U.S. May Experience Inflation Unseen in More than 30 Years - Holmes

Release Date: 
Friday, December 16, 2016

Gold prices bounced on Friday but remained in negative territory as the Federal Reserve announced its first rate hike in twelve months.

“Gold futures managed slim gains on Friday after a tough few days that are set to hand the yellow metal its sixth-straight weekly loss and leave it trading near 10 1/2-month lows… Gold hit that multimonth price low as the first U.S. interest-rate hike in a year announced midweek—and the prospect of a more-aggressive Federal Reserve in 2017—sent the buck surging and weighed on precious metals that are pegged to the dollar’s value …

“Higher interest rates typically make the dollar stronger, which can put pressure on commodities, such as gold. In addition, noninterest-paying assets like gold lose their luster as interest rates increase. But should the scales tip toward worrisome inflation views, gold could resume some demand as a haven from the assets whose value can be chewed up by inflation….” (“Gold stabilizes but on track for sixth-straight weekly loss,” MarketWatch, 12/16/16.)

Gold ended the week down $25.00, closing at $1,135.60. Silver prices closed at $16.17, down $3.45.

U.S. May Experience Inflation Unseen in More than 30 Years - Holmes
Frank Holmes, CEO of U.S. Global Investors, forecasts significantly higher inflation under a Trump presidency.

“Inflation can be understood as the destruction of a currency’s purchasing power. To combat this, investors, central banks and families have historically stored a portion of their wealth in gold. I call this the Fear Trade. The Fear Trade continues to be a rational strategy… The U.S. is not likely to experience out-of-control hyperinflation anytime soon, as the dollar continues to surge on bets that Trump’s proposals of lower taxes, streamlined regulations and infrastructure spending will boost economic growth. But I do believe the market is underestimating inflationary pressures here in the U.S. starting next year …

“Consider Trump’s recent Carrier deal … As I see it, the Carrier deal is indicative of the sort of trade protectionism that could spur inflation to levels unseen in more than 30 years … That’s just the reality of it. Prices will go up, especially if Trump succeeds at levying a 35 percent tariff on American goods that are built overseas but imported back into the U.S. The extra cost will simply be passed on to consumers …

“What’s more, Trump has been very critical of free trade agreements … But trade agreements have also helped restrain inflation over the past three decades … Additional tariffs and the inability to import cheaper goods are inflationary pressures that could result in a deeper negative real rate environment. And as I’ve pointed out many times before, negative real rates have a real positive effect on gold, as the two are inversely correlated …

“The U.S. dollar accounts for about 64 percent of central banks’ foreign exchange reserves. With the potential for higher U.S. budget deficits and debt risking dollar strength, central banks around the globe could be motivated to increase their gold holdings, says Credit Suisse.

“As I mentioned last week, gold is looking oversold in the short term and long term ... Statistically, when gold has done this, a return to the mean has often followed. This has been an attractive entry point for investors seeking the sort of diversification benefits gold … have offered. In a note to investors this week, ETF Securities highlighted these diversification benefits, writing that a gold allocation has ‘historically increased portfolio efficiency—lowering risk while increasing return—compared to a diversified portfolio without an allocation to precious metals….’” (“Inflationary Expectations in 2017 Keep the Polish on Gold,” U.S. Global Investors Alert,” 12/9/16.)

Gold Has Most Turnaround Potential in 2017 – MarketWatch
“A Marketwatch commentary identifies gold as the investment with the greatest turnaround potential in 2017.

“[M]y candidate for the investment with the most turnaround potential in 2017 is gold … Here are three reasons why I like gold at the current price of $1,150 an ounce.

“1. Inflationary U.S. and Chinese policies will result in speculative fund flows into gold …

“[T]he U.S. federal debt is still expected to increase from 77% of U.S. GDP at year-end 2016 to 86%, or about $23 trillion, over the next decade, driven by entitlement spending such as Social Security and Medicare/Medicaid. Higher fiscal spending amid a tight labor market and rising wages invariably leads to higher inflation … Chinese speculators are now turning to the commodities market to hedge the depreciation in their Chinese yuan-denominated assets … Finally, gold futures turnover in China has risen to about 25% of that on the Chicago Mercantile Exchange, suggesting that precious metals pricing power is increasingly shifting to Chinese hedge funds and traders.

“2. Chinese and Indian jewelry demand will recover in 2017 …

“This year’s unprecedented weakness of the Chinese and Indian jewelry markets was due to a confluence of factors that will not repeat themselves in 2017 … With the recent correction in gold prices, I expect both Chinese and Indian consumers to step up their jewelry purchases in 2017. Already, a large Hong Kong-based retailer, Wo Shing Goldsmith, is reporting a 20%-25% rise in gold jewelry sales over the past month.

“3. Speculative inflows into the … Gold Trust have capitulated, suggesting a good entry point …

“In the month leading into, and in the immediate aftermath, of the June 23 Brexit vote, the … Gold Trust’s holdings increased by 3.7 million ounces …  Since then, the [gold trust] holdings have declined by 4.1 million ounces ... This means much of the Brexit-related ‘hot money’ has gotten out and capitulated on gold. From a contrarian and trading standpoint, today’s price of $1,150 an ounce is thus a good entry point.” (“Gold is the investment with the biggest turnaround potential in 2017,” MarketWatch, 12/16/16.)

Australia May Follow India with Ban on $100 Currency – The Hindu BusinessLine
The Indian periodical, The Hindu, reported that Australia may follow India’s lead by banning the $100 bill as legal tender.

“After India and Venezuela banned high-value notes, Australia, a developed economy, is considering a ban on the A$100 note, its highest denomination. While Venezuela’s tottering economy is battling hyperinflation, Australia, like India, is trying to flush out money from its ‘black’ economy …

“The government is setting up a ‘black economy’ taskforce under former KPMG global chairman Michael Andrew to weigh the future of the A$100 note, which is believed to facilitate tax dodging and welfare fraud, and also look at capping cash payments beyond a certain amount … [R]eports indicate that about 92 per cent of Australia’s currency, by value, is in $50 and $100 notes. Any demonetisation drive will be further complicated by the fact that the Australian dollar is a freely convertible currency and its notes are in circulation around the world …

“Last month, Bloomberg reported that Swiss global financial services major UBS had called for a ban on the A$100 note. ‘Removing large-denomination notes in Australia would be good for the economy and good for the banks,’ UBS analysts led by Jonathan Mott said in a report. This, they said, would help reduce crime and welfare fraud (claiming support while working for cash), while increasing tax revenue (fewer cash transactions) and ensuring a ‘spike’ in bank deposits.” (“Now, Australia may demonetise its $100 bill,” The Hindu, 12/14/16.)

 

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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