The Axis of Gold

Posted On May 24, 2018 By Dave Gonigam

  • Trump-Kim talks scrapped, gold jumps
  • How U.S. withdrawal from the Iran nuke deal could turbocharge gold
  • Dow’s losses from summit cancellation can’t overcome gains from Fed
  • Life expectancy falls, Social Security’s sustainability rises
  • Provocative billboard gets attention, but does it get customers?
  • Bitcoin takes a hit from the feds… auto imports as a “national security” issue… will California regulators strangle the legal-cannabis goose?… and more!

Well, well: All Donald Trump had to do was cancel his summit with North Korea’s Kim Jong Un and gold is back above $1,300.

Usually we’re suspicious of simple cause-and-effect explanations for day-to-day market movements… but the news broke around 9:45 a.m. EDT and gold instantly jumped about 1%. That’s classic safe-haven buying in the face of the proverbial “geopolitical tensions.”

But this morning, it’s another of Washington’s bêtes noires that’s on our mind, and a much longer-term driver of gold.

In short, Trump walking away from the Iran nuclear deal has the potential to drive gold to multiyear highs.

How so? “Trump’s new sanctions on Iran may be the last straw in the world’s willingness to tolerate what is perceived as U.S. bullying through the use of dollar-based sanctions,” says Jim Rickards.

For a couple of weeks, we’ve been documenting the phenomenon Jim describes. It’s captured nicely in this this pithy statement by the French finance minister: “The international reach of U.S. sanctions makes the U.S. the economic policeman of the planet, and that is not acceptable.” (A few days later, he described Europe’s relationship to Washington as that of “vassals.”)

The Europeans might yet buckle under the pressure… but China and Russia, also parties to the Iran deal, are another matter.

Jim directs your attention to this chart of the leading customers for Iranian oil. China’s way out in front.

china-needs-oil

“China’s need for imported oil is huge, and Iran’s need for hard currency from its oil exports is existential,” says Jim. “If the U.S. makes it impossible for Iran to pay or receive dollars or other hard currencies for its oil exports and machinery imports, Iran will have to resort to other payment channels. China would be willing to pay Iran in yuan, but Iran’s appetite for yuan is limited.

“An obvious solution is for Iran and China to settle their balance of payments accounts in gold,” Jim goes on.

“China is a gold power with official reserves of about 1,800 tons, and a much higher amount of ‘off the books’ gold not revealed publicly. China is also the world’s largest gold producer, with mining output of about 450 tons per year.

“Russia, Turkey and other nations are ready to join Iran and China in a new Axis of Gold designed to create a robust multilateral payments system that is free of hacking, tracking or interdiction by the U.S., and free of U.S. dollars. This gold-based payments system will dilute and ultimately eliminate the impact of U.S. dollar-based sanctions.”

Reminder: Russia’s gold reserves as a percentage of its economy are the biggest in the world. And Turkey already has a history, chronicled here in The 5, of sidestepping anti-Iran sanctions by paying Iran in gold for natural gas supplies.

“The Axis of Gold creates huge embedded demand for gold as the Axis nations build out an alternative to the dollar payments system.”

As noted here yesterday, Jim’s looking at $1,400 gold by late summer or fall. But longer term, the Axis of Gold could drive the price far, far higher. Remember, the dollar price of gold is by and large a measure of confidence in the dollar — or lack thereof.

The Dow opened flat for the day, but at last check it’s down 250 points after Vice President Pence and National Security Adviser John Bolton sabotaged the Trump-Kim summit.

Really, there’s no other way to look at it. Both of them made noises in recent days about how Libya would be a model for North Korean disarmament.

A quick refresher: In 2003, Libyan strongman Muammar Gaddafi gave up a decades-old nuclear weapons program. He spent a few years on good terms with the West — until the Arab Spring erupted in 2011 and spread to Libya. With Hillary Clinton leading the charge, the Obama administration decided regime change was the way to go. About six months into the rebellion, opposition forces captured Gaddafi, sodomized him with a bayonet and shot him dead.

And this is what Pence and Bolton think would be a fine template for Kim Jong Un to follow.

There’s some context for the “tremendous anger and open hostility” that prompted Trump to cancel the summit. You won’t hear it from the cable-TV pundits banging the “Trump got played!” drum.

Gee, and the Dow’s fall today more than offsets its gains late yesterday fueled by the Federal Reserve.

The Fed issued the minutes from its meeting three weeks earlier. As a reminder, Fed “minutes” are not like the minutes from your local sewer board; they’re not an objective record of who said what. They’re a carefully crafted document designed to telegraph a message to the markets.

And in this case, the message is that the Fed might be OK if inflation runs hotter than its 2% target for a while. Or in Fed-speak, “A temporary period of inflation modestly above 2% would be consistent with the committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations.”

In the back-and-forth guessing about whether the Fed will raise interest rates three or four times this year, the betting is now back to three. “The punch bowl just got refilled,” quips Alan Knuckman, our man in the Chicago options trading pits.

Not coincidentally, the dollar index is retreating from six-month highs reached right before the minutes’ release yesterday.

Also weighing on the markets today — a new dimension to the trade wars.

This morning’s Wall Street Journal has a front-page story about the White House looking into tariffs of up to 25% on imported cars and trucks. They would be justified on national security grounds under the 1962 Trade Expansion Act, just like the steel and aluminum tariffs imposed in March.

