The First Signs of a Gold 'Bull Mania'
The first signs of a gold "bull mania"... Bad news from Japan... The central bankers are failing...
Gold could be breaking into the "mainstream"...
Regular Digest readers know we're super bullish on gold today. We believe a major bull market has begun. And we're in good company... Many of the world's most successful investors agree.
But it's important to remember that most investors – from big money managers down to individual "mom and pop" investors – still don't own even one ounce of gold.
They've never even considered it... yet.
But as the reasons to own gold grow stronger, these folks will wake up sooner or later.
This awakening will unleash a flood of money into gold unlike anything we've seen before. This is what will drive the "bull mania" Porter has predicted.
That hasn't happened yet, but it will. And there are signs it could be starting now.
Last month, a fund manager named Russ Koesterich published a note that may sound familiar to many of you. As he wrote (emphasis added)...
Central banks are pushing the outer limits of monetary policy. This has had many odd side effects, not the least of which is a significant portion of sovereign debt today is trading at a negative yield. If you buy government bonds from Japan today, you'd have to pay interest. Welcome to a world in which investors pay for the privilege of lending money...
All told, this is a serious problem for yield starved investors. Ironically, one potential remedy is to take a second look at an asset class that provides no income: gold...
Given slow growth, a cautious Federal Reserve and the proliferation of negative sovereign yields in Japan and Europe, U.S. real rates are likely to remain low for the foreseeable future. At the same time, both core inflation and wages have been firming while the inflation drag from last year's strong dollar and collapse in oil is beginning to fade. This is exactly the type of environment that has historically been most favorable to gold.
Again, these ideas should sound familiar to regular readers. What's unusual is where they're coming from.
You see, Koesterich is the head of asset allocation for BlackRock's Global Allocation Fund. If you're not familiar, BlackRock is the world's largest asset-management firm.
More important, this isn't just the rambling of a rogue fund manager. BlackRock has been buying a lot of gold as well...
According to filings from the U.S. Securities and Exchange Commission, the firm bought more than 100,000 shares of the SPDR Gold Shares Trust (GLD) – worth more than $10 million – in the first quarter of the year. It now owns more than 145,000 shares worth nearly $17 million.
The firm's private investment subsidiary – BlackRock Advisors – has been buying, too. It increased its holdings of GLD more than 500% to 10.4 million shares in the first quarter... a position worth more than $1 billion today.
If the world's biggest money manager is this bullish on gold, we suspect others could soon follow.
Central banks around the world have sold their reckless policies as a necessary evil.
Sure, their quantitative-easing programs and super-low (and negative) interest rates have made it virtually impossible to earn a safe yield on your savings... but they were necessary to boost the economy and prevent deflation.
We won't discuss the foolishness of deflation fears here today. That's a separate conversation.
But we will note that there is little evidence these policies have worked as intended. And today's news only strengthens the case...
This morning, Japanese Prime Minister Shinzo Abe officially announced he would delay a promised increase to the country's sales tax.
In short, Abe had planned to increase the sales tax from 8% to 10% in 2014 to help deal with Japan's soaring debt loads. But he canceled the move after his previous increase (from 5% to 8% earlier that year) pushed the Japanese economy back into recession.
Since then, Abe has delayed the move further, eventually pushing the date out to as far as next April. Following the last delay, he promised he would not delay the move again unless Japan faced a true economic crisis.
Last week, he hinted that he may have to delay the move again. This morning, he made it official – Japan will not raise its sales tax before October 2019.
Abe was also forced to admit that – despite more than three years of massive stimulus and easing under his "Abenomics" growth program – the Japanese economy remains weak and deflation remains a threat.
Naturally, like any respectable government official, Abe is confident he has a solution to these problems...
"To shake off such risks, we need to rev up the engine of Abenomics," he said. He also said he plans to pass another large fiscal-stimulus package this fall.
In other words, unprecedented amounts of easing and stimulus haven't worked... so Japan will do even more of it.
Unfortunately, Japan isn't alone... Major governments have been following the same playbook for years. Despite the Federal Reserve's rate-hike rhetoric, this is unlikely to change anytime soon.
An end to these policies would result in a severe (but short-term) crisis as trillions in bad debts go under. This would be political suicide for those in power.
The only alternative is inflation. More easing, stimulus, and money-printing are virtually guaranteed. One way or another, gold will soar.
In the meantime, the pullback in precious metals continues...
Gold is now down 6% since hitting a new high on April 30. Silver is down 11%.
As we've discussed, the pullback is no reason to turn bearish. The sector was long overdue for a correction.
It may go on for a bit longer, but one common trading indicator suggests a bottom could be near. As you can see in the chart below, gold's relative strength index ("RSI") – a measure of momentum – is nearing 30...
Readings of 30 and below indicate an asset is "oversold" and due for a reversal.
Gold could fall a bit more and become more oversold in the near term. This is what happened prior to the last two bottoms in gold in July and November of last year.
But history says this decline is closer to its end than its beginning.
New 52-week highs (as of 5/31/16): Cedar Fair (FUN), PNC Financial Services – Series P (PNC-PP), and Ritchie Bros. Auctioneers (RBA).
In today's mailbag, a subscriber sends praise for best-selling author and Digest contributing editor P.J. O'Rourke. Send your notes to feedback@stansberryresearch.com.
"I have really enjoyed the PJ O'Rourke periodic writings included in the Digests. "It is interesting that what was once called Liberalism now has to be called Classical Liberalism. The Socialists usurped the term long ago and bastardized it so badly that today Liberal = Left Wing. Changing meaning of words and use of political correctness was a tool of the Soviets. Something is either political or it is correct. By definition it cannot be both.
"What is truly interesting (or perhaps sad) is that the modern Liberal hates the individual and mankind in general. What other political view point can rationalize a John Kerry for President bumper sticker along with a 'Honk if you hate people' bumper sticker (of course driven by a do-gooder soccer mom). We also know that the 'Coexist' bumper stickers really mean diversity of everything but political thought or expression.
"Fredrick Hayek was a gift to us all. We should all read Road to Serfdom with open minds and hearts. True Liberalism believes in Free Markets and the Greatness/Autonomy of the Individual. Today the individual is being systematically destroyed by categorization/labeling of individuals into a group (mostly for political gain or advantage). The soap box has been placed back into the closet. Thanks folks for the great information and the opportunity to learn and grow." – Paid-up subscriber J.W.K.
Regards,
Justin Brill
Baltimore, Maryland
June 1, 2016
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