Walter Pehowich, Executive Vice President of Dillon Gage Metals, is a long-time friend of ours and holds over 38 years of experience in precious metals investment services. His recent commentary on the position of equities and gold was particularly insightful and highlights a potential shift in current markets. You can read his comments below for details about his position on the gold and equities markets as well as the new tax bills being introduced in Washington.

—Rich Checkan

Gold Stuck In $20 Trading Range

By Walter Pehowich

Just before I was ready to send out this report, I received a call from an old friend who is a prominent Wall Street trader. He said, “I believe that the equity markets have reached the sun and have already started their return to earth. With all the uncertainties over these two tax bills they are trying to pass, I’m throwing my hat in the ring buying treasuries and gold. I think their time has finally come.” Music to my ears, and I can’t agree more.

Our Markets

With our gold market seemingly stuck forever in a $20 trading range, we are constantly looking for any hint of a major breakout either way, higher or lower.

Let’s look at some topics that have a direct effect on the price of gold.

Geopolitical Risks

Understanding geopolitical risk is important in a world that has become more closely intertwined with rapid advances in communications and the rise of globalization. It also can have a direct relationship with the amount of risk investors are willing to take.

Geopolitics is defined as the study of how geography and economics influence politics and the relations between countries. An example of geopolitical risk just occurred with the arrests of some predominate Saudi officials, which moved the price of oil. Other examples include a possible banking crisis in Europe that results in market players piling into U.S. treasuries, which could result in American bond yields falling, putting selling pressure on global equities and rallying the price of gold.

Every investor should take risk into account when building and maintaining a portfolio, and that is why it is wise to have at least some familiarity with geopolitical risks around the world. If you’re not aware of these risks and their potential to move markets, then certainly you could be caught off guard. Geopolitical risk has the potential to move markets very aggressively in short periods of time.

So, now with tensions with North Korea seemingly at a calm state, markets are discounting any potential flare up between the U.S. and Kim Jong-un. So, one might say the markets are very complacent at this moment.

Currently, if you look at the CBOE VIX Index, most investors seem to be very comfortable with their investments and don’t expect a major move in equities in the short term. Also, with interest rates still at very low levels, seniors are taking on more risk with their investments and searching for higher yields. But, in the last week, the CBOE VIX Index has started to climb, ever so slowly, but trending higher. So, it seems, some investors are getting a little nervous about holding equities, as indicated by the VIX close last Tuesday—up 1.29 at 12.88.

Interest Rates

The CME FED Watch Tool is currently showing over a 90% chance that the Fed will raise rates at the December meeting.

In March next year, there is a 46% chance that there will be another rate hike. It seems that all markets are focusing on the tax bill and nothing else at this time. If there are any derailments and this tax bill doesn’t get passed, I expect the odds of a rate hike in December to drop dramatically. That will be good news for the longs holding gold positions. When all this madness is over, no matter which way they vote, I hope we can go back to basics and see what the real drivers of the markets will be.

Now onto the Hot Topic—Washington

On November 9, the Senate released its version of the new tax bill. The highlights of this bill are extensive changes to the corporate and international tax codes. The House Committee on Ways and Means has already approved their own version of the new tax code.

Committee Chairman Kevin Brady said this tax bill will give middleclass Americans the tax relief they so desperately need. I’m holding my breath and pausing on writing what I really think about what Mr. Brady and Mr. Ryan stand for. One thing is for sure, it’s not the middleclass. Now that I’ve somewhat composed myself, I will continue.

The Senate was expected to sharpen their pencils (and see how many more lobbyists they have to meet with) before they put their signatures on the bottom line. The full House is expected to vote on the House Bill later this week.

Here are some of the highlights, or lowlights, of each plan:

• The Senate bill will entirely repeal the deduction for state and local taxes, making no exception for property taxes. The House bill, in a bid to win support from moderate Republicans, would allow deductions up to $10,000 for property taxes. Senate Republicans see little need to allow property tax deductions, as they don’t have members in their conference from high-tax states such as California, New York, New Jersey, and Illinois.
• The Senate would keep in place the home mortgage interest deduction for newly purchased homes up to $1 million, while the House plan would cut the threshold to $500,000. The National Association of Home Builders is swarming Washington with its lobbyists trying to get that corrected.
• The Senate would keep in place a variety of popular tax credits and deductions that would have been eliminated by the House tax bill released last week. It preserves tax credits and deductions for adoption, medical expense, teacher expenses, and student loan interest.
• The House bill would condense the number of tax brackets to four: 12% for income up to $90,000; 25% for income up to $260,000; 35% for income up to $1 million; and 39.6% for income over $1 million. The Senate bill would establish seven tax brackets at 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5% for the nation’s highest income earners. The top rate kicks in for individuals who earn $500,000 and couples who earn $1 million.
• The Senate bill would double the estate tax exemption for wealthy estates from $11 million to $22 million per couple, or from $5.5 million to $11 million per individual, while the House bill would repeal the estate tax entirely.
• The Senate would cut the corporate tax rate to 20%, like the House would, but delay its implementation until 2019 to reduce the projected cost of the bill over ten years. The House would cut the corporate tax rate next year.

And now comes the meat and potatoes. After what you have read here and heard on the news, who will be the benefactors of these two house proposals? Answer: Corporate America, Washington’s politicians, and the Wall Street elite. I don’t think there is any other answer.

In the meantime, more and more people are losing their healthcare, more and more homeless people are on the streets, and our roads and bridges continue to crumble. So, let’s just concentrate on corporate America. (And Rodger Goodell, Commissioner of the National Football league, who is looking for a salary of 49.5 million a year, a private jet for life, and healthcare for his children for the rest of their lives.) I scratched my head so many times I started to bleed.

I just can’t comprehend this stuff anymore.

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