The U.S. dollar outperformed gold in the first two months of 2015, gaining 5.5% against other currencies. The S&P 500 hovered around its all-time highs and jumped 2.5% in January and February, also outpacing gold and silver. But despite the slow start, 2015 could be a huge year for gold and silver investors – so long as they keep these 15 things in mind for the remainder of the year:
#1 – The Fed
The Federal Reserve is expected to raise interest rates for the first time since 2007, possibly in June. Since all rates are based on the government’s “risk-free” rate of return, and since bond prices move inversely to interest rates, the Fed’s pending rate hike is a ticking time-bomb for conventional bond investors. The bond market is several times larger than the stock market and has an impact on all asset classes – including gold and silver.
#2 – Other Central Banks
While the Fed is likely to begin raising interest rates, the other major central banks – the Bank of Japan, the European Central Bank, and the People’s Bank of China – are all cutting their economies’ benchmark rates. The resulting divergence of monetary policies is designed to make foreign currencies “cheaper” versus the dollar, thereby giving the dollar strength. Minor central banks, from Denmark to Indonesia, are also cutting rates; while other countries – like Switzerland – are revisiting their currency pegs.
#3 – The Stronger Dollar and “Deflation”
The dollar’s relative strength versus the inflationary yen, euro, and other currencies, has allowed the Fed to be “patient” when raising rates. Stronger dollars result in lower dollar-denominated prices, which is good for U.S. consumers. Keynesian economists decry falling prices as “deflation” and as the cause of economic recessions, but this conflates correlation with causation. In reality, lower prices may result from economic contraction, but that’s clearly not what’s going on in this case.
#4 – Gold-Forex Arbitrage?
All things being equal, the stronger dollar should result in lower gold and silver prices – just like all other dollar-denominated prices. Since gold trades predominantly in U.S. dollars on global markets, foreigners seeking exposure to gold must first sell their domestic currencies to buy dollars, and then use those dollars to buy gold. Since not all Forex trades into the dollar will be used to buy gold, U.S.-based gold investors may have an opportunity at arbitrage – to buy gold at lower dollar-denominated prices, while gold’s value increases in terms of yen, euros, and other currencies.
#5 – China
China’s central bank has been cutting interest rates in an attempt to stimulate growth, even as the economy remains the second-fastest growing among large economies. China’s vast currency and gold holdings top $3.9 trillion, and that doesn’t include the $423 billion held by Taiwan or the $126 billion held by Hong Kong. The U.S., by comparison, has $126 billion in currency reserves, and only $49 billion of U.S. dollars in its Treasury, while the bulk of China’s holdings are in gold and U.S. dollars. The end of China being bullied by the U.S. is drawing near, and the nominally Communist nation recently ramped up its military spending. China is forming closer ties with Russia and Iran, too.
#6 – India
India is the fastest-growing large economy in the world, overtaking the slowing China in 2014. India’s populace has always been enamored with gold, and the nation’s gold imports reached nearly 150 metric tons in 2013, before pulling back after the government instituted a gold import duty designed to protect its currency. Nevertheless, India gobbled up a quarter of the world’s gold supply last year, and its peoples’ appetite for the precious metal remains strong. Indian gold demand normally accelerates in April through June, as the country’s wedding season kicks into gear.
#7 – Oil
The price of oil cratered from a high above $115 to less than $50 a barrel in 2014, and prices have remained low the first two months of the New Year. This has put a tremendous amount of pressure on countries that rely on oil exports – including Russia and Iran; to the great benefit of countries that rely on oil imports – most notably Japan. Cheap oil is helping destabilize the Middle East, but it has also served as a special dividend to American consumers, stretching the dollar and making all goods and services relatively cheaper. But part of America’s recovery has been its shale boom, and the Federal Reserve’s easy money has led to malinvestment in the U.S. energy sector. The fallout could be significant, particularly if the federal government intervenes in an attempt to engineer a “soft landing.”
#8 – The Middle East
Things have gotten complicated in the Middle East. Islamic State is carving out territory in Iraq, Syria, and Libya; Shiite rebels have taken Yemen from the U.S.-allied Sunni government, while the rebels and the old government both fight al-Qaeda; the Saudis have a new king, while cheap oil is crippling many OPEC-member nations, making them increasingly desperate; and Israel is lobbying hard for the U.S. to make war on the Shiite Crescent of Iran, Hezbollah, and Syria. The U.S. military and Treasury are stretched too thin to pursue any of these campaigns, but that doesn’t stop the 2016 presidential candidates from promising to pursue them all.
