What Tariffs and the NBA Finals Mean for Gold’s Rally

As we close out another week, I’m currently in Toronto, the mining finance capital of the world. But at the moment, all eyes are on the Toronto Raptors, now the most valuable sports franchise in Canada as they make their way through the NBA Finals.

The whole country of Canada has rallied around this international team, which has players from all over and whose main superstar, Kawhi Leonard, previously played for San Antonio, home of U.S. Global Investors. The enthusiasm and energy surrounding the Raptors is infectious, and I truly believe that this type of positivity can lead to success in all areas of life—even when it comes to investing and economics.

Letting negative energy get in the way is disruptive, as we saw this week when Warriors part-owner Mark Stevens shoved Raptors player Kyle Lowry from courtside. Even LeBron James called out Stevens’ unsportsmanlike behavior, writing in an Instagram post, “There’s absolutely no place in our BEAUTIFUL game for that AT ALL.”

Economic wealth is made and lost by the attitudes we choose to present to the world. Because of his negativity, Stevens, a billionaire venture capitalist, will be fined $500,000 and be banned from the NBA for a year. There may also be further, unforeseen ramifications.

This brings me to the topic of the U.S.-China trade war, which some may argue is about as negative as you can get. Did you know the biggest losers in the stand-off will be the two superpowers themselves, responsible for 40 percent of trade around the world? The U.S. is projected to lose as much as $94 billion in exports, China $205 billion, according to the United Nations Conference on Trade and Development (UNCTD).

Another loser is the average American, whose tax reform savings has already been wiped out by the trade war, according to Bloomberg.

Trust in Institutions Has Been Slipping

Americans’ trust in institutions, from the federal government to banks to the news media, has been deteriorating for decades. Sixty years ago, three quarters of Americans expressed faith in the government to do the right thing “most of the time” or “just about always.” Today, only one in five people, a near-record low, believes our leaders make decisions in the country’s best interest.

The news media fares just as poorly. A new survey finds that Americans believe “fake news” is a bigger problem right now than violent crime, illegal immigration and terrorism.

Just take a look at the chart below, based on Gallup polling data going back to 1973. Whether it’s newspapers, television news or, more recently, online news, Americans’ faith is steadily eroding. Last year, the percent of Americans who said they have a “great deal” or “quite a lot” of confidence in newspapers stood at a near-record low of 23 percent. Trust in television and online news was even lower.

So where can you still put your trust in today’s often cynical world? Friends and family. Our churches and other religious organizations. Our jobs.

As an investor, I continue to have great faith in gold as a store of value during times of economic and geopolitical uncertainty. It’s behaved precisely as I expect it to. In response to heightened global trade concerns and weakening economic indicators, investors have piled into the yellow metal, pushing its price up for a remarkable eight straight days as of today. We haven’t seen such a winning streak since June 2014, when gold traded up for 10 straight days.

It’s now within striking distance of its 2019 high of about $1,356 an ounce, which should spur even more investors to get off the sidelines and participate.

White House Still Moving Forward With Tariff on All Mexican Goods

Indeed, there are a number of warning signs that suggest investors should proceed with caution as the U.S. economic expansion turns 10 years old. Global manufacturing growth reversed for the first time since 2012, with the purchasing manager’s index (PMI) falling for a record 13 months in May.

This weakness turned up in the monthly jobs reports from the federal government and payroll services provider Automatic Data Processing (ADP). The Labor Department reported today that U.S. employment edged up only 75,000 in May, far below expectations of 175,000.

According to ADP, the U.S. added 27,000 jobs, making May the weakest month for job gains in more than nine years. I don’t know about you, but I can’t help reading this as a direct negative consequence of the White House’s escalating trade war with China and threat to impose a tariff on all imports from Mexico. The U.S. goods producing sector was hit hardest, with construction losing 36,000 positions, natural resources and mining losing 4,000 and manufacturing losing 3,000.

The 5 percent Mexican tariff is still reportedly on track to be imposed on Monday, despite negotiations that took place this week between U.S. and Mexican officials.

As I’ve explained elsewhere, tariffs are essentially taxes and, as such, they’re inflationary. This has historically supported the price of gold.

