THE PRICE OF GOLD V INFLATION

 

The price of gold is on an almighty tear.  Which leads most Americans who have missed the entire gold move to wonder: Is it too expensive to get in here?

The answer is simple: Gold has to keep rising because inflation has to keep rising.  There is simply too much debt for anything else to happen.  The debt must either be defaulted or inflated away.  Inflation is the only politically viable solution.

Gold moves in relation to inflation because they measure the same thing: the erosion fo the purchasing power of the elctronic/paper currency.

To understand where gold is headed you only need understand where inflation is headed.

That doesn't mean the "Rate of Inflation."  This is a political number created by the government to reflect what the government wants the citizen to think about the job it is doing holding down the cost of living.

In most cases the "Rate of Inflation" corresponds to the CPI Consumer Price Index.  That sounds as if it should reflect the cost of living for consumers.

I does not.

Because of what is excludes: 

It doesn't measure: the cost of buying a house.

I doesn't measure the cost of insurance: medical insurance, car insurance, home owner's insurance, life insurance, etc etc

It doesn't measure the cost of food. (core cpi)

It doesn't measure the cost of energy: gasolline, electricity, heating oil, etc etc (core cpi)

It doesn't measure the cost of education.

It doesn't meaure the cost of child care outside of education: child health care (physical, mental psychological and special needs), child pre school, child tutoring, child music, sports, and other ineterests.

In short it measures the cost of your toilet paper and your air conditoner and your Iphone.  But even with your Iphone it doesn't measure the real cost because of "Hedonics" which makes up a pretend price based on reductions of your actual dollar outlay for things like "AI" which the governement says makes the same Iphone cheaper even though you pay more for it because it "does more."  Hedonics is applied to all comsumer items.  They say your LG air conditoner costs less than you paid for it because it has a function which lets you turn it on from your Iphone (which also makes your Iphone cost less in CPI terms).  Like you can't just push the button on the remote.

Real inflatioin grows at about 10 percent a year as measured by the 500 most purchased items (iincluding everything) in the 500 largest cities in the US every year.  See the CHAPWOOD INDEX.  

Or go see SHADOWSTATS which measure the CPI with exactly the same metrics the government used in the 1980's,  which still reveals a near 10 percent inflation rate even excluding food energy education health care, insurance etc.

The problem is the government lies.  And most financial analysts you see on TV are multimillionaires (like the plutocrats running the govenment) who don't really feel the inflation because when you have that much money it's not a big deal.

But for most Americans it is the biggest deal on earth.  Because they can't afford to live.

But the point of this post is that GOLD has to keep appreciating because INFLATION is embedded into our financial system wherein the US Dollar is a unit of DEBT rather than a store of value.

There is no way out except a DEBT DEFAULT which would lead to a DEFLATIONARY DEPRESSION.  Or to just keep inflating away the debt which makes more and more debt.

The more debt we have the more debt we need to issue just to pay the service on the debt - which is now the largest item in the Federal Budget.  And this is why the Debt Ceiling has just been eradicated.

So, don't think there is limit on the natural price of Gold until there is a limit on the unvirtuous DEBT/INFLATION spiral in which wer are ensnared.

And the longer you wait to accumulate a gold position, the more you will eventually have to pay for it.

THE DIRTY SECRET OF INFLATION

The dirty secret of inflation is that it never goes down.   It is cumulative.  

Inflation is the erosion of the buying power of a currency.  And all that erosion that has occured over time will never be reversed.  It continues to erode at faster and slower rates.

Look at the chart above.  It is accurate.  That is inflation: the dollar buys less and less every day.  And over decades that adds up to the destruction of the purchasing power of the dollar. 

Of course it you extend the chart out to current day, the erosion has accelerated terribly.  

The RATE OF INFLATION changes.  It is meaningless to people living in the world.  It only has meaning to traders who make a living off minute rates of change.  And of course to corrupt lying politicians who make a living off convincing their miserable constituents that things are getting better.  

