US equities edged higher on Friday to finish a choppy week full of both sharp up and sharp down price moves. A lot of large-cap companies (Apple, Facebook, Amazon) that have significant weight in US indices reported their financial results for the fourth fiscal quarter of 2016.

Apple, the world’s largest company by market capitalization, beat Wall Street’s expectations when it released record earnings of $78.4 billion in revenue, up 3.3% from the same time last year. Naturally, the strong earnings announcement boosted the price of Apple (AAPL) 5.6% intraday and pushed the Nasdaq 100 Index higher as well, since Apple is such a large component of the index.

Facebook and Amazon, two other very popular companies that reported earnings last week, did not fare as well in the market. Both companies had strong financial and user growth but failed to fully impress investors. Despite these two notable earnings letdowns, most other large-cap companies reported robust Q4 earnings that surpassed The Street’s estimates.

Given mostly strong earnings with bullish market reactions, investors were left scratching their heads as they witnessed substantial price swings in the broader equity indices.

Thomas Siomades, head of Hartford Funds Investment Consulting Group noted, “every day there is news explosion that is hijacking airwaves, pushing aside fundamentals that should matter to markets, like earnings.”

He went on to describe how most people “would think markets would be in a good place as earnings are coming stronger than expected and the Fed is not in a rush to raise rates due to some softness in the economy.”

Because there has been more political influence on equity markets in the past three weeks than there has been in the past three years, the only explanation for the bizarre intraday moves seem to stem from mounting investor skepticism over President Trump’s economic influence and plans.

Despite the widespread skepticism and uncertainty in the markets, the US Labor Department said on Friday morning 227,000 jobs were created in the public and private sectors in January, thereby beating the expectation of 175,000 jobs.

Solid job labor data definitely helped stocks finish the week on a positive note, and the minimal hourly wage growth of only 0.10%, which was also part of the labor report, is likely to make the Federal Reserve more cautious about hiking their benchmark lending rate in March.  

When interest rates stay low or unchanged, this is generally seen as favorable to stocks and precious metals, like gold and silver. This makes sense, because gold rapidly recouped its losses immediately after all the data was dissected in the labor report.

In trading last week, gold marked its best finish since mid-November amid the usual geopolitical risks and the wavering US dollar. In 2017, investors from all regions of the globe have been flocking to the precious metal to seek refuge in an asset that has a sound logical basis to climb higher in the coming months – and so far, they’ve been handsomely rewarded.

As expected the Federal Reserve left interest rates unchanged at the conclusion of its two-day meeting on Wednesday.  In a unanimous 10-0 vote, the central bankers voted to hold its benchmark interest rate steady in a range between 0.50% and 0.75%.

There were no surprises from the Fed this week, but the real story for investors could unfold in the months ahead surrounding the Trump administration and the level of the U.S. dollar.

Meeting Recap

The general tenor of the post-meeting statement was little changed as the central bank said “job gains remained solid and the unemployment rate stayed near its recent low.” In a new addition to the statement, the central bankers noted that American consumers have a more optimistic view about the economy going forward. “Measures of consumer and business sentiment have improved of late,” the Fed said, noting that household spending “has continued to rise moderately.”

Market Reaction

Gold spot prices edged slightly higher in electronic trading from their Wednesday settlement level after the Fed statement was released. April gold traded up to $1,208.89 an ounce after the statement was released.

Stock Volatility Is Picking Up

Stock market volatility picked up significantly in the past few days, as Wall Street traders were unnerved by some of the new executive orders from the Administration, which left the Fed meeting as a mostly ignored sideshow.

Battle over the Level of the U.S. Dollar

The Trump stock market honeymoon may be fading as traders brace for potential repercussions on a number of fronts, including trade. This week, the Trump administration accused Germany of currency manipulation, adding them to its list which includes China and Japan.

The Trump administration has been complaining about the high level of the dollar – which could leave the central bank as a potential target later this year.

Why? If the Fed hikes interest rates it will strengthen the dollar even further and the Trump administration has already said the dollar is too high.

A higher dollar tends to weigh on gold prices, while a weaker dollar tends to support gold prices.

Timing of Next Rate Hike?

Look at June for the next potential interest rate hike.  According to the CME Group Fedwatch tool, the market is pricing in a 17% chance of a rate hike at the March meeting, a 33% chance of a rate hike at the May meeting and a 48% chance of a rate hike at its June meeting.

The real market fireworks of 2017 could emerge if a political battle emerges between the Trump administration and the Federal Reserve. Rising interest rates could dampen economic growth – and that is exactly what President Trump is trying to spur. Interest rates remain near historical lows and there are new pressures building that could keep a lid on how high interest rates climb this year.

Blanchard and Company has been helping individual investors diversify their portfolios with tangible assets for over 40 years. Contact us at 1-800-880-4653.

An article by Entrepreneur magazine listed 14 Things Ridiculously Successful People Do Every Day. The secrets to success according to the article?

They include:

• Focusing on minutes, not hours
• Focusing on only one thing
• Using a notebook – and writing everything down
• Following the 80/20 rule (80 percent of results comes from 20 percent of activities).

