After an impressive period of six consecutive weekly gains for equities, optimism officially wore off and skepticism undoubtedly took over, at least for a brief period last week. The S&P 500 and the Dow Jones Industrial Average both closed negative for the week, while the Nasdaq 100 continued its historical eight-week-long winning streak. The decline in stocks came on the heels of a 5% intraday crude oil sell-off, which was the biggest decline in the price of crude oil in well over an entire trading year.

At a time when institutional investors increased their net-long positions in crude oil to record levels, betting that OPEC actions would stabilize the market, the oil “crash” seemed to be exacerbated by forced selling and capitulation of bullish bets gone awry after trading in an extremely narrow range since the beginning of the year.

Unfortunately for many investors, the oil sell-off spilled into the equity markets. The S&P 500 energy sector fell 2.5% on Wednesday, making it the worst performing sector in the entire stock market. Needless to say, WTI oil took everyone by surprise and by falling beneath the critical level of $50 a barrel.

Shares of energy companies didn’t see any reprieve on Thursday and Friday, either, as oil continued to plummet again, this time below $48 a barrel.

“In the long run, either OPEC will cut, or demand will pick up a bit of this extra supply. It’s a bit of a tango around the middle-term,” said Michael Poulsen, oil risk manager at A/S Global Risk Management Ltd.

Until then, the record level of oil stockpiles seems to be the driving force behind the plunging price. The US Energy Information Administration reported that crude oil inventories rose by 8.2 million barrels, well above the forecasted 1.1 million.

Dramatic plunges in the price of oil are particularly unnerving for many investors, because this is precisely what instigated a temporary bear market in equities circa late 2015.

During this time, when oil was trading near $30 a barrel, there was a lot of chatter on Wall Street that many companies who based the majority of their revenue on high oil prices (above $50-$60/barrel), like energy companies, would quickly become insolvent.

Furthermore, when the price of oil really started to tank in 2015, the correlation between WTI crude oil and the S&P 500 was extremely high, (almost near 1.00). This meant that the S&P was catching any significant upside or downside movement in oil, and this created tremendous volatility in the market. As such, investors rapidly moved to safe-haven assets like gold and bonds.

Therefore, given the current situation of a borderline lack of physical infrastructure to store the mounting supply of oil in the US, and the fact that alternative transportation measures like Uber and Tesla are increasing in popularity, there is genuine concern about oil’s future in the modern world.

Of course, this is only one side of the oil thesis. The bullish side sees demand increasing from China and emerging economies which analysts predict will send the price of oil above $100 a barrel. This would, as a result, benefit energy companies and broad-based incises around the world.  

Ultimately, nobody knows what the future holds for oil, but there seems to be one certainty: if oil continues to decline or see large price swings, the effects will unequivocally be felt in the equity markets which will likely be a direct boon for gold owners.

Spot gold prices gyrated around the $1,200 per ounce level on Friday after the U.S. Labor department reported that more U.S. jobs were created than expected in February. The latest non-farm payrolls report revealed 235,000 new jobs were created, above expectations for around 190,000 new jobs.

The data gives the green light for the Federal Reserve to hike interest rates at its March 15 meeting, economists said. “The 235,000 gain in non-farm payrolls in February will erase any lingering doubts that the Fed might not hike interest rates,” at the March meeting said Paul Ashworth, chief U.S. economist at Capital Economics.

Inflation Clues

The official unemployment rate was unchanged at 4.7% in February. There is already evidence that the low unemployment rate is putting upward pressure on worker’s pay. Notably, average hourly earnings edged higher to an 2.8% annual growth rate in February. Wage growth is considered to be an inflationary signal and provided support to gold in the wake of the jobs release.

Bigger picture, the gold market has been under pressure since late February, falling from the $1,258 an ounce area to the $1,196 area just ahead of the jobs report. However, the gold market actually spiked higher to the $1,207 level after the report was released as traders reacted to the increase in average hourly earnings.

A March Rate Hike Is Baked into the Cake

A Federal Reserve interest rate hike has been priced into the gold market on the recent decline from the $1,258 area. Market expectations have shifted dramatically over the last month in regards to a March interest rate hike. One month ago, the MNI PINCH (Probability of Interest Rate Change) indicator revealed at 16.9% expectation for a Fed rate hike on March 15. Just ahead of the jobs report release, those expectations had skyrocketed to 85.5%.

Typically, Federal Reserve interest rate increases are thought to be a negative factor for gold as the yellow metal pays no interest. Higher interest rates compete for investor’s assets and are thought to detract interest in the gold market.

