Outlining Some Similarities Between 2010 and 2019
Craig Hemke, Founder of TF Metals Report shares some insights on a recent article her wrote comparing 2010 to 2019. We look at Fed policy, general sentiment for the metals, and overall market positioning. Be sure to read his full article posted below.
Click here to visit Craig’s site for more metals commentary.
Here is the article looking at the scenario in 2019.
By Craig Hemke
For
each of the past several years, we’ve written January posts that helped
to serve as a road map for the year ahead. Though crystal ball gazing
is an inexact science, on balance we’ve done a pretty good job with
these forecasts. As 2019 dawns, we thought we should give it another try
today.
Let’s begin with where we’ve been…
After
the election of Trump in November 2016, a narrative was quickly
assembled and shoved down our collective throats. This narrative
included a strong dollar, a bursting of the bond bubble, a roaring stock
market and falling gold prices. We felt this was mostly garbage, and we
wrote about it here: https://www.tfmetalsreport.com/blog/8103/questioni…
Heading
into 2018, the establishment theme was a strong dollar that would drive
the U.S. economy and stock market forward. Again, this was all supposed
to lead to falling gold prices. We didn’t buy it, and instead listed
three primary themes that would drive events through the year. You can
read all about it here: https://www.tfmetalsreport.com/blog/8755/three-the…
So, how’d we do?
Again,
on balance we did quite well. Yes, the stock market rose in 2017, but
the dollar fell, the bond market bubble did not burst and gold prices
gained more than 10%. And last year, despite all of the dollar
bullishness that permeated and drove most markets, the dollar index only
gained 4.6%, and by late in the year, the Political Risk that was
listed as Theme #1 was definitely taking hold and driving the dollar
lower. Yes, the price of gold fell in 2018, but in the end, the decline
was less than 3%—a far cry from the doom and gloom so many generalists
had predicted.
Thus
here we are in 2019, and the time has come again to post some long-term
projections. What excitement will the year bring, and how will all of
this impact gold and silver prices?
Well,
if you’re a member of this site, then you likely already know where
we’re headed with this. If you’re not, then perhaps the title of this
post gives it away. To put it succinctly, the year 2019 will closely
resemble the year 2010 in regards to the economy, the dollar and Fed
policy. Most importantly, these factors will all combine to drive gold
and silver prices to their best year since 2010—when COMEX gold rose
nearly 30% and COMEX silver rose by an amazing 83%! We may not be able
to duplicate these gains in 2019, but we’re going to do pretty well.
That’s almost certain.
And why do we say this with such confidence? Again, the answers lie in the macro-similarities to 2010. To wit:
- The
U.S. economy began 2010 in a recovery mode from The Great Financial
Crisis. The mainstream media banged on incessantly about “green shoots”,
and GDP growth was positive. In fact, Q2 of 2010 saw GDP grow by 3.7%,
Q3 was +3.0% and Q4 was +2.0%. - The
Fed had initiated the first QE program to monetize the debt in March of
2009, but it was completed in 2010. It was generally considered a
one-off and a success—and also never to be needed or repeated again. - And
the dollar rose, as the U.S. economy was perceived to be recovering
faster than the rest of the world. The dollar index posted a 2010 gain
of 1.5%.
For the just-completed 2018:
- The U.S. economy was reported to have grown nicely, with gains of 2.2% in Q1, 4.2% in Q2 and 3.3% in Q3.
- The
Fed hiked the fed funds rate every quarter to the point where this
overnight rate is now at 2.50% and the full yield curve is essentially
flat. - And
the dollar rose, as the U.S. was perceived to have the strongest
developed economy. As mentioned above, the total gain for the dollar
index in 2018 was 4.6%.
Turning
back to a decade ago, the U.S. never made it to renewed prosperity in
2011. After peaking in Q2 2010, the U.S. economy began to visibly slow
and the dollar began to decline with it. Similarly, a funny thing
happened on the way to higher interest rates and balance sheet
normalization in 2018. Just as in 2010, the U.S. economy began to slow
and the dollar began to decline.
And
now here we are, with a sense of deja vu all over again. Under similar
circumstances, the Fed reverted to their original intentions in November
of 2010 and announced what was dubbed “QE2”, a second QE program that
promised another $600B in bond buying. This plan allowed the Fed to buy
even more garbage securities from their member Banks, as well as
monetize an additional $300B in U.S. debt. The market reaction was swift
and consequential by late 2010.
