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Gold prices tumbled this week as the dollar was boosted by an expected Fed rate hike and fiscal spending under a Trump presidency.
“Gold hit its lowest since late May on Friday as the dollar surged to a near 14-year peak on expectations for a U.S. rate hike next month and higher fiscal spending from U.S. President-elect Donald Trump's incoming administration. The dollar is on track for its best fortnight since 1988 against the yen, and hit its highest since early 2003 versus a basket of currencies, as Trump's win stoked talk of tax cuts and fresh investment in infrastructure to boost the U.S. economy…
“’ Given these headwinds, gold is holding its own relatively well at the moment,’ Commerzbank analyst Daniel Briesemann said. ‘You could easily argue for lower prices, given the sharp appreciation of the dollar and the sharp rise in bond yields….’” (“Gold slides to 5-1/2-month low on dollar surge,” Reuters, 11/18/16.)
Gold ended the week down $80.20, closing at $1,208.40. Silver prices closed at $17.47, down $0.82.
Trump Presidency Faces Unprecedented Economic Headwinds
Financial expert and New York Times best-selling author John Maudlin discussed the unprecedented challenges that may hinder Mr. Trump’s ability to reform government and help our economy.
“President Trump will do his best to reform government and stimulate business. But he will have to fulfill that in the face of major economic headwinds, some of which are outside his control. Here are the five strongest ones…
“Unprecedented debt levels: The US government has accumulated almost $20 Trillion in IOUs. That doesn’t even factor in unfunded liabilities or the cost of a massive infrastructure program.
“ZIRP: The Fed has made it clear it will raise rates going forward. But the economy is now too weak to weather higher interest rates. The nation’s bank is pretty much out of magic bullets to stimulate the economy should it falter.
“Rioting around the country: We can hope that time heals deep political divisions in the US. However, political discourse is breaking out and many citizens are willing to resort to violence. President Trump will need to be very savvy if he is to lead a united America towards peace and prosperity.
“Recession: The US has had eight consecutive years of growth without a recession…
“Washington reforms: President Trump has a mandate, yet very little power to reform the political system in Washington. Crony capitalism is entrenched and the ties between Wall Street and K Street will stay resilient…
“I don’t doubt Trump’s desire to bring change was sincere and I hope he succeeds. But hope makes for a very bad investment strategy. Hence your portfolio should always be prepared for the worst. The best hedge? Gold and other precious metals.
“Precious metals rarely do well in times of stability and prosperity. But during economic stress, they are the best natural refuge. Whether it’s high deflation or high inflation, gold almost always shines…
“We all pay for insurance that we hope we never claim. Nobody wants to get money for a house fire, auto accident, or heaven forbid, the death of a loved one. Yet, we buy it.
With all of this in mind, I am increasing my own allocation to gold and precious metals from 10% to 15% of my portfolio. I suggest you do the same.” (“5 Reasons You Should Buy Trump Insurance—And It’s Not Trump’s Fault,” Market Oracle, 11/18/16.)
India’s Elimination Of Large Denomination Bank Notes Throws Economy Into Turmoil
As the United States considers eliminating the $100, India’s decision to remove its large denomination currency leads to dire turmoil for its citizens.
“The rickshaw meter read about $2.30, but passenger Gaurav Munjal didn’t have cash. The first ATM he and the driver found had a long line; the second was out of bills. Frustrated, the 26-year-old tech entrepreneur asked the driver, ‘Do you want some rice?’
The two men drove to a department store and Munjal used a credit card to pay for an 11-pound sack of basmati rice that he deposited on the floor of the rickshaw, next to the driver’s feet. ‘Good thing for the barter system,’ Munjal said later in an interview. ‘Otherwise it was chaos.’
“An exasperating cash crunch has gripped India in the week since Prime Minister Narendra Modi took the unprecedented step of withdrawing the country’s large currency notes from circulation… Indian media report that at least five people have died of exhaustion while waiting to change money outside banks, and that three children have succumbed to illnesses that private hospitals wouldn’t treat because their families had only old notes…
“Blue-collar workers are not showing up for jobs, unable to scrounge up money for bus fare or fuel to power their motorbikes … Even filling up the tank has become a chore as gas stations, which have been authorized to accept the old bills for a limited time, refuse to make change … Neighborhood grocers who deal mainly in cash have offered to sell goods on credit, while some customers are bartering phone credit — bought with a credit card — for vegetables….” (“Cash chaos in India: An unprecedented ban on large bills backfires on the poor,” Los Angeles Times, 11/16/16.)
Platinum Premium To Gold Expected To Return In 2017 - Hecht
Commodities and futures trader Andrew Hecht explained why he believes platinum’s premium to gold is expected to return in 2017.
“Platinum and gold share many characteristics. They are both precious metals and signs of wealth. Investment demand tends to drive the path of least resistance for the price of both metals. Over the years, many have called platinum ‘rich man's gold.’
“As the quarterly chart of the price of platinum minus the price of gold dating back to 1974 highlights, platinum has not traded at a premium to the yellow metal since 2014. Over 42 years, the range in the inter-commodity spread has been from a premium for platinum over gold of around $1200 in 2008 to a discount of $350 this year. Before 2011, platinum never traded less than $121 cheaper than gold. As of November 16, platinum was trading some $283 under the price of gold and from a historical perceptive that tells me that either platinum is too cheap or gold is too expensive when it comes to value…
“Platinum has a much higher resistance to heat and it is a harder and denser metal than gold. Therefore, on a per ounce produced basis, platinum has many more industrial applications than the yellow metal across a broad range of industries. The recent rebound in the industrial sector could mean that platinum is on the verge of a resurgence against gold…
“Platinum's discount to gold since 2014 has been a divergence from the norm within the precious metals market. The depressed nature of the industrial commodity sector has led to a decline in demand for platinum. Platinum has followed gold and silver lower since the election but open interest, the number of open long and short positions in NYMEX platinum futures has declined. It is probable that many of those positions were for financial rather than industrial purposes. Once the speculative and investment positions exit the market, platinum could be ready to respond to market forces as an industrial metal once again.
“I believe that markets are cyclical and that historical relationships eventually cause prices to move towards medians or averages established over long periods. In 2017, it is probable that platinum will move towards its long term median price when compared to gold and we could see a premium for the rare metal that we can once again call, ‘rich man's gold….’” (“Update On The Platinum Gold Spread,” Seeking Alpha, 11/16/16.)