What have Trump and Clinton just done to gold?

  • A confession
  • The outlook for gold
  • ‘Penny gold’

Jason Stevenson

You are going to regulate these businesses out of existence. You have regulations on top of regulations. And you want to increase regulations and make them even worse’.

Donald Trump

This morning, I tuned into the first of the US Presidential Debates. That’s what the ‘Donald’ had to say about Hilary Clinton’s policies.

Now if you’re into the entertainment factor — rather than any true substance — the US does elections right. And this one is shaping up to be the most interesting election in US history.

We have cowboy Trump, who just shoots his mouth off — and it’s hilarious. We also have career pollie Clinton, who seemingly can’t avoid rumours of corruption scandals.

In 50 years’ time, this year’s election may be documented as the ‘tipping’ point for American politics. In fact, we could be watching the death of the US Empire in real time. What fun!

Before I tell you more, let’s look at the markets…

Markets

Overnight, the Dow Jones Industrial Average fell 166.62 points, or 0.91%.

The S&P 500 fell 18.59 points, or 0.86%.

In Europe, the Euro Stoxx 50 index dropped 56.43 points, or 0.1.86%. Meanwhile, the FTSE 100 fell 1.32%. Germany’s DAX index fell 2.19%.

In Asia, Japan’s Nikkei 225 index is up 48.93 points, or 0.3%. China’s CSI 300 index is up 0.09%.

In Australia, the S&P/ASX 200 is down 30.12 points, or 0.55%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$45.88 per barrel. Brent crude is US$47.22 per barrel.

Gold is US$1,335.41 (AU$1,742.39) per troy ounce. Silver is US$19.47 (AU$25.41) per troy ounce.

The Aussie dollar is worth 76.63 US cents.

Confession: I like Trump

My publisher will shoot me when he reads this. He doesn’t like me taking political sides. But I can’t help myself.

There is no point denying it. I like Trump.

My colleagues think I’m crazy for liking him.

But, what do I do?

Like many, I’m sick of career politicians.

The under-35s — the younger generation — don’t care about big party politics. We like to think for ourselves.

What’s more, younger voters are starting to outnumber older voters. The majority are dissatisfied with career politicians. As Pew Research Centre reported on May 16:

Millennials, who already have surpassed Baby Boomers as the United States’ largest living generation, now have caught up to the Boomers when it comes to their share of the American electorate.

‘As of April 2016, an estimated 69.2 million Millennials (adults ages 18-35 in 2016) were voting-age U.S. citizens – a number almost equal to the 69.7 million Baby Boomers (ages 52-70) in the nation’s electorate, according to a new Pew Research Center analysis of U.S. Census Bureau data. Both generations comprise roughly 31% of the voting-eligible population.

Career politicians have over-promised and under-delivered for decades. That’s why Australians keep voting for a new leader — and for minority parties. We’ve had six Prime Ministers in the past nine years.

The days of career politicians are numbered. And, one fact is almost guaranteed: politics over the next five years will be completely different to the past 50.

This is the elephant in the room. More on this in a moment. If Clinton makes it to the White House, you know what you’re going to get — more of the same. There won’t be much difference between a Clinton White House and an Obama White House.

If you’re an Obama fan, you’ll probably see that as a good thing. But the trouble is, despite the spin, the US economy has never really recovered from the Global Financial Crisis of 2008.

Many young people are up to their neck in student debt. The average American leaves university at the age of 22, with a student debt balance of US$37,172. Add in limited job prospects, and it adds up to a bleak future.

That’s a big reason why Trump is rising in the polls. Not because the young themselves are likely to vote for Trump, but because older voters see what’s happening, the direction the US economy is taking, and they just don’t like it.

If Clinton wins, there probably won’t be any change. The bankers will continue running Washington.

If Trump wins, well, it’s a mystery as to what will happen. He’s not a career politician. That does make everyone nervous — especially the politicians who don’t want change. That’s kind of what makes this whole thing so fun (and why I admit to liking the guy).

But what difference does it make who wins? The future is uncertain.

And when it comes to uncertainty, it’s rarely good for stocks. However, it could be good for one asset class — gold.

