Why 2017 May be a Good Time to Buy Gold

Three general economic principles that relate to Collum's Review are: 1) People Face Tradeoffs, 2) People Respond to Incentives, and 3) Prices Rise When the Government Prints Too Much Money. The first of these principles -- "people face tradeoffs" -- is evident in the outcome of the 2016 general election for President of the United States, a lens through which Collum views much of the year's events as it offers a polarizing juxtaposition of two worldviews -- the Trumpian and the Clintonian. The former presented voters with a vision in which offshoring was brought to an end, taxes were cut, nationalism defeated globalism, incessant warring was ended, terrorists were defeated, and the Establishment was obliterated. The latter offered a promise of hostility towards Russia (responsible to a large extent for defeating U.S.-backed "rebels" in Syria), the continued suppression of the energy sector (coal, especially), no end to offshoring, more trade deals in the spirit of GATT and NAFTA (that would make nations beholden to multinational companies, allowing the latter to essentially be above the law of individual countries), and a continuation of the Establishment. Just enough voters in just enough counties in just enough states saw to it that the former vision prevailed on Election Day. The trade-off was giving up the globalist agenda of the Establishment-class for the nationalist agenda of the populist. So far, the economy has not crashed and the S&P 500 has risen to all-time highs: Collum asserts that the S&P index has gone up mainly because of a short squeeze that began before Election Day and simply continued on. The economy remains on a precipice -- and with the Fed promising to raise rates, perhaps aggressively in 2017 (Durden, 2017a), Collum's predicted "mean regression" in the equities market could prove correct as money flies an expensive market propped up by QE for other asset classes. Bonds and bullion (at Bitcoin -- thanks to China's capital controls) have been bid (Durden, 2017b).

The second principle -- people respond to incentives -- is not far behind: voters responded to Trump's several pledges: 1) to build a wall and end illegal (and some forms of legal) immigration; 2) to "drain the swamp," 3) to bring back jobs from overseas (already this appears to be happening with Ford, Carrier and other companies making commitments to manufacture in the U.S.), 4) to "make America great again" by protecting and supporting American interests, 5) to "get along with" world leaders rather than engage in regime change, acts of war (sanctions -- the Obama Administration could not resist placing new ones on Russia just weeks before leaving office), 6) to "lock her [Hillary] up" -- he has already back-tracked from this pledge, and 7) to invest in American infrastructure. These incentives were enough to spur 60 million+ Americans to vote for Trump. It now remains to be seen how much impact a Trump Administration can have on the real economy, especially as the Fed takes a skeptical view of Trump's economic policies and sees aggressive rate raising as now imperative (for some reason NIRP and ZIRP were okay during the Obama Administration). Meanwhile, cash bans in India and other parts of the world -- but mainly in India, which is primarily a cash-based society -- are raising questions about how far totalitarian leaders can push things before countries swing in the opposite direction. The Philippines have Duterte (their own version of Trump). Italy has theirs. The Netherlands has Geert Wilders. UK voted to leave the EU. Even France is looking to abandon the left. Only Germany remains enamored of Merkl -- but that may change as more attacks like the recent one in Berlin take a toll. For Americans, the incentives offered by Trump were enough to secure a Trump victory. Now the various other players in the world market will have their say -- starting with the Fed and its plan to hike rates. Collum suggests that this could be the trigger of the market correction -- which is part of the reason he is nearly 30% in PMs.

The other part of the reason for Collum's buy recommendation of gold and silver is that PMs are a wealth preserver: and this leads to the third economic principle -- "prices rise when the government prints too much money." Three rounds of QE are responsible for the biggest bull market run in history -- at a time when the world economy remains mired in recessionary-level activity. Take the QE away and give money managers the opportunity to get a decent yield from a (relatively) safe investment 10-Year T-bills, for instance, and a market whose prices have risen (some to the level of 300x PE -- like Amazon) stands in line for punishment. PMs may in fact prove to be safe havens if the mean regression occurs that Collum predicts in the wake of a massive market unwinding.

GDP is the gross domestic product of a nation -- i.e., the market value of goods/services produced in the nation -- and a leading indicator of economic strength. Collum (2016) notes that while GDP in the U.S. has not shown any real measurement of considerable growth in the past 8 years, the real troubling ratio is the debt to GDP ratio, which is near 100% in the U.S. and near 300% in China. The world is being buried under a tsunami of debt and if interest rates rise, the interest payments alone on the debt will be unserviceable. Greece is a micro-version of what will happen at a macro-level all over the world. Central banks have lost control and their failed attempts at stimulus will only make the impending crash that much more painful.

Another index that Collum utilizes is the S&P 500, which is the index of companies selected by the S&P Index Committee based on market cap, industry and liquidity. It is used to measure a country's stock/capital along with consumer confidence. With S&P prices at all time highs, the market is suggesting that consumer confidence is at all time highs and that the U.S.'s economy is strong. Collum suggests this is a false indicator because QE has turned the market into a bubble. If interest rates rise, there will be a sell-off, the market will reverse and a flight to safety will occur. A number of geopolitical, social and economic factors are likely to have an impact on the fate of the S&P as well -- but with a Trump Administration promising to invest in American infrastructure by issuing more debt, market turmoil may be in the near future. Collum anticipates as much, which is why he recommends a cash position for now for investors.

The third index is the unemployment rate -- which Collum (2016) pessimistically states is officially at 4.9% but more realistically much higher with "38% of working-age adults not working." Collum's unemployment figure suggests a startling economy that is struggling to find purpose -- and this traces back to Trump's incentives for voters -- i.e., to bring back jobs and restore employment. With middle class wealth dropping 30% over the past 16 years, as Collum (2016) points out, Trump's appeal to voters is directly related to the dour economic feeling that many have and the real unemployment rate that Collum identifies.

With the economic principles identified above and these macroeconomic indices used to assess the state of the economy in the U.S. -- as well as the global economy (Collum discusses China's Yuan devaluation and credit problem, Japan's Central Bank asset-purchasing program, and the problems facing the EU), the picture painted by Collum is stark indeed. Thus, he foresees a severe market correction -- though he does not say when it will happen. He is content knowing that it will happen because it cannot not happen: the wheels are coming off and it is enough to be prepared for impact. Collum's advice is to store what wealth one wishes to preserve buy purchasing precious metals (gold and silver). If one wishes to re-enter the equities market once the bottom is in, post-correction, a cash position is most favorable.

The forecast that can be made from Collum's (2016) article is that 2017 will be a year with many shocks: Trump will assume office in the White House; the Fed will reverse its low interest rate policy of the past decade; a credit crisis will result -- just as Trump is eager to take advantage of credit markets; equities will fall, and safe haven assets will rise (premiums are already soaring in India, where a ban on cash by Prime Minister Modi has virtually wrecked the country's economy overnight). The housing bubble 2.0 (as Collum calls it) will have to be popped as the shadow inventory now in existence (foreclosures bought and turned into rentals in the wake of 2008) puts pressure on prices, already at peaks from 2007. If one is thinking real estate is a safe investment at this point, one might do well to consider the illiquidity of the market and the fact that buying at historical highs does not mean that one should expect historic returns. Physical gold and silver -- barbarous relics -- can at least still be traded at or near spot price.