October 21, 2019 BARRON’S 5
Gold’s Ready to Shine Again
Y
OU WOULDN’T KNOW IT FROM THE CONSTANT BARRAGE
ofnewsonthepoliticalandinternationalfronts,but
therearepositivedevelopmentsinthebackground
forthefinancialmarkets.Tobesure,therehasbeen
goodnewswitha“Phase1”tentativetradedealwiththeU.S.
andChina,andmaybe,justmaybe,someBrexitagreement
(althoughitain’toveruntilParliamentvotesthisweekend).
Butthereisamorepositivemonetarybackdropdevelop-
ing from lower short-term interest rates and
aweakerdollar.Andthatwouldbebullishfor
mostriskassets,includingU.S.stocks,emerg-
ing market debt and equities, and commodi-
ties—notably precious metals.
Thefederal-fundsfuturesmarketisputting
an89.3%probabilityoftheFederalOpenMar-
ket Committee voting for a one-quarter per-
centage-pointreductioninitskeypolicyinter-
est rate on Oct. 30, according to the CME
Group’sFedWatch.Whileanumberofecono-
mists have pushed back on the notion of another rate cut
thismonth,andmostFedofficialsremainnoncommittal,if
notopposed,tofurthereasing,thecentralbankhasalong
historyofnotdisappointingmarketexpectations.Whilethe
betting line can change by game time, the odds now favor
a rate reduction at the next policy confab.
TheFedalsohasbegunbuying$60billionamonthofTrea-
surybills,whichitcontendsdoesn’tconstituteapolicymove
likepastquantitative-easing,orQE,purchases.(SeetheEcon-
omycolumnonpage27.)Inactuality,thebuyingreversesthe
quantitative tightening, or QT, that occurred as the Fed re-
duceditsassets,whileontheothersideofthebalancesheet,
liabilities, notably currency, increased, resulting in an even
sharper shrinkage in bank reserves.
Quantitative tightening was supposed to be like “paint
drying,”asformerFedChairJanetYellendescribedit,but
resultedintheequivalentof7.5percentagepointsoftight-
ening,nearlythreetimesasmuchastheactualratehikes,
Julian Brigden, chief economist at MI2 Partners, has esti-
mated.QThaskeptthedollarstrongerthanfundamentals
would have predicted, he writes in a client note.
Aweakergreenbackwouldprovidethemissing“corner-
stone of a reflationary move,” along with lower rates and
higherequityprices.Globalinvestorshavebeenpilinginto
U.S. growth stocks, taking advantage of strong currency
and equity returns. As the dollar turns, Brigden looks for
arotationfromgrowthtovaluestocks,whichshowedsigns
of starting in early September.
A weaker dollar and negative interest rates also have
boostedhedgefunds’interestingold,accordingtoSociété
Générale. The so-called barbarous relic, and exchange-
tradedfundsthattrackit,suchasthe SPDRGoldShares
(ticker: GLD), have moved mostly sideways around the
$1,500-an-ounce level since late August.
Butthebank’sstrategistsrecommendamaximumbullish
allocationtogold(5%initsportfolios)because
themetal“isincreasinglyseenasanalterna-
tive to cash.” They’re especially bullish on
gold since they also expect further Fed rate
cuts and a lower dollar. While the bank isn’t
advocating a return to a gold standard, it
notesthatcentralbankssuchasthePeople’s
BankofChinaarediversifyingintothemetal.
President Donald Trump has made no
secret of his desire for a weaker dollar, which
wouldbeconsistentwithhisbarrageoftweets
calling on the Fed to slash rates. An end to the tariff wars
would further ease the upward pressure on the dollar. And
thatwouldbenefitcorporateearnings,as40%ofsalesofS&P
500companiesoriginateabroad.Sothere’sgoodreasontobet
your bottom dollar that the greenback is close to a top.
L
ET ME TELL YOU ABOUT THE VERY RICH. THEY ARE
different from you and me,” F. Scott Fitzgerald
wrote. To which Ernest Hemingway would retort
years later, “Yes, they have more money.”
This difference these days is referred to as inequality,
which of course figures prominently in today’s politics. This
pastweek’sDemocraticdebatedisplayedthatinspades,with
potentialpresidentialcandidatesprofferingmeasurestonar-
rowthedifferencebetweenFitzgerald’sveryrichandpresum-
ablyjustabouteverybodyelsewhowatchedtheproceedings.
Prominent among these suggestions was a wealth tax,
proposed by the two leading lights of the left, Sen. Eliza-
bethWarrenandSen.BernieSanders.Warren,theMassa-
chusetts Democrat, would levy a 2% tax on a household’s
wealth that exceeds $50 million, and 3% on the amount
above $1 billion. The Vermont independent’s plan would
start at 1% on a household’s wealth over $32 million and
increase to 8% on assets above $10 billion.
Warrenestimatesthatherlevywouldbringin$2.75trillion
overthenext10years,whileSanderssayshistaxwouldyield
$4.35trillionoverthenext10years.Thetaxwouldfundthe
There’s good reason
to bet your bottom
dollar that the
greenback is close
to a top
Up & Down Wall Street
By Randall W. Forsyth