$1,400 Gold In 2017

Current conditions, however, reveal that investors are purchasing gold for others reasons besides the low interest rate environment. Wall Street analysts remain bullish on the prospects for gold in 2017. A March 9 BofA Merrill Lynch Global Research report outlined the positive backdrop for gold and highlighted a $1,400 per ounce year-end target for gold.

“Gold has come under pressure in the run-up to the next Fed rate hike. While tighter monetary policy is not bullish, inflation and a range of uncertainties, including European elections and protectionism should support the yellow metal. As such, we see prices at $1,400/oz by year-end,” the BofA Merrill Lynch Global Research report said.

Alternative Assets Spike

Bitcoin, the digital currency which is created and held electronically, recently hit new all-time highs. The recent strength in the virtual currency suggests a lack of investor confidence in fiat currencies, says analyst Michael Kahn in a Barron’s article last week.

Why Invest In Gold

Uncertainty is on the rise. Gold is a time-honored alternative to paper money, and has proven portfolio diversification benefits. The stock market is within spitting distance of its all-time highs and by most measures is overstretched and overvalued. Blanchard clients are using stock market strength to rebalance their portfolio by selling partial stock positions and reallocate that into tangible assets, including gold and silver. Learn more about the reasons it is important for all investors to diversify their portfolio with gold here.

When we picture gold, we often conjure images of mining operations, vaults or perhaps a fancy retirement watch. Instead, we should imagine the halls of academia.

Duke University professor of finance Harvey Campbell has applied academic rigor to the question of owning gold. His findings are surprising. His research, emanating from a statistical and scientific approach, upends some of the conventional wisdom behind gold. Let’s look at two key discoveries that may change your understanding of the asset.

Look Abroad

In his 2013 paper, “The Truth About Gold: Why It Should (or Should Not) Be Part of Your Asset Allocation Strategy,” Harvey concludes that those considering a gold purchase should think less about the decision as an inflation hedge. Rather, according to Harvey, investors should consider demand on the international level because “a move by developing markets to hold more gold could exert substantial upward pressure on the price of gold.” What can the international community’s appetite for gold tell us about the likelihood of such a move?

China’s bar and coin demand finished 2016 exceeding totals for the last two years. In fact, the Q4 demand in the country increased by 86% year-over-year according to the World Gold Council (WGC). This growth reflects the burgeoning interest in gold among Chinese citizens who were unable to own gold before 2004 legally. Additional research from the WGC reinforces the notion that, “Investors in developing markets are willing to invest more of their income,” thereby buoying gold purchases and its value. The Chinese invest 37% of their income compared to only 17% in the U.S. The robust drive for gold among these developing markets is hardly a surprise given the commodity’s 250% gain since 2003. This outperformance surpasses the S&P 500 total return and the Barclays US Corporate Bond total return over the same period.

Interestingly, the motivation to own gold (e.g. growth in value, safe haven) differs from the factor boosting its value: international purchases. Moreover, Professor Harvey has identified a second elusive characteristic boosting the outlook for gold: the economic policy uncertainty. Let’s take a closer look.

The Most Important Number You Don’t Know 

Additional work from Harvey further illustrates why we can expect global gold consumption to continue. The professor has used a special metric called the Economic Policy Uncertainty Index (EPU) to understand how the pervasive anxiety surrounding politics can influence gold prices. Academics at Northwestern University, Stanford University and the University of Chicago developed the index to form a consistent measurement of uncertainty. The data used to formulate the index consists of three parts. First, the frequency of economic policy uncertainty discussions in major U.S. papers. Second, future tax uncertainty based on Congressional Budget Office data. Third, a survey of professional forecasters provided by the Federal Reserve Bank of Philadelphia.

Today the EPU is higher than it has ever been.

Why does that matter? “According to Prof. Harvey, gold shows a modest historical correlation with the global version of the EPU,” reports The Wall Street Journal. Therefore, a high degree of uncertainty can reasonably “translates into a bullish forecast for gold,” continues the WSJ. As the global community experiences trepidations amid Trump, Brexit, a looming ‘Frexit’, Russia and North Korea the index rises. It’s unlikely any of these major sociopolitical concerns will dissipate soon. Instead, the widespread sentiment is that we’re witnessing a secular trend.

Gold is a particularly challenging investment to value given the array of unquantifiable price influencers. However, the work from Harvey illustrates scientifically backed methods which give investors reason to agree with the professor’s conclusion from his 2013 paper: “I believe that gold should be part of a portfolio.”

