Exclusive Precious Metals Outlook and Recommendations

Index updated September 1, 2017

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The Blanchard Economic Report

Gold Outperforming the S&P 500

The price of gold climbed over 3% in the past month and is up 11% since the start of the year. Meanwhile, stocks remain up, but gold is outpacing gains in the S&P 500. Things are just starting to get interesting folks.

Gold has been gaining as the U.S. dollar continues to weaken and Treasury bond yields fall. Big picture, global central banks are still keeping interest rates lower for longer in an absence of significant inflationary pressures in advanced economies.

Year-to-date returns through Aug. 25

  • Gold is up 11%
  • Silver is up 6%
  • Platinum is up 7%
  • S&P 500 is up 9%

Debt Ceiling: Front and Center

A potential government shutdown may be just around the corner on October 1, if the House and Senate fail to pass a spending bill. Political wrangling may lie ahead as President Trump as requested funding for the southern U.S/Mexico border wall in order to keep the government running.

Unless the U.S. debt ceiling is increased soon, the Treasury will no longer have enough money to finance all the government’s expenditures. If the Treasury runs out of cash before Congress makes a deal to raise the debt ceiling, the government will likely prioritize certain debt and bills that it will pay ahead of other items. Treasury bills yields that mature after the end of September have climbed sharply, indicating a “risk premium” that is being built into those vehicles. Investors aren’t confident that an agreement will come to pass in a timely manner.

This is an extremely bullish catalyst for the gold market. It was the dramatic debt ceiling standoff in late summer 2011 that propelled gold prices to their all-time high above $1,900 per ounce.

Federal Reserve & Monetary Policy

Meanwhile, the Federal Reserve will meet on Sept. 19-20, but for now Wall Street does not expect the central bank to increase interest rates at that time. The Fed has broadcast intentions to start reducing its swollen balance sheet (leftover from the 2008 global financial crisis) and that could start to unfold at the September meeting.

The next time the Fed may hike rates is at the December meeting, but low inflation numbers have hamstrung the central bank. A Fed rate hike later this year is also dependent on Congress raising the debt ceiling without too much political, economic and financial market disruption.

Speculation is rising that Fed hikes will be delayed in 2017, with some Wall Street firms now calling for no rate hike in December.

The snail pace of Fed rate hikes is bullish for gold. The official Fed funds rate remains extremely low at 1.00-1.25%. A more historically normal level is in the 3.0-4.0% range.

The Stock Market: Is the Tide Turning?

Labor Day marks the unofficial end of summer. Typically, once vacations are over, kids are back to school, institutional equity fund managers get down to business – selling losers and “cleaning house” for performance return “window dressing.”

September is the worst performing month for the S&P 500 going back to 1950, according to research by The Stock Trader’s Almanac. Looking only at post-election years, September’s S&P 500 performance is slightly better but history still shows that the index fell in 9 out of the last 16 post-election Septembers.

A pullback or correction in the stock market would provide additional upward momentum in the gold market. The average gold return hit 14.2%, when the S&P 500 fell 20% or more – going back to 1968, according to a recent Wells Fargo Investment Institute report.

The Economy: No Inflation in Sight

The U.S. economy continues to limp along at its sub-par growth pace. Wall Street expects 2017 GDP growth around 2.4%, well below the long-term trend growth pace of 3.5% or even higher. The limp inflation rate is a key factor holding the Federal Reserve back from hiking interest rates. The core personal consumption expenditure (PCE), the Fed’s preferred inflation gauge is forecast at 1.5% in the fourth quarter 2017, well below the Fed’s target rate at 2.0%.

Big picture, the current economic expansion is old. Economists are beginning to signal that a recession is looming over the next year or two, simply from a cycle standpoint.  Typically, the post-war US recessions have lasted about 12 months, etched a 2% decline in gross domestic product (GDP) and seen the labor market shrink by about 2.5 million people.

An economic downturn would also be a bullish factor for gold. The Fed would be forced to lower interest rates once again, and they don’t have much leeway from current low levels. That leaves open the door to a retreat to negative interest rates in the U.S. during the next recession cycle.

Geopolitical Tensions

The geopolitical outlook remains a wild card for politicians, economies and markets. Tensions remain high in both the Middle East and the Korean peninsula. The rising frequency of terrorist attacks and international conflicts has been climbing in recent years.

Gold will remain well-bid as uncertainties remain high as to how the Korean peninsula situation will be resolved. Gold historically has proven to be an excellent hedge against geopolitical conflicts.

Rare Coin Update: The rare coin market picked up significant steam this summer as spreads began to narrow between rare coins and gold bullion. Rare coins show a faster and more significant price appreciation when gold bullion is rising, due to the rarity factor – and that is happening now.

The Bottom Line: Current stretched levels in equity markets offers investors a valuable opportunity to book actual profits there and diversify their portfolio into tangible assets. Gold is rising alongside stocks for many reasons. Global investors are turning to the safety and security that gold can provide in an increasingly uncertain world.

Predicted Price Trading Bands, Next 90 Days

Gold $1,280-$1,400

Silver $16.80-$17.80

Our Recommendations

The high-end rare coin market continues to increase in value as inflationary expectations build.

For investors able to hold at least 10 years, ultra-rare acquisitions offer the safest store of wealth and strongest growth potential.

Buying Rare Coins

The high-end rare coin market continues to grow.
For investors able to hold at least 10 years, ultra-rare acquisitions offer the safest store of wealth and strongest growth potential.

Buying Precious Metals

The trend is up. Any modest price pullbacks would offer an excellent buying opportunity as higher levels are forecast ahead. An accumulation strategy is probably the best bet for clients wishing to add to holdings.

Trading Precious Metals

Silver continues to offer a better value than gold

Ratio: 75 oz. silver = 1 oz. gold

This ratio has averaged 55 to 1 over the past five years

You may want to consider converting some gold holdings to silver

Popular silver products: 10 oz & 100 oz. silver bars, Silver American Eagles in monster boxes

Current price levels and any minor price retreats offers investors an excellent entry point for both gold and silver investments. Give your portfolio manager a call today at 1-866-827-4314 to discuss current market conditions and potential shifts you may want to consider to your investment picture.