by Frank Holmes, CIO, CEO, U.S. Global Investors
A quote often attributed to St. Augustine, the early Christian theologian, is: āThe world is a book, and those who do not travel read only a page.ā I feel blessed to be able to travel as much as I doānot because Iām a big fan of 10-hour flights or living out of a hotel room. I feel blessed because travel allows me to meet and speak at length with some truly fascinating and successful people, from CEOs of firms both large and small, to deal lawyers, to audit partners.
Hearing varying opinions on global issues and politics has helped expand the scope and depth of my ābook,ā or understanding of the world. In turn, I enjoy sharing some of these thoughts with you, as regular readers of Investor Alert and Frank Talk know well.
Opinions come a dime a dozen, of course, and in todayās hyper-partisan world, itās impossible to expect everyone to agree on all things all of the time.
Case in point: I recently polled readers on their approval of the way Donald Trump has handled his job as president so far. This isnāt a scientific poll by any stretch of the imagination, but for whatever itās worth, a combined 56 percent of participants said they approve of the president. Amazingly, thatās roughly the percentage of Electoral College votes given to Trump in November. (The exact figure is 56.87 percent.)
Some could easily take from this poll that Frank Talk readers are huge Trump supportersāand many of them areābut that would be overlooking the fact that nearly 40 percent said they disapprove of the way heās handled his job.
I share this because it serves as a relatively accurate cross section of the types of opinions and perspectives I come across during my travels. Some of those opinions end up informing my own thinking, some donātābut all of them are added to my ābook.ā
Now with North Korea launching even more rockets over Japan, the market continues to make new highs. This is what I was asked most often last week on CNBC Asia, Bloomberg Radio and Fox Business. As I said then, Iām bullish because the purchasing managerās index (PMI) is up and oil prices are down, thanks to the ingenuity of Texas fracking, which has created a global peace tax break. The weaker dollar is also favorable for exports and gold.
Bitcoin on Sale After the China-Dimon One-Two Punch
Someone whose opinion I greatly admire, even if I donāt always agree with it, is Jamie Dimonās. The highly-respected JPMorgan Chase CEO was asked last week at a global financial services conference in New York to share his thoughts on bitcoināwhich can be as polarizing as President Trump. Some people love the cryptocurrency, some people hate it.
Dimon, whoās decidedly in the latter camp, didnāt mince his words.
Although he likes blockchain technology, which bitcoin is built on top of, he began by saying he would fire any JPMorgan trader who was caught trading bitcoin, which he went on to call āstupid,ā ādangerousā and āa fraud.ā
āYou canāt have a business where people can invent a currency out of thin air,ā he said.
With all due respect to Dimon, some might point out that āinventing a currency out of thin airā is how we got Federal Reserve Notes and other forms of paper money in the first place. Even he admits this:
āThe first thing a nation does when it forms itselfāliterally the firstāis forming currency.ā
Bitcoināand any of the 800 other cryptocurrenciesātakes this idea to the next level, the main difference being that no third party or monetary authority controls its issuances or transactions. Itās all peer-to-peer.
Governments tend to resist anything that disrupts the status quo, which is why we saw China restrict new initial coin offerings (ICOs) the week before last. I suspect weāll see a few more countries attempt to regulate ICOs in other ways, and as long as these regulations are fair and reasonable, I welcome them.
The bitcoin price was knocked down following the one-two punch of China and Dimon, falling 39 percent from its peak of $4,919 on September 1. Last Thursday it lost more than $611 a unit, one of its worst days ever, but on Friday the cryptocurrency rallied strongly again.
With its ability to validate all transactions in an immutable electronic ledger, the blockchain has the potential to be as disruptive as Amazon was in the late 1990s. When the company went public in 1997, there were serious doubts whether people would willingly give up their credit card information just to buy a book. Since then, Amazon stock is up 8,000 percent, and founder Jeff Bezos briefly overtook Bill Gates in July to become the worldās wealthiest person.
If youāre curious to learn more about how blockchains work, I recommend that you watch this engaging two-minute video.
Gold Price Correlated to Money Supply Growth
In some ways, cryptocurrency more closely resembles gold. Just as thereās only so much gold that can be mined in the world, the number of bitcoins that can ever be mined is set at 21 billion. But the exact amount is irrelevant. It could have been set at 21 trillionāthe point is that supply is limited and finite.
The same cannot be said of the U.S. dollar, or any fiat currency, which today is printed āout of thin airā with abandon. This has led to hyperinflation in some instances and destroyed the value of several countriesā currency, including the Zimbabwean dollar and, more recently, the Venezuelan bolivar.
Iām not suggesting weāll see the same thing happen here in the U.S. Nevertheless, rampant money-printing has certainly contributed to many peopleās dwindling trust in traditional monetary systems. A 2016 Gallup poll found that Americansā confidence in banks is stuck below 30 percent, where itās been since the beginning of the financial crisis nearly 10 years ago.
When more money is printed, gold has traditionally been a beneficiary, for two key reasons: 1) If the money-printing is accompanied by economic growth, greater access to capital might boost demand for luxury items, including gold (the Love Trade); and 2) If the money-printing isnāt accompanied by economic growth, inflationary pressures might prompt investors to increase their exposure to real assets, such as gold (the Fear Trade).
These were among the findings in a 2010 World Gold Council (WGC) study. Even after seven years, the findings still apply. As you can see below, the price of gold expanded over the years as more and more money was printed.
If we want to get really technical, the WGC estimates that for everyĀ 1 percent increase in U.S. money supply, the price of gold tends to rise 0.9 percentānearly as muchāwithin six months.
According to the most recent Federal Reserve report (September 7), more than $13.67 trillion in M2, or broad money, are now in circulation. Thatās up about 1 percent since the end of June, when M2 stood at $13.54 trillion.
So will the gold price climb 1 percent in response? That would amount to only $13 an ounce, but remember, there are other factors driving gold, including negative real interest rates and geopolitical uncertainty.
One final note: A former UBS metals trader was arrested and charged last week with fraud and conspiracy over his alleged role in placing āspoofā orders for precious metals futures contracts. Andre Flotron, a Swiss citizen, was arrested while visiting his girlfriend in New Jersey. Flotron began working for UBS in 1999 but was put on leave in 2014.
See Zero Hedge for more on conspiracies and convictions in court over price manipulation of precious metals. Many cryptocurrency advocates allege this is why Jamie Dimon is so aggressive in knocking down bitcoin. The enthusiasm for bitcoin has accelerated this year with South Korean and Japanese banks accepting them as a form of money.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
The Purchasing Managerās Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article was held by any accounts managed by U.S. Global Investors as of 6/30/2017.
This post was originally published at Frank Talk.
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