Gold Market Commentar y March 2017
Weakness to Rally:
Gold Follows Rate Hike Pattern
Joe Foster, Gold Strategist
Expectations around the Federal Reserve’s (Fed) March 15 rate
(MVGDXJTR) fell ahead of the March 15 Fed announcement
announcement were the principal drivers of the gold market in
and gained afterwards, but, unlike the metal, both gold stock
March. U.S. economic statistics have been somewhat positive
indices ended the month with small losses overall.
recently, leading the market to expect the Fed to become more
hawkish and to perhaps even guide for four rate increases in
Gold’s Before and After Rate Hike Pattern
2017 (one more than the Fed had announced in December).
The March 0.25% Fed rate increase was the third in this
As a result, gold was weak ahead of the Fed’s rate decision,
tightening cycle that began in December 2015. In all three
falling roughly $50 over two weeks to the $1,200 per ounce
instances, increasing pessimism in the gold market caused
level. On March 15 when the Fed implemented its first 2017
gold to fall to long-term or technical lows. This pessimism was
rate hike as expected, it maintained its projection of only
caused by anticipation of rising real rates, a strong U.S. dollar,
two more rate increases this year. Economic guidance also
and faith in the Fed’s outlook for a strengthening economy.
remained unchanged and Chair Janet Yellen said the Fed is
However, the economy has not been as robust as hoped and
willing to tolerate temporary inflation in order to overshoot
recently, rising inflation has caused real rates to fall. The Fed
its two percent target. The $1,200 per ounce gold price level
rate increase in December 2015 was a major turning point,
held on the dovish Fed announcements and gold rallied to end
marking the end of the historic 2011 – 2015 bear market for
the month with a small gain closing March at $1,249.35 per
gold. A shift in sentiment also lead to gold rallies following the
ounce.
December 2016 and March 2017 rate hikes. Markets were
irrationally causing the U.S. dollar to become overbought
Political activity in the U.S. was also supportive of gold. As we
and gold to be oversold before each rate increase. Three
had expected, the market euphoria surrounding the November
times makes a pattern and if we have learned anything in our
U.S. presidential election continues to dissipate. The Trump
history of investing, it’s that trading patterns end once they are
administration has suffered two strikes: the courts are blocking
recognized. We will look for market sentiment, Fed behavior,
the implementation of new travel restrictions, and the House
or some other driver to help change the pattern when the Fed
has blocked healthcare reform. In our opinion, these early
hikes rates again. The market expects the next possible rate
defeats make it increasingly unlikely that the administration
hike at the June Federal Open Market Committee (FOMC)
will be able to deliver on the expected pro-growth reforms
meeting.
that drove the market to new highs following the election. We
believe one more strike could create a confidence crisis, which
The Current (More Rational) Market Bubble Could Pop on
makes meaningful tax reform the next issue that will be vital for
Growing Debt
Trump’s presidency to gain some positive momentum.
The current economic expansion and bull market in stocks are
among the longest on record. Such cycles do not last forever
The price trend for gold stocks mimicked gold bullion in
and we have commented in the past on the risks an economic
March, for the most part. Both the NYSE Arca Gold Miners
downturn would bring to the financial system. While valuations
Index1 (GDMNTR) and the MVIS™ Junior Gold Miners Index2
for stocks and real estate are lofty, the level of mania that we
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Gold Market Commentar y
March 2017
had felt ahead of the tech bust (2001) or housing bubble (2008)
Indications of a Late-Cycle Economy Are Increasing
has not materialized. Although the popularity of exchange traded
Here are a number of signs of a late-cycle economy and market.
funds (ETFs) and other passive investment vehicles could be seen as
Many of these were highlighted in recent Gluskin Sheff4 newsletters:
a form of mania, it is difficult to see anything happening in those
vehicles that foreshadows a market crash. Perhaps, if there is to be
a downturn, this time it will likely be more orderly than others in the
recent past.
ƒ ƒAt eight years, the S&P 500® Index5 is in its second longest bull
market since 1928.
ƒ ƒWith a 16.9% annualized gain, this is the third strongest S&P
bull market since 1928.
