Stocks in the US started last week off with a bang, as the three benchmark stock indices all rallied on Monday amid lessening tensions with North Korea.

As mentioned in last week’s article, there was a significant amount of market apprehension about the events that could take place over the weekend, i.e. a missile attack. However, Emini S&P 500 futures gapped up Sunday evening by approximately 5 points as the possibility of a North Korean missile strike dwindled over the weekend. The strong Emini S&P 500 futures rally continued throughout the night and into Monday’s trading session.

The S&P 500, and the Dow Jones Industrial Average both rallied into the close on Monday to settle at fresh all-time highs, with both indices closing more than 1% in the green.

Although Monday’s rally seemed to lose a little bit of momentum mid-week, bids started flowing into the market again on Friday as prices began to drift towards new all-time highs.

For the week, the Dow Jones advanced the most with over a 2% gain. The Nasdaq 100 and S&P 500 both closed around 1.4% higher.

North Korea ended up shocking the world by actually firing a missile over Japan early Friday morning. There was an initial knee-jerk reaction to the launch that sent S&P futures about ten points lower, but investors clearly used the sell-off as an opportunity to add to their long positions after they digested the news.

The Dow Jones went on to make its 39^th record high of 2017 on Friday, along with the S&P 500. Although the Nasdaq 100 didn’t make a new record, it still closed largely positive.

“In general, and the markets have kind of figured this out, geopolitical events are fairly short lived. You have to be careful of them and they will create stress moments in the market, perhaps corrections, but they don’t tend to last,” said Matthew Peron, head of global equities for Northern Trust Asset Management which oversees about $1 trillion in assets.

This certainly seemed to be the case with North Korea. Strong gains in the stock market, especially after the missiles were fired, confused a lot of investors due to the amount of fear and uncertainty that was priced into the markets in weeks prior.

The last thing market participants expected was for stocks to rally after North Korea finally tested their missiles after weeks of threats.

Most of the market’s gains were powered by a solid rally in technology stocks. Nvidia Corporation (NVDA), gained 5.9% on Friday alone amid analysts price-target upgrades, which contributed to a significant portion of the Nasdaq’s spike. Similarly, Advanced Micro Devices (AMD) was up 2.2% on Friday which boosted both the S&P 500 and the Nasdaq.

Although there was a brief surge in safe haven assets immediately after the North Korean missiles landed near Japan, the flight to safety didn’t last.

Gold for December delivery was trading around $1,325 per ounce on Friday after declining almost 2% for the week. However, given that gold just made a new YTD high only one week ago, slight declines are not too alarming.

Since 1975, Blanchard has successfully helped over 450,000 clients invest wisely in precious metals and rare coins. Our team of experts are always here to help you make the right investment decisions and capitalize on opportunities in the precious metals market.

Call us today at 800-880-4653

The U.S. dollar is the world’s reserve currency. For now.

Being the global reserve currency means that when commodities from grain to oil are bought and sold between countries the medium of exchange is the U.S dollar. That benefits the U.S.  because there is on-going demand for U.S. dollars. China must use U.S. dollars to pay Brazil for soybeans, or pay Russia for oil.

That’s changing. Over the past several years there has been a significant movement in the world trading community to squeeze the U.S. dollar out of the picture.

Russia and China have cut deals and now trade crude oil with yuan, not U.S. dollars.

The trend to squeeze the U.S. dollar out of the picture is picking up speed.

New Crude Oil Contract Cuts Dollar Out

China is now developing a brand new crude oil futures contract that would be priced in yuan and convertible into gold. It is expected to become a third global benchmark for crude oil trade.

This is significant as it allows countries to buy and sell crude oil, bypassing U.S. dollars. For those countries who aren’t comfortable yet with accepting yuan, the futures contract is convertible into physical gold. That means oil producers could get paid for selling their oil in physical gold. That’s a smart move on the part of the Chinese. Everyone acknowledges and accepts the value of gold.

