The equity market has been highly volatile despite a strong U.S. economy and record corporate earnings. Why are investors so nervous when the fundamentals appear so supportive?
It’s a function of where we are in the market cycle and the current risks that could usher in a recession and bear market. We’re in the late stages of one of the longest bull markets in U.S. history, so naturally investors are going to be wondering how long the run will last and what might do it in. Every potential threat is magnified because the bull is so long in the tooth. I’m not saying the risks aren’t real. We have rising bond yields, increased commodity costs, wage pressures, the possibility of a change of control in Congress, the threat of a “cold war” with China, and the political uncertainty in Italy. So, investors have reason to be nervous, but there are just as many reasons to remain optimistic about the prospects for equities.
The most worrisome risk, in our view, is a jump in inflation and more aggressive Federal Reserve [Fed] tightening than the market is expecting. That’s the biggest concern because interest rates obviously affect the pricing of trillions of dollars in the bond markets, which affects equity prices. A spike in yields generates larger flows into bonds at the expense of equities, which drives down stock prices. At this point, we don’t expect inflation to spike. We’ve seen commodity prices rise this year, and there are labor shortages that could translate into higher wages, but there are also offsets to those pressures, such as automation, outsourcing and a stronger dollar. So, the uptick in inflation is more tactical than strategic. We might get a bout of short-term inflation, but, in our view, it’s not sticky.
The most worrisome risk, in our view, is a jump in inflation and more aggressive federal reserve tightening than the market is expecting.
The Fed has said it wants the Fed funds rate to reach 3%. That’s its neutral rate, the rate that neither stimulates economic growth nor chokes it off. Right now, the Fed funds rate is 1.75%–2.00%. The yield on the two-year Treasury is telling us it should be above 2.5%, which is where I believe it will be in 2019. That is a very modest increase over its current level and nothing that would trigger a recession or bear market. The wild card is the actual level of inflation over the next 18 months versus the expected level.
As I’ve written about for the last month now, the trade wars across the world are really beginning to make investors very uncomfortable. Trade is the primary driver of global growth, so naturally we’re concerned about the resurgence of protectionism. So far, there has been more saber rattling than real conflict. The tariffs announced by the Trump administration and China’s response are worrisome, but we do not expect them to have a significant impact on U.S. and China overall trade volumes or the countries’ economies by themselves. If the brinksmanship turns to an all-out trade war, that’s a different story. We’re of the mind that cooler heads will prevail because the cost of a trade war would be prohibitive for both countries. Consumers would see higher prices, and the supply chains of Chinese and American businesses would be upended. So, it’s in the best interest of both governments to work things out. It’s a situation that’s analogous to two people chained together at the end of a pier. If one jumps, you can be pretty sure he’ll take the other with him.
There are two issues in Europe. One is political instability in Spain and Italy. The other is slowing economic growth in the European Union. If growth in Europe continues to weaken, that could negatively impact U.S. equities, especially if we see anemic growth in Europe and tighter financial conditions in the U.S.
What do you tell investors who are anxious about putting money at risk at this point in the market cycle?
We tell them diversification is the only choice if they really want to feel safe knowing that no matter happens they are well prepared, as it is with every type of market — bull, bear, early stage, late stage, etc. The key to making diversification work is to be well diversified both across and within asset classes. Using stocks as an example, diversification within equities means having an allocation to high-quality large-cap stocks, especially multinationals because of their diversified revenue streams and the exposure they provide to the strong global economy. At the same time when we look at the price of Gold, we see the longest lasting form of money sitting at the lowest price we’ve ever seen it whenever we take the Gold Spot Price and examine it in correlation with Gold Production costs.
The practical, regulatory, and security costs associated with gold production can vary dramatically from region to region. The most expensive place in the world to mine gold is in South Africa. There, all-in gold production costs can be more than twice as much as in Peru, which is the least expensive place to mine gold. According to the Thomson Reuters GFMS Gold Mine Economics Service, average all-in costs for South Africa were over $1,400 between 2005 and 2013. Compare that to less than $700 in Peru, approximately $850 in the United States, $1,100 in China, and $1,200 in Australia.
