Weekly Article 01-30-2019
Many of you know that I have an affinity towards gold and silver mainly because it is no one else’s liability and I don’t have to rely on a promise to get repaid. “Gold is money- all else is debt” JP Morgan.
Recently, gold has finally caught a bid that may or may not last in the short-term. Short term anything is possible. Long term I am as bullish as I could possibly be. I will list the reasons for optimism and the reasons for some possible short-term pessimism below.
Historically, gold tends to rise when there are certain circumstances that are taking place like:
Many find this the easiest to understand because in an inflationary environment the value of paper currencies are declining in value which leads to higher prices for most goods. Gold holds its value. As currencies fall- like the Russian Ruble and many other emerging market currencies the price of gold vaults higher and holds its purchasing power. If it gets bad enough- like in Venezuela where you need over 3 million bolivars for a cup of coffee and an ounce of silver can feed a family of 4 for a month, the value of holding an asset like silver or gold is glaringly obvious. PLEASE … anyone who thinks it can’t happen here I just saw an interview with a Mrs. D’Souza who grew up in Venezuela and described the entire story of how her country went from capitalism (the Venezuelan Bolivar was only second to the US dollar in the Western Hemisphere). Then they went to socialism and possibly communism but it is obvious now that the rule of law is gone and it is anarchy in the streets. They got there by taxing the rich (the rich left), “printing” up money to pretend it was still good and then … here we are!
In the past deflation may have been bad for metals prices because the value of paper currencies could be rising. The reason it is different in our current circumstances is one thing … DEBT. The debt that has been built up globally is historically unprecedented and cannot even be SERVICED let alone retired with anywhere near normal interest rates. As a matter of fact, I don’t believe the system would still exist without the (admitted) $100 trillion (could be FAR more- we may never know) and the debt would likely have defaulted in 2009 at the latest. Even today the answer to having too much debt is to issue more debt and kick the can as far as it will go.
Unfortunately, in the beginning of this experiment those in charge were “hoping” that eventually we could grow our way out of the debt problem. It is becoming alarmingly obvious globally that economic activity is falling fast and it appears only more debt can continue the “growth”. The bad news is that it takes $4-6.00 of debt to get a $1.00 rise in GDP in the USA. Not long ago $1.00 of debt would increase GDP by $1.00. (Zerohedge (March 2017) and Sovereignman (July 2019) Remember- each and every intervention has to be larger to get the same effect.
In the event we have deflation today almost every counterparty (those expected to pay back loans), with the possible exception of those that can “print” the money up will be in question. We saw this back in 2008 when even the banks lost trust in each other and over $24 trillion has been spent to shore up the banking system since 2009. Over $16 trillion in 2009 alone! (GAO)
Deflation, which the central banks are fighting tooth and nail for this reason and are demanding at least a 2% devaluation of our currency annually (2% inflation target) could be THE catalyst for a large upside move in metals in particular because most people, entities and countries will likely want to get paid in an asset they believe in. Again I will ask, if a central bank can “print up” any amount of fiat currency, WHY are they buying gold and silver now? Why are China, Russia, India and many other countries buying gold in historically huge amounts? Why are other countries buying and repatriating their gold now?
I believe something is up. What it is we will likely find out shortly.
Is there enough of this to go around?
The Middle East has been a powderkeg for a long time and continues to be a flashpoint for future problems. China’s economy is drastically slowing down. It took 1.14 trillion yuan to stem the stock market rout in China JUST LAST WEEK. (Yes-1.4 trillion yuan in a WEEK). While many may gloss over this keep this in mind. The Fed, the ECB and Bank of Japan have increased their balance sheets (“Printed up money and bought stuff that they now own) but China has been the main driver of economic growth globally since 2009. Keep in mind that in the year 2000 the Chinese had a national debt of $1 trillion. Today, that reported number is OVER $30 trillion with most of that issued since 2009. This IS a geopolitical problem of massive proportion. The main reason is the political instability that may arise if the economy experiences a hard landing. It could just be that those in charge there may need a scapegoat to hang on to power. This could lead to some unfortunate consequences.
Venezuela could be a flashpoint. The Bank of England has refused to send Venezuela’s gold back to them as requested- my opinion is that they may not even have it but the excuse is that they believe Maduro may use it for himself. This is a signal but the real signal is that it is reported that Russia has sent 400 mercenaries to protect Maduro (leader) which was reported in many news outlets including Newsweek and the Kremlin has denied it. One thing for sure is that the Russians have sent 2 nuclear capable bombers to Venezuela as a show of force. There are also reports of US and Russian aircraft having “close calls” all over the place.
Violent riots are taking place daily in Europe that get VERY little press here in the USA.
Right here in the USA we are at each others throats- just like those in charge want it so we blame “the other guy” and not the real culprit in the matter. Unfortunately it appears to me that we are also a house divided and I read in an important book “A house divided cannot stand”.
With all of this – and MUCH more going on you may be wondering why there could still be some short-term pullbacks. My belief is that if metals were traded in a fair manner the prices would be exponentially higher but that would also give everyone a clue as to what was actually happening to their dollars, yen, euros, yuan, etc. (Being created in infinite amounts likely leading to a greatly reduced value over time). I believe this is why the 4AM and 8AM paper gold trades go off almost daily where market orders (sell at any price) are put in to sell gold when the fewest buyers are available. Also keep in mind that this is a paper proxy- it is NOT real gold. It is actually a naked short that you or I would be in deep trouble if we were to ever attempt it. Basically, it is selling an asset that you don’t actually have- very similar to “printing up” money and buying stuff, here they just create paper proxys and sell them.
This is why I believe that gold and silver were rising in December because the same “money” that was artificially propping up stocks, bonds and real estate is the same “money” being used to hold down the price of the metals and it failed for a few days. I believe this will ultimately fail at some point but that point cannot possibly be known because the authorities seem to always have another trick up their sleeve that no one sees coming- like negative interest rates, buying all types of assets that historically have not been bought by central banks like corporate debt, stocks, etfs, etc.
For anyone with a time horizon longer than 5 years or so I believe you will be around to see this. It could have happened ANY time since 2009 and there have been major signals in 2013, 2015 and I believe we are seeing more in late 2018 into 2019.
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
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