After an unprecedented rally, US stocks finally retreated late last week but still managed to finish with a noticeable weekly gain. On Wednesday, the three benchmark US indices were up well over 1% after President Trump delivered a speech to congress. This strong daily gain was the largest intraday move for stock indices since the beginning of the year.

Beyond the congressional address, the main chatter on the Street focused around a potential March interest rate hike which Fed Chair Janet Yellen said is “likely appropriate.”

Because this was Yellen’s last scheduled public talk before the US central bank meets later this month, investors were closely monitoring her every word to gauge when an interest rate increase will happen. The consensus seems to be that the Fed will raise rates at least once this year.

In the currency and fixed-income markets, the US dollar and treasury yields climbed because of the expected rate increase.

In terms of other financial assets, as the Federal Reserve raises their lending rate, precious metals typically tend to decline, because it gets more expensive to borrow money to purchase them. As such, gold and silver declined amid the heightened interest rate speculation, with gold posting its second weekly decline for the year and silver posting its first weekly decline, respectively.

For now, the key driver of both the precious metals and equity markets seems to hinge around economic policy.

“Policy is likely to be tighter, but that’s because the U.S. economy is better and the U.S. consumer is consuming the goods of the world,” said James Athey, manager at Aberdeen Asset Management with client assets over $350 billion.

He went on to describe how investors always get nervous after stocks break new highs, but rates are still low in absolute terms, growth and inflation are picking up, and the Fed’s balance sheet is still enormous, which he thinks might just be the perfect storm for equity markets.

Looking oversees, although European stocks finished the week with a lackluster trading day, the London-based FTSE 100 index advanced 1.76% higher for the week, spurring investor confidence about the resilience of global markets. In Asia, stocks capped the week with modest losses finally putting an end to a six-week-long rally.

In total, investors didn’t seem to lose any confidence in global equity or precious metals markets, even in the face of a little economic uncertainty and potential interest rate movement. Along with equities, gold and silver futures trading on the COMEX quickly recovered most of their losses on Friday going into the weekend, which, historically, is a bullish signal.

The Dow Jones Industrial Average hit a record high last week – surging above the 21,000 mark for the first time in history. The Dow recorded its fastest-ever 1,000 point increase, in only 24 trading sessions. The stock market rally has been largely attributed to a number of promises and new policies from the Trump Administration. Wall Street analysts are warning that if the new President and Congress fail to deliver, a sharp correction could ensue.

The latest round of gains in the stock market smacks of euphoria and perhaps a little bit of greed. Traditionally, stock market tops form as late-comers to the party – typically the “retail, investing public” rush to buy stocks. As the public hears about the tremendous gains on the news and hears the chatter among their friends, they buy stocks.

In cycle after cycle this occurs. The smart money or institutional buyers enter the market on the way up and the public buys at or near the top, only to get trapped as the cycle turns.

Before you let the current wave of bullish stock market euphoria take over your investing decisions, consider these wise 9 sayings.

1. “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die of euphoria.” John Templeton

 There is a high level of euphoria and bullish expectation built into stock prices right now.

2. An investment in knowledge pays the best interest – Benjamin Franklin

The wise investor takes the time to learn and gather knowledge from multiple sources.

3. The stock market is filled with individuals who know the price of everything, but the value of nothing – Phillip Fisher.

Current stock valuations are extremely stretched. There are only two times in history that markets have been more expensive – in 1929 and 1999. (Remember what happened then?)

4. How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case – Robert G. Allen.

Cash in savings accounts or even CD accounts earn virtually no interest in today’s low-rate world. While it is important to have an emergency savings account in liquid investments or cash, this is not the key to building wealth over the long-term. A properly diversified portfolio that includes tangible assets is key to building wealth.

5. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett

Greed can be just as damaging to your portfolio as fear. Are you rushing to buy stocks right now? Tops often form as the “public” chases new highs at the end of a cycle. Don’t get caught up in the greed.

6. “If you don’t own gold, you know neither history nor economics.” – Ray Dalio – billionaire investor and founder of Bridgewater Associates, one of the world’s largest hedge funds.

History has proven gold’s value throughout the ages. The long-term price trend for gold is up. Over the last century, the larger trend of paper or fiat money has been down, while gold has vastly outperformed.

7. “The international monetary order is more precarious by far today than it was in 1929. Then, gold was international money, incorruptible, unmanageable, and unchangeable. Today, the U.S. dollar serves as the international medium of exchange, managed by Washington politicians and Federal Reserve officials, manipulated from day to day and serving politician’s goals and ambitions. This difference alone sounds the alarm to all perceptive observers.”–Hans F. Sennholz

The U.S. faces a nearly $20 trillion deficit. The Fed’s balance sheet is near historic levels in the wake of quantitative easing (money printing) after the 2008 global financial crisis. Paper money continues to be devalued.

