How high can gold go?

In "normal" times you could easily calculate gold in terms of the purchasing power of the US dollar.  Or in terms of total us debt.  Many people use these valuation.  And they are useful.  For  example the chart above shows a strong correlation of Gold to US debt.  The second chart show gold price moving inversely to the puchasing power of the US dollar. 

By both metrics there is no reason to think gold is overvalued.  US debt is accumulating at an alarming rate with no sign of moderation even being contemplated, and the purchasing power of the dollar is dropping dramtically while the current Regime has a stated goal of forcing the value of the dollar ever lower.

But Nassim Taleb has shown in his book "The Black Swan" that events we regard as abnormal hit the markets with  alarming frequency.  They can be any sort of event that was not expected and  not built into the models regarding "normal" valuations.

Right now, the gold market is being buffeted with a number Black Swans that are all extremely bullish for gold, and which are, by definition, unaccounted for by the normal methods of gold valuation.

GOLD BLACK SWANS:

1. Tarrifs: Tarrifs on this scale have not been experienced in the global economy since the Great Depression.  Tarrifs slow growth and foster inflation.  They are stagflationary.  However, this is only part of the Tarrif effect on Gold.  Tarrifs are also a weaponization of the US Dollar and as such they provide enormous incentive for Global Central Banks to sell dollars and buy Gold - which they are all doing at a record pace.  This tail wind for gold is not likely to moderate any time soon. 

Tarrifs are also simply the tip of the iceberg in a deglobalization push that is upending 50 years of economic precedent, and the resultant uprooting of supply chains, economic and military alliances, and global trade relationships is necesserily an enormous drag on global growth and highly inflationary.

But if the Global Trade war results in Global Hot wars ( as it did after the Great Depression)  that would make gold the most  crucial asset for every portfolio. 

2. Loss of Independence of the Fed.  The Regime take over of the Fed is in progress.  The last time a Central Government controlled the central bank in a Western economy was when Hitler took control of the Reichsbank.  This was a prelude to World War II.  Ir was also a prelude to  the theft of 600 million dollars (in 1931 dollars) of  gold from European central banks.  What this signals for the US, in the short term, is the lowering of rates  down to 1 percent, and the resultant inflation, and loss of confidence in the US dollar and US debt.   This is terrific for gold.  

But the knock on effects of the world's largest economy switching suddenly from a capitalist system to a centrally planned economy controlled by one man are undertermined, but potentially cataclysmicly good for gold.  

If this were all, it would still be reason to throw out past valuations and ratchet up all expecatations of Gold's future performance.  But a number of other Black Swans could easily occur in the near future.  Among them would be a credit crisis (reference Michael Howell and Ray Dalio and David Stockman)  a crisis from reversion to the mean in financial assets (reference Jermeny Grantham, Lacy Hunt, Charly Munger among many others) a crisis from the vicious swing in passive investing (Mike Green), a nascent housing crisis (Melody Wright, Gerald Caliente) or the Hot War that occurs in every fourth turning (Neil Howe.) 

So high can gold go?

How long can this US and Global instability persist?

GOLD AND STAGFGLATION NATION

 

If you hold Gold there is nothing better than Stagflation.  This is when the economy slows to a grind and inflation rages.  This erodes the puchasing power of the currency and turbo charges the alternate stable currency: gold.

But really, all inflation hedges such are hard assets and top grade financial assets do great under stagflation.

This is by design.

Stagflation is not an unfortunate biproduct of bad policy.  It is the policy.

Staggering debt is the unfortunate biproduct of bad policy.  

This policy started in the 1980s under Reagan and Greenspan who realized that in an economy with no debt and no inflation (thanks to Paul Volker) you can smoothe out any problem with debt.  

After 50 years, that debt is now in the hundreds of trillions if you include unfunded liabilities.  And inflation, as measured by the diminishing purchasing power of the US dollar, is so far out of control that 60 percent of Americans live pay check to pay check, and can hardly pay their monthly bills, and they have nothing left over for any type of emergency.  

That is life on the edge.

Meanwhile, the current political regime is funding their current spending spree with 1 trillion dollars of new debt every quarter.

That is life in the fast lane.

So the only policy option to deal with this ever increasing, massive debt, is Stagflation - which requires ever more debt and ever lower rates which inflates the debt away while also inflating that value of hard assets and quality financial assets - and simultaneously bankrupting the vast middle class.

The only other policy option is Deflation which requires the retiring of debt, forcing the debtors to go bankrupt when they can't pay what they owe, (nobody is to big to fail) massively cutting spending, removing liquidity from the system,  and in the process, eradicating the value of all financial assets.  But preserving the integrity of the currency and the purchasing power of the middle class.

