THE GOLD DIVE: WHEN WILL IT END?

There are two aspects to the move in any market.  There is math.  And there is narrative.

I love the gold market because it runs largely on math.  In the short run (over a period of months - sometimes at the extreme a year or two) the narrative can take over and knock the primary trend for a loop.  But over the long run which usually reasserts itself over a relatively short period of time, the math of the gold market is ineluctable.  And that math says that gold moves up in value as the value of the paper currencies in which it is denominated are inflated away.

That is math.

The current narrative is that the Fed is tightening.  How can they tighten when the debt is spiraling out of control?  They can't.  In fact the Fed and the treasury are currently printing trillions to support US debt auctions which are grossly undersubscribed and US Stock market, which must stay afloat for the US economy to stay afloat.  The tightening is all narrative.  The easing is all math.

In the stock market for example, narrative can prevail over math for years and years on end.  That is how Spacex can be valued at 100 times sales because its P/E if infinity.  It has no earnings.  It lost 40 billion dollars.  But Elon Musk is now a trillionaire because he is able to sell the narrative that one day there will be data centers on Mars.

Maybe there will be data centers on Mars.  And maybe I'll replace Jalen Brunson next year as the point guard for the Knicks.  It's possible.  Though I have two plastic hips, and even 40 years ago my jump shot was pretty inconsistent.  But it's possible.  If only I could sell that narrative I could be a trillionaire too.

But I can't.  So the best I can do is stick with the math.  And the math of the gold market tells me that some time quite soon gold will be trading much higher as the value of the dollar is inflated away.  Just as the math of the stock market says that valuations will eventually revert to a mean.

But the math of gold tends to dominate the gold market.

So when will the math reassert itself over the "tightening" narrative?

When A) the fact that consumer spending is dependent on wages which are stagnant while prices continue to climb mercilessly reasserts itslef.  How does the consumer keep spending?  By going deeper and deeper into debt to consume needs like housing, food, energy, insurance, education and health care (much of which is excluded from CPI data).  Consumer debt is at record levels and climbing. About 90 percent of the US populace is functionlly insolvent.  Eventually that huge segment will become dangerously unhappy and need to be placated with even more printed money.  B) the fact that Federal Debt auctions are dangerously undersubscribed and the Federal Government has resorted to funding itself almost exclusively at the very short end (which is a form of QE) finally creates a debt crisis that has to be bailed out with another several trillion dollars. of printed money C)  The perpetual war machine that is now demanding another half trillion of printed money and has already spent a half trillion of printed off budget money this year adds a dangerous level of printed  money to the perpetual dilution of the dollar.  D) The no hire no fire economy creates a jobless future for an entire generation of college grads entering or not entering the workforce with hundreds of thousands of dollars of college debt.  Eventually they too will need to be placated with more printed money.

The whole future of a viable America depends on printing ever greater amounts of money to be distributed at the whim of a highly centralized government, added to a hundred trillion dollars of already incurred unfunded liabilities.  

This is why the math of the gold market is stronger than temporary spun narratives.

Techtonic Shift and Gold

 

Two extraordinary flow of funds shifts are now beginning to hit the US financial markets.

1) Japanese Central Bank is comitted to raising rates.  This means that two trillion dollars of Japanese yen carry trade invested in US financial markets will be unwound as that money heads back into Japan.  That is a significant outflow especially form our debt markets.

2) The Chinese Government and Populace combined have another trillion dollars invested in the US financial markets.  China has just announced that going forwards investment in any US financial markets will be illegal.  And China has two years to unwind and repatriate all investment.  Anything remaining after that time will be coniscated.

This alone will put tremendous pressure on the US ability to fund it massive and rapidly growing debt (nearly 40 trillion dollars plus another 100 trillion of unfunded liabilities).  The debt is now growing at a rate of a trillion dollars every hundred days.  And that doesn't include funding for the forever wars we are now engaged in that by conservative estimates will add another trillion dollars per year to our deficits.  Don't even count the vanity building/celebration projects that are set to add a few hundred billlion.  That's just a rounding error at this point.

But add to this pressure the fact that tarrifs by design are meant to decrease our financial acount surplus.  Every dollar for which this policy succeeds is a dollar not available to be invested in US debt.  To call this the most baffling policy goal in the history of finance would be an understatement.

The pressure on our debt markets is so extreme we now have everyone from Stanley Druckenmiller to Ray Dalio to Jamie Diamond to  Hank Paulsen to David Stockman to James Grant to Jim Rickards and a host of billion dollar fund managers are warning that a Debt crisis is imminent.

Question: How can the fed do anyting but ease and then print in the face of an imminent debt crisis? (I know the market is placing a 68 percent chance of a rate raise.  That's a strange joke.)  And this in the face of o 4.5 percent CPI and 6.8 percent PPI.  And that's just official inflation.

So GOLD?  Draw you own conclusion.  But consider this: when the credit market falters, the Fed will have the choice of saving the credit market or saving the currency.  Which will they choose?  If they choose the credit market (correct answer!) the currency will crash and gold will skyrocket.

