and further re-expansion of Quantitative Easing. Market reactions to this should reflect some flight from the U.S. Dollar into the relative safety of the precious metals.
 

PROTECTION FOR INVESTORS 

Discussed regularly in these articles, the practical protection for investors in these extraordinarily volatile and dangerous times, and unstable financial markets, remains the investment in, and holding of physical Gold and Silver.   EG