Through
2011, the dollar fell sharply and a crisis of confidence grew to the
point where in August 2011, U.S. gridlock, government shutdown and debt
ceiling debates led to the first S&P downgrade of U.S. credit
quality in history.
As
you’ll recall, the dollar prices of gold and silver skyrocketed. As
2010 began, COMEX gold was trading near $1100 per ounce. By early
September 2011, it reached $1920. COMEX silver was even crazier. It
began 2010 near $17 and was still just $18 in early August. However, the
crisis of confidence brought about by the reversal of Fed policy (QE2)
and an epic short squeeze of The Banks in early 2011 led to a peak of
$48 by late April 2011. Yes, that was a gain of nearly 150% in about
eight months.
Can this happen again? Of course it can. A better question is: will it happen again? And now we get to the point of this post.
As
laid out above, economic conditions and Fed policy as we begin 2019 are
very similar to what we experienced in 2010. This alone should get your
attention. However, consider all of the additional extenuating
circumstances at present:
- Political
discord in the U.S. is at levels unseen for decades, with the very high
likelihood of congressional investigations and even impeachment of the
president. Not only will this serve to create massive legislative
gridlock, it will also derail any hope and confidence the American
consumer may have for the year ahead. - Falling
consumer and business confidence will lead to economic slowdown, lower
tax revenue at all levels and falling home prices. - All
of this leads to an exacerbation of U.S. government debt levels. With
trillion dollar deficits projected through the next decade (and these
are based upon 2+% economic growth!), the U.S. national debt will
explode, along with the interest costs to service this accumulated debt. - And
this will matter in 2019. The total debt in 2010 was just $12B, and
there was hope that the U.S. could “grow out of it”. The next recession
will finally bring with it the realization that that’s not possible.
Ultimately,
The Fed will be forced to reverse their current policy of rate hikes
and balance sheet reduction. Will they hike the fed funds rate again in
March? I have no idea, and frankly, I couldn’t care less. They will
either not hike in March and begin a move toward rate cuts and QE by
later this year OR they will hike fed funds in March and begin a move
toward rate cuts and QE by later this year. So what’s the difference?
COMEX
gold and silver have already begun to decipher the situation, and THIS
is the reason they have begun to move higher after bottoming for good
back in November. Oh sure, the stock market weakness of December helped
with a few extra bids, but that influence was minor compared to the
awakening that gold and silver have had to the pending Fed changes and
fiscal crises of 2019.
We’ve
often stated recently that the calendar year of 2019 will see COMEX
gold and silver post their best gains since 2010. Of this, we are
completely certain. Will these gains be 30% for gold and 80% for silver?
Maybe, but probably not. We were early by about six months in
projecting the economic turn last year, and we may be early by six
months in projecting the Fed’s turn in 2019 too. However, what IS
certain is that The Fed will eventually be forced to reverse course,
just as they did in 2010, and when they do, the reaction in COMEX gold
and silver will be even greater than it was in 2011.
Why?
Because this time there will be no reversal of course and confidence.
The Bernanke Fed was able to convince the world that the $1T of QE3 in
2013 would be beneficial, and lead to a stronger dollar versus the ECB’s
euro and the BoJ’s yen. Confidence in the dollar returned, and the
metals fell dramatically. Not this time. Eight years down the road have
led us to a place where, once the realization sets in that the central
banks have no broad plan and that all they can do is create fiat
currency, the COMEX metals will soar and then remain on an upward
trajectory for the foreseeable future.
Of
course now, don’t go thinking that this will be easy and that The Banks
will simply stand down and allow prices to run. Experience has taught
us that this will NEVER be the case! Instead, expect COMEX precious
metal prices to resume the typical bull market pattern that we witnessed
from 2002-2011. Price will move two steps forward while Specs
accumulate longs and
Banks issue shorts, and price will fall one step back as the inevitable
“Spec Wash and Rinse” occurs. However, the overall trend and momentum
will be undeniably higher for all of the reasons laid out in this post.
So,
go now and begin to plan accordingly. Diversify your portfolio by
following the lead of the Chinese, the Russians and many other
sovereigns with dollar reserves. Perhaps you might accumulate a few
mining shares, after doing some thorough research and due diligence.
And, most importantly, add to your stack of physical precious metal while you still can and while prices remain at these affordable levels.