A Little Background

China is the world’s second largest economy and in recent years has been demanding a seat at the table at global financial and monetary institutions. In late 2016, the International Monetary Fund added the renminbi (yuan), to its elite basket of reserve currencies in the Special Drawing Rights (SDR).

That was a momentous event for the Chinese currency and marked an international stamp of approval to use the yuan in the global economic system. The Chinese currency jumped onto the global currencies “A” list basket along with the euro, yen, pound and dollar.

The new Chinese futures contract, however, will be convertible into physical gold. That represents some hesitation on the part of the global financial community regarding the Chinese yuan.

“In order for the renminbi to be considered a safe place for investors to put their money in times of turmoil, foreign investors and domestic investors in China must have trust in China,” says Cornell University economist Eswar Prasad. “And that is missing,” he adds.

In order to develop global trust in the yuan, China needs political and legal institutions like those in Europe, the United States and Japan. China does not have a democratic form of government with multiple checks and balances. It needs an independent and trusted central bank like the Federal Reserve. And China also would require a legal framework where the rule of law takes precedence over the Chinese Communist Party, and not vice versa, Prasad says.

The Rise and Fall of Reserve Currencies

For decades the U.S. dollar held a special spot in the world financial community. Being the world’s reserve currency accords a country a special economic status. History shows that reserves currencies come and go. It would be foolhardy to assume the U.S. dollar will be the reserve currency forever.

From the Arab dinar in the Middle Ages to the Florentine florin in the Renaissance to the Dutch guilder to the British pound, reserve currencies change with time.

We are in the midst of a transition now. There is no clear currency that could replace the dollar, and that is in part why the shift is slow. But, there is movement. Some talk about how the SDR could become new global reserve currency. Read one view on that here.

What Does This Mean For You?

The decline of the U.S. dollar will come with a heavy price for Americans. It will mean less demand for dollars by world trading partners. That means an even greater glut of the U.S. paper currency, which is already declining in value. It also means higher U.S. interest rates. The U.S. runs a highly indebted economy. For now, foreigners are happy to finance our debt as they need U.S. dollars to buy and sell critical global commodities.

What happens when that changes?

For the individual investor, these developments are largely out of your control. It is likely only a matter of time before the U.S. dollar has less and less prominence on the world stage. With that come higher interest rates and less purchasing power of the dollar.

As the U.S. paper money decreases in value, the true value of hard assets like physical gold become even clearer.

Gold is a good insurance policy and a portfolio diversifier. New research from the CPM Group shows that between 1968 and 2016 your portfolio would have performed best if you had 27-30% of your portfolio in physical gold.

You can’t control what will happen to the U.S. dollar’s status as a reserve currency. But, you can control what’s in your portfolio now.

If you are concerned about the impact of the changing global conditions on your investments, please share this article with your family and friends. They need to know too.

There are countless ways to invest. Some prefer to simply “buy the market” and choose an equity index fund. Others have a more risk-averse approach choosing instead to stick with more predictable fixed-income products. However, all these different styles should include a consideration of modern portfolio theory (MPT). The reason: MPT is an important concept that applies to virtually all investing styles, even those that include exposure to gold.

MPT represents the practice of seeking the highest possible return for a given level of risk. What makes the theory so intriguing is the way in views individual investments. MPT asserts that investors should not consider each component of their portfolio in isolation. Rather, each asset should be selected with consideration for how it impacts all the other holdings in the portfolio. MPT advocates for context.

However, engaging this concept can be difficult for gold investors because gold has so many singular characteristics that seem to have little relation to those of stocks, bonds and real estate. In fact, this uniqueness is the basis of its appeal for most investors. The question is: what allocation of gold is optimal in a portfolio? The answer, according to MPT, depends on what’s included in the rest of the portfolio. For the sake of simplicity, we can assume the other part of the portfolio is an S&P 500 index fund, a popular choice for today’s investors.

Revealing research from analysts offers some surprising answers to this question. In a segmented approach, the researchers looked at what gold/S&P 500 ratio would maximize the investor’s return over three periods of time, 2004-2014, since 1971 and since 1934.