The outlook for gold

MarketWatch.com reported yesterday,

Gold futures climbed Monday, recouping most of what they lost in the previous session as a weaker dollar and losses in the U.S. stock market buoyed demand for the precious metal.

Investors reassessed last week’s rise in gold to a two-week high on a boost from central-bank policy updates, including the Federal Reserve’s decision to hold off on hiking interest rates in September.

Financial markets, however, braced for volatility that could be stirred by the evening debate between Democratic presidential candidate Hillary Clinton and her Republican rival Donald Trump.

Big US bank, Citigroup Inc [NYSE:C] believes that Trump will win the presidency. In its fourth-quarter commodities update released this week, it said that uncertainty around the US election, along with the possibility of US Fed interest rate increase in December, will spell volatility for both the FX and gold markets.

That makes sense…

Gold is a hedge against the uncertainty of government and central banks. 

It could easily move higher into the November election. There’s plenty of uncertainty to support that.

Citi believes gold could trade sideways between US$1,300 and US$1,350 per ounce until the Fed decision in December. It also believes prices could see a ‘knee-jerk move’ if Trump wins the election.

That does seem plausible.

It reminds me of the ‘Brexit’.

When the Brits voted to leave, it was unexpected. It sent a shockwave through the financial world, and gold screamed higher.

If Trump wins, that could be the US version of the ‘Brexit’. Financial markets might get a shock, and that could be good for gold. That said, in order for a ‘true’ bull market to develop in gold, you’ll most likely need to see a disaster in the debt markets.

That doesn’t seem too far away.

The Australian Financial Review reported today:

‘There are sickly European banks. And then there is Deutsche Bank.

Shares of the German banking giant, like those of a number of its peers in Europe, have swooned over the past year as investors reject banking models that rely on volatile market activities as opposed to collecting deposits or managing investor accounts.

The latest turbulence came Monday. Shares of Deutsche Bank touched a 20-year low after a German magazine reported that Berlin had ruled out providing government aid to Deutsche Bank.

Deutsche bank is in big trouble. Before the 2008 banking crisis, gold rallied, then collapsed when reality hit and the banking system went down.

This time, unfortunately, we probably need to see a major shock to the financial system before gold truly takes off.

‘Penny Gold’

My view is that the gold price will quadruple in the long term. And if gold goes up, it could spell big profits for another asset, gold stocks, in the years ahead.

I’m not the only one to say this. Jim Rickards believes that gold will head to US$10,000 per ounce.

Jim is one of the world’s best macro commentators. If we’re right, you’ll want to own gold stocks…

That doesn’t mean you should go out and buy any old gold stocks, though. There are a lot of good stocks out there. But there’s a lot of rubbish too. Remember, some gold stocks will significantly outperform the pack. Naturally, those are the stocks you want to find.

So, what are these stocks?

We like to call these gold stocks, ‘penny gold’. These are some of the smallest gold stocks in the world. ‘Penny gold’ stocks don’t care about macroeconomics. Their performance depends almost entirely on the company’s fundamentals. If a ‘penny gold’ stock finds a truckload of gold, do you think its share price will stay low based on who wins the US election?

Not likely.

Investors would reprice the stock to reflect its new value. That’s why these stocks can make investors thousands of percent in gains. Intrigued? If you want to know the three best penny gold stocks on the ASX today, go here.

Now over to Jim and his ‘invisible gorilla’…

Cheers,

Jason

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The Invisible Gorilla

Jim Rickards

You may have heard the phrase ‘the 500-pound gorilla’.

It’s used to describe something that is obvious to everyone in the room, but that no one wants to acknowledge or discuss. It’s a metaphor for an unpleasant or potentially damaging reality that most people prefer to ignore or deny entirely.

The usual outcome is that the 500-pound gorilla eventually makes its presence known by wreaking havoc in the room and destroying the plans of those who ignored it.

But have you heard of the invisible gorilla?

The invisible gorilla is the name given by social scientists to a kind of selective perception. Spoiler alert: The video experiment that gave rise to the invisible gorilla name is available online here. Try it on yourself if you like before reading the rest of this article, where we discuss the results.

