Why 2017 May Be a Good Time to Buy Gold Essay

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Dave Collum's (2016) Annual Year in Review posted at Peak Prosperity and Zero Hedge one week ago gives a lengthy rundown on the year's social, political and economic events, with the core focus of the report going to what will happen in 2017 with the price of equities, precious metals (PMs), and bonds. Collum provides analysis on investing, the U.S. economy, banks, geopolitics and much more in order to justify why he is currently at nearly 60% cash (with expectations of a substantial market correction -- or "mean regression" as he puts it -- to the downside, Collum wants to be sure to have funds available to purchase at the bottom). This paper will analyze Collum's Review and evaluate outcome expectations using three general economic principles (taken from Mankiw's Ten Principles of Economics, three macroeconomic indices, their relation to the overall article, their impact on one another and an appropriate forecast derived from the preceding.

Economic Principles

Three general economic principles that relate to Collum's Review are: 1) People Face Tradeoffs, 2) People Respond to Incentives, and 3) Prices Rise When the Government Prints Too Much Money. The first of these principles -- "people face tradeoffs" -- is evident in the outcome of the 2016 general election for President of the United States, a lens through which Collum views much of the year's events as it offers a polarizing juxtaposition of two worldviews -- the Trumpian and the Clintonian. The former presented voters with a vision in which offshoring was brought to an end, taxes were cut, nationalism defeated globalism, incessant warring was ended, terrorists were defeated, and the Establishment was obliterated. The latter offered a promise of hostility towards Russia (responsible to a large extent for defeating U.S.-backed "rebels" in Syria), the continued suppression of the energy sector (coal, especially), no end to offshoring, more trade deals in the spirit of GATT and NAFTA (that would make nations beholden to multinational companies, allowing the latter to essentially be above the law of individual countries), and a continuation of the Establishment. Just enough voters in just enough counties in just enough states saw to it that the former vision prevailed on Election Day. The trade-off was giving up the globalist agenda of the Establishment-class for the nationalist agenda of the populist. So far, the economy has not crashed and the S&P 500 has risen to all-time highs: Collum asserts that the S&P index has gone up mainly because of a short squeeze that began before Election Day and simply continued on. The economy remains on a precipice -- and with the Fed promising to raise rates, perhaps aggressively in 2017 (Durden, 2017a), Collum's predicted "mean regression" in the equities market could prove correct as money flies an expensive market propped up by QE for other asset classes. Bonds and bullion (at Bitcoin -- thanks to China's capital controls) have been bid (Durden, 2017b).

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The second principle -- people respond to incentives -- is not far behind: voters responded to Trump's several pledges: 1) to build a wall and end illegal (and some forms of legal) immigration; 2) to "drain the swamp," 3) to bring back jobs from overseas (already this appears to be happening with Ford, Carrier and other companies making commitments to manufacture in the U.S.), 4) to "make America great again" by protecting and supporting American interests, 5) to "get along with" world leaders rather than engage in regime change, acts of war (sanctions -- the Obama Administration could not resist placing new ones on Russia just weeks before leaving office), 6) to "lock her [Hillary] up" -- he has already back-tracked from this pledge, and 7) to invest in American infrastructure. These incentives were enough to spur 60 million+ Americans to vote for Trump. It now remains to be seen how much impact a Trump Administration can have on the real economy, especially as the Fed takes a skeptical view of Trump's economic policies and sees aggressive rate raising as now imperative (for some reason NIRP and ZIRP were okay during the Obama Administration). Meanwhile, cash bans in India and other parts of the world -- but mainly in India, which is primarily a cash-based society -- are raising questions about how far totalitarian leaders can push things before countries swing in the opposite direction. The Philippines have Duterte (their own version of Trump). Italy has theirs. The Netherlands has Geert Wilders. UK voted to leave the EU. Even France is looking to abandon the left. Only Germany remains enamored of Merkl -- but that may change as more attacks like the recent one in Berlin take a toll. For Americans, the incentives offered by Trump were enough to secure a Trump victory. Now the various other players in the world market will have their say -- starting with the Fed and its plan to hike rates. Collum suggests that this could be the trigger of the market correction -- which is part of the reason he is nearly 30% in PMs.

The other part of the reason for Collum's buy recommendation of gold and silver is that PMs are a wealth preserver: and this leads to the third economic principle -- "prices rise when the government prints too much money." Three rounds of QE are responsible for the biggest bull market run in history -- at a time when the world economy remains mired in recessionary-level activity. Take the QE away and give money managers the opportunity to get a decent yield from a (relatively) safe investment 10-Year T-bills, for instance, and a market….....

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Collum, D. (2016). 2016-Year in Review. PeakProsperity. Retrieved from https://s3.amazonaws.com/cm-us-standard/documents/2016-Year-In-Review-PeakProsperity.pdf

Durden, T. (2017a). FOMC minutes show 'considerable uncertainty' about Trump impact on economy. ZeroHedge. Retrieved from http://www.zerohedge.com/news/2017-01-04/fomc-minutes-show-fed-fearful-fiscal-policy-overshoot-may-raise-rates-faster

Durden, T. (2017b). Bitcoin China soars to record high amid capital control concerns.

ZeroHedge. Retrieved from http://www.zerohedge.com/news/2017-01-04/bitcoin-china-soars-record-high-amid-capital-control-concerns

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