Gold: No way to go but up

January 4, 2018

Pat Heller

The price of gold was up more than 13 percent in 2017, and silver rose more than 7 percent. In typical years, those would be satisfying results. Not this time around. Stock prices and cryptocurrencies turned in much stronger results, leaving these precious metals as also-rans.

In my judgment, though, 2018 will turn out differently.

Whether or not most people realize it, the global economy depends on the relative stability of the U.S. dollar. That did not happen in 2017. As of Dec. 27, 2017, the U.S. Dollar Index was down about 9 percent year-to-date. This is a major indicator of the instability of the value of the dollar.

As I again remind you, the values of physical gold and silver don’t change. An ounce of gold from a thousand years ago or 10 years ago are both still worth an ounce of gold today. What does change, though, is the value of other assets in relation to gold and silver.

When the Federal Reserve System was established in 1913, the U.S. dollar was worth 0.0483792 of an ounce of gold. As of the close Wednesday last week, the value of the dollar had fallen to 0.000777 of an ounce, a decline of 98.4 percent. Most of this drop occurred after former U.S. President Nixon “temporarily” closed the gold-exchange window on Aug. 15, 1971.

There are several factors that point to a significant prospect that the U.S. dollar may fall significantly against gold and silver in 2018.

In the last few months of 2017, maturing gold contracts on the COMEX saw a significant percentage settled by “exchange for physical” rather than in the actual physical metal. This option was created by the COMEX in the 1970s as an emergency measure that involves payment of some amount of cash to the contract holder plus ownership of a like-size gold contract in the London market. Since this is effectively costing the party making the delivery more than what it would cost for the physical metal, this tends to indicate an extreme shortage of physical metal. During the first two weeks of December, average daily volume settled in this fashion exceeded one million ounces – an amount greater than the registered gold inventories in COMEX warehouses available to deliver.

Instead of making the stability of the value of the U.S. dollar its primary focus, the Federal Reserve continues to state that its primary mandates are “to foster maximum employment and price stability.” Even these alleged top priorities are lies, as the Fed regularly states that its goal is to see consumer prices rising at least 2 percent annually. In plain English, the Federal Reserve is committed to constantly reducing the value of the U.S dollar.

Unfunded liabilities for pensions and retiree health care benefits for employees of the federal state, county and local governments and government schools are really going to hurt the dollar’s stability during 2018. Just for Social Security and Medicare, the net present value of unfunded liabilities is now at least $70 trillion and perhaps as much as $90 trillion. At state and local governments, the combined unfunded liabilities probably exceed $5 trillion. Governments really began to notice the critical impact of these liabilities last year when they were finally required to include these amounts on their financial statements. Expect a year-long series of major controversies across the country of taxpayers, government employees and retired government employees arguing over who will take how much of the financial hit of these debts too large to ever pay off.

Government manipulation to hold down interest rates over the past decade has resulted in the misallocation of resources. Now the Fed is promising to allow interest rates to rise significantly in 2018. In recent years, consumers bought homes and made other purchases they could not afford if rates increase. Business investments were made that will fail as interest rates rise. Savers will suffer, as low interest rates encouraged them to consider risky investments to seek higher returns that could end up in losing all of their original investment as higher interest costs sink these alternatives.

The best information I have is that governments, central banks and sovereign investment funds around the world spent close to $2 trillion last year purchasing stocks in publicly held companies. This has artificially propped up stock prices, which cannot continue indefinitely. Further, much of the rise in U.S. stocks during 2017 was in anticipation of the tax cuts that were enacted late last year. Now that these tax cuts have made it into law, there is not another comparable legislative action pending to have the same impact on stock prices in 2018.

The new lower 21 percent corporate income tax rate in the United States will boost business profits overall. However, a number of major U.S. firms already pay a lower effective federal income tax rate, which means the cut in the rate will provide little to no increase in profits.

Since late 2016, the Chinese government has increased international usage of its yuan currency. At the end of the 20th century, for example, 100 percent of all international oil transactions were priced and paid in U.S. dollars. Now China has signed a growing number of oil purchase contracts where payments will be made in the yuan instead of dollars.

Saudi Arabia was a key ally in helping the U.S. force international oil trade to be priced and paid in U.S. dollars. Right now, the Saudi government is steering away from the U.S. and toward Russia, signaling an even greater decline in the demand for U.S. dollars for international commerce, especially in oil contracts.

There are many more negatives looming over the U.S. dollar in 2018. It would only take one or two of the foregoing points or any I did not list to spark a major decline in the dollar against ounces of gold and silver. For your own protection, I encourage you to establish your “wealth insurance” holdings of physical gold and silver as soon as possible.