January 9, 2018
Beginning in late 2016, we began to question what we termed "The Generally Accepted Narrative of 2017". This allowed us to accurately forecast rising precious metal prices last year. For 2018, we will generally rely upon three overriding themes, and we discuss them in detail today.
As a recap, what was GAN2017? We first spelled it out in a formal post on January 17, 2017. You can read it here: https://www.tfmetalsreport.com/blog/8103/questioni...
From that post, the five primary tenets of GAN2017 were:
1. Major US deficit spending will promote economic growth
2. This economic growth will allow The Fed to hike the Fed Funds rate 3-4 times
3. Rates on the long end will rise, too, as "the bond bubble bursts"
4. All of this growth and higher rates will prompt a huge rally in the dollar
5. And the US stock market will charge toward 25,000 on the Dow.
So, how did this turn out?
1. Economic growth as measured by GDP looks to come in at around 2%. Trump's only political win came with the tax cuts of late December. Nothing done on infrastructure or healthcare.
2. The Fed did, in fact, hike the FF rate 3 times.
3. Long rates fell, and the bond bubble definitely did NOT burst.
4. “King Dollar" did NOT return, and the Dollar Index fell by over 10%.
5. The Dow topped 25,000 for the first time in history last week.
For the purposes of precious metal investing, points number 3 and 4 were the most important. Because rates and the dollar fell, Comex gold rose over 13% on the year . . . its best annual gain since 2010.
So, what's next for 2018?
As we’ve already mentioned, 2018 will be defined by three general risks. How these play out will dramatically impact the dollar, the bond market and precious metals. The three risks are:
Political Risk -- By late summer of this year, attention will turn to the coming mid-term elections in the US. If the Democrats are poised to regain control of Congress, speculation regarding a move to impeach President Trump will rapidly intensify. How will this affect US fiscal and monetary policy?
Geo-Political Risk -- If you're paying any attention at all to global events, this needs no further explanation. Whether it's the possibility of renewed war on the Korean Peninsula, conflagration in the Middle East or actual Hot War between NATO and Russia, geo-politics have the potential to greatly unsettle global markets in 2018.
De-Dollarization Risk -- The global pace of de-dollarization is clearly quickening. Later this month, a yuan-denominated crude oil contract will begin trading in Shanghai. Later this year, a ruble-denominated gold contract will begin trading in Moscow. These and other events will provide a clear challenge to US dollar hegemony in 2018.
In 2017, the mainstream financial press blindly pumped GAN2017 without any regard to other possible outcomes. At TFMR, we were first to proclaim GAN2017 a sham, and we were all rewarded with gains in gold and silver. Now in 2018, where in the media do you see ANYONE discussing the three risks laid out above? Instead, it's all about the cryptos and Dow 25,000. Well, I can assure you that just as we were generally correct about GAN2017, we're going to be correct about The Three Themes of 2018, too. Just give it a while to play out.
To that end, 2018 has begun with a continued fall in the broad-based US Dollar Index. As mentioned above, this index fell over 10% in 2017. If it soon drops below 90, it will be poised to fall a similar amount in 2018.
And what signs tell us that more US dollar weakness is coming? Note the current breakout in copper, the building breakout in crude oil and the coming breakout in the CRB commodity index. As these three accelerate to the upside this year, they will foreshadow even greater dollar weakness to come.
One look at the weekly chart for the Dollar Index and you can see where it's likely headed. Note above that copper is already at levels not seen since the summer of 2014, and by breaking above $60, crude also appears headed back to 2014 levels. And where was the Dollar Index in the summer of 2014? Near 80. See for yourself:
Of course, maybe we’re wrong. Perhaps every Wall Street analyst will be proven correct and the US dollar will soar in 2018. However, if The Three Major Themes play out as we expect this year, another drop of 10% for the dollar may be a low-ball estimate. And if that's the case, you should take steps now to prepare for what will be a wildly unpredictable and volatile year ahead.