Unfortunately, the financial press that serves the trading community and kowtows to the political elite will also talk endlessly about changes in the RATE OF INFLATION.  In other words minute changes in the RATE at which inflation is accelerating or deccelerating in the very short term.  But this has no meaning at all to average citizen living and shopping in the world.

All the inflation that has ever occured continues to destroy the purchasing power of the dollar.

The only thing that brings inflation down is a true deflation which brings about a depression.

That's the other dirty secret about inflation.

It takes political suicide to reverse inflation.

Because such a  reversal into deflationary depression wipes out the wealthy class along with the middle class.  Because all assets deflate in a deflationary depression.   

The poor suffer too.  But they are already suffering.

The only class that suvives a deflationary depression is the class that owns the only curency that holds its value during a deflation: THE GOLD OWNING CLASS.  Because the gold is then used to purchase real assets that have finally derpreciated in value.

But the politcal class will never again allow deflation to take place.  Their only ammunition against this defation (that is the natural result of massive debt) : is to create helicopter money - infinite quantities of electronic chits: Hyperinflation, or at best: vicious stagflation.

Ironically the only class that survives a hyperinlflation or a vicious stagflation (which is where we are currently headed) is the class that holds the only currency that holds its value against hyperinflation: the Gold owning class.  Because gold inflates in value as the electronic/paper currency erodes.

If you are a trader, you can keep focusing on the Inflation Rate.  And trade off minute changes in that rate.  And if you're really sharp (like Drukenmiller sharp) you can do well.

If you're just a normal  person arming yourself agaisnt the evolving DEFLATION V INFLATION wars, you'd be better off just owning gold.

I CAN SEE THE FUTURE OF GOLD

 

I can see the future.  Even if the market can't.

The market doesn't look towards the future.  In stead it looks at the current trajectory of the underlying asset and projects that out into the future, while lurching up and down according to the rumors, lies, data points and underhanded trading schemes that affect each passing second.  

But over time it is easy to see where things are heading.

And with Gold the overarching ineluctable driving force is debt.

Debt and Interest Rates.  Because rates and debt control the fate of the value of the paper currency.

And over time we know the debt is heading ever higher.  Higher and Higher and Higher.

And now we know where rates are headed.  Because our politcal leader has told us he wants rates back to ZERO.  If he has to charge Jerome Powell with corruption to get him out early, he will.  He's telling us that every day.  Believe him.

And even if he has to wait a year to put in a puppet Fed Head, we still know where rates are headed: Back to Zero.  He's telling us that.  Believe him.

At least short term rates.  Then if long term rates still back up, as they most certainly will:  We'll get quantitative easing and negative rates.

So with rates at Zero and Debt headed towards infinity where will Gold go?

Up and Up and Up and Up.....

Regardless of short term gyrations, that is the future for gold.

WAR/MASSIVE DEFECITS/TROOPS ON THE STREETS IN THE US = VIX AT ALL TIME LOWS

 

If you looked at the chart above of the volativlity of the SP 500 you'd have to conculde that there were almost no risk on the horizon either politically, militarily, or financially to the US stock markets.

And with almost no prospect of risk of any kind, Gold is still very near all time highs trading around the $3400 mark.  That's an increase of $800 since the new US political regiem has taken power.  So far this move has been largely driven by foreign central banks seeing and protecting themselves against risk.  And the US billionaire class is also sees risk and is buying gold (check out ther services of Matterhorn Asset Management for example.)

But the average US investor still sees no risk.

Yet, it seems that there are risks.  Troops are fighting US citizens on the streets of the largest US cities.  War is intensifying in Ukraine,  War has broken out between Israel backed by the US and Iran - fully backed by China and Russia.  Iran's defenses are far more sophisticated than what we are being told in the Regiem sponsored media.  This war is also intensifying with "surrender" or