To determine the optimal proportions, they had to consider what’s called the “efficiency frontier.” This is a curved line that sits on an “X,Y” axis. The points along the curve represent the highest possible return on an investment possible before the risk exposure becomes too great for that level of return.

The researchers found that from February 28, 2004 to February 28, 2014 a portfolio represented by only the S&P 500 would have earned an annualized return of 7.14%. Meanwhile, a portfolio of 100% gold would have delivered 12.84%. The diversified investor interested in holding both could have an optimized their balance with 68% gold and 32% S&P 500 offering an annualized return of 11.28%. Moreover, the annualized risk was actually lower than either holding all gold or all S&P 500. That’s the magic of MPT; you get an optimized return without unnecessary exposure to risk.

The researchers also determined that since 1971 the optimal gold allocation and S&P 500 allocation was 29% and 71% respectively. However, as the timeline expanded and they looked at the data since 1934 they found that investors choosing to hold both would have maximized their return with a portfolio of 41% gold and 59% S&P 500.

Eventually, the founder of MPT went on to earn the Nobel Prize in Economics. His work shows us how our conventional understanding of portfolio allocation can be flawed. While most people advocate for tempering their gold exposure, MPT and the hard figures behind the research show that investors can earn more with a larger investment in the metal.

Recent headlines have been a constant reminder of destabilized relations with North Korea. As CNN reports, “The country has fired 21 missiles during 14 tests since February.” This frequency signals a powerful drive by North Korea to gain attention as a nuclear capability on the world stage. “Less than six years into his reign, Kim Jong Un has tested more missiles than his father and grandfather combined,” continued the reporting.

This development has alarmed Americans fearful that North Korea leader Kim Jong Un will soon reach a level of engineering sophistication necessary to incite a war. Meanwhile, the United Nations Security Council adopted a new resolution from the U.S. to impose new sanctions on the country. The move aims to limit oil imports, ban textile exports and stop joint efforts with other nations. Investors are taking notice.

In recent weeks, we’ve seen financial markets move in step with rising and falling fears stoked by Kim Jong Un. At the same time, gold has seen a rise as investors turn the the “safe haven” characteristics of the currency. Simultaneously, cryptocurrencies have risen for similar reasons. These tandem movements have led some to compare the two investments. “Approximately $155 billion in cryptocurrencies are in circulation around the world right now. Bitcoin by itself is at $78 billion, which is close to the $90 billion invested in all gold ETFs,” remarked Forbes. Some investors are asking where their assets are best held, in bitcoin or gold?

Proponents of bitcoin often advocate that the “supply is mathematically metered” and therefore much more likely to grow in value over time whereas “the global gold supply has inflated steadily over the last hundred years,” according to authors at ARK Invest and Coinbase Inc. While these statements are true, they ignore an important counter argument. Bitcoin is still exposed to “counterparty risk.”

We have previously discussed counterparty risk at Blanchard. In short, counterparty risk is the risk inherent in an investment, like equities, that involves another party. If this group doesn’t hold up their end of the deal you, as the investor, can be left holding the bag. A publicly traded company (like Enron) might reveal themselves as fraudsters losing millions of shareholder investments. The technological marvel and novelty of bitcoin often leads investors to forget that with such an investment counterparty risk is very real.

However, if the transactions behind bitcoin are purely democratic, peer-to-peer, and on a shared, open ledger, how does counterparty risk enter the picture? This is where we return to North Korea’s saber rattling.

Bitcoin needs the internet to live, gold doesn’t. In a full military strike, infrastructures like the country’s internet are likely to be a primary target. Gold survives even without the supporting structure of technology.

Bitcoin, like the fiat currencies it eschews, is man-made. Technology is such a ubiquitous presence in our lives we often forget that it’s even present. Bitcoin investors would do well to temper their support for such a new asset that has not yet been tested against the leveling effect of warring nations especially in the nuclear age.

In the U.S. investors are often fixated on the S&P 500, the Nasdaq, or the Dow Jones. Few know of the Caixin Purchasing Managers Index (PMI). Even fewer pay attention to it, but they should. Why? It’s an important industrial metal indicator for one of the world’s economic powerhouses.

