The Envelope Please
Gold Was Up vs the USD in 2016- What's the Problem Here?
It is almost a given that the USD must weaken if Trump's policies are implemented in their most recent iteration. And while people long Gold fret at USD strength, remember Gold was still up against the Dollar in 2016. Gold was just up even more against the other FIAT currencies. Take it from Marc Faber who said just 3 days ago
If I look at the sentiment of investors towards precious metals, it is actually puzzling because gold is up against the US dollar and gold shares were up on an average of 60 to 80% in 2016. But despite this performance, investors are very bearish about gold and gold shares. I would accumulate or recommend to accumulate precious metals stocks and the physical in 2017.- Marc Faber Interview Jan 7th
Best Performing Currency of 2016?- GOLD
Keep it Simple- The End Game is Inflation
Signs continue to point to a 1970's like inflationary environment. The UK is ground zero, Japan is behind, Europe is in denial and the US doesn't have to debase right now until its own stock market weakens. And a rallying stock market is discounting either an organic recovery, a weakened dollar, or some combination of the 2. The bond market, while off its recent lows is now damaged. Base metals are being bought for use, anticipation of use, or by China just to de-dollarize its reserves and prepare for its own competitive race to the bottom.
Gaming Out the US Trade/Current Account Deficit With China
China and the US are co-dependent. They still need us to buy their finished goods. And we still need them to not puke their UST holdings. So how to deal with:
- The US needs a strong dollar to keep rates down and China happy on the investment side , but a weak dollar to reduce the value of its outstanding debt.
- The Chinese worry that a strong dollar will discourage our consumption of its goods but a weak dollar will kill its UST holdings.
Solution? International Pump and Dump
The answer as always, is in the exit strategy. The sucker at the table is SA and other emerging markets who are clamoring for USD on the basis of their various pegs to it, and because of its "reserve currency" status in no small part because of its global liquidity.
- China has and will continue to cut deals with countries long "stuff ' and short USD.-Buying soybeans from Argentina with USD is an example
- The US will selectively restrict access to USD at its window to increase its Giffen good factor thereby protecting its creditor China while it exits
- When China is out of its dollar risk and the emerging markets are long dollars, the US removes the floor under the USD
Strategy is the Same (Inflate), Tactical Vagaries Apply.
As long as stocks are stable here, the US can keep its stimulus powder dry. But (Trump's wild card tweets aside) as long as the USD is strong with a healthy stock market, it's a home run. When markets start to focus on our debt and rate-hikes no longer keep long rates stable**, our stock market will begin to wobble as high rates dampen stock buy-backs and compete for capital. And then we shoot the moon with Fiscal stimulus not giving a damn about the USD. Cries of BUY American will echo throughout the land.
The result will in part be a captive American consumer who must buy sub-quality products from a company Trump cajoled to come back with tax breaks and subsidies. Meanwhile, the US consumer will be buying overpriced crap while regressive taxes increase in red states and progressive taxes go up in blue states.
Do you really thing trickle down will save you when a bank is paid money ot stay in a state while your mill rate for real estate tax goes up? Do you think all those jobs will be protected?
**Alternately, lets suppose the yield curve does not steepen and Bonds do not compete for investment capital. Then we have deflationary fears and stocks drop. NIRP and Helo money are put on the table and free money props up assets again. And you get fired from your job.
To quote an MS contributor here:
On Gold Now
"Gold prices are a function of the Dollar and the world hanging on every Trump Tweet. It (the Dollar) will remain strong because Trump said so. Gold floats around $1,100. It is captured. I don't see any strong move. The key to gold now is the relentless U.S. dollar."
On Gold Later
“Only when the rest of world is long USD will we pull the plug. ... any type of surprise or black swan move by Donald Trump. Complete policy reversal to make America great by weakening the dollar as part of manufacturing push,” he explained. “The dollar will weaken after rest of world currencies are in gutter."
On Outliers and Possible Paths to Inflation?
“Fed hikes, rates rise, and then Fed starts QE4 (almost) simultaneously; War in Syria ends; confidence increases, business flourishes, but money printing continues; Navy is the immediate focus (similar to Reagan); Trump will walk softly (he likes to be liked now that he is in the club); EU dissolution or SA revolution on radar.”- Vince Lanci interview
The thing is, Gold is up against every major currency. Convert your Gold to USD and then buy some Greek cheese. Of course that is if the Fed hasn't imposed an import tariff undermining your economic freedom to choose yet. Cynical, you bet we are.