October 1, 2019

The past year has been somewhat surreal in the gold market, as we have the rare occurrence of the U.S. dollar rising in somewhat slow fashion while gold bullion has appreciated about $300 per ounce to trade near $1,500. Historically, a rising dollar and rising gold bullion haven’t gone together, but the distortions that have come with global QE policies are to blame for the breakdown in this inverse relationship.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Federal Reserve rate-cutting cycles in the past have meant a lower dollar and a boom for gold bullion, but the fed funds rate no longer pushes the dollar up or down, but rather the policy of QE or QT. Also, if the Fed is cutting the fed funds rate and the ECB is accelerating QE due to the bad economic numbers from the Old World, the dollar will not decline, as the interest rate differential is in favor of the greenback.

This is why we have a rising dollar, due to accelerating QE from the ECB that pushes the euro lower (as it is the biggest component of the US Dollar Index, at 57%), with rising gold bullion – at the same time.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

How high can gold bullion go in this environment?

Historically, as “the system” prints money via fractional reserve banking and credit multiplier effects, there is generally inflation and depreciation of the purchasing power of money. That makes gold bullion go up in terms of those depreciated dollars. For example, one U.S. dollar has roughly one third of the purchasing power today as it did in 1980, yet gold bullion is not three times the level it was in 1980 because one can argue that near $800 per ounce, gold bullion was overvalued back then.

The tendency of gold bullion to swing from undervalued to overvalued is what makes its comparison to the CPI index problematic. While gold bullion will appreciate with inflation over time, it certainly does not do so with the relentless linearity of the CPI Index.

Still, the excess reserves in the global financial system, which are a function of QE policies by the ECB, BOJ, BOE, and the Fed, are what has given gold enthusiasts the hope that we will make fresh all-time highs in gold bullion. Many wonder why excess reserves – produced by the buying of bonds with electronic credits and placing them on the central banks’ balance sheets – have not produced hyperinflation yet. It is because those excess reserves in dollars or euros are for financial institutions only. While they push the prices of government bonds to unreasonable levels – all the way to negative interest rates – they do not increase the broad money supply in an uncontrolled fashion. Therefore, we don’t get hyperinflation.

Such has been the dynamics of QE, so far. I do not know that we will always be able to avoid undesired inflationary effects, but so far QE politics have managed to produce negative interest rates with no inflation in Europe and Japan. Despite the lack of undesired inflation, I think negative interest rates help gold bullion, as there is no carrying cost for this hard asset, and it offers no yield.

How the China/U.S. Trade War Helps Gold

There has been a rough Chinese yuan devaluation from about 6.20 to about 7.20 (per U.S. dollar) since the trade friction started in 2018. The Chinese yuan exchange rate is controlled by the Chinese central bank as it has $3.1 trillion in forex reserves. Should the Chinese central bank directed by Beijing push the yuan further down, that would cause global inflation to drop and local Chinese inflation rates to increase.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Devaluing the yuan is bullish for gold, as that causes a deflationary shock globally and causes central banks to do more QE. Ironically, QE has not worked very well in either Europe or Japan, other than to help push trillions of government bonds into negative yield territory, but those negative yields have helped the price of gold bullion and kept the dollar strong due to the still-positive interest rates in the U.S.

In the brave new world of trade wars and negative interest rates in Europe and Japan, the combination of a strong U.S. dollar and well-bid gold bullion are no longer the exception but the norm.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives