THE VALUE VIEW GOLD REPORT

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1 THE VALUE VIEW GOLD REPORT October, the month Federal Reserve said it would begin unwinding its balance sheet, has arrived. Will Federal Reserve actually begin reducing its balance sheet by $10 billion per month? What does it mean for financial markets? Remember, no cental bank in all of history has done this! In an effort to answer that first question we prepared the bottom chart. Black line in that chart, which uses left axis in $billions, is Reserve Bank Credit from weekly report issued by Federal Reserve on Thursday, and is largely its portfolio of bonds. At end of September, beginning point for black line, the value was ~$4,424 billion. In latest report from last week, those bond holdings declined to ~$4,419 billion. Red bars in that chart, which use right axis, are for the change in the size of balance sheet since end of September. Thus far, and measuring over only two weeks, Reserve Bank Credit declined by a little more than $4 billion. While we can observe what has already happened to Fed s balance sheet in this chart, what it means for financial markets is more important issue. To date Street has assumed that it means U.S. interest rates will soar higher causing the dollar s value to also soar. Disciplined Analysis of GOLD Purchase Timing for Profits Volume 2017, No. 10 October 2017 THE GREAT FRB BALANCE SHEET UNWINDING? (Something never before done!) Ned W. Schmidt,CFA Publisher Schmidt Management Company 2017is our 30 th Year Beach Boulevard Unit 812 Jacksonville FL Phone: nwschmidt@earthlink.net OUR WEB SITE FOR SUBSCRIBING IS This written effort is simply an attempt to report on global financial matters, and the foolishness of policymakers around the world. Wise people should not believe everything we write. Investing should only be done after research and study.

2 With that view Street began to sell foreign currencies versus the dollar as soon as FOMC released its statement at conclusion of September meeting. As can be observed in top chart, dollar has appreciated the past month as foreign currencies were sold. Note that oscillator hit a value of 99%, which is extremely over bought. Since then dollar has weakened. That rising dollar did hurt Gold badly, but with dollar now again weakening Gold has turned back up. So, will Fed Res allow interest rates to soar higher as it begins to unwind its balance sheet? NO. While Fed Res has repeatedly reaffirmed commitment to interest rate normalization, it has been slow to raise rates. Second, Hurricanes Harvey and Irma have had a marked impact on U.S. employment, Fed Res is unlikely to allow rates to move higher until that effect has passed. Third, Fed Res board will be down to only 3 members at end of month, out of seven. One nominee is now being considered by the Senate. Unlikely Fed Res will make any rate changes until some of those new members have been approved. The next FOMC policy announcement date is 1 November. Expect no rate change, but some comments on balance sheet unwinding. To next page Puerto Rico s Debt: Hurricane Maria has devastated Puerto Rico. At present time true economic activity is essentially near zero. Years will be required to redevelop the economy and provide income for people and the government. While a lot of mouths are moving, reality is that ~$70 billion of debt owed by government cannot be paid and will not be paid. U.S. government will not pay it. All that really needs to be done is create mechanism for abolishing the debt. Most I II III Page -2-

3 likely is conversion to a near zero coupon bond with a long, long maturity. In short, government guarantee of debt was only as good as last storm. Next in line is Connecticut, Illinois and New Jersey. Resolution of Puerto Rico debt without U.S. government bailout will have strong negative implications for weak U.S. state and local government debt. Gold is a better alternative to those bonds. Relative Valuation: Gold is cheap. U.S. stocks are expensive. Analysis of $Gold / S&P 500 Ratio Data: Years Current Ratio 0.51 Probability Gold Higher = 77% Average Ratio 1.14 Standard Deviation 0.85 If S&P 500 = 2,553 $Gold should be: $2, % If $Gold = $1,303 S&P 500 should be: 1,144-55% As can be observed in charts, $1,350 is still resistance on monthly average, previous page, and the daily charts on this page. Note how oversold short-term oscillator had become recently. That condition compares to mid-summer oversold condition. Both circled in top chart. That Summer low was a major low that led to almost a hundred dollar rally for $Gold. That could very easily be the resolution of the recent over sold condition. In bottom chart note that Gold early this past week bounced off the 200-day moving average, and that the oscillator is far from an over bought condition. The recent sell off was not enjoyable because of widespread expectation that $Gold would move Page -3-