COLLECTOR GOLD VS BULLION

 

Anyone who's been in the precious metals market for a significant period of time will have some level of interest in the collector market.  

For most Americans that means short print modern bullion issues - proofs, enhanced finished coins, specially produced limited issue images.  These often sell at large premiums to bullion.  There's no real track record as these issues are at most a few decades old, so no real analysis is possible.  I think if you can get them relatively close to bullion there's little harm in them and some possible upside.  For this you have to get them directly from the national mints or in bullion auctions at Heritage or Stacks where you can bid a bit over melt.

But those with a relatively thorough education may be tempted by the historical coin market.  British, French, Spanish, Italian, Dutch Latin American, Medieval, Byzantine, Roman and Greek coins.

All of these markets are booming and have been booming for over two decades.  And they've recently moved up noticeably slong with the rest of the hard asset market.

The one thing you really need to succeed in these markets is a strong knowledge of the History of the period and region that inerests you. You can always momentum trade.  But if you buy a coin that has particular Historical importance and it is in attractive condition, over time you'll do well.  And many who play in these markets don't have a sound historical background, so that will give you an edge.

The second thing is condition.  A coin must be atrractive and it must be unaletered.  If it is certified unalatered (it has a numerical grade from NGC or PCGS) it is as good as unaltered.  As far as atractive is concerned, there again, you need to trust your own eye.  If a coin has been awarded a Star or perhaps a fine style designation, that will give it some bump in price, but even with thses designations, if the coin is unattractive, over time, it won't go up all that much in price.  Because, most oftern, those buyers at the top of the historical markets do have some aesthtetic training (and coin graders do not.).

The third thing is the market itself.  There is a tremendous amount of momentum trading and a lot of that comes from particukar groups chasing particular coins.  For example the Japanese love the German Salvator Mundi medallions in gold.  But if there is a credit crisis in Japan, the value of those medallions will plumet because all the buying is there.  Similarly the Japanese love Queen Victoria.  But so do the British, and so do many Americans, so if there is a credit crisis in Japan, the value of Victoria coins should be stable.

The only way to understand these aspects of the market is to be in the market full time for years.  Otherwise it is smart not to momentum trade, but rather buy areas you truly relate to historically and aesthetically,

Finally a word about Ancients.  These are becoming inceasingly popular.  I love the area personally,  But to do well here financially it is best to have a very sound historical background.  There are a lot of rare coins compared to other eras.  But many of them will never appeal to those other than numismatic specialists,  Those that appeal for broad historical reasons are safest.  And here, again, your own eye is paramount.  You have to know the diffence between a coin engraved by a master and a coin engraved by some schmuck who got a job at the mint.  Do not rely on the holders for this.  They're good for the preservation grades but aesthetially they mean little to those with real money in this numismatic area.

And finally it is best to specialize.  Don't diversify until you master an area.  Beause all the edge goes to the specialist.

GOLD AND THE ECONOMY

 

When assessing a portfolio's overall need for gold you obviously have to compare that need to the overall performance of the economy.

Easier said than done.

There are many economies.  There's the financial economy that serves those with financial assets.  That is explicity the top 10 percent, although the lion's share of these assets and associated gains go to the top tenth of the top 1 percent.

By every account that part of the economy is doing well, depending high how up you are in the top 10 percent.

Then there is the real economy that produces goods and services that can be split into things that those with assets like to buy for themselves and things that are non discressionary like food, insurance, education, shelter, health care etc., that even those with no assets must purchase.

This part of the economy is doing real well for those with assets.  And even for those without assets it's doing okay right now because these are things  that must be purchassed.  However the 90 percent is currently going deep into debt to be able to purchase these things.  Even some areas of discessionary purchase for those below the billionaire class are beginning to feel a pinch.

Finally there is the the monetary economy.  This measures the monetary health of the economy.  How much debt does it take to keep the economoy operating?  How much return does the economy provide for a dollar of debt?  And how much money is being created when we produce this debt?  ANd most important, what does the debt/money inflow do to prices over time?

This part of our economy is deeply deeply ill.  Perhaps terminally ill.  According to the Congressional Budget office, sovereign debt is growing at 8 percent per year.  Debt service is over a trillion per year.  And with long rates backing up to 4.5 percent that number is growing.

And it is this Deeply Ill Monetary Economy that necessitates the purchase of gold.  Gold is you only hedge for wealth preservation for the necessary monetry debasement that is happening right now.

At some point this monetary debasement will morph into a debt crisis that will produce something akin to hyperinflation - or deep dark stagflation.

A lot of people think we are just about there.  Ray Dalio.  Stan Druckenmiller.  Jamie Diamond.  Hank Paulsen.  Luke Gromen.  Ed Howe.  Rick Rule.  Peter Grandich.  Frank Giustra.  These are not weird alt bloggeres.  They're high net worth money managers. They all think you need gold for the inevitable credit crisis.  Maybe they're right.