China’s Caixin Manufacturing Index is expressed as a number. The figure represents the outcome of a survey of small and mid-sized businesses in China and their appetite for industrial metals like copper and nickel. Why does this matter? China is the world’s largest metal consumer and the second largest economy on the planet and the number is rising.

In August the figure reached a six-month high of 51.6. This value beat all expectations signalling a more robust than expected Chinese economy. The head of strategy for Asia Pacific and emerging markets at Merrill Lynch remarked, “The world economy is in a pervasive growth mode where 85 percent of the countries that we track in the world have PMIs that are above 50. That’s very, very high and I expect that to continue.” China’s healthy demand comes not only from industrial expansion and favorable economic tailwinds but also renewed focus on environmental improvement.

Recently, China committed to the average concentration of airborne particles by over 15 percent a year in 28 northern cities. As Reuters explains, “China’s efforts to control pollution have often roiled the prices of steel, iron ore and coal with output routinely curtailed as a result of emergency smog regulations and inspection campaigns.”

While industrial metals are used for infrastructure projects the measurement has implications for gold. Part of this reason stems from the fact that a strong Caixin PMI figure represents a strong Chinese economy. With a strong Chinese economy comes reinvigorated gold purchases. This is evidenced by an 11% year-over-year increase in coin and bar demand led, in part, by China. These numbers represent not only a commitment to building bullion reserves but enabling growth within the tech sector. The World Gold Council reported that in Q2 of 2017 “Technology demand registered its third consecutive quarter of growth: up 2% to 81.3t. Growth in wireless charging and development of features that use LEDs boosted demand. New smartphone handsets supported chip production.”

Components like memory chips are in constant demand. Meanwhile, LEDs, PCBs, and bonding wire are all common electronic parts requiring some amount of gold for production. Simultaneously, “Research into new applications for gold continued to grow” reported The World Gold Council.

Industrial metals build the factories. The factories build components that require gold. This connection underscores the value of a deeper interpretation of the

Caixin Purchasing PMI. The latest measurement comes amid the fastest expansion seen in 37 months.

As the world continues to evolve into a global economy we’re witnessing the pervasive effects of China’s industrial growth. While supply and demand have enormous influence our “flat earth” economy is so interconnected that even China’s environmental policy can impact prices.

Stocks in the US finished last week mostly lower as investors braced for impact from Hurricane Irma in Florida and eyed a renewed missile threat from North Korea.

The S&P 500 booked a weekly loss of 0.58%, with nine of its 11 sectors trading in negative territory on Friday alone. Dow Jones Industrial Average futures declined 0.86% for the week. Trailing behind the pack was the Nasdaq 100, which closed 1.29% lower for the week.

Despite slowly declining stock prices, the real talk of Wall Street was the continuing weakness in the US dollar. The US Dollar Index, which measures the greenback against a basket of 6 rival currencies, closed 1.54% lower for the week. This stout weekly loss brings the US dollar’s 3-month performance to -5.53% and its 6-month performance to -10.36%, putting it in correction territory.

During Friday’s trading session, the US Dollar Index briefly touched 91.06, which put it on track for the largest weekly decline since May 19, according to data compiled by Factset.

Generally speaking, a weak US dollar is a direct benefit to commodities that are primarily traded in US dollars, because US dollar denominated commodities become cheaper to purchase for foreign investors. The extremely weak US dollar certainly aided gold last week, as gold soared to $1,362.40 per troy ounce during Friday’s trading; a level not seen in two years.

Similarly, spot silver traded above $18.10 per ounce for the first time in seventeen weeks, marking its third consecutive weekly gain.

Analysts noted last week that a strong rally in precious metals is not unusual amid lingering North Korean missile tensions and a string of unprecedented natural disasters in the US.

“Risk aversion is creeping back into the markets on Friday as traders prepare for what could be another troubling weekend in the continuing standoff between the U.S. and North Korea,” said Craig Erlam, senior market analyst at Oanda Corporation, a foreign exchange data company.

