We would characterize the tenor of gold markets during the week of 4/8 as modestly disappointing. “Modestly,” because spot gold traded essentially flat, declining 0.1% to $1,290.35, in concert with flat 10-year Treasury yields (down 1 basis point). “Disappointing,” because gold’s mid-week surge to $1,310.69 petered out by week’s end, despite a (weekly) decline of 0.5% for the U.S. Dollar Index (DXY).
On the bright side, physical demand in global gold markets remained strong, with measured A.M. Indian ex-duty premiums (see Paper Tiger) averaging $8.92 for the week. As the gold price has oscillated around the high-profile $1,300 level throughout 2019, it has become increasingly apparent that strong demand from Eastern (physical) markets below $1,300 is roughly offsetting a lack of urgency in Western (paper) markets above that price point. Pure and simple, potential new highs for the S&P 500 Index are always tough competition for gold enthusiasm in Western asset markets.
Because relevant gold fundamentals are predominantly long-term in nature, aligning their incremental progress with short-term price movements is always a frustrating endeavor. As with most long-term investment theses, gold investors can never confuse “inevitable” with “imminent.” Along these lines in recent weeks, gold has remained essentially range bound despite a backdrop of increasingly dovish official monetary signals. To date, investors have judged equities to be the default beneficiary of a synchronized global central bank pivot away from tightening bias. The Teflon buoyancy of U.S. equities has been especially vexing to us because the current episode of Fed policy softening appears to be developing into something far more dramatic than a traditional rate-hike swivel.
On 4/9, the Fed kicked off a telegraphed year of self-examination with Vice-Chair Richard Clarida’s keynote speech at the Minneapolis Fed entitled The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices. Mr. Clarida’s three-part query focused on whether the Fed should a) temporarily permit higher-than-2% inflation (to compensate for prior years below the Fed’s target), b) expand its toolkit to boost the U.S. economy, and c) reassess appropriate transparency in public communication.
Given outstanding global debt levels, we are willing to concede that the Fed should logically consider its congressional mandate for stable prices (0% inflation) a bit too-close-for-comfort to actual deflation. But are investors now expected to accept that inflation even higher than the Fed’s self-appointed 2% target will also be a good thing? Cursory review of toolkit additions now rumored for Fed consideration should make any investor queasy. Prior to joining the Fed, Mr. Clarida had espoused capping long-term Treasury rates a la Japan, a concept now squarely under FOMC consideration. The panoply of academic options now being projected into FOMC discussion apparently includes direct Fed lending to state and local governments, as well as households and small businesses. The Fed might also endeavor to depreciate the U.S. dollar through purchases of foreign currencies or hard assets such as real estate or precious metals (why not—other central banks are doing it).
Figure 1: Richard Clarida’s Proprietary Formula for Labor’s Share of U.S. National Income (4/03/1952 - 4/15/2019)
Source: U.S. Department of Labor, Bureau of Economic Analysis, Bloomberg
The Fed even appears to be considering income equality for addition to its self-appointed list of responsibilities. One of the panel discussions at the Fed’s 4/9 Minneapolis policy confab explored impacts of monetary policy on workers’ participation in GDP growth. During prior employment as Global Strategic Advisor to PIMCO, Mr. Clarida had developed a personal, proprietary model to estimate “the share of labor compensation in national income.” Mr. Clarida’s formula is 100 x (Household and Nonprofit Employee Compensation + 50% of Proprietor Income) / Ratio of GDP to National Income). As Bloomberg has memorialized in Figure 1 (4/15), “Rich’s Ratio” of labor participation in national income since the financial crisis has woefully lagged prior economic expansions. Governor Clarida beamed with pride from the Minneapolis audience as his proprietary formula was referenced, “I’ve been thinking for several years about this...so I’m really delighted that folks are thinking about it now.”
Figure 2: Federal Reserve Regional Bank Presidents (12/23/1913)
Photo by Harris & Ewing
Truth be told, we are encouraged that Fed stewards may finally be recognizing the contributions of QE and ZIRP to escalating imbalances in the U.S. financial system. True to form, however, our contemporary monetary mandarins, rather than scaling back their interference in free markets, appear to be focused on widening their toolkit to address economic problems at least partially of their own making. We would assume that original Regional Bank Presidents of the Federal Reserve, pictured in Figure 2, would hardly have approved. In due course, we expect gold to concur.
Past performance is no guarantee of future results. You cannot invest directly in an index. This content is intended solely for the use of Sprott Asset Management USA, Inc. for use with investors and interested parties. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this commentary are those of the presenter and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.
This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to sprott.com. The opinions, estimates and projections (“information”) contained within this content are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.
The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.
© 2020 Sprott Inc. All rights reserved.
You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering Sprott ETFs. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETFs, you will be directed to the ALPS/Sprott website at SprottETFs.com.Continue to Sprott Exchange Traded Funds
You are now leaving Sprott.com and entering a linked website. Sprott Asset Management is a sub-advisor for several mutual funds on behalf of Ninepoint Partners. For details on these funds, you will be directed to the Ninepoint Partners website at ninepoint.com.Continue to Ninepoint Partners
You are now leaving sprott.com and linking to a third-party website. Sprott assumes no liability for the content of this linked site and the material it presents, including without limitation, the accuracy, subject matter, quality or timeliness of the content. The fact that this link has been provided does not constitute an endorsement, authorization, sponsorship by or affiliation with Sprott with respect to the linked site or the material.Continue