As we turn the corner into the second half of 2017, I'll start where I left off in my Looking Forward article from the first of the year...

"Certainly, visibility into 2017 is murky at best.

For how can we know what the world will look like going forward? Will we have a world where China and the US are in a trade war, where Russia is moving on Eastern Europe, where North Korea and Iran are becoming more aggressive, where Obamacare has been repealed but in chaos if the Republicans blow the transition to a market-based healthcare system, and where Congress and the Administration are banging heads over debt and deficits and how to finance all the new infrastructure planned?

Or will we have a world where aggression falls in the face of an assertive US; where tax reform and deregulation are passed quickly; where there is an orderly transition from Obamacare to a market-based health system; where money held abroad is coming home and prosperity breaks out for the first time in nearly a decade?

I submit unlike any other year in memory, we cannot predict with any clarity whatsoever, what the world will look like going forward. For that reason economic and monetary predictions are impossible. That's why I, as an investor, will take things one day at a time, looking to trade what the world gives me. Going into 2017 I will proceed trading with caution, but looking for the next big turn and another profitable year in a very volatile world.

Whereas going into 2016 I was leveraged to the hilt, buying up depressed gold and silver stocks, this year I enter 2017 defensively with cash on the sidelines looking for the next big move."

Gold has traded in a range of roughly $1050 to $1350 in the last 18 months with a lot of time spent in the middle of that range. I bought at the $1050 level for reasons stated in my Looking Forward 2016 article and have successfully traded the move higher during the first half of the year. I leveraged my portfolio to as high as 175% in that move, making 50% profits on many trades, and have reduced my position to as little as 75% at times, which is where I am presently, with 25% cash on the sidelines.

I have indeed taken the world one day at a time and see no reason to change my investment strategy now. I've traded TBT a few times this year betting on higher interest rates, entering it in the 29 area and selling it in the 40 area.  I am now out of that trade altogether.

It is important to realize that even in sideways moving markets, which the gold market has been over the last couple of years, there are good profits to be made in trading the swings. The second half of this year looks to me more dangerous than the first half in most markets. The stock and bond markets look "iffy" and commodities are already in a distinct downturn.

The world's economy is improving. There has been real progress since the days not long ago of fears of financial crisis, recession, and deflation. But there are distinct dark clouds forming. Even the world economies could be in the beginning of a possible roll over according to long-term leading indicators.

The Trump Administration called the US economy a bright spot, estimating that the economy would grow at 2.3% this year. That is Obama-like growth and is unacceptable. Normal GDP is 3%. What we should expect if the right policies were implemented are at least a couple of quarters of 4 to 6% GDP growth, then an average of 3% in the years that follow. 2.3% is anemic growth by historic standards. And that may end up an optimistic estimate for the year.

Meanwhile, the velocity of money is still at historic lows. And liquidity is such that any lack of it could push us back toward deflation. Which leads us to the CPI which, speaking of deflation, was just reported down .01% last month. This is the first whiff of deflation we've seen in a couple of years. And this at a time when we should be running at 2% inflation. This is what I've been worried about and have been warning my subscribers about for weeks.

Retail sales fell again for the 4th straight month, another sign of further GDP weakness. And durable goods came in at half what was expected. For the first time in a very long time I'm hearing the "R" word uttered by some top financial people. The possibility of recession is being talked about openly. The bond market is the "tell".

Interest rates have fallen further this month to previous yearly lows. Everyone is scratching their heads trying to figure out why rates are falling so low. The interest rate conundrum can be explained in the following way: Interest rates fall as inflation falls. They also fall when the demand for money falls. The demand for money falls when the economy slows. We are seeing a slowing economy and a slowing inflation rate, plain and simple. 2nd quarter GDP will be better than 1st quarter GDP, but down from the expectations of just a couple of months ago.

It is in this context that the Fed has decided to tighten money. They lowered their inflation forecast this year from 1.9% to 1.6%. That's a big reduction. They expect 2% inflation for the next three years after that. What if instead it falls further? What if this tightening further reduces GDP and inflation? What then? And let us not forget that there are three vacancies at the Fed yet to be filled, and Yellen may be replaced in February. Will the new Fed governors and Chairman want to tighten monetary policy even more? Or will they want to loosen it to stimulate growth?

The future is uncertain, so again, we have to take markets one day at a time.

As the world has changed dramatically, so has my portfolio. I'm down to three long-term holds that are speculative gold and silver stocks. All the rest have been liquidated. I'm concerned that the recessionary deflationary bias that plagued the system for many years has re-entered the system.

Like I have been telling my subscribers, a bias is not necessarily a destination -- it is a direction. We may not get to the end result, but the direction is what matters because if not reversed, we will get there. The question I'm most interested in is whether this last Fed interest rate rise will lead to further deterioration in the economy and inflation rate. Because if we see it show up in the next couple of months in the form of further falls in growth and inflation, markets will respond negatively. And it’s there and then that the Fed will have to re-evaluate.

At the minimum they will have to signal that they are on hold, with no more interest rate hikes for the foreseeable future and no reduction in their balance sheet. And if they get really concerned they will have to decrease interest rates, and stimulate monetary growth which has been stagnant of late. The money supply (M2) is unchanged since April. And the CRB continues to plummet. These are red flags signaling a possible recession in the making.

The above is the scenario I'm operating on at this time. I still think the Trump agenda will be implemented to some degree. But before that happens, and because of the delay, we may see a continuation of the present trend of falling growth and inflation rates. If things turn, I'll turn. But at this time I'm as defensive as I've been in some time.

The false break-out of gold through the 50 and 200-day moving averages has now reversed. Gold is a barometer of growth and inflation among other things. It is stable at present trading either side of the $1250 level. A breakdown below $1200 will likely signal lower growth and lower inflation rates to come. A breakout above $1300 will likely signal higher growth and inflation rates in the future. All markets should take heed, since $1250 gold is telling us that right now the direction going forward is a flip of a coin.

Paul Nathan
Paulnathan.biz