While economic downturns are not necessarily drivers for gold,
ƒ ƒDespite stock market gains, GDP growth has expanded just
since the subprime crisis of 2008-2009 the financial system has
1.8% annually, versus 3.4% during the longest bull market,
been in such a precarious state that even a mild recession could
be financially devastating, thus ultimately benefitting gold and gold
stocks. The difference in this cycle is, firstly, that sovereign debt
globally is higher than it has ever been during peacetime and it
continues to grow. The Congressional Budget Office’s (CBO) annual
report shows the debt/GDP ratio3 has doubled since 2008 to 77%
today and is forecasted to reach 150% in 2047. The CBO also
forecasts debt service rising from 7% today to 21% in 2047. The
budget deficit was not mentioned in President Trump’s February 28
speech to Congress. We believe no politician wants to seriously
tackle the debt bubble for fear of getting voted out of office for
raising taxes or cutting entitlements.
occurring from 1987 to 2000.
ƒ ƒ10 of the last 13 Fed hiking cycles ended with a recession.
ƒ ƒPrice to Earnings multiples are in the top quintiles historically and
the most expensive since the dot-com bubble (1995-2001).
ƒ ƒMargin debt is at all-time highs.
ƒ ƒAuto sales and loan delinquencies suggest automotive activity
has peaked.
ƒ ƒA record 279 corporate insiders have sold stock so far this year.
ƒ ƒInitial jobless claims are at their cycle lows, typical historically in
the waning months/years of expansions.
ƒ ƒEach of the seventeen Republican presidents since Ulysses S.
Grant has experienced a recession within roughly two years of
taking office.
Recently we have seen that it appears politically impossible to
implement the necessary reforms required to avoid insolvency or a
systemic failure of the public healthcare insurance system. Social
Sentiment and Consumption: A Recession Precursor?
Security is yet another entitlement that appears to be heading
A recent Morgan Stanley report interestingly examines historical
toward insolvency. Gridlock reigns, which makes a debt crisis or
consumer confidence, as measured by the Conference Board
another calamity a prerequisite to motivate those in Washington
Consumer Confidence Index,6 and personal consumption
to act constructively. Such a crisis becomes much more likely in a
expenditures7 (PCE). The sentiment of consumers and businesses
recessionary economy.
(soft data) has been trending higher, while data that tracks actual
economic results (hard data) has stagnated. This chart is particularly
The Fed’s three rate increases in this cycle amount to 75 basis points
compelling. Notice the divergence between the soft and hard data
(0.25% on December 16, 2015; 0.25% on December 14, 2016;
preceding the last three recessions. A similar divergence is happening
and 0.25% on March 15, 2017). U.S. rates remain far below
now, as consumer confidence appears to have reached its highest
historic norms and rates in other advanced economies are even
level since the tech bust.
lower. Quantitative easing did not work as well as planned. The
Fed is holding trillions of dollars in U.S. Treasuries and mortgagebacked securities on its balance sheet and may have to resort to
more radical policies to stimulate the economy in the next recession,
which brings added financial risks.
vaneck.com/etf-europe
Gold Market Commentar y March 2017
Divergence between Sentiment and Consumption Precedes Recessions
Source: Bloomberg; Federal Reserve Bank of St. Louis; U.S. Bureau of Economic Analysis. Data as of February 28, 2017.
While we hope that President Trump is able to bring tax,
regulatory, and other reforms that energize the U.S. economy,
political headwinds and late cycle evidence suggest it is prudent
for investors to begin to hedge against the financial pain that the
next recession might bring.
1 NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.
2 MVIS™ Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and
medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s
revenue from gold or silver mining when developed, or primarily invest in gold or silver.
3 In economics, the debt-to-GDP ratio is the ratio between a country’s government debt (a cumulative amount) and its gross domestic product (GDP) (measured in years). A low debt-to-GDP ratio
indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt
4 Gluskin Sheff + Associates Inc., a Canadian independent wealth management firm, manages investment portfolios for high net worth investors, including entrepreneurs, professionals, family trusts,
private charitable foundations, and estates.
5 The S&P 500® Index (SPX) consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial, and transportation).
6 The Conference Board Consumer Confidence Index® is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that
consumers are expressing through their activities of savings and spending.
7 Personal consumption expenditures (PCE) is the primary measure of consumer spending on goods and services in the U.S. economy. It accounts for about two-thirds of domestic final spending, and
thus it is the primary engine that drives future economic growth.
vaneck.com/etf-europe
Gold Market Commentar y November 2016
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