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Stocks Struggle, Silver Surges, Gold Gallops

As we find ourselves firmly entrenched in 2019, it warrants a look at some of the things we mentioned the last time we wrote in 2018.  It appears that things are progressing rapidly, in accordance with trends identified last year.  Those that were paying attention back in October, have 12-14% gains today on gold and silver bullion and can sell gold back now for a premium over spot price.  Not a bad return for 3 months, with relatively little risk.  If you were still on the sidelines in 2018, it is not too late.  We still appear to be in the beginning stages of what looks to be a great 2019 for those that own precious metals.

Some of the challenges we discussed in our projections for 2019 were the difficulties faced by American corporations, as far as stocks and bonds are concerned.  Many companies have failed to properly invest in themselves over the last few years, and are not as prepared as they could be for the years ahead.  During the extended period of low interest rates, many took advantage of the low rates to borrow money.  Normally, this could be a good idea, if the funds borrowed were used to upgrade facilities, develop new technologies, etc.  But in many cases, companies used the borrowed funds to purchase back their own stock from other shareholders.  When company insiders (executives) buy back shares with their own money, it is often a good sign indicating confidence in the economic future of the corporation.  But when corporations buy back their own shares with borrowed money, it can indicate something else entirely.

Sometimes it is a strategy used to reduce the number of outstanding shares of stock for a corporation, which increases the “earnings per share” reported in annual financial filings.  Even when earnings are the same or lower, the “earnings per share” can be increased due to a reduced number of shares.  For example, if a company earns $1,000,000, and there are 50,000 shares outstanding, they earned $20 per share.  If they purchase back 25,000 shares, then the $1,000,000 becomes $40 per share of earnings, spread among the remaining 25,000 shares outstanding.  Often executive pay and benefits are tied to stock price performance.  When earnings per share rise, it often looks good on paper.  It appears that management has done a great job of growing revenues, and entices investors to bid up the share prices further, as they purchase more shares.  A deeper dive sometimes reveals that revenues have not grown and that earnings per share have increased only because there are fewer shares in circulation.

Many market analysts believe that a significant reason for much of the run-up in stock prices the last few years is due to just such stock buy-backs purchased with borrowed money.  This would indicate that without continued buy-backs, there will be less support for further stock price increases.  The problem now is that many of these companies have loans coming due, without the increased earnings necessary to pay them off.  In previous years, such debt could be rolled into a new loan at similarly low rates, and the party could continue.  But with interest rates on the rise since December 2016, new loan rates (when available) are in many cases twice as expensive as the old loans.  This requires companies to take funds from other areas of development to service debt, which can be problematic when revenues have not grown.

The reverberations in the stock and bond markets have already begun to make themselves known.  Last month was the worst performing December since the Great Depression for stocks.  While we have bounced back some from the lows, signals are flashing even today that corporate profits are expected to go negative in the coming months, putting further strains on share performance.  Things have become quite volatile, as the attached picture indicates.  By the time a market headline was posted about an index rising by 100 points, it had already dropped 216 points, turning a +100 into a -116.  Many senior analysts have pointed out that severe swings in volatility such as we have seen recently, are sometimes a precursor to a major downturn.   A few months ago, analysts were concerned about the effects of rising interest rates on stocks and bonds.  Today there are new concerns of future pain, regardless of the direction of future interest rates.

This brings us to precious metals.  As we mentioned in the first paragraph, those that read and acted on articles written in October, have already seen some nice short-term gains.  But we believe the opportunity for gains in gold and silver still have a long way to run, both for 2019 and beyond.  Just as there are many factors working together right now to create uncertainty in the stock and bond markets, there are many factors working together to create certainty in the precious metals arena.  We, as well as other colleagues at the US Gold Bureau, have written about these factors often.  What makes conditions uniquely beneficial for metals this year, are the difficulties surfacing in many other areas of investment.  Even in the best of times, gold and silver are an important diversifier for a portion of our assets.  You can find a deeper comparison of metals vs markets here, written after a recent visit to Wall Street and the New York Federal Reserve.

The current prices for gold and silver, though higher than a few months ago, are still below the cost of production for many producers.  This means we can enter the metals market with a solid floor under our feet, without much downside risk.  Gold and silver dealers themselves also believe that it is a good entry point to purchase metals, as they are offering a premium over spot to purchase from the public right now.  How many times lately have you seen signs saying “We Buy Gold”, encouraging people to bring in gold.  I’m guessing it is more often than signs saying “We Sell Gold”.  The demand is growing, and the metal available is limited.  2019 provides us the unique opportunity to own an asset whose strength becomes more certain, even as financial uncertainty elsewhere becomes the calling card of the day.  Do yourself and your family a favor, and reach out today.  You will be glad you did.

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