As one of the best-performing areas of the financial markets this year, gold and silver have been added to many investors' portfolios. And while every dip has been used as an excuse to buy, bulls should hold off a bit when making any new purchases.

 

The price of gold is up more than 20 percent and silver gained over 17 percent so far this year. Despite the sector's performance, there are many portfolio managers out there who won't touch precious metals and probably never will. "Too speculative," "impossible to analyze," and "we are not in the business of gambling" are all explanations I have heard through the years.

 

Granted, gold is not for everyone, but something must be said for its appeal as a hard currency since it has functioned as such for thousands of years.

 

I am not here to proselytize, but to point out that there are investment cycles for most commodities, and we happen to be in one for precious metals. This time around, some of the typical reasons for owning gold are once again present. Geopolitical uncertainty comes to mind with actual shooting wars in Ukraine and the Middle East, either of which might trigger a more serious conflict with nuclear implications. As such, the safe-haven status of gold is an appealing reason to hedge against this geopolitical risk.

 

Purchases by central banks have been one of the biggest drivers this year with buying hitting a record in the first quarter of 2024. Bank of America estimates that gold has now surpassed the euro as the world's largest reserve asset after the U.S. dollar.

 

The threat of inflation continues to hang over the world's economies and precious metals have long been considered an inflation hedge. Governments continue to spend, especially here in the U.S., reviving fears that whoever may win the coming elections, their policies will lead to a revival in the inflation rate. If you also add fears of a falling dollar, brought on by a ballooning debt load, make gold and silver something tangible that investors can hold on to and offer an appealing alternative to a stock market at record highs.

 

While gold is the go-to precious metal most buy, silver has also been purchased for many of the same reasons. Its price has been linked to gold in the past, but to a lesser extent recently as its industrial usage climbs. About 55-60 percent of silver production is dedicated to the industrial area. This percentage is increasing with the popularity of electric vehicles where silver is in demand for its conductive qualities in EV batteries and photovoltaics. 

 

Silver is normally a byproduct of copper mining and as such its price is heavily dependent on demand for copper. Why is this important? China is the world's largest marginal buyer of copper, so Chinese demand for copper sets the price of that commodity. This year, China is battling with a slowing economy, a major real estate problem, and waning consumer demand. As such, copper demand is anemic at best, and lower copper prices reflect that situation. The price of silver, therefore, is subject to the countervailing forces of a bullish gold price and an offsetting weakening copper price. 

 

Interestingly, much of the recent demand for gold has been attributed to demand from China's central bank as well as retail buying in the form of small gold beads by Chinese investors who are wary of their stock market. Western investors have also piled into gold with physically backed gold funds and have seen three straight months of inflows.

 

Given the bullish background on gold, and to some extent silver, why do I advise caution heading into September? If one studies the 10-year seasonal trend of gold beginning on Labor Day weekend out until Sept. 28, the gold price has declined in every year of the past ten years. In the last 15 years, there were only three up years and 12 down years. Silver's record is almost as negative with four of the past five years suffering declines in September.

 

Does this mean that you should sell all your gold, silver, and the mining stocks that produce precious metals? No, but I do recommend that you just wait to add new purchases, i.e., buy the dip.

 

Remember that the Fed is expected to begin an interest rate-cutting cycle on Sept. 18. Gold futures have rallied an average of 6 percent within 30 days of the first interest rate cut after a hiking cycle begins. At the end of September, gold has rallied on average 13 out of the past 15 years. There is often a slight pause in early November (elections?) and then tends to rise from Thanksgiving into the New Year.

 

In this case, the data says gold and silver have a much better than average chance of falling in price in September. As for silver bulls, I would keep a close eye on the copper price and data coming out of China's economy.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

We enter September with the three major averages close to or above yearly highs. Momentum is still on the side of the bulls. As such, in the next week or so, markets could attempt to scale those heights and possibly better them.

 

It is what happens next that concerns me. The next two months are seasonally the worst period for the stock market. However, investors also expect the Federal Reserve Bank to cut interest rates at their meeting on Sept. 17-18. That is normally a bullish development for stocks. We won't know if the Fed will cut rates, but the markets are betting heavily on that outcome.