Guess which choice the regime has chosen?

The regime is clear: they want rates at 1 percent and will get that.  And they want no debt ceiling and have gotten that.  And they will spend however much they want without constraint and they are doing that to the tune of 1 trillions dollars of new debt per quarter.

Stagflation.

And, the regime has also decided to fire or prosecute anybody who stands in the way of Stagflation, and fire or prosecute anybody who reports economic numbers that suggest there is slow growth or high inflation. 

So the policy is not only to encourage stagflation, but also to deny that it exists.

I cant comment on what this means for the economy.

But is is awesome for gold. 

GOLD THE FED AND CHINA

 

Gold opened uip $25 dollars this morning - not a huge devlopement, but surprising since Gold was on schedule, according to most analysts, for a mid cycle low a few hundred dollars lower.

Of course this low could still be reached.

But a couple of new trends seem to be driving this counter trend rally:

1) The political regeim is threatening hawkish Fed voting Governors with Justice Department persecution if they don't immediately resign.  Fed Governer Lisa Cook now must decide if fighting inflation is worth a trip to a Somalian dungeon.  This developement contradicts those who point out that even if the regeim replaces Powell with a loyalist, rates can only be lowered by a consensus vote.  It seems the regeim has an answer for that objection.  They will get rates where they want them.  And that is back to ZERO.

2) Just as significant, and equally damaging to the dollar in the long run, is a news flash signalling that China is agreeing with Kenya to refinance their dollar denominated debt in Yuan..  Bid deal, right?  Kenya is just a shithole country, as far as America is concerned.  But, it seems China considers Kenya to be a terrific source of Rare Earth, and Gold mining wealth.  This developement gives teeth to the de-dollarization trend that many critics have dismissed as a fantasy.

At the same time China is is taking advantage of the US Regeim's puzzling tarrif attack on India to effect a raprochement of trade and economic developement with their long time rival.  This too poses a grave long term challenge for the dollar.

So which of these developements are driving gold's counterrally this morning?

Who cares?

Over time this is all terrific news for gold.

WHY IS THE GOLD PRICE STUCK?

 

The gold price is stuck around $3300.  That's only $800 up since the election in november.  What's wrong?

In fact for a whole three months gold has gone nowhere but sideways.  What in the world is wrong?

Maybe the tarrifs could actually work.  Maybe the current government debt binge is really no bid deal.  Maybe the world is on the verge of another Pax Americana.  Maybe the US consumer is much stronger than anyone realized.  Maybe the stock market is about to set off on another stunning leg higher.  Maybe we're on the verge of a true Golden Age.

If anything above sounds the least bit reasonable to you, Gold is really the wrong investment for you.  Stop reading and go out and buy stocks.  Or bitcoin.  Or buy calls on Invidia.  And do it all on margin.  It's a golden age: what could go wrong?

On the other hand, maybe Time unfolds on its own schedule.  Maybe the massive regressive tax that we call Tarrifs will take its own good time to destroy the the purchasing power of the US consumer.  Maybe, the back and forth media-opportunity diplomacy will yield nothing but an ever more dangerous, wars-torn world.  Maybe the debt binge that defines our current Government will lead to an EVENTUAL credit crisis.

If any of tht sounds reasonable maybe you shouldn't worry about when gold will break out on its next upleg in this generational bull market and just keep patiently stacking.

TRADE WAR, Switzerland, and GOLD

 

The axiom that everyone loses a trade war has to do with the fact that trades wars necessarily slow global growth.  This is especially true during a period that is seeing the global trade war viciously reverse 40 years of globalized trade.  Forty years of globalized supply chains that have significantly reduced transactions costs, sourcing costs, labor costs, and final product costs.  All of that necessarily becomes much more expensive for companies and consumers.

Slow global growth along with higher consumer product costs due to both the trade war and run away global debt leads to global stagflation which is the ideal environment for gold.

But the Trade War also has implications for the production, sourcing and  delivery of Gold itself,

This was in evidence this last week when the extraordinary 39 percent tarrifs levied against Switzerland included those same taxes on the large Gold bars most often used  by Comex for Stand for Delivery contracts.  

This caused  a small spike in the gold price.

The US regiem was quick to label this Fake News.  But the gold market didn't seem to care much about this characterization.  It reacted as if gold is becoming harder to source and deliver.

But this is just the tip of the iceberg for Gold.

China has nantionalized their entire gold production.  Russia is now in the process of doing the same.  And many other smaller gold producers like Niger and Mali, Burkino Fasso and Venezuela  (whom the US has dismissed as shithole countries) are nationalizing their gold production in consultation with China.  China is currently trying to foster resource relations with all global suppliers of gold who are under assault of the US Tarrif regiem.

