The holidays are over. We just had Christmas, quickly followed by New Year’s Eve. A good moment to reassess the year. For me personally, moreover, a useful moment for self-reflection. How much of the things we have written over the course of last year has turned out to be true? Can we, perhaps, shed light on some of the important topics again? In any case, something that can be observed from this top 10 of 2017, is the fact that cryptocurrencies have been the eye catcher of 2017. Various articles that made it to the list are, therefore, about Bitcoin, which had a rather remarkable year. The most important of all cryptocurrencies rose from roughly $1,000 to more than $15,000 dollar, which equals a return of 1500%+. We also briefly revisit Trump’s presidency, the Fed and the yield curve, the dollar, futures markets and price formation in the gold market and, of course, our gold price forecasts over the year. Below you can see the ten most read articles of 2017 with a brief description and/or reflection.
I wrote, briefly summarized, the following in February, moments after Trump was inaugurated as the new president of the United States and threatened to begin a trade war with, among other countries, Mexico and China: “President Donald Trump is not wasting any time: the negative trade deficit is public enemy number one. (…) Leaders on the opposite side of the borders, both in Mexico and China, are keen to respond to the import taxes with import taxes on American products. We are having a moment of déjà vu: it is the 1930’s all over again. (…) Trump’s protectionist policy failures will, after the current debt binge, only serve to accelerate the fall of the American economy.”
I pointed out that Trump inherited a record public debt from his predecessors. The US public debt was never as high as it is today. Fortunately, for every earthling, Trump seems to have shelved his protectionist plans for the time being. He first pushed hard for a tax reform, which was passed through Congress just before Christmas (for an extensive analysis on Trump’s tax reform, click here). But that does not mean that Trump has forgotten all together about his trade war. Now that his tax reform has passed, one of his New Year’s resolutions seems to be the introduction of an import tax on Mexican, Chinese and Canadian products and to withdraw from trade agreements such as NAFTA. The danger, therefore, has most certainly not passed and will probably take on a more concrete form rather sooner than later in the new year. And that means bad news for the US economy and the creditworthiness of the United States.
The debate on whether Bitcoin will make gold obsolete was a recurring theme last year. My conclusion at the time? “The idea that Bitcoin will displace gold in the short run as safe haven is (...) largely a myth. And the short run in the context of a centuries-long evolution of money and media of exchange, easily means twenty years or more.” My opinion has been reinforced ever since. I foresee great troubles for Bitcoin to ever become a stable unit of account. Whether Bitcoin can ever overcome this problem remains to be seen. We currently find ourselves in a cycle in which nobody wants to have gold and everybody wants to invest in Bitcoin. If I have to pick between buying Bitcoin at a price of around $20,000 or buying gold, then for 2018 I would prefer having gold.
I am pleased to see this article at a third place of best read articles in 2017. In this article, I tried to clarify and demonstrate an important investment lesson. Many gold investors with whom I spoke over the years, would say the following: “I’ll buy gold when the market rebounds.” Or: “I will sell gold now to get back into gold when prices have fallen.” My conclusion is that this is probably the worst advice that an investor could follow. I wrote that many investors “fail to understand that the long-term returns on an investment depend disproportionately on price fluctuations that occur in a matter of days, weeks or months.”
To prove this, I picked the ten best days of gold (highest daily returns) since 2000. If we, for whatever reason, would not have a position in gold on exactly these ten days (on a grand total of 6388 days!), then our average annual return would have amounted to 2.9%. However, if we do include gold’s ten best days, then our average annual return shoots up to 10.1%. Because of a mere ten days, we went from a mediocre return to an excellent return. Now, even though the gold price has moved sideways for almost an entire year, this is an important lesson to remember. Because if we, despite our best intentions, think we are able to outsmart and time the market, we could easily end up turning an excellent investment into a rather disappointing one.
