The Global Ticking Debt Bomb Underscores the Need for Gold
Frank Holmes: Since its recent high of $1,370 an ounce at the end of January, the price of gold has shaved off about $40 as Treasury yields continue to head north. The yield on the benchmark 10-year T-note is looking to cross above 3 percent, which would be the first time since early January 2014. This is a short-term headwind for the yellow metal that could reverse if inflation continues to rise more than expected, as it did in January. The consumer price index (CPI) increased 0.5 percent from the previous month, against forecasts of 0.3 percent.
Looking more long-term, there are mounting risks involving debt that make gold appear very attractive right now as a safe haven and portfolio diversifier.
A new report from the Federal Reserve Bank of New York indicates that U.S. household debt rose to a new all-time high in the last quarter of 2017. American families now owe a jaw-dropping $13.15 trillion, or roughly $40,000 per man, woman and child. That’s up 1.5 percent, or $193 billion, from the previous quarter, and up 8.5 percent from the high during the financial crisis.
Thirteen trillion is a head-spinning sum, but we can’t place all the blame on borrowers. For nearly a decade now, the Fed has kept interest rates at historically low levels, flooding the economy with cheap money.
The good news is the rate of delinquency for all debt has fallen to prerecession levels.
But there’s one area that’s worsened since then—student debt, which now stands at nearly $1.4 trillion, the largest type of lending second only to mortgages. At the start of this year, about 11 percent of student debt was considered delinquent, or more than 90 days past due.
A Global Credit Binge
Americans aren’t the only ones loading up on debt, though. Last month, the Institute of International Finance (IIF) reported that global debt rose to a record $233 trillion in the third quarter, up $16 trillion in only nine months.
As much as $44 trillion is owed by households alone. And in some countries—most notably Switzerland, Australia, Norway and Canada—the amount of debt families have on their balance sheets is now greater than what Americans owed soon before the housing bubble.
All of this news follows an October 2017 report from the International Monetary Fund (IMF) warning that leveraging in G-20 nonfinancial sectors—governments, nonfinancial companies and households—had exceeded pre-crisis levels, presenting “rising financial vulnerabilities.”
Combined with overstretched asset valuations, these debt loads “could undermine market confidence in the future, with repercussions that could put global growth at risk,” the IMF writes.
Time to Add to Your Gold Exposure?
I see this growing debt bomb as just the latest sign that investors might want to consider adding to their gold exposure. The yellow metal has been sought as a safe haven during times of economic and systemic market risk, and I frequently recommend a 10 percent weighting, with 5 percent in gold bullion or jewelry and the other 5 percent in high-quality gold stocks, mutual funds and ETFs.
Since the Fed raised rates in December, the price of gold has been trending up, as it did in the previous two years following December rate hikes. A declining U.S. dollar continues to support the metal, which has consistently been hitting higher highs and higher lows so far this year.
The greenback is expected to remain lower for longer, with CLSA writing in a note to investors on Tuesday that it “is a casualty of strong risk appetite that has characterized financial markets since the start of the year.”
As for the monumental debt load, I can’t say when or whether it might burst. All I can say with certainty is that the bigger it gets, the greater the risk it presents. This, in turn, underscores the need for a reliable safe haven investment, which I believe gold is.
The Gold Market
This week spot gold closed at $1,328.75, down $18.35 per ounce, or 1.36 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 2.85 percent. Junior-tiered stocks outperformed seniors for the week, as the SP/TSX Venture Index came in at 0.49 percent. The U.S. Trade-Weighted Dollar strengthened this week and rose 0.88 percent.
- The best performing metal this week was palladium, up 0.11 percent as hedge funds boosted their net bullish in the metal. Gold traders are split between bullish and bearish on the yellow metal after the U.S. dollar rose this week. In the prior week traders were bullish and positive sentiment sent $529 million into the VanEck Gold Miners ETF.
- According to Haywood Cheung Tak-hay, president of the Chinese Gold and Silver Exchange Society, China is in talks with Singapore, Myanmar and Dubai to set up a gold commodity corridor to promote gold trading using yuan as the main currency. This is part of Beijing’s “One Belt, One Road Initiative” and would use Hong Kong as a base for the exchange.
