Gold News

Gold Rally Due as 2017 Begins

Technical charts first, then US debt dynamics, than geology...
In MORE WAYS than one, 2016 was a roller coaster year. One need only look at gold's performance to confirm this, writes Frank Holmes at US Global Investors.
After rallying more than 30% in the first half, the precious metal stalled in the days before the US election, then retreated on a weekly basis, under pressure from a strengthening Dollar and tightening monetary policy.
As you can see in the oscillator below, gold is now down more than two standard deviations from its mean, or average, Dollar amount. The reason I show you this is because, in the past, this was a good time to begin accumulating, as mean reversion soon followed.
Gold vs. 2-Year Treasury Yield Percent Change Oscillator
The 2-year Treasury yield, meanwhile, is looking overbought and set to correct, based on our model. I've explained several times before how gold has tended to share an inverse relationship with Treasury yields. The math suggests a nearly 90% probability that mean reversion will occur over the next three months, with yields falling and the gold price rising back to its mean.
Even though gold stocks have given up a large portion of their gains since the summer, they were still up close to 40% for the 12-month period, as measured by the NYSE Arca Gold Miners Index. Over the same period, blue-chip stocks were up 12%, with the Trump rally driving most of it. Therefore, a portfolio composed not just of S&P 500 equities but also gold stocks and bullion would likely have performed better than one composed only of equities. 
Gold Miners Had a Phenomenal Year
I always recommend a 10% weighting in gold, with 5% in gold stocks, the other 5% in gold bars, coins and jewelry.
Looking ahead, US debt dynamics are expected to turn positive for gold in 2017. That's according to ICBC Standard Bank, which makes the case that the costs of higher yields are being overlooked. The Congressional Budget Office (CBO) calculates that net interest payments on the nearly $14 trillion of US debt will amount to about $250 billion in 2016 – or 1.4 percentage poimts of US gross domestic product. But...
"If we apply an 80 basis-point increase to the CBO's net-interest forecasts and keep the other variables unchanged, then by 2026 the Treasury would be paying an additional $185 billion in interest annually, and interest will have increased to 3.3% of GDP."
...says ICBC Standard.
Effect of 80 Basis Points Increase on US Treasury's Interest Costs
In the note, Tom Kendall, head of precious metals, stresses that the financing costs for the US have already jumped. But under President-elect Donald Trump's policies – which may or may not have a positive impact on US growth – the effects will likely lag. Any disappointments on the growth front, then, combined with higher interest costs and contentious negotiations on raising the debt ceiling in the first quarter, could well result in a more bullish scenario for gold.
Looking further ahead to the long term, gold's rarity is one of the key reasons why it's so highly valued across the globe and for most of recorded human history. The precious metal makes up only 0.003 parts per million of the earth's crust.
"Peak gold" has been a topic for years now, with major discoveries on the decline. According to a recent Bloomberg article, the number of new gold deposits discovered in 2015 was down a whopping 85 percent since 2006.
This means annual production is expected to peak in 2019, followed by a steady decline until at least 2025. 
Global Gold Output Expected to Top Out in 2019 Before Declining
Regardless of when peak gold might occur, it's pretty widely accepted that all of the low hanging fruit, with regard to major deposits, has already been picked. As a consequence, we'll likely see an increase in gold recycling, but the metal's price could also rise as supply becomes restricted.

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

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