Since writing this article, the dollar has gone up slightly further (with the EUR/USD rate at 1.19), while gold prices have remained largely unchanged. Despite all this, I was and am not bullish on the euro nor on gold prices in the short run. I wrote: “Until we are on the verge of a recession, the gold price will remain under pressure. Under pressure, the gold price, as was the case earlier this year, could rally from time to time. But every rally will be followed immediately by downward pressure, because fundamental factors lack (...).” And that is exactly what occurred, more or less, over the past twelve months. I predict for 2018 a trend which I have announced earlier, but failed to crystallize in 2017: a stronger dollar and a sideways or lower gold price, until the moment nobody can no longer deny that a recession is extremely likely.
About two months ago, I made an effort to clarify my outlook for gold prices until the end of 2017. Since we are nearing the end of a (for the gold market) somewhat boring 2017, it is also a good moment to reflect upon what I said back then. I wrote: “I suspect that the dollar rally will resume and that therefore gold prices remain in a tough situation. In that case, gold prices will remain under pressure, as long as the current narrative remains dominant across market participants (the current dominant narrative can be summarized as: “the Fed is raising interest rates”). Only when this dominant paradigm, this narrative, suffers a terrible blow for whatever reason, a real reversal might happen in the gold market. Whatever the case, gold seems relatively cheap, especially in comparison to the existing alternatives (mainly bonds and shares). Therefore, the advice seems still to gradually accumulate a significant position in (physical) gold.”
In this article, Frank Knopers addresses yet again the question whether Bitcoin will make gold obsolete. Cryptocurrencies are “hot,” precious metals “not.” He analyzes to what extent Bitcoin currently functions as means of payment, store of value and safe haven. “Ever since cryptocurrencies began their impressive rally, the interest in gold has declined significantly”, concludes Knopers. “I would therefore be tempted to take a (partial) profit on cryptocurrencies and buy undervalued precious metals such as gold and silver.”
Some people invest, according to my humble opinion, for the wrong reasons in gold. They think that, for some reason, no price arbitrage exists between the physical gold market and the futures market. In this article, we discuss the various myths that exist regarding the COMEX (the world´s most important futures exchange for precious metals) and why the idea that the gold price is being manipulated is wrong. A, at least according to my personal judgment, very complete article about price formation in the gold market.
The eighth best read article is also on the alleged manipulation of the gold price. Many proponents of this theory presented the fact that Deutsche Bank settled a lawsuit in which it was being accused of manipulating the “Gold Fix” as prove that the gold price was being manipulated. A big mistake, according to my analysis. In this article, you can learn more about how this Gold Fix (a daily benchmark of the gold price that is being used by, among others, jewelers) works and what the lawsuit against Deutsche Bank was about.
My most recent contribution is again about cryptocurrencies. In this article, I write that the recent crypto bubble is undeniable, even for the most passionate among crypto proponents. However, I also argue that the current crypto bubble is a symptom of a far bigger bubble that was caused by ultra-low interest rates. I draw some parallels between the dotcom bubble and the crypto bubble.
This article from June, was published right after the Fed raises interest rates (last month, the Fed raises interest rates again, this time to 1.5%). For me, this was the most important development in 2017: the flattening of the yield curve. An inverted yield curve (in which short- term rates exceed long-term rates) normally indicates that a recession is near. Since the publication of this article, this trend has continued to strengthen. I wrote at the time: “[Here we have] the 10-year US Treasury rate minus the 3-month rate (red line) and the 10-year US Treasury rate minus the 2-year US Treasury rate (blue line). What can we observe? The last time the difference between these both rates was this small, was many years ago. Better yet, the last time the difference was this small, was in November 2007 when the US economy was on the verge of a recession (only in the summer of 2016 the difference came anywhere close). In brief, the flattening of the yield curve spells trouble and should make the Fed pause to reflect upon its proposed rate hike trajectory.”
Ever since, a large number of discussions emerged about the predictive power of the yield curve. A majority of investors and the Fed (led by Janet Yellen) explained that the yield curve will not indicate a recession this time around, which is a rather bold statement. In Yellen’s most recent press conference, she was even asked about the yield curve. You can read more about Yellen’s comments and my refutation here.
Happy New Year, dear reader, and my best wishes for 2018. May this year be an excellent year for precious metals investors.