#9 – Dirty Politics
President Obama may have run his last campaign – having won both of them – but his lame-duck years are likely to be eventful ones. Every presidential election is a scramble for stolen loot, and with it clear that the Titanic U.S. government is on the verge of hitting a fatal iceberg, the stakes have never been higher. The final run on the state looks to be a slugfest between Jeb Bush and Hillary Clinton – one that will inevitably provoke a serious third-party candidacy likely to tip the election in Ms. Clinton’s favor. The Republican Party’s clearer path to victory is to nominate someone other than Jeb Bush, who would no doubt win a sizeable contingent of anti-Hillary voters, so Jeb Bush’s strategy will be to knock Hillary Clinton out of the running before she gets the Democratic nomination. We’ve already seen the first assault on Hillary, with Email-Gate. Further Bush-family tactics could involve any number of shocking world events that could wreak havoc on markets across geographies and asset classes.
#10 – Russia
The neocons and the Western Establishment in general are trying to portray Russia as the new Nazi Germany, gobbling up territory like Hitler did on the road to World War II. But if the rebels of the 1776 American colonies had the right to political self-determination, so do the Donetsk and Luhansk rebels in 2015. That said, the U.S. and its allies are out to destroy Russia, which has vast currency reserves and gold holdings, not to mention oil and natural gas reserves. It’s true that lower oil prices and sanctions have hurt Russia, but the Kremlin has the assets to weather the storm. With financial measures unable to defeat Putin, more aggressive options may be explored.
#11 – Gold Repatriation
The establishment of the Bretton Woods System in the wake of World War II resulted in most Western countries’ gold ending up in Federal Reserve vaults, and those vaults haven’t been audited since 1953. In December 2013, Germany announced it would reclaim 674 tons of gold from the U.S. and France, but a year later, only 5.4% of that total had been returned, and only 5% of that tiny portion came from the U.S. In June 2014, Germany announced it had “full faith” in the Fed to hold its gold, and that it wouldn’t be requesting any more be returned. However, the Dutch central bank successfully – and secretly – repatriated 122 tons of gold from New York to Amsterdam in 2014, and Belgium and Austria are also reportedly interested in repatriation.
#12 – Alternative Currencies
2014 saw unprecedented investment in and acceptance of bitcoin, which despite its lack of precious metal backing, may have profound implications for the future of electronic banking. While the U.S. has effectively imposed a ban on gold-backed currencies, the dollar’s global hegemony is weakening, as evidenced by the development of the Aurum, a paper currency embedded with gold. According to the February 28 SD Weekly Metals & Markets podcast, Ecuador may be considering using the Aurum alongside its own dollar-pegged domestic currency. Less encouragingly, Islamic State is minting a gold dinar for use within its conquered territories.
#13 – Apple
What does Apple have to do with gold and silver? Lots! First and foremost, Apple alone constitutes a significant slice of the U.S. stock market, which is always an investment alternative to gold. High stock-market returns make gold less attractive by comparison, and while the Fed’s loose monetary policy undoubtedly goosed the entire stock market, Apple’s market mastery and accumulation of assets over the past five years have been built on more than just funny money. Now the firm stands poised to challenge the authority of insolvent world governments as its balance sheet continues to fatten. The iWatch, which will debut in April, is being produced in a premium 18-karat gold version that could cost as much as $10,000. To manufacture all of these watches, Apple could need to buy as much as 30% of the world’s annual gold production. With $180 billion in its coffers, the world’s first $700 billion firm may be on its way to becoming a major player in the gold market.
#14 – The JOBS Act
The JOBS Act of 2012 was one of the most revolutionary pieces of legislation to ever be signed into law. Of course, the media has all but ignored it, and the most dramatic aspect of the Act – Title III, which will allow non-millionaire investors to fund startups and other private investments – hasn’t been implemented yet. If finally put in place later in 2015, the JOBS Act could result in unprecedented small-business growth – or it could create a private-equity bubble like none that have ever come before. Either way, it’s likely to be eventful.
#15 – Bold Possibilities
August 19, 1991 was a day that began normally, but by nightfall, Boris Yeltsin was standing on top of Russian tanks, and the Soviet Union had collapsed. Although Ludwig von Mises predicted this implosion nearly seven decades earlier, few listened. The U.S. is similarly doomed and could fall with just as little warning – but unlike the Soviets, America’s marketplace infrastructure could step in to replace the bankrupt state in the provision of legitimate goods and services. Perhaps Apple’s gold buying has to do with more than iWatches.