 

The macroeconomic data this week certainly reinforced those expectations. Second quarter GDP was revised upward on the back of higher consumer spending from 2.8 percent to 3 percent. This week's jobless claims were flat versus last week and the Fed's favorite inflation gauge, the Personal Consumption Expenditures Price Index (PCE), came in line for July with economists' expectations at 0.2 percent.

 

Between now and the FOMC meeting, the only data point that could make a difference to the Feds' rate decision would be next Friday's non-farm payroll numbers for August. Recall that the last report spooked investors. The number of jobs decreased by 36.3 percent versus the month before. Economists were looking for 175,000 job gains but the economy only added 114,000 jobs.

 

The data sparked fears of a deep recession and calls for immediate rate cuts by the Fed to avert a hard landing.  Since then, investors have explained away the sharp increase by blaming the shortfall on Hurricane Beryl, which decimated the Houston job market. If next week's jobs report does not show another sharp decline, the Fed is expected to cut the Fed Funds rate by 25 basis points.

 

What concerns me is that several market strategists are expecting an even deeper rate cut by one-half percent, followed by cuts every month for the remainder of the year. In my opinion, they are way over their skies unless the jobs data next week is poor.

 

In any event, one of the major concerns of investors this week was the fear that a disappointing quarterly earnings result from Nvidia might sink the markets. While the AI leader posted better earnings and sales, it wasn't enough to satisfy investors. As a result, the company's stock fell roughly 6 percent after its earnings announcement, but the markets overall held their own.

 

There has been a lot of backing and filling in the markets over the last several days. Blame it on the summer doldrums. It feels like the market wants to grind higher, possibly into the FOMC meeting in two weeks. An added variable investors will contend with is politics.

 

After Labor Day, voters normally begin to pay attention to the upcoming elections. It is a time when political promises come fast and furious as politicians and the media make hay while the sun shines. The combination of negative seasonality and election rhetoric could be "a perfect storm" of volatility for the stock market, especially given the level of gains in the market. Many who follow technical charts are convinced that a pullback will occur. It is just a question of when. I agree.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

U.S. deficits at $35.225 trillion are going through the roof and interest payments on our debt load account for an increasing share of gross domestic product. We are not alone in facing this trend. The question is what monetary and fiscal policymakers will do about it.

 

The time-honored, go-to strategy that has worked well for decades among nations in times like these is to devalue one's currency. How does that work?

 

Readers need to understand that the level of interest rates plays an important role in currency devaluation. For example, the U.S. dollar and U.S. interest rates work hand in hand. When traders buy dollars, they don't just keep their money in the currency and hope it goes up. Most often they buy dollar-denominated Treasury bonds where they can get an interest rate return on their money. If the Federal Reserve Bank cuts interest rates the return for holding those dollars is reduced. That triggers a move to sell the dollar and buy bonds in another currency that yields more. The opposite occurs when the Fed raises rates as they have been doing for the last two years. How does this impact the U.S. debt load?

 

In the simplest terms, imagine I owe you $10, if I push down the dollars' worth by lowering interest rates, those ten greenbacks of debt will be worth less as well. If I keep doing that, over time, my debt to you becomes more and more manageable, since it too is less valuable.

 

You, the lender, may not be happy about it, but there are compensations. A weaker dollar may mean the lender (foreigners who buy our debt, for example) can buy more products priced in cheaper dollars with their currencies. If their plans also include investing money in plants and equipment in America, the cost of doing so suddenly becomes cheaper and they can build more for less.  

 

The key to succeeding at such a strategy is coordination among nations, and a lot of it. Otherwise, it becomes a currency free-for-all and a race to the bottom for all concerned. Most nations understand this from prior experience, and so central bankers and their treasury counterparts work behind the scenes to ensure an even keel in devaluation that over time allows their debt loads to be reduced.

