Look What’s Lighting a Fire Under Gold

Posted On Mar 7, 2018 By Dave Gonigam

  • A curious, dare we say suspicious, move in gold
  • Now that a trade war is on, Rickards revises his 2018 gold target
  • The market’s never seen a “pot stock” like this before
  • Corporate America’s “live for today” mindset, aided by debt
  • Donald Trump’s steel beams and Robinson Crusoe’s wood plank
  • A good problem to have, and how The 5 is dealing with it

“The elements of an escalating trade war are in place,” Jim Rickards wrote his Rickards’ Gold Speculator readers yesterday afternoon.

“Once markets come to this realization, gold will break out above the recent $1,365 per ounce high and continue its march toward the $1,450 per ounce level, which I expect later this year.”

Jim’s note hit readers’ inboxes about 3:00 p.m. EST yesterday. Note well what happened as the afternoon wore into evening…

Spot Gold Price

The chart requires a little explanation. Gold trades electronically in New York nearly 24 hours a day Monday–Friday… except for a brief window when trading is closed between 5:15–6:00 p.m. Eastern time. That’s the little ruler-flat line on the chart.

It was during that window when word emerged from Washington that Gary Cohn — leader of the anti-trade war faction within the White House — is quitting as director of the National Economic Council. Thus the vertical $5 bump you see on the chart. Obviously it didn’t last… but someone surely made money on some lightning-quick trades.

A cynic might wonder if Cohn timed the leak during that window to benefit his buddies back at Goldman Sachs. On the other hand, the folks who pay closest attention to the manipulation of precious-metals futures say it’s JPMorgan Chase that calls the shots.

Anyway, Cohn is history and so apparently is any influence by his fellow “globalists” when it comes to Trump’s trade policy.

The MSM is verklempt — to wit, ABC’s chief White House correspondent…

Tweet

Oy. “Widely respected by whom?” tweeted back our favorite political reporter Michael Tracey.

“Notice how it’s just taken for granted that everybody shares in the press corps’ apparent reverence for the Goldman Sachs guy… No Goldman alum at the helm of U.S. economic policy would be the most dangerous norm violation of all. Whither our democratic institutions to rescue us from this peril?”

Heh…

Yesterday we mentioned how Cohn had called a meeting at the White House for tomorrow, where he’d entertain CEOs from companies that would be hurt by higher prices of imported steel if tariffs came into effect. That meeting is now off.

Pro-Trump but anti-protectionist conservatives who hoped they could bring Trump around to their side have been frozen out of the White House. “We’d like to try to get in to see him and try to talk him out of this or at least ramp it down,” The Heritage Foundation’s Stephen Moore said on Fox Business last Friday. “Whether it’s going to happen or not is unclear.”

Uhhh… it’s pretty clear by now, wethinks.

“Gold and gold stocks wiggled with each twist in the trade war story,” Jim Rickards says of recent days.

Last Thursday, “stocks fell sharply when the steel and aluminum tariffs were first announced by Trump. Gold rallied from the low end of the recent trading range on a safe-haven trade.

“Then by this past Monday the stock market decided the trade war fears were overblown. Inside the Beltway, conventional wisdom said that Trump would not follow through on his threats, that exemptions would be issued to Canada and Mexico and that even the tariffs on China, South Korea and Europe would be mitigated somehow. Gold pulled back a bit on this ‘all clear’ signal from stocks.

“Yet,” Jim wrote hours before the announcement of Cohn’s departure, “the conventional wisdom is wrong. Trump may give Canada and Mexico more time in the context of the ongoing NAFTA negotiations, but he expects results. If Trump cannot get concessions on NAFTA, the steel tariffs will apply with full force to Canada and Mexico. There’s almost no chance that China, South Korea and Europe will receive any exemptions.”

As the trade war escalates, deep-pocketed investors will seek out gold as a safe haven. Thus Jim’s outlook for a $100-plus jump to $1,450 before year-end. “If you do not already have a full allocation to physical gold and gold mining shares,” he says, “the time to buy is now, before the next leg of the new gold bull market begins.”

[For the speculative-minded only: As you know, Jim is down on bitcoin. Hates it. Says it’s destined for a 95% or better collapse. But recently, Jim found a cryptocurrency he actually likes. It’s the first one that meets all five criteria of a rigorous evaluation he applies to the crypto markets.