When looking at the market from a macro perspective, the US dollar is in free fall, North Korea is still loosely threatening to launch nuclear warheads, the stock market has lost most of its momentum, and gold is absolutely soaring.

Moreover, as earnings season is officially over, there seems to be a lack of fundamental bullish market events that have the possibility of pushing the market higher in the next couple of months.

With this said, all of the ingredients seem to be present for a big spike in precious metals. Natural disasters, potential nuclear war, a flat stock market running on fumes, and Washington in political deadlock are all significant factors to market participants around the world.

Additionally, gold analysts noted last week that many institutional investors are not heavily invested in risk-averse assets.

“Wall Street is heavily under invested in precious metals, and even a little bit of capital flowing into these markets can spark a much larger price run,” said Peter Spina, president and CEO of precious-metals data firm Gold Seek.

This is truly fantastic news to gold bulls, because institutional investors on the Street arguably have the most influence on market prices. And if even one of the current issues facing the market takes a turn for the worse, an institutional flight to safety could easily send gold soaring even more than it already has.

Stocks in the US closed out the final week of August with a bang. Major stock indices rose the most on a weekly basis for all of 2017 amid signs of a strengthening economy and favorable economic data.

Although stocks initially sold off on Tuesday of last week, markets quickly rebounded on an intraday basis and managed to close positive for the entire week.

The Nasdaq Composite Index had its best weekly rise of the whole year as it finished with a weekly gain of 2.7%. Most of the Nasdaq’s gains came from the biotech sector. The Nasdaq Biotechnology Index finished the week nearly 8% higher following groundbreaking FDA approvals and bullish industry merger news involving one of the largest biotech companies, Gilead Sciences (GLD).

Following in the footsteps of the Nasdaq, the S&P 500 closed the week with a nice gain of 1.4%. The Dow Jones Industrial Average, however, trailed behind with a weekly gain of 0.8%.

Many analysts were impressed yet equally cautious with last week’s gains because of the extremely low liquidity ahead of Labor Day weekend.

“It’s hard to draw any real conclusions on the activity in the market this week because volumes are just so low,” said Art Hogan, chief market strategist at Wunderlich. He went on to note how “you could basically see volume decrease by the hour,” when referring to last week’s gains coupled unusually light trading volume.

Since economic data was the primary focus of last week’s market moves, gains weren’t just limited to stocks.

Although the hiring pace slowed and the unemployment rate rose slightly, job wages rose less than expected. According to the Labor Department, hourly average earnings ticked up just 0.1% from the prior month. Market participants were expecting a wage increase of 0.2%.

Slower than expected wage growth is particularly bullish for stocks, but it’s also bullish for precious metals. This is primarily due to the fact that wages are still rising at what seems to be a perfect rate.

Continued wage growth will likely cause more consumer spending, which is a direct boon to the economy, but this level of low wage growth may alter the Federal Reserve’s rate-hike agenda.

“It’s right now in the sweet spot where it’s enough to drive consumption but not enough to lead inflation jumping up so the Fed feels it needs to be more aggressive. It’s also not affecting profit margins yet,” said Sameer Samana a global quantitative analysts at Wells Fargo Investment Institute.

Lingering nuclear drama from North Korea and a plausible delayed rate-hike path was enough to send gold for September delivery soaring 2.5% for the week; it’s largest weekly rise in well over a year. September gold futures traded as high as $1,334.5 per ounce on Friday before closing at $1,329.90 to make a new YTD high.

Besides the perfect amount of wage growth, other economic data also points to a likely delayed rate hike. August’s job creation of 156,000 with an unemployment rate of 4.4% is leading many analysts to speculate that the Fed might actually hold off on rising rates another time in 2017.

The current consensus is that the Fed will hike rates one more time in 2017. However, if this doesn’t happen due to economic data that has the perfect balance of helping the overall economy but causing the Fed to hold off on interest hikes, it will likely be a direct boon to both stocks and everybody’s favorite precious metal – gold.