 

I believe the devaluation of the dollar has already started. It was, in my opinion, partially behind the yen-carry trade debacle ("Japanic Monday") of three weeks ago. The dollar, after years of strength, had been falling gradually against many currencies for weeks, but not the yen. The actions of the Bank of Japan to raise interest rates slightly forced the Yen to strengthen against the dollar practically overnight. This currency catch-up trade caused havoc around the world. Bankers want to avoid this kind of fallout whenever possible. 

 

Many believe that a potential rebound in the inflation rate is behind the record run in gold prices recently, but that is not the whole story. There are many global traders, as well as a whole host of central banks, that realize a devaluation of the dollar is underway and have been buying gold as an alternative form of currency.

 

How will devaluing a dollar to ease our debt impact you? Since a weaker dollar means that the dollar can be exchanged for less foreign currency, producing goods priced in dollars and goods made in other countries is more expensive for American consumers. Devaluation can also lead to higher inflation. Therefore, a devaluation must be managed carefully. And finally, it could lead to lower profits for some companies that import a great deal of materials from offshore. That could lead to layoffs in the labor force.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

In this election season of competing promises, one idea stands out as a good way of redistributing income from the haves to the have-nots. More than 70 million needy Americans would benefit directly by cutting federal taxes on Social Security.

 

Let's face it, retirees have been getting the short end of the stick for a long time. For years, with interest rates at practically zero, retired savers, unwilling to bet on the stock market, have received scanty returns on their savings.

 

Fast forward to the pandemic and its aftermath. Elderly Americans, if they were lucky enough to dodge serious sickness or death as the highest-risk segment of the population, they were faced with burgeoning inflation for everything from food to health care on a fixed income.

 

Sure, interest rates spiked higher, but not nearly enough to keep up with inflation. To make ends meet, seniors were forced to find jobs bagging groceries, waiting on tables, or acquiring whatever menial, minimum-wage job they could find. To make matters worse, many of those part-time jobs ended up pushing their income level over the threshold. What threshold, you might ask? The answer lies in the past.

 

Before 1984, Social Security benefits were exempt from federal income tax. But Congress, faced with a Social Security funding crisis of their own making, then decided to tax a portion of these benefits, with the share gradually increasing as a person's income rose above a specified threshold. Today, if you file single on your tax return and earn above $34,000, or file jointly and make above $44,000, 85 percent of your benefits are taxed. Up to 50 percent of benefits can be taxed if you make between $25,000 and $34,000 (or between $32,000-$44,000 if filing jointly).

 

And those income levels have never been adjusted for inflation over more than 30 years. Bottom line, by eliminating federal income tax on Social Security, many retirees would be given a bit more financial breathing room, especially those who receive other types of taxable income such as wages or distributions from retirement accounts. All but 12 state governments are already recognizing this issue and do not tax Social Security benefits.

 

Advocates of tax-free benefits argue that the present tax structure is not only extremely regressive but discourages seniors from working, even when they want to.

 

How does that fit with all those free-market capitalists out there who extoll the benefits and rewards of American labor? It doesn't. But it gets worse! Retirees have already paid taxes on their Social Security benefit contributions via the payroll tax during their working lifetimes, so retirement benefits are taxed twice.

 

Last year, two Florida congressmen, Daniel Webster and Thomas Massie, introduced a bill, the Senior Citizens Tax Elimination Act, that would eliminate this double tax. Co-sponsoring the bill were 24 Republican members of Congress from across the nation. For Massie, this was the sixth time that he has reintroduced since 2012.

 

Up until now, Massie's bill has been dead upon arrival in Congress. Many politicians argue that tax-free benefits would simply worsen a social program that many in Congress and the Office of Management and Budget predict will be insolvent by 2034. Does it matter that the program brings in 90 percent of its revenue from the payroll tax on earned income, and only 4 percent of the total is derived from the taxation of benefits? That 4 percent is a drop in the budget compared to what we spend every year on so many government boondoggles but an "every little bit helps" attitude permeates the discussion in the Capitol's corridors.

 

Democrat Rep. Angie Craig, from Minnesota, thinks she has solved this hurdle. Her bill, the You Earned It, You Keep It Act, introduced this year, would eliminate taxes, but at the same time increase the Social Security wage base. It would mean that higher earners would foot the bill for eliminating the federal tax on retirement benefits.