8. “The possession of gold has ruined fewer men than the lack of it.” – Thomas Bailey Aldrich

Tangible assets – whether that is real estate, or physical gold or silver are real assets – something you can drive by and see, or hold in your hand, unlike a paper asset of a stock or bond.

9. “Money is gold, and nothing else”— J.P. Morgan

What’s in your portfolio now? It is very easy to get started buying physical bullion. Contact Blanchard at 1-800-880-4653.

When people discuss sourcing gold, they often think of towering mining operations drilling into the earth. However, there is another story unfolding on the surface: recycled gold. This approach seeks to reclaim gold from discarded goods, often electronics. The precious metals industry has embraced recycling as conventional mining operations struggle to keep pace with global demand.

Unexpectedly, this demand is having a positive effect on the environment. Ravenous international appetite for gold has invigorated interest in the 50 million tons of e-waste generated each year. Recyclers are stemming the tide of this humanitarian and ecological threat. “In the U.S., consumers alone dispose of some 3.2 million tons of e-waste annually; more than 80% ends up in the trash,” reports one U.S. based precious metal recycling company.

It seems the market is a solution.

Moreover, “every 20 minutes the US discards one ton of cell phones containing over 70 times the amount of gold and silver found in virgin ore,” remarks the same company. Data from the World Gold Council echoes these findings as their researchers have determined that even the high point of gold recycling (2009) captured only 1% of the above ground stock. As an international community, we are throwing gold in the trash. However, some plan to do something about it.

Urban Mining

The untapped resource of e-waste has given rise to urban refineries. Recent technological innovations have made this process more efficient and therefore more affordable than ever before. The model centers around plasma arc technology, which focuses intense, controlled heat on electronic waste equipment to isolate gold from other components. Resultantly, recycling requires 10% of the energy used to mine gold.

This system poses an enormous potential for countries like China where some regions receive thousands of tons of e-waste every hour. New methods designed to unlock the value of this mounting waste can simultaneously alleviate the problem of pollution while satiating surging demand. Today only 15% of the gold in these devices is recycled. As a result, millions in value is left to sit.

As technology pervades the developing world, we are guaranteed to see recycling opportunities grow as firms eager to capitalize on waste find more ways to become efficient. These urban refineries are proving the famous adage “necessity is the mother of invention,” and the need will only grow. Case in point: “Mobile phone sales are expected to increase from 1.75 billion units in 2011 to 2.2 billion in 2017, and tablet sales will grow from 0.1 billion units to 0.5 billion in the same period,” according to the World Gold Council.

A Golden Opportunity

Some companies see such value in the business of gold recycling that they are reaching for end-of-life electronics before they even reach the trash. UK business Mazuma Mobile went so far as to persuade customers with same-day cash payments for old cell phones. Meanwhile, as technology within the devices advances, the gold is becoming harder to harvest. Parts have become smaller. Circuit board gold contents are shrinking.

The drive to free this gold from what would otherwise be another landfill underscores the fact that demand is alive and well. As we’ve reported in earlier posts, China’s reach for gold should buoy prices well through 2017. As always, the market will find a way to slake their thirst, and recycled stock will inevitably take a growing role.

The future of gold production may not rest with the drillers of yesterday. Rather, the salvagers of tomorrow are finding ways to leverage their relatively small footprint to capture what is hiding in plain sight.

U.S. stocks posted modest gains last week as multiple intra-day sell-off attempts were viewed as buying opportunities, and investors took advantage of briefly discounted prices. The Dow and S&P continued their gradual weekly march towards record highs despite a marginal decline on Friday. Many analysts attribute the brief declines in equity prices to profit-taking among investors who have held onto long positions for decades.

“We’re vulnerable to a short-term pullback because a lot of optimism has come into the market in the past week or two,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co.

There’s no question that optimism is at a record level. In spite of this optimism, however, investors have evidently been hedging their portfolios with gold and silver.

Silver is officially the best-performing asset so far in 2017, with YTD gains of 14.64%. Platinum takes the number 2 spot, with YTD gains of 13.59%. Not too far behind, gold is the seventh best-performing asset this year, with YTD gains of 8.98%.

To put these percentages in perspective, the benchmark index for the United States, the S&P 500, is up approximately 5.43% for the year.

In total, precious metals have dramatically outperformed the broader equity, fixed income, and energy markets, largely to due what is known as a “flight to quality”. Although U.S. stocks have been performing well, this does not negate the volatility and concerns of global stocks, particularly in Europe.