Besides Walmart and Costco, a number of other retailers have been telling customers and investors that prices will be going up thanks to either the Chinese and/or Mexican tariff. Discount retailer Five Below said it will likely need to raise prices on certain items above $5 for the first time. Dollar General and Dollar Tree both alerted shoppers that they will be “facing higher prices as 2019 progresses.”

Discussing the trade war, JPMorgan’s Michael Cembalest, who hosts the “Eye on the Market” podcast, reminded listeners this week of an article written back in August 2015 by Trump’s National Economic Council director, Larry Kudlow, and former Trump pick for the Federal Reserve Board of Governors Stephen Moore. In the article, titled “Why Trump’s protectionist ways will hurt the economy,” Kudlow and Moore compared then-candidate Trump unfavorably to Herbert Hoover, the last Republican “trade protectionist.”

“Does Trump aspire to be a 21st century Hoover with a modernized platform of the 1930 Smoot-Hawley tariff that helped send the U.S. and world economy into a decade-long depression and a collapse of the banking system?” the two asked.

For better or worse, we may end up getting an answer to this question in the coming weeks and months.

What the Gold/Silver Ratio Is Telling Us

Another sign of slowing economic growth is the surging gold/silver ratio. This ratio tells you how many ounces of silver it takes to buy one ounce of gold. This week it crossed above 90 for the first time in 26 years, meaning silver has not been this undervalued relative to gold since the first year of Bill Clinton’s first term.

The reason this is important is that half of silver demand comes from industrial applications. When the demand cools, the price of silver falls. One of the metal’s primary uses is in semiconductors, sales of which have been falling. According to the Semiconductor Industry Association (SIA), global sales were $32.1 billion in April, a 14.6 percent decrease from the same month last year. This is the deepest plunge since the financial crisis.

Buying silver, then, could be a contrarian play, but I recommend also that you maintain a 10 percent weighting in gold. Although the yellow metal’s price has surged this week, it’s still not quite in overbought territory when you look at the 14-day relative strength index (RSI). There could be further upside potential, especially if Trump moves forward with the Mexican tariff.

Will inflationary tariffs finally boost gold? Watch my latest interview with Kitco’s Daniela Cambone by clicking here!

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Gold Market

This week spot gold closed at $1,340, up $35.35 per ounce, or 2.71 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 6.10 percent. The S&P/TSX Venture Index came in off just 0.83 percent. The U.S. Trade-Weighted Dollar was pummeled 1.20 percent lower.

Date Event Survey Actual Prior
Jun-2 Caxin China PMI Mfg 50.0 50.2 50.2
Jun-3 ISM Manufacturing 53.0 52.1 52.8
Jun-4 Eurozone CPI Core YoY 0.9% 0.8% 1.3%
Jun-4 Durable Goods Orders -2.1% -2.1%
Jun-5 ADP Employment Change 185k 27k 271k
Jun-6 ECB Main Refinancing Rate 0.000% 0.000% 0.000%
Jun-6 Initial Jobless Claims 215k 218k 218k
Jun-7 Change in Nonfarm Payrolls 175k 75k 224k
Jun-11 PPI Final Demand YoY 2.0% 2.2%
Jun-12 CPI YoY 1.9% 2.0%
Jun-13 Germany CPI YoY 1.4% 1.4%
Jun-13 Initial Jobless Claims 215k 218k
Jun-13 China Retail Sales YoY 8.0% 7.2%

Strengths

  • The best performing metal this week was silver, up 3.06 percent, partly on the stronger gold price and on the news that the world’s third largest refinery was forced to halt production due to a failed blast furnace. The yellow metal was on fire this week and is heading for its best week in a year. The weekly Bloomberg survey showed that most gold traders and analysts are bullish going into next week as gold rose near the highest level in three months. Investors took note of the rally as assets in the largest bullion-backed ETF rose 2.2 percent on Monday – the equivalent of 16.44 metric tons. Much of the gold price action is driven by the growing geopolitical tensions surrounding the trade war.
  • Another big driver for gold this week was poor ADP data and job growth. Companies in May added the fewest U.S. workers in any month since 2010, according to ADP data. Only 75,000 jobs were added in May versus an expected 175,000.
  • Gold imports to the world’s second largest consumer of the metal, India, grew 36 percent in May from a year earlier, as customers rushed to buy after prices fell to their lowest level this year last month due to a stronger rupee, and then have subsequently risen this month so far.