 

Craig's bill would increase the wage limit to over $250,000, which would mean that high earners would pay a 6.2 percent payroll tax on almost $100,000 more of their wages. The Social Security Office of the Actuary believes her bill would ensure payments could be made through 2054, rather than 2034 while benefiting retirees for decades ahead.

 

The biggest challenge would be getting enough support on both sides of the aisle to amend Social Security laws. That would take 60 votes in the U.S. Senate. The problem is that neither party has held a supermajority of 60 seats in the upper house of Congress since 1979. But times are changing.

 

At least one of the candidates is savvy enough to see the political benefit of eliminating this double tax on 70 million voting seniors. Populism has swept the country and with it the recognition that income inequality in the U.S. needs to be reversed if this country has any chance of righting the wrongs of the last 40-50 years. To do that, a bottom-up approach to economic and political policies must be enacted. Where better to start than with an unjust tax that is already despised by more than 90 percent of American seniors? Is anyone in Chicago listening?

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

It was a good week in the equity market. The bounce back from the 8 percent sell-off at the beginning of the month is but a distant memory. Does that mean we are in the clear for further gains?

 

Maybe. So far, the financial markets have seen a "V" shaped recovery from the lows of Monday a week past. Technically, that is a rare occurrence after a downdraft of that magnitude. And yet, that is exactly what has happened thus far.

 

The gains have been helped by a spate of good corporate earnings, with 80 percent of S&P 500 companies beating estimates. A few benign macroeconomic readings suggested continued economic growth, a lessening of inflation, and a still strong if moderating, labor market. What's not to like about that?

 

It appears the yen-carry trade has been relegated to the back burner. Japanese stocks have recovered most of their losses and the yen has weakened versus the dollar every day this week.

 

On the geopolitical front, the awaited response to Israel's assassinations of several Middle Eastern terrorist chieftains has not materialized. Iran appears to have telegraphed that while it is still considering a response, much will depend on whether a Gaza cease-fire agreement can be hammered out by the combatants.

 

Both the Producer Price Index and the Consumer Price Index for July came in on target or even a little cooler depending on how you parse the numbers. July retail sales were a big surprise rising 0.4 percent, double the consensus of a 0.2 percent increase. That put to bed worries over faltering consumer spending.

 

And once again this week, unemployment claims came in less than expected at 227,000, down from the 234,000 the week prior. Given the data, economists are now calling the disappointing non-farm payroll number of two weeks ago an anomaly possibly caused by fallout from Hurricane Beryl.

 

There is also a bit of excitement and consternation surrounding the election campaigns of both candidates. This is the season of promises where politicians dangle new and tasty carrots before the electorate. Donald Trump has floated the idea of making social security benefits tax-free while arguing that he should have more control over central bank decisions.

 

Kamala Harris unveiled her economic policy initiative on Friday. She is promising to slap price controls and other penalties on price gouging in the grocery industry and make it harder for food producers to acquire distribution businesses like supermarkets and grocery stores. 

 

She also wants to cut taxes for the middle class and expand affordable housing. Both candidates are now talking about making tip income tax-free as well. In the meantime, government Medicare officials have also negotiated lower prices for 10 drugs including some in cancer, blood clots, and diabetes areas for the first time. It may represent a turning point to rein in healthcare costs and could save billions of dollars a year in Medicare payments. Harris is promising to expand this effort in the years to come.

 

On Aug. 22, the yearly Economic Policy Symposium in Jackson Hole, Wyo., will kick off. Federal Reserve Chair Jerome Powell will speak next Friday. Investors will be sure to parse every word of his speech to get his latest thoughts on the interest rate front.

 

Marketwise, we have officially recouped all the downside which occurred at the beginning of the month. Staying invested and/or buying the dip proved to be the right thing to do. There may be more volatility ahead since August into September is seasonally the worst period for the markets. My advice is to keep your eyes on the long term, which seems to be fairly rosy.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.