“Unlike steel and aluminum, ordinary cars aren’t widely used by the U.S. Armed Forces, potentially complicating the administration’s efforts to link their imports to national security,” says the Journal piece — evidently written by someone with the world’s driest sense of humor.

The follow-up paragraph: “Dan DiMicco, the former Nucor Corp. chief executive who advises the administration on trade, said Wednesday that cars by themselves aren’t central to national security, but he said that the broader manufacturing supply chain that produces cars is important for security.”

Hmmm… Switzerland produces neither steel nor autos in meaningful quantities but has kept foreign invaders at bay for centuries. Just sayin’…

Bitcoin has tumbled to six-week lows in the last 24 hours — coinciding with word the feds are looking into alleged price manipulation.

Bloomberg, citing anonymous sources, says the Justice Department has opened a criminal investigation. “The investigation is focused on illegal practices that can influence prices — such as spoofing, or flooding the market with fake orders to trick other traders into buying or selling.”

At last check, bitcoin has bounced back a bit to $7,538.

For the record: The Social Security program just bought itself a little more time, as it appears longevity in the United States has now declined three straight years.

You’ll have to pardon our somewhat ghoulish take… but since 2014 we’ve been spotlighting a theme we call “the awful way Social Security might be ‘saved.’

The gist of it is this: Growing numbers of better-educated, higher-earning Americans are working well past retirement age… and continuing to pay into the system. Meanwhile, less-educated lower earners are dying off in growing numbers from suicide and substance abuse, often years before they collect a dime in benefits.

The Centers for Disease Control and Prevention is still crunching the 2017 numbers, but preliminary estimates show higher death rates from Alzheimer’s, diabetes, flu and pneumonia. The figures for overdoses and suicides aren’t yet in… but the trajectory isn’t looking good.

The only other three-year decline in U.S. longevity occurred from 1916–18 — which coincided with a global flu pandemic wrought by World War I.

From Alabama, a strange way to attract customers to a gym…

alabama-gym

Scott Campbell, owner of Pell City Fitness in Pell City, Alabama, put up this billboard on Tuesday, May 15.

He figured it would get a rise out of people on social media, and it did. But by Thursday it also attracted code enforcement. Campbell was informed the sign had to come down, although the city didn’t inform him what violation he’d committed.

With that, Campbell doubled down — posting a Facebook video to rally support. “They’ve given me til 5 o’clock tomorrow evening to take it down. So it’s going to stay up til 4:50 tomorrow afternoon.”

From The Washington Post: “On Friday, a day after the video was posted, Campbell said city manager Brian Muenger called to say the issue involved a necessary permit, which Campbell did not have. He filed the paperwork Monday, and said no fine has been issued.”

The city manager clarified there was no objection to the content of the sign.

But has it brought in new business? The Post is vague on that question: “The sign is still up, Campbell said, and has sparked some interest from potential clients for the gym, which opened last July. That was the entire point.”

“I am indignant,” writes an indignant reader after yesterday’s 5, “you would insinuate Barney Frank’s statement that (giggle) $50 billion was too low as though (snicker) he would ever try to financially gain from a change in law.

“Mr. Frank was a dedicated (guffaw!) public servant and his character should never be sullied (tee-hee) by cynical attacks on his… sorry, laughing too hard to finish.”

The 5: Heh.

Curiously, the other guy whose name is on the original law, former Sen. Chris Dodd (D-Connecticut), has been silent.

Then again, Dodd’s wielding his might a little more quietly these days — having joined a K Street lobbying firm as senior counsel in January.

Just curious: How did Dodd manage to exit his gig as CEO of the Motion Picture Association of America last year only weeks before the Harvey Weinstein scandal blew wide open and #MeToo started taking down one Hollywood legend after another? The timing is freaking uncanny.

“West Coast marijuana meltdown,” says the subject line of our next entry.

“I pointed out earlier this spring the wholesale price of marijuana the dispensaries will pay the growers fell from $1,500 to $500 in one year in Oregon,” the reader writes.

“Now comes a heartbreaking report the tax revenues from recreational marijuana sales in California came in at only $33.6 million for the first quarter of the year — well under the forecast of $175 million.

“And now that everyone can grow six plants for personal recreational use in California, come November when the first recreational crop is harvested by millions of backyard growers they will be giving it away to family and friends like tomatoes and chicken eggs from their backyard garden. That is what has been happening in Oregon for two years now.”

The 5: Have to say, we saw this coming a year ago when we mentioned that California was planning not only a 15% sales tax on cannabis but also a flat $9.25 per ounce tax on flowers and $2.75 per ounce on leaves — no matter the market price!

Fast-forward to early April, when Reason reported that “Cannabis entrepreneurs are anxious about the future of the legal market under California’s highly regulated and highly taxed system. Under these conditions, some industry insiders expect the black market will continue to thrive.”

Which sets the context for the latest development spotlighted by our reader. New Frontier Data is the name of the firm that issued the sales estimate. Says CEO Giadha Aguirre de Carcer, “It is quite clear that the new adult use regulations have made it more difficult than anticipated for the legal market to get established and for consumers to transition to from the illicit market.”

In addition, “Given the number of local government bans on cannabis businesses, we are not seeing the same kind of conversion rates that we have seen in other legal markets.”

Taxes and regulations — they’ll get you every time.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Don’t get the wrong idea. California’s regulatory hurdles can’t kill the “budding” legal pot industry. Investment opportunities abound, events are moving quickly in Washington, D.C., and California bureaucrats are realizing they’ve gone too far. More about all of that tomorrow.


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