A Year for Accumulation, Jeff Christian July 2019 Part 1
Sean Brazney: Hello, my name is Sean Brazney, Sales Director for Monex Deposit Company. I'm here with Jeffrey Christian, Managing Director of CPM Group and Author of our, A Year for Accumulation Report. As always, Jeffrey it's great to have your time and your knowledge with us today. Thank you very much for being with us.
Jeffrey Christian: It's good to be here. I'm glad to be with Monex and happy summer.
Sean Brazney: Jeffrey, in the beginning of our A Year for Accumulation Report, you mention that there are various events in May and June that got the Federal Reserve to be a little bit more concerned about the outlook for the U.S. economy and be more open to cutting rates in 2019. Would you be willing to review some of those events with us?
Jeffrey Christian: Yeah, I think the biggest issue was the worsening trade war issues both between the United States and China. You had a ramping up of the rhetoric on both sides in May and early June. Then you also had the U.S. go after Mexico and threaten major trade sanctions and tariffs, tariff and duty increases and import restrictions. I think that that put a real shock into the economy. We saw it in the stock market. We saw it in precious metals and you saw it on the Fed. I mean, the Fed basically looked at this and they said, "Yeah, we have an economy that is strong, but it has pockets of weakness and... with the gathering negative potential problems related to these trade wars, I think we have to be cautious." You know, if you think about it, just going back to December. In December of 2018, the Fed was still gung-ho that it would be raising interest rates in this year, and then in January it signaled that well maybe it isn't going to and it's going to take a pause, and by May, June, they're talking about the potential for rate cuts. So, I think that that was probably the biggest thing that pushed gold prices higher in the second half of June.
Sean Brazney: I've seen reports of as much as a 100% consensus for July rate cut go from 50 basis points down to 25 basis points, but a rate cut in July still feels kind of early. We've even seen a Fed Governor call it an insurance cut. Do you think that the 25 basis point cut is already priced into the market?
Jeffrey Christian: I'm not sure that it's priced into the market and I agree with you that a rate cut at the end of July probably is premature. If there is a rate cut, it's probably going to be 25 basis points, not 50 basis points, we think. It's going to depend on the economic and political developments that are going on at the time. Right now, we've sort of backed away from the chaos that we saw in late May and early June. So, I think it is a little bit premature to expect the Fed to cut rates in July still. I think that the Fed is right to be concerned about the economic health and the risks that are being presented to economic activity and the equity market by trade wars and events in the Persian Gulf and other factors, but I also think that the Fed is right to be very cautious about being too easy too early. So, I think, what we'll see is the Fed will continue to be cautious, they'll continue to indicate that they're willing to cut if they need to, but unless we see a major deterioration in economic trends between now and the end of July, I doubt that we'll actually see a real cut in interest rates by the Fed.
Sean Brazney: Also, in our A Year for Accumulation Report, you mention several factors expected to influence global gold investment demand. Would you be willing to review some of those factors with our listeners?
Jeffrey Christian: Yeah, I mean, you know, we've always talked about five or six factors that are really the key issues and one of them is inflation. Gold works well as an inflation hedge. It also works well as a deflation hedge, I should mention, but the reality is that inflation hasn't been problematic in the United States really for about 30 years now. So, gold really hasn't been tested as an inflation hedge. If you look at the current situation, while inflation can come back and deflation can emerge, the reality is that inflation probably is the least of our economic worries. We have a lot greater risks in the stock market, the bond market, and currency markets. There's a tremendous amount of uncertainty about the direction for stocks. They're at record levels by some measures depending on which industries you look at. There's a tremendous uncertainty about the bond market trends and the dollar, while it still has some things going for it, there's clearly an anti-dollar sentiment building up on the part of foreign investors and Central Banks. So, I think that there's increased risks in the currency market and gold does well as a currency hedge. There's increased risks in the stock and bond market and gold's primary thing is a portfolio diversifier and a safe haven, a safe haven in times of political, economic, and financial unrest, bank instability. We're seeing the banking industry go through major cuts. The Deutsche Bank, the day before we're taping this, announcing that they were laying off 18,000 workers or more, getting out of the equity markets globally, and further cutting back on their investment banking operations. You're seeing a tremendous amount of financial market instability and uncertainty. You're seeing concerns about the currency market. You're seeing concerns about the stocks and bonds, and gold does well as a safe haven against those kinds of risks and as a portfolio diversifier at times when the stocks, or the bonds, or the currencies are looking particularly bad and risky.