With France’s presidential election looming, along with China’s alleged manipulation of their currency, the yuan, overseas investors have unquestionably been pushing precious-metal prices higher. As a result, when geopolitical risks are combined with lofty stock valuations, the amazing run-ups in gold, silver, and platinum seem fairly reasonable.

Moreover, at a time when the Dow Jones doesn’t decline one iota for ten consecutive days, investors naturally begin to worry that an ominous event is on the horizon; the good times can’t last forever. Or can they?

“Of course we’re not comfortable with valuations, but valuations don’t tell you what direction the uncertainty, the market could be safe until taxes are cut and regulations are withdrawn. Once those happen, the market could be vulnerable.”

So far, every macroeconomic event that has materialized since the start of the year has been bullish for gold – even the possibility of rising interest rates.

Regardless of the reasons for the epic climb in precious metals, the solid gains demonstrate the benefits of a well-balanced and diversified investment portfolio – something we fully stand by at Blanchard.

As the April 15 income tax filing deadline looms, taxes are on many American’s minds. The Trump administration is readying a proposal that could slash corporate tax rates, with the intended goal of boosting economic growth. A lower tax rate could be a boon to large corporations and encourage more spending, hiring and boost corporate earnings over the longer-term.

But, with every positive there is a negative.

The double edged sword behind tax cuts includes the potential to increase the United States debt and deficit unless there is legislation passed to raise revenue to match the cuts. Let’s take a deeper look at the dynamics at play.

The Current Landscape

A number of major U.S. corporations currently hold mega-bucks in overseas bank accounts including Apple to the tune of $230 billion, Microsoft with over $110 billion parked on foreign shores, Pfizer with $80 billion overseas and Exxon-Mobil with over $50 billion held offshore.

Why? These companies are bypassing U.S. tax laws by holding profits earned in other countries in offshore accounts.

The top U.S. corporate tax rate currently stands at 35%. There are a number of deductions that companies can take, which lowers the average effective tax rate for companies in the S&P 500 to about 26%. President Trump has proposed a plan that would slash the statutory tax rate to 15%.

No doubt U.S. corporations would cheer at a major tax cut. Who wouldn’t like to pay less in taxes?

What Does It Mean For the Deficit?

Whether or not the current U.S. tax rate is too high on corporations is not the issue. The key point going forward is what could a major tax cut mean for the U.S. debt? The U.S. national debt is creeping toward the $20 trillion mark. At the end of FY 2017 the gross US federal government debt is estimated to be $20.1 trillion, according to the FY17 Federal Budget.

There’s no getting around it – that’s a lot of debt.

The Congressional Budget Office reported that the U.S. government received roughly $300 billion in revenues from corporate tax payments in 2016. If the Trump Administration proposal passes as a pure tax cut – without any offset to increase revenues – that means a bigger federal deficit.

Another proposal looming on the horizon from the Trump Administration is the plan to spend $1 trillion on infrastructure spending. Unless new revenue is generated from the government from other sources, this will also increase the overall debt and deficit.

Why This Matters to Gold

As the United States (and other advanced industrialized nations) remain weighed down by debt it hurts long-term economic growth prospects. Currently, the United States has the unique opportunity to pay extremely low interest on its debt –around 2.40% on 10-year notes. But, that is extremely low by historical standards. Looking back in recent decades:

• 2007 – 10-year yield at 5.31%
• 2000 – 10-year yield at 6.80%
• 1994 – 10-year yield at 8.16%

 Just as a consumer who is paying back debt off a credit card – the higher the interest rate – the more the consumer has to pay. In this case, the government’s low interest rate is unlikely to last for much longer. Treasury yields hit a generational low at 1.33% in 2016 and the only direction for them to go is up.

Looking ahead, the more debt a nation has and the more interest a nation has to pay on its debt, means it has less funds available to spend on things its citizens want – including education, roads, police and fire safety and other basic benefits.

Rising debt levels ultimately degrade the value of the U.S. dollar, which means less purchasing power for every dollar that you hold.

Gold is a currency without a government. There is no counter-party risk and there are no devaluations. Gold is accepted as a store of value around the globe.

While a tax cut sounds great for everyone, there is the double edged sword as it relates to our country’s long-term fiscal health.  In the end, policies that swell the nation’s deficit boost the value of gold, especially in relation to the dollar. Gold is a store of wealth that cannot be destroyed by a national debt.

Take the time to properly diversify your portfolio today. Blanchard and Company has been advising individuals on how to protect and grow their wealth for over 40 years. Contact us at 1-800-880-4653.