New Fundamentals Should Lift Gold’s Price in 2017

Each year brings a new set of dynamics to the gold market.  There are several new elements surfacing in 2017, each of which promises to lift the price of gold more than in any of the last few years:

Sharia-compliant gold buying.  Last December, the massive global Muslim community was given the green light to buy gold in compliance with the technical demands of Sharia law. Last week, we learned that State Street Global Advisors, which operates SPDR Gold Shares (GLD), the world’s largest gold-backed exchange traded fund, announced that the fund has been officially certified as Sharia-compliant by Amanie Advisors of Malaysia, a leading sharia advisory company specializing in Islamic financial law.

That ruling opens the gold door to millions of Muslims who had been prevented by Islamic prohibitions from trading in gold, since Islamic law prohibits accepting interest or fees for loans of money.  It was unclear exactly how gold ETFs measured up against that provision, until now. Last December, the World Gold Council collaborated with AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) to develop criteria for gold trading that in accordance with Sharia law.  Islamic financial markets are currently valued at $2 trillion – a massive market now open to Muslim buying of gold EFTs.

Elections in Europe could end the European Union.  “Brexit” was only the beginning. Britain voting to leave the European Union (EU) was not a death knell to the EU since the British have their own currency, the British pound, but if major Euro-zone nations leave the EU, that union is doomed.  Many key Euro-zone nations will stage elections this year and the anti-EU candidates are leading in the polls in the first two elections.  First comes the Dutch election on March 15, where Geert Wilders, leader of the far-right Party for Freedom (PVV) is favored to win.  Then comes the French election on April 23 (with a runoff likely on May 7). In France, the nationalist candidate Marine Le Pen currently leads the polls there.

These elections will also likely lead to a stampede out of the EU.  The biggest economy in the EU, Germany, holds elections on September 24, followed by another Italian election not yet scheduled. If the Dutch or the French opt to exit the EU, that will send the euro currency into a tailspin.  It will likely cause millions of Europeans to turn to safe havens such as gold to protect them from currency erosion.

President Trump’s Deficit Spending.  Uncertainty over America’s direction in global trade, domestic spending, tax policies, immigration law enforcement and several other contentious factors is bolstering gold, but perhaps the biggest fuel to gold’s price in the Trump era will be an increase in the deficit on the federal budget, especially with interest rates rising, adding to the cost of servicing the rising national debt.

Already, President Trump has announced a $54 billion increase in defense spending.  His infrastructure plan will likely run into the trillions – a Trump equivalent to the massive “stimulus” packages under Obama, which ran up trillion-dollar-per-year deficits in each year in Obama’s first term.  Any new border wall project will certainly suffer cost over-runs and not be that effective in the end.  The President will also pass some tax cuts. If the nation falls into a recession, tax receipts will dry up while spending soars.  Gold performed exceptionally well in previous high-deficit years, such as Obama’s spendthrift first term.

More States are Repealing Sales Tax on Gold.  Early in 2017, two more states – Virginia and Alabama – have removed sales taxes on gold purchases, based on the fact that gold is a currency, not a commodity.  A Tenth Amendment Center (TAC) blog reported that a bill was introduced in the Alabama House that would exempt gross proceeds from the sale of gold, silver, and platinum bullion, and coins from sales and use tax in Alabama. “By removing the sales tax on the exchange of gold and silver, Alabama would treat specie as money instead of a commodity. This represents a small step toward reestablishing gold and silver as legal tender and breaking down the Fed’s monopoly on money,” said the TAC report.

In addition, a Virginia House bill, signed by the governor, would exempt gold, silver or platinum bullion or legal tender coins with a price over $1,000. According to TAC, Constitutional tender expert Professor William Greene said that when people in multiple states start using gold and silver instead of dollars (Federal Reserve Notes) it would effectively end the federal government monopoly on money.  This is an example of Gresham’s Law states, which says good money (gold & silver) drives out bad money (paper).

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5 years ago

“SPDR Gold Shares (GLD), the world’s largest gold-backed exchange traded fund…”

This is questionable at best. Paper gold GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. This fact alone would mean GLD shares are nothing more than paper at the end of the day. Furthermore, GLD’s prospectus is chalk full of weasel clauses and legal loopholes that allows the fund to get away without the full physical gold backing. One good example of this is the clause that states GLD has no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this audit loophole. I’ve also verified the following to be true and welcome everyone else to do so:

“Did anyone try calling the GLD hotline at 866▪320▪4053 in search of numerical details on GLD’s insurance? The prospectus vaguely states “The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody.” When I asked about how much of the gold was insured, the representative proceeded to act as if he didn’t know and said they were just the “marketing agent” for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.”

“I remember there was a well documented visit by CNBC’s Bob Pisani to GLD’s gold vault. This visit was organized by GLD’s management to prove the existence of GLD’s gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this “GLD” bar was actually owned by ETF Securities.”

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