- The Russian Central Bank surpassed China to become the fifth-largest sovereign holder of gold, reports Bloomberg. Russia increased its holdings to 1,857 tons, topping China’s reported 1,843; however, China has not officially reported its holdings since October 2016. Switzerland’s gold imports increased 26 percent in January to 204.5 tons, the highest amount since last September with the majority exported to China and Hong Kong.
- The worst performing metal this week was gold, down 1.36 percent. Gold fell this week on the heels of a stronger U.S. dollar. UBS strategist Joni Teves writes that gold continues to be sensitive to dollar moves and that equities bouncing back have hurt the yellow metal some. Teves said that gold’s year-to-date performance “has to do with the dollar falling as much as 4 percent so far this year, and being down as much as 15 percent since early 2017.”
- The gold price fell five consecutive days, the longest stretch since last June after the Federal Reserve meeting minutes from January showed increasing confidence in economic growth, reports Bloomberg. Bullion for immediate delivery fell to $1,321 on Thursday, the lowest since February 14.
- Several gold companies experienced losses in the fourth quarter last year according to Bloomberg First World. Alamos Gold’s fourth quarter operating revenue missed the average analyst estimate, coming in at $161.7 million versus estimates of $165 million. Iamgold reported an unexpected fourth quarter loss with a loss per share of 3 cents while estimates were for a loss of 2 cents per share. Torex Gold also reported losses per share of 25 cents versus the estimate of a 12 cent loss per share.
- Analysts are debating how high 10-year Treasury yields will go with median forecasts compiled by Bloomberg see them rising to 3 percent by the end of this year. If history is any guide, during the last five rate hiking cycles the short end of the curve raised the most with the long end largely anchored. If long rates do indeed remain subdued, perhaps the dollar will not see renewed strength which would be positive for the price of gold.
- BMO has picked up coverage of Wesdome Gold Mines with an outperform rating and price target set to C$3.75. SilverCrest Metals has also been given a buy rating with drilling active at their high grade Mexican mine and a new larger resource statement is expected shortly.
- Northern Star Mining recently paid out a 4.5 cents per share, which is higher than estimates of 4 cents. The stock has grown from 2 cents per share up to $6 per share in the last eight years, and its executive chairman Bill Beament says that it is still a “growth stock” with their forecasted production. Newmont Mining Corp almost took over Barrick as the biggest bullion producer in the world, according to Bloomberg. Newmont was just 50,000 ounces, or 125 gold bars, away from claiming the top spot. Newmont doubled its quarterly payout to 14 cents a share and pushed itself ahead of Barrick in terms of market share.
- At Janet Yellen’s final Fed meeting, she and her colleagues received a special briefing on what had gone wrong with the computer models used to forecast price measures and inflation, reports Bloomberg. According to that briefing, the models used seemed to come up short on explaining and forecasting inflation. “Perhaps even more troubling for policy makers is that inflation appears to be anchored below the Fed’s 2 percent target,” the article reads.
- Canada, the top steel and aluminum exporter to the United States, is hopeful of being exempt of President Trump’s crackdown on foreign shipments, reports Bloomberg. Although the U.S. Commerce Department didn’t recommend giving Canada a pass during the outline of tariffs and quotas on Friday, it did single out its importance to the U.S. aluminum industry and numerous cross border manufacturing relationships, the article continues.
- Apple has become the latest major consumer to seek long-term supply deals with cobalt firms, which sent China Molybdenum’s stock surging as much as 10 percent on the news, reports Bloomberg. In fact, Apple is one of the world’s largest end users of cobalt for the batteries inside of its various gadgets, but up until now left the business of buying the metal to the companies that make its batteries. With the rapid growth in battery demand for electric vehicles threatening to create a shortage of raw material, the tech giant maker is “keen to ensure that cobalt supplies for its iPhone and iPad batteries are sufficient,” the story continues. This is almost reminiscent of when Ford started switching to a more palladium centric catalyst for emission and drove the price up ten-fold to later fall about 80 percent. However, the next generation of batteries may be cobalt free, as Nano One had developed for commercial testing a high voltage spinel (HVS) using lithium, manganese and nickel. Besides avoiding the high cost and supply chain risk of cobalt, the higher six-volt cells would mean fewer battery cells needed, less weight, less cost extending range, longer lifetime or better warranties, greater storage, faster charging and more power.
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