4 through $1,350. That emotional high we were all feeling was what put in that high without pushing to higher ground above $1,350. And yes, feeling an emotional disappointment after that failure to move higher was quite normal. Now that disappointment has built up, the reverse emotional situation can now lead to higher prices. Sell off in a bull market is what builds the energy for the next rally. From S this past week: I'm so frustrated with Gold. But am a fervent believer! Late last week I knew exactly how he felt, but I believe in numbers and what they say. At top of previous page that table tells us that the relationship between $Gold and the S&P 500 that has unfolded over past 70 years clearly says that $Gold should rise and/or the U.S. stock market should plummet. But, one must remember that markets neither reward nor punish when we want them to. We are living through the end stage mania of hopefully the last great monetary induced stock market bubble. Federal Reserve is deflating its balance sheet, the monetary base that has financed one of the greatest debt financed stock market manias. EVERY one before has collapsed, and the current stock market mania will also. At that time, Gold will be the alternative that investors seek out. This stock market mania has been centered on internet/technology companies. Crypto-currencies are a natural extension of that technology mania. Most technology stocks hardly justify their market valuations. Crypto-currencies are a logical mutation of that thinking as they are totally worthless, but are assigned monetary value by worshipers. So, hang in their Page -4-

5 S, real question remains: What can keep Gold from going up? AND, $Gold did close above $1,300 last week. VALUATION US$ GOLD RENMINBI CNY/$ $/CNY US$ SILVER Target Price $2, % $ % $ % Fair Value $975-25% $ % Current Price $1, / $ $17.40 Signal Oscillator 69% 72% Probability of BULL trend 91% 70% 90% Bear Market $1, Dec 15 $ Dec 2016 $ Dec 15 % Change From Low + 25% + 5% + 28% Days Since Low Market Low Test $1, Dec 2016 $ Dec 2016 % Change Low Test 16% +11% 200 Day Moving Average Current - Value $1,261 +$42 $ $0.23 Virtual Demand: Demand for metals is sum of physical demand and virtual demand. In charts below net long positions in U.S. futures held by large speculators in U.S. Gold and Silver futures are shown. We rate the action in both as neutral. Page -5-

6 SILVER, as can be observed in far right portion of top graph, has again moved above the 200-day moving average. That should be considered a positive development. Since the Summer low for Silver it has been moving in an uptrend higher. At present time we are watching the previous short-term high which was roughly $18. A move above that shortterm high should bring more money into Silver. Note also that oscillator is not yet over bought. GOLD STOCKS While the Gold stocks did decline this past month, we take encouragement from the positive picture developing in the middle chart. This Gold stock index has been moving in a lateral trading range for ten months. That is a long period of time in which the Gold stocks had a chance to break down. But, they did not. Rather, for last few months index has had a positive bias. A move up through upper boundary of that trading range would mean that UP is path of least resistance. Black line in bottom chart is year-to-year percentage change for $Gold, using right axis. Red bars are for revenue growth of Gold stocks, using left axis. Notice how the Page -6-

