Exclusive Precious Metals Outlook and Recommendations

Index updated December 1, 2019


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The Blanchard Economic Report

 

Fed’s Easy Money Policies Lull Investors into Complacency

 

Gold slipped lower from its 2019 highs in November as investors went “all-in” on the stock market. Despite economic worries about the trade war, slowing global growth and the impeachment inquiry, U.S. stocks climbed to new all-time highs last month.

The Fed’s easy money policies are driving the stock market higher in the wake of the three interest rate cuts this year. The Fed’s buying of securities in the repo market now tops $300 billion in 2019 and still counting. While this is not quantitative easing, it does push the stock market higher. The need for these ‘repo operations’ also warns of weaknesses in the financial system that could come home to roost in 2020.

Gains in the stock market are injecting a sense of optimism into the marketplace, which triggered some short-term traders lighten up on their gold market positions last month. Risk aversion has waned for now and investors are lulled into complacency amid the equity strength.

 

Government Shutdown for Christmas?

 

Congress passed a four-week stop-gap spending bill in late November that expires just days ahead of Christmas. While the Trump impeachment inquiry continues, there has been no market impact so far. Stay tuned, the potential remains for this to become a market-moving event.

While it’s not getting much news coverage, a potential risk is that the impeachment process could result in a government shutdown. Democrats and Republicans could attempt to use a shutdown as negotiating leverage if an impeachment hearing proceeds.

 

US Economy Still Growing, But Weakening

 

The U.S. economic growth trajectory is down. First quarter GDP growth came in at 3.1%. Second quarter slowed to a 2.0% rate and third quarter came in slightly higher at 2.1%. This year, the U.S. – China trade war created a black cloud of uncertainty for companies as global supply chains have been disrupted.

The Atlanta Fed now projects the U.S. economy to grow at a 1.7% rate in the fourth quarter. The Fed’s three rate cuts this year may have provided some cushion and extended the current record long economic expansion phase, but the growth trajectory has been lower throughout the year.

Consumers aren’t so sure on what lies ahead. The latest Consumer Confidence index fell from 126.1 in October to 125.5 in November. The Consumer Confidence registered readings as high as 135.8 in July, so the recent decline reveals caution on the consumer front.

 

Federal Reserve

 

The Federal Reserve is set to meet mid-month on Dec. 10-11. After three interest rate cuts in 2019, the current funds rate stands at an extremely low 1.50-1.75% range. The Fed is not expected to cut rates at its December meeting. The CME FedWatch Tool reveals market expectations at 93% that the Fed keeps policy unchanged this month.

The greater concern among economists is once the U.S. economy does eventually slip into recession, the Fed will be largely impotent to stimulate growth with interest rates so close to zero. That leaves open the strong possibility of negative interest rates during the next recession.

 

Silver Buy Recommendation

 

Silver has also retreated from its 2019 high scored in September. Current silver price levels offer investors an excellent buying opportunity around $16.75 an ounce.

In fact, the widely-respected New-York based CPM Group just issued a silver buy recommendation for investors with an intermediate-term investment horizon (a two- to three-year time horizon.) Founded in 1986, CPM Group offers analysis and research to producers, consumers, institutional investors, governments, regulatory authorities, and high net worth individuals.

“The silver market is at a critical vertex at present,” CPM Group’s Vice President of Research Rohit Savant said. “Silver market fundamentals are precariously similar to the critically poor conditions that existed in 1989. Prices seem more likely to rise in the years ahead rather that to decline. There are many external as well as internal factors behind our analysis.”

 

The Bottom Line

 

Barring some unexpected economic or geopolitical news, the stock market could continue higher over the next few weeks as the seasonal “Santa Claus Rally” supports the market.

Peering into 2020, risks rise on all fronts. The U.S. economy is still growing, but slowing. The stock market continues to look toppy, with gains fueled by the Fed’s easy money policies. The 2020 U.S. presidential election opens the door to major financial market risk. An Elizabeth Warren or Bernie Sanders win in 2020 could significantly rattle the stock market as both candidates are running on platforms designed to cut back on the power of the big businesses that comprise the stock market.

History proves that portfolio asset diversification is a key to successful investing. If you haven’t fully diversified your portfolio with tangible assets, current price levels offer an excellent opportunity to protect your wealth against the uncertainties that lie ahead.

 

Our Recommendations

 

The high-end rare coin market remains an attractive buying opportunity for long-term investors. Rare coins offer investors an opportunity for significant price appreciation in the current environment.

The appeal of rare coins to investors is their impressive historical price appreciation, which has outpaced the level of the underlying precious metal.

 

Buying Rare Coins

 

For investors able to hold 5–10 years, ultra-rare acquisitions offer the safest store of wealth and the strongest growth potential. Accumulate the highest-quality coins that you can afford. This strategy will pay off handsomely as rarity tends to appreciate the fastest.

 

Buying Precious Metals

 

An accumulation strategy is probably the best option for clients wishing to add to holdings.

 

Trading Precious Metals

 

Silver continues to offer a better value than gold. Generally, readings above 65 signal that silver is severely undervalued and is a strong buy signal for the metal.

 

Ratio: 86.50 oz. silver = 1 oz. gold

The gold/silver ratio is a way for investors to measure the relative value of these two metals. The ratio indicates the number of ounces needed to buy one ounce of gold. Investors have long turned to this ratio to identify attractive long-term entry points for precious metals purchases. A high ratio is generally viewed as a signal that silver is undervalued relative to gold. That is what we are seeing now.

You may want to consider converting some gold holdings into silver.

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