What this will do to the sourcing of real physical gold is anyone's guess right now  We are right at the beginning of a trend that will have real implications for a resouce that is quickly becoming the global reserve currency of choice.  (If you don't believe that is so see Nasim's Talib's views on this subject).

But surely it will beome another driver in a perfect storm of conditions sending the price of gold ever higher.

Over time this will also surely affect the premium of physical gold over the spot price.  Right now, in the US, that premium is near record lows, because US retail interest in gold is still very low compared with the rest of the world.

But surely, as retail interest slowly picks up and gold sourcing becomes ever more difficult, that premium is bound to expand.

Who owns gold?

 

For stocks there are two classes of investor: Retail and Institutional.  In general if you measure retail bullishness against institutional bullishness you get a pretty good idea of where the markets are headed.  But in the short run there is a balance between these two speculative forces.

For bonds there are three clases of investor: Retail, Institutional and Govenment.  Here the funding needs of Governments competes/conspires with the bank/broker/dealer system that dominates this market.  Retail has to simply read the tea the leaves to try to get on the right side of this trade

For Crypto there are thee classes of investor: Retail, Institutional (like Microstrategies) and criminal.  In crypto the criminal element (including the political classes that use crypto for extra-legal purposes).  dominates the market.  Yet the highly speculative retail flow can cause swings in the price.

For Gold there are three main clases of investor: Retail, Institutional and Cenral Bank.  The Central Banks dominate this market because they have unlimited access to electronic/paper money, since they can print/generate it.  

But the worldwide retail market for gold also can move prices at the margins. 

Worldwide, the retail investor holds about 10 percent of their assets in Gold. 

In the US that number is less than 1/2 of 1 percent.

Even now with the gold price at all time highs and global ineterst,  both global retail and Central Bank buying accelerating year over year, the US investor is competely oblivious to the Gold market.

Who really cares about the reasons for this disconnect?  Surely some of the same reasons US citizens are far more likely to fall for consipiracy theories than any other developed nation (and most third world nations.)   For example the only country on earth more likely to believe climate change is a hoax is Nigeria at 32% vs the US at 31%.  Or the only country whose citizens are more likelly to believe Biden stole the previous election is Russia (at 37% vs US at 33%)

Clearly US citizens are more likley to believe the US is in the middle of a Golden Age because their leaders tell them this is so even though the labor market fell off a cliff three months ago and inflation is raging at record levels.  So who needs gold?

But over time it seems that even the US citizen is more likely to join the rest of the world in understanding that run away Government Debt does lead to either Stagflation or Hyperinflation.

And no country on earth is accumulating debt faster than the US.

So, when the US retail investor finally wakes up, they will provide another fantastic tail wind for gold.

Meanwhile, if your reading this, you're probably one of the few in the US who have already realized this.  

Lucky you.

GOLD PRICE FORECAST

 

Where is the Gold price headed?

To know this you have to understand the basic elements of the two principles at play: Gold price, and Time.

Both are elastic.

The Gold price is elastic, but in a surprising way: the more expensive it gets, the higher the demand.  This is because it becomes expensive when other currencies erode and then begin to fail.  And as they erode you need more and more gold to protect yourself.  And since gold price is primarily central bank driven there is no limit to the amount a central bank will buy to protect its economic viability, thus driving the price ever higher.

But as it gets ever more expensive it becomes ever more necessary for the retail investor but they never realize this until their paper currencies become extremely compromised and by then they have to buy smaller and smaller quantities, fractions of ounces.  But as gold is divisible this is never a problem for gold.  The premium on quarter ounces and tenth ounces simply blow out.

But figuring out what price it will reach at what time is not possible when you take into account the elasticity of time.

For example we know there are cycles, like the 8 year cycle, or the 13 month cycle.  Or the ellliot wave cycles.  All of these can by instructive to some degree or other.  But none of them take into account the elasticity of TIme itself.  One year can whip by.  Another drags on forever.  This is not merely an illusion of subjectivity.  Rather our measurement of time is the illusion of subjectivity.

Just as our prediciton of price at a certain time is an illusion of subjectivity.  

What this means for price discovery is that the conditions that create a Gold bull market are the determining factor for price.  And the various methods of measurning the time of a gold bull market tend to be useless.  You just have to accumulate and let the price unfold as it will.  As long as the paper currencies are being eroded, gold tends higher.

That is why bullion is the only sensible way to accumulate gold.  Because you will not be tempted to trade gold bullion.  And trading a gold bull is the fastest way to lose all your assets.  Because it is impossible to measure the elasticity of Time.