7 declining trend for the black like led revenue growth, red bars, lower. Now that black line is rising, and has broken out of the down trend in which it had been. If it continues to be in a positive mode revenue growth should improve. That would be beneficial for the Gold stocks. GOLD STOCKS ISSUES HI Denotes New 52 Week High in Month CURRENT US$ PRICE % CHANGE ESTIMATE of VALUE % TO VALUE % GROWTH NOW / LAST* Yamana Gold (AUY) $ $ % - 2% / - 1% Goldcorp. (GG) $ $ % + 2% / - 6% Barrick Gold(ABX) $ $ % + 2% / + 1% Gold Fields (GFI) $ $ % + 1% / + 2% Agnico Eagle (AEM) $ $ % + 1% / + 3% Newmont (NEM) $ $ % - 2% / + 8% Randgold (GOLD) $ $94.1-5% + 5% / + 9% Kinross Gold (KGC) $ $ 4.2-6% - 0% / + 6% MEAN - 5% + 6% + 1% / + 3% MEDIAN - 5% + 3% + 1% / + 3% *Six month rate of change for trailing twelve month revenues. GOLDCORP(GG) is portrayed in chart to right. Here again we have an interesting pattern developing. Solid red line is revenue growth, using the right axis. Revenue growth did decline materially into the end of 2015 low for $Gold. Since then, the revenue growth line has been rising. Recently, as highlighted by top black arrow, revenue growth rose to the highest level since mid That is a positive development. But yet, as indicated by bottom arrow, the stock is trading at near lowest level in almost two years. Assuming that revenue growth continues, stock should move higher in year ahead. Web site is Page -7-

8 GOLD STOCK ETFs Charts below are for GDX, the ETF for producing Gold miners, and the bottom chart is for GDXJ, the ETF for smaller mining companies. The ETFs continue to build in a way that should point to higher prices. GDX continues above the 200-day moving average. GDX in the March through July period put in place three lows without breaking down. That suggests those lows were a bottoming base that should allow it go higher. At present, $26 is the price level for which to watch. GDXJ is just below the 200- day moving average. A move above that measure, ~$34.8, would confirm the previous move above the moving average, and set GDXJ up to move above $38. Notice especially the rising trend since earlier in graph. APPROPRIATE ACTIONS: Investors should be holding their Gold. Gold should be bought on price weakness. Investors should be establishing investments in Chinese Renminbi deposit accounts. Be selective, seek value, and take care of the dog, NED ned@valueviewgoldreport.com Follow Publication schedule: Next Trading Thoughts: 30 October Next monthly issue: 15 November Page -8-

9 VALUE VIEW GOLD REPORT MAJOR BUYS SIGNALS ON $GOLD Based on buy signals from Intermediate oscillator. Starting Date of This Record 8 July 2002 Ending Date for This Record $Gold = $1,303 on 14 October 2017 Number of Buy Signals 71 Correct Buy Signals 55 Percent Correct 77% Average Gain on Signals +55% Average Buy Price of Gold $1,058 Gain on Average Price +23% The signals are from the published record. They do not represent actual trades. This record is not a prediction of future performance. Wish it was! VALUE VIEW GOLD REPORT MAJOR BUYS SIGNALS ON GDX, GOLD STOCK ETF Using Intermediate Oscillator Starting Date of This Record 21 February 2006 Ending Date for This Record GDX = $23.84 on 14 October 2017 Number of Buy Signals 58 Correct Buy Signals 14 Percent Correct 24% Average Gain on Signals -25% Average Buy Price of GDX $35.62 Gain on Average Price -33% The signals are from the published record. They do not represent actual trades. This record is not a prediction of future performance. Wish it was! Page -9-

10 Subscribe to THE VALUE VIEW GOLD REPORT. One(1) Year =US$199 Two(2) Years = US$348, SAVE $50 VALUE VIEW GOLD REPORT can be delivered each month by to you. Use our web site to subscribe: Or, use form below to order by credit card. To pay by check: Checks must be made out to Ned W. Schmidt, and sent to Beach Blvd., Unit 812, Jacksonville FL, 3222 Credit Card Billing Information. (All sales final, and no refunds.) NAME ADDRESS 1 ADDRESS 2 CITY/STATE or PROVINCE / COUNTRY/ MAIL CODE / CARD TYPE & NUMBER MC / VISA / AMEX SECURITY NUMBER Back of card. Front on AMEX. EXPIRE DATE PHONE NUMBER ADDRESS SIGNATURE Per one of U.S. founding fathers: A useless man is a disgrace. Two useless men is a law firm. Three or more is the U.S. Congress. Page -10-