Weaknesses

  • The worst performing metal this week was platinum, up just 1.49 percent as hedge funds pushed their bearish view to a 15-week high. Bloomberg reports that Venezuela defaulted on a gold swap agreement valued at $750 million with Deutsche Bank. In 2016 Venezuela signed an agreement for a cash loan and put 20 tons of gold as collateral. A big headwind for gold in the past few months has been the troubled South American nation’s gold reserve selling, which amounted to $570 million in just May alone. Any wonder why gold was having difficulty going up when you have a significant distressed seller in the market?
  • Dacian Gold saw its shares plunge a whopping 76 percent in this week after it received multiple downgrades because of lowered guidance. RBC Capital Markets analyst Paul Hissey said “Dacian is likely to now be uninvestable for some at any price.” RBC lowered its price target for the gold miner from $3 to just $0.50. Gold explorer NuLegacy announced on Monday that it had suspended all field exploration on its Red Hill property in Nevada to preserve cash. The stock fell 55 percent this week on the news.
  • Tiffany & Co. said sales to Chinese tourists fell by more than 25 percent last quarter due to the trade war tension with the U.S. The Swiss Competition Commission said that it is suspending its investigation into whether banks colluded in precious metals trading due to a lack of evidence. Perhaps now they can investigate Glencore since almost every other security regulation agency outside of Switzerland has an investigation open against them.

Opportunities

  • Ecuador just made a big show of support for the nation’s mining industry. The Vice President and Minister of Energy and Non-renewable Natural Resources visited Lundin Gold’s flagship project, where 50 percent of the construction is completed. The officials also presented a new Public Mining Policy that focuses on supporting large-scale operations and investments, and eradicating illegal mining.
  • The focus on “weak dollar policy” continues from lawmakers. Senator Elizabeth Warren called for “actively managing” the U.S. dollar’s valuation as a part of a plan to create more American jobs. A weaker dollar has historically been positive for the price of gold. President Trump has also been critical of a strong dollar.
  • The junior gold space is starting to get interesting as major miners are striking deals to fund some of the best projects they see going forward. PolarX secured an initial investment of $4.3 million from Lundin Mining to acquire an earn-in option on its Alaskan copper-gold projects with a staged spending program of up to $24 million on the property. PolarX has already drilled and identified a skarn deposit, which it will retain the ownership to, but Lundin is interested in any major copper-gold porphyry deposits on the land package which is all on state land, thus unencumbered by federal permitting or native titles. TriStar Gold announced that it will sell Royal Gold a stake in the company and a 2 percent net smelter royalty on its Castelo de Sonhos property in Brazil. The funding for TriStar will cover its budget for the next two years.  Lastly, Chakana Copper Corp announced that it completed a previously announced private placement with Gold Fields to fund its project.

Threats

  • Bloomberg reports that the trade war has already wiped out most of the average American’s household savings from the 2017 tax cuts. Only $100 remains of the average $930 tax break due to tariffs on Chinese imports. The additional tariffs and now added to Mexican imports on Monday, could cost middle-earning households a massive $4,000.
  • South Africa’s Minister of Mineral Resources and Energy said this week that gold output from the once top producer will continue to decline due to a lack of exploration for new deposits.
  • Liquidity in the credit market could be a big problem soon. Bank of America’s CEO Brian Moynihan said that leveraged finance threatens to become an issue in the broader market. According to a survey of investors at JPMorgan Chase’s U.S. Macro Quantitative and Derivatives Conference in New York last month, the greatest risk to quant strategies wouldn’t be an equity bear market or a rate increase. Rather, it would be a collapse in liquidity. Pimco’s fund managers are also concerned about liquidity after noticing that the bid-offer spread shows trading costs are approaching the December levels.

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Index Summary

  • The major market indices finished mostly up this week. The Dow Jones Industrial Average gained 4.71 percent. The S&P 500 Stock Index rose 4.41 percent, while the Nasdaq Composite climbed 3.88 percent. The Russell 2000 small capitalization index gained 3.34 percent this week.
  • The Hang Seng Composite lost 0.20 percent this week; while Taiwan was down 0.85 percent and the KOSPI rose 1.50 percent.
  • The 10-year Treasury bond yield fell 4 basis points to 2.082 percent.

. . .

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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