Let’s see how this applies to traders this week.

• Wall Street traders this week will be focusing on the minutes leading up to a number of big events.
• On Monday, they will be focusing on one thing: the PCE Price Index report.
• Many traders use a notebook to record big market events and they realize that a big portion of their profits (maybe 80 percent come from 20 percent of their trades).

Wall Street traders are bracing for a busy week. Here are three things big events that will drive gold prices this week.

1. Monday – The December Personal Income and Spending data is released 8:30 am ET.

Why this matters to markets? The answer is one simple word – inflation.

Tucked inside Monday’s economic report is the Federal Reserve’s “preferred” inflation indicator known as the PCE Price index. The Fed has valiantly been attempting to stimulate inflation in recent years and there are signs that price pressures are starting to kick higher. The Fed’s target for inflation is 2.0 percent.

There are numerous signs that inflation is moving higher these include:

• Medical costs are not under control and continue to increase
• Housing costs are rising at the fastest pace in nearly 10 years
• Energy prices are on the rise
• After years of no raises – wages are finally increasing

Sharper than expected gains in inflation numbers this week would be gold-bullish.

2. Wednesday – The Federal Open Market Committee (FOMC) will release its interest rate decision at 2 pm ET.

Why this matters? The Federal Reserve has broadcast its intentions to hike interest rates – perhaps several times this year. A trend toward higher interest rates is generally a negative for gold and other precious metals, which pay no interest.

Right now, Wall Street does not expect the Fed to hike rates at its January meeting. If they did – it would be a surprise and would rock markets. Traders will be reading the post-meeting announcement closely for clues on what may lie ahead for 2017.

3. Friday – The Labor department releases its monthly non-farm payrolls and unemployment rate data for January at 8:30 am ET.

Why this matters? The jobs data is one of the biggest economic data market movers of the month and can trigger fireworks if the numbers come out higher or lower than expected. The December jobs report showed that job growth is slowing, but that wages are rising. In December, non-farm payrolls jumped by 156,000 and the overall unemployment rate stood at 4.7 percent.

Economists will be watching this closely for signs if the labor market is beginning to fizzle and how much wages are increasing.

Now is a good time to conduct your annual portfolio review if you haven’t already re-balanced your assets. Market fireworks beginning to heat up. The precious metals complex has started off the year strong and many Wall Street analysts believe it is just the beginning of a bigger rally move. Gold and other precious metals are already beating returns in stocks since the start of the year. Blanchard and Company has been helping individual investors for over 40 years to build a tangible asset allocation for portfolio diversification. Learn more about us here.

Technology enables instant gratification among investors all around the world. In minutes you can own ETFs holding assets ranging from livestock to carbon emissions credits. This easy accessibility in the market enables fast transactions, and as a result investors seeking to bolster their portfolio with gold often resort to the ease of a precious-metal ETF. However, the problem is these investors don’t own gold; they own paper.

First, consider the cost of owning ETF shares. A review of 22 popular precious-metal ETFs reveals that the average expense ratio is 0.58. This cost is in perpetuity, and every year you will pay managers to oversee the fund. While this fee doesn’t sound like much, the compounding effect equals a total cost of $1,666 over a 20-year period, assuming 6% annual growth. The discrepancy between the initial costs of purchasing gold versus an ETF grows as the burden of the expense ratio increases over time. This cost means the ETF will always underperform the market price of precious metals. Furthermore, this expense also represents an opportunity cost. If this $1,666 total were put to use as an investment (again, at a 6% annual return over 20 years) it would grow to $5,343. The ones making the real money here are the fund managers. Investors face inflation, market downturns, and political upheaval; we don’t need the headwind of onerous expense ratios added to the list.

Second, holding shares in a precious-metal ETF gives you no claim to the physical asset. Many of these funds hold gold, silver, and platinum in large, industrial bars that exceed the value of the average holder’s shares, making liquidation impossible. Even those with more substantial holdings might be surprised by the fine print. Many of these ETFs include language in their prospectus stating that the fund has the option to settle in cash rather than physical gold. In other words, the prospectus governs the terms and conditions. This document was written to benefit the fund managers and the underlying institution, not the investor. Though many cite the simplicity of an ETF solution, there is nothing simple about teasing apart the esoteric language of such a report.

Finally, the spectrum of risk widens with the ETF option due to “counterparty risk.” This risk comes from the decision to engage financially with another party. When the other party defaults or fails in any way to meet their obligations, you have succumbed to counterparty risk. Such risks are not hypothetical. The most recent example of counterparty risk occurred during the financial crisis sparked by defaulted collateralized debt obligations. With the purchase of a physical asset, the relationship is between you and the precious metal. Conversely, the decisions of the fund managers, rather than pure market movements, influence the ultimate value of the ETF. For many investors owning gold is about gaining control of their assets. This goal becomes difficult when it is dependent on unseen managers who are often not liable for damaged or stolen property.

If you want to own gold, then you must own gold. ETFs merely serve as an indirect and costly alternative to having the asset in hand.