South African gold mines are relatively insecure, mainly because South Africa remains a relatively dangerous place to conduct business. Companies there may have to hire additional security because the region lacks the property rights protection, police presence, and just legal systems of more developed regions.
What are the steps to Producing Gold?
Gold mining is uncertain, expensive, competitive, and highly intensive.
In 2014, the Minerals Council of Australia broke down the typical mining cycle into eight stages. The most expensive stages are 4, 5, and 6.
The process of discovering mineable gold deposits. “Generative” refers to the application of geoscientific tools to identify general areas for potential gold exploration.
This is where exploratory drilling and extensive geochemical analysis take place. Once a potential spot is identified, gold companies often need to halt the process until the local authority grants an exploration license (along with other approvals and/or studies).
The mining company, having estimated the size and location of the gold reserve, must conduct socio-economic analyses and undergo various other environmental processes.
The stage where a gold mining company prepares the new site for construction. New buildings, roads, and mining apparatus need building. Sometimes, old buildings or structures need clearing out before construction begins. This process can last for years.
When the company physically extracts new gold ore from its site.
Rehabilitation rules vary from location to location, but nearly all modern gold excavation sites must be restored to pre-exploration conditions or at least as close as possible, within reason. Rehabilitating a gold mine can be very expensive.
Mining company monitors vegetation growth, species diversity, and other ecological factors at the location. This process sometimes lasts several years.
The last stage involves an assessment by the local authorities. If the government believes the company has done enough to return the site to a natural state, the company many relinquish its lease, tenure, and liability for the area.
Regulations Increase the Cost of Production
Many developed countries, including the United States and Australia, have seen increasing regulation and taxes on businesses in the 21st century. These also contribute to rising gold production costs.
As the Minerals Council of Australia warned in 2012,
“Long and complex approval processes, as well as other areas of unnecessary red and green tape, have acted to delay project development and added to project costs.”
Not all gold is sourced from the ground. According to the World Gold Council, more than one-third of the yellow metal comes from recycled products, such as old jewelry, dentistry, and electronics.
During large chunks of the 20th century, the world’s central banks were net suppliers of gold. After spending their early history accumulating gold to back up national currencies, central banks sold more gold than they purchased after the U.S. dollar became the de facto world reserve currency under the Bretton Woods Agreement. In recent years, however, the trend has changed. Central banks have become net demanders of gold, which puts upward pressure on both production and retail costs.
My father always reminded me that you can lead a horse to the trough, but you can’t force him to drink the water. That is the same for investing and doing so in a manner that doesn’t put you and your family at more of a risk than needed. We believe from all the economic data we’ve researched that the numbers show that the market seems to be steady. I don’t see anything pointing to a major crash tomorrow, however I also don’t foresee anything that will it make it continue to climb.
Every since I’ve been investing, analyzing, and helping others protect their wealth, this has always been the GOLDEN RULE. We’re sitting in markets that the volatility alone makes me lose sleep at night, the numbers are higher than we’ve ever seen them, yet we’re still getting bombarded with calls from our stock brokers to invest in the newest and best thing that’s hit the market in years. This same broker almost certainly explained to you that He would call you when to sell and when to buy. IT’S AT AN ALL TIME HIGH. What is it that you think he’s waiting on? A huge uptick in the market over the next year or cashing in his residuals check he just received in the mail.
Now is one of it not the best time to buy Gold in the past several decades. It’s at an all time low as far as the buy price / production cost is concerned, not to mention the fact that Central Banks have become net buyers instead of net Sellers of the shiny metal like they historically have been. If Central banks are the ones who control the worlds monetary policies, yet they’re picking up gold at record highs then it’s safe to believe that they know something that they don’t want the public to know in fear of panic. Don’t wait until another 2008 or worse happens before you hedge your bets. Call us now and speak one of our Precious Metals Experts. As I always say, BUY NOW, or PAY MORE LATER! Call us now at Toll Free 1-855-423-GOLD (4653)