Best of all, this coin is dirt-cheap — so you can load up on it without putting huge amounts of capital at risk. Jim figures you could make 10 times your money this year — and that’s just for starters. See for yourself right here.]

Stock traders aren’t freaking out — not too much, anyway — over Cohn’s departure.

The Dow opened down 300 points this morning, but as we write that loss has been trimmed to barely 100. Heck, the Russell 2000 index — made up of small-cap stocks that don’t rely heavily on global trade — is up a quarter percent.

Gold has drifted back to $1,327. Crude is down a bit but still above $62 a barrel. Bitcoin has slipped back below $11,000.

As irony would have it, the major economic number of the day is the trade deficit — which grew bigly in January to $56.6 billion. That’s higher than the highest guess among dozens of economists polled by Bloomberg. Imports were nearly unchanged, but exports fell sharply.

“Exports are going to have to pick up in February and March,” says Econoday. “Otherwise, first-quarter GDP will be fighting uphill against an accelerating trade deficit.”

One pot-stock company just made history: “This marks the first time ever a pot company’s stock is as easy to buy as Coca-Cola, GE or Apple,” says our technology authority Ray Blanco.

A week ago yesterday, Canadian medical-marijuana company Cronos Group began trading on the Nasdaq.

“The SEC would have gone through a very thorough review/vetting process before allowing a cannabis company to list on a major U.S. exchange,” observes one analyst at Beacon Securities.

“The main reason the SEC finds Cronos compliant is because they only do business in countries where marijuana is federally legal,” Ray says.

Cronos is one of Canada’s largest medical-marijuana companies, with a diverse group of holdings that cultivate marijuana and manufacture cannabinoid oil. The company also has international partners in Germany, Israel and Australia.

As soon as the U.S. reverses federal prohibition of marijuana, Cronos is ready. “When it comes to U.S. market entry,” says CEO Mike Gorenstein at Marijuana Business Daily, “the regulatory landscape can change a lot, and we feel it is heading in the right direction.

“We’ll be opportunistic and aggressive.”

For investors interested in the nascent pot industry: “You can now access a major pot stock as easily as you would any other mainstream Wall Street play,” Ray says.

Cronos Group (CRON) — with a market cap of $1.6 billion — opened trading at $8.24 and sits today at $9.68 per share.

“Not a bad first week,” Ray says. “Considering most stocks see significant short-term volatility after listing, Cronos’ first week is a strong sign of good things to come.

“I’m not saying run out and buy Cronos today, but it’s a stock worth watching.”

And “securing a Nasdaq listing is not only a huge step forward for Cronos,” says Ray. “It’s a huge step for the entire industry.” (If you want a pot-related recommendation Ray says you can act on right now, check this out.)

“Message to newcomer: Stop whining, the world ain’t fair, get used to it,” a reader writes in response to yesterday’s mailbag.

“If the newcomer is so easily offended, perhaps they should return to their safe space in whatever academic (sarc) institution they have occupied until now and leave the real world to the grownups.

“I know you won’t print this, but I had to say it anyway.”

The 5: We are running it because it helps spotlight a conundrum your editor’s been wrestling with for some time now.

Our marketing folk have done a crackerjack job finding new customers of late. And because every new subscriber to an Agora Financial publication gets The 5 as a free bonus, our readership has doubled in 18 months.

At the risk of generalizing, the newcomers aren’t the same kind of customer as grizzled veteran newsletter subscribers — i.e., folks who came upon the financial publishing biz via direct-mail advertising 20 years ago, or even The Daily Reckoning 10 years ago. They’re not as hip to our business model… and in some cases they’re new to the world of investing.

That’s not to say they’re ignorant; they just don’t have the same kind of knowledge base we once took for granted with our “typical” customer.

Now, keep in mind that a good writer in our trade doesn’t “write to” a mass audience; he or she writes to a single individual, to keep the communication as personal and intimate as possible. (It’s why I wouldn’t write, for instance, “Here’s the real story, folks,” or “Here’s the real story, everyone.” It’s simply, “Here’s the real story.”)

But you see what I’m up against, balancing the different desires of different people.

