by Peter Schiff, SchiffGold:
On Dec. 31, 2016, the price of gold stood at 1,156.00. Today, it is knocking on the $1,300 mark. The yellow metal is on track to gain about 12% in 2017, its best year since 2010. Gold has made these gains despite a number headwinds that we would expect to put a significant drag on gold.
Here are seven major themes that have driven gold news over the past year.
Over the last year, we’ve talked a lot about geopolitical risk. Could turmoil around the world now be the new normal?
Some analysts think so.
The focus has primarily been on tensions between the US and North Korea. But there have been plenty of other risk factors popping up around the world, including ongoing uncertainty about Brexit, the secession movement in Catalonia, war in the Middle East, terror attacks, tensions between the US and Russia, various elections, a coup in Zimbabwe, and more. On top of that, outside of the US, a lot of people think Americans should be looking at the geopolitical risks right here at home due to political divisions and uncertainty in Washington D.C.
Historically, geopolitical turmoil is good for the yellow metal. Investors buy gold as a hedge to protect themselves against such risk. Some analysts now believe geopolitical uncertainty may be the new normal.
The US federal government is spending money like a drunken sailor. In November alone, the US government reported a $139 billion deficit. Pause for just a moment and think about what that actually means. Last month, the government spent $139 billion (billion – with a B) more than the revenue it took in. In other words, it put $139 billion on a credit card.
Through the fiscal year to date, the US government has run up a $202 billion deficit, compared to $183 billion in the comparable period for fiscal 2017. You might be thinking, oh, well that’s not too bad for the whole year. But you have to remember the fiscal year for the US government starts in October. So that’s $202 billion in two months. The total national debt has eclipsed $21 trillion and is in the neighborhood of 105% of total GDP. That’s the highest level in history except for a two-year spike at the end of World War.
The US government isn’t alone in this pool of red ink. US household debt has surged this year. Corporate debt has continued to grow. And China has an even bigger debt problem than the US. Analysts say it could threaten global financial security. All of this debt has significant ramifications. Many analysts believe debt will be the trigger that kicks off the next economic crisis. Mint Capital strategist Bill Blain predicted that “the great crash of 2018 is going to start in the deeper, darker depths of the credit market.”
The Trump era got off to a rough start with two failed attempts to repeal and replace Obamacare, and the administration was dogged by “Russia collusion” stories, but the passage of a tax cut package was a crucial victory for Republicans.
There is significant tax relief in the bill, but there is no government relief. In the absence of spending cuts, the plan will add another $1.5 trillion to an already ballooning national debt. Debt puts a drag on growth. Promises of economic expansion due to the tax cuts simply don’t ring true. Studies have shown GDP growth decreases by an average of about 30% when government debt exceeds 90% of an economy.
And as Peter pointed out in a previous podcast, incentives matter. And the incentives in this bill will likely decrease revenue even more than projected. That means an even bigger deficit than expected.
The weakening dollar
The dollar index has dropped more than 9% this year, putting it on track for its biggest annual slide since 2003. Peter has argued that the dollar is entering a long-term bear market and the next crisis will be a currency crisis.
I think this one is going to be the mother of all dollar bear markets, and I think the dollar is going to fall much further than it did in any prior bear market.”
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