The invisible gorilla is shorthand for selective perception. In other words, we see certain objects and don’t see certain others based on our mental frames and biases. If we are totally focused one problem, our brains will ‘shut down’ on the perception of other events in order to give us the mental bandwidth to solve the problem. The issue is that the things we shut out may be more important than the things we’re focused on. That’s when we get blindsided by the gorilla.

In the original experiment — conducted in 1999 by psychologists Daniel Simons and Christopher Chabris — subjects were asked to watch a short video of two teams passing a basketball.

One team is dressed in white shirts; the other team is dressed in all in black. The subject is asked to count the number of times the white team passes the ball.

It’s challenging because the teams are passing two balls, using some razzle-dazzle passing tricks.

The video begins and the subjects are completely focused on the white shirts — the actions of the black-shirt team are irrelevant.

In the middle of the video, a scientist in a black gorilla suit walks onto the basketball court, looks straight at the camera, beats his chest and moves off the court. The gorilla is clearly visible for nine seconds.

When the video is over, subjects are asked to tell how many times the white shirt team passed the ball (the correct answer is 15). Then comes the point. The experimenter asks the subjects, ‘But did you see the gorilla?’

Amazingly, over 50% of the experimental subjects did not see the gorilla!

How could over half the subjects watch a short film of basketball and not see a gorilla that was clearly visible on the basketball court?

The answer is selective perception. The experimental subjects were totally focused on the white shirts. Their minds ‘shut down’ anything that was black (the black-shirt players were irrelevant to the problem they were trying to solve).

But when their minds went blank on the colour black, it not only shut out black shirts but also black gorillas! The gorilla was ‘invisible’ to more than half the subjects, even though it was in plain sight on the video.



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Interesting stuff.

But how does it affect you as an investor? What impact does an invisible gorilla experiment have on your net worth and portfolio allocation?

The answer is that selective perception is not limited to basketball videos. It’s hardwired into our brains.

Invisible gorillas are everywhere, and investors don’t see them unless they work hard to ignore what Wall Street wants us to see. You have to focus on what really matters in the world.

For example, investors tend to obsess over the day-to-day gyrations in the stock market and the month-to-month policy decisions of the Federal Reserve.

Wall Street and Washington want you to focus on the ‘white shirts’ in stocks and bonds.

What do they not want you to see? What is the invisible gorilla in global markets?

The answer is gold.

The facts on gold are as obvious as the gorilla in the video.

World output is about 2,000 tons per year. China, India, Iran and Russia alone have been buying about 3,000 tons per year for the past seven years. The jewellery industry absorbs over 1,000 tons per year. I consider jewellery to be gold bullion in decorative form, what I call ‘wearable wealth’.

Additional thousands of tons are being purchased by countries other than the ‘big four’ mentioned above and by savvy individuals in Europe, Asia and Latin America. (US citizens don’t understand gold and are not large buyers.)

This excess of buying over output means existing gold stocks from vaults in London, New York and elsewhere are being depleted at a rapid rate. Actual physical gold shortages and high-profile failures to delivery physical gold by banks and dealers are imminent.

Our thesis is that physical gold is increasingly scarce despite the ‘paper gold’ manipulations.

What about our timing? Is it too late to invest in gold? That’s where the invisible gorilla comes in.

Investors have been conditioned for 40 years not to think about gold. Investors have been told it’s a ‘barbarous relic’. Investors have been told ‘gold has no yield’. Investors have been told ‘there’s not enough gold to support a monetary standard’.

Supplies of gold in Switzerland are already tight. I heard this firsthand from my refinery and vault contacts there. If that shortage gets worse, as we expect it will, there’s only one way to adjust the Swiss gold trade imbalance — higher prices. Once the higher prices kick in, the paper gold demand will send it into overdrive. From there, it’s just a matter of time before the whole paper gold pyramid comes crashing down.

Gold prices are set to skyrocket based on a combination of supply and demand fundamentals and the paper gold feedback loop. If gold goes up, the prices of gold mining stocks go up even faster. In effect, buying gold mining stocks is a leveraged bet on the price of gold itself.

To learn more, go here.

All the best,

Jim Rickards