I’m still figuring it out. But if you’re one of those grizzled veterans, you can rest assured we’re not going to cut back on the snark, or on our contempt for politicians of all stripes or on the occasional foray into vinyl versus CDs — well, that was a strange one, come to think of it. But it was inspired by a business story, so it’s fair game!

“The scariest part about Corporate America’s bias toward living for today — rather than creating new wealth — is that it has been fueled with so much debt,” a reader writes after our big topic yesterday.

“Unfortunately, households and governments seem to be equally guilty of this as well.

“It would be one thing if corporations were the only ones shirking their responsibility to invest in the future (and I’m not making excuses for them). But it’s all of us. This easy-money policy has created a three-headed monster where we’ve mortgaged our future beyond repair.

“Anyway, the buybacks, dividends and M&A might not be such a problem if they were (a) offset by more capex and R&D and (b) funded organically. But they’re not. This ‘everything bubble’ is now a freakish burden of debt everywhere you look.

“IMO, we’re kidding ourselves if we think we’ll ever pay it off without a massive reset.”

The 5: In one sense, you can’t blame the companies for doing what they’re doing in a low-interest-rate world. If you were Intel in 2012, it made total sense to borrow $6 billion at rates as low as 1.35%… and use the proceeds to buy back shares paying a dividend of 4.3%. Not to do so would amount to criminal negligence!

But by the summer of 2016, the borrowing-for-buybacks practice was already getting out of hand… and corporate debt as a percentage of GDP was back to highs that accompanied the dot-com bust and the Panic of 2008.

That’s not reason to hoist the crash alert flag yet… but if interest rates continue to climb, refinancing that debt’s going to become a mighty tall order.

On the subject of a trade war, a reader writes: “To pundits who ask what if China decides to look for other sources for their imports, I ask what if we do the same?

“Who draws the short end of the stick in such a scenario? China.

“If only 30% of our steel is imported, then the panic about a ruinous price impact is overblown. Besides, most is easily absorbed by businesses due to the massive tax cut.

“In the long run, this initiative, mostly a shot across the bow to move from talking to action, is positive to the U.S. economy.”

The 5: We hark back to the Robinson Crusoe example described by the French political economist Frédéric Bastiat: Crusoe is building his cabin. He has no saw, only an ax. He’s knocking himself out trying to make planks of wood just the right size. One day, a plank washes ashore, and by some miracle it’s already the perfect size and shape for what he needs.

Crusoe flings the plank back into the sea. If he used it for his cabin, he’d have less work to do.

“It is nonetheless the same line of reasoning that is adopted by every nation that protects itself by interdicting the entry of foreign goods,” wrote Bastiat. “It kicks back the plank that is offered it in exchange for a little labor, in order to give itself more labor.”

For further perspective, we turn to a piece this week by Agora founder Bill Bonner. The whole thing’s a gem, but here’s the most relevant section…

“Until the 1970s, America was the world’s leading exporter. Then, in a few years, it became the world’s leading importer. From having the biggest trade surplus, it soon had the biggest deficit.

“Why? Did Americans suddenly forget how to make things? Did our businessmen and entrepreneurs lose interest in making money? Were they incapable of making a good deal?

“What really happened was that the money system changed. In 1971, the Nixon administration created a new dollar by removing the last vestiges of gold backing.

“Instead of making stuff at home, the U.S. began taking it from abroad, and paying for it with its new credit money.

“Instead of being a manufacturing powerhouse, it became a consumer’s EZ credit paradise. And instead of favoring real jobs with good wages on Main Street, the economy was distorted by overempowered Ph.D.s at the Fed, overpaid scalawags on Wall Street and hoggish scoundrels in both parties wallowing in an overblown, overreaching and overindebted swamp in Washington.

“But the president won’t bother to think about it. And the Deep State wouldn’t permit him to do anything about it even if he did.”

We are so screwed…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Speaking of Goldman Sachs… this morning Alan Knuckman urged his 42-Day Retirement Plan readers to sell half of the GS call options he recommended only two days ago.

Once the order is filled, they should have a quick 50% gain.

Of Alan’s closed trades since we launched the 42-Day Retirement Plan five months ago… he’s 23 for 23.

But the biggest gains of all are likely to be had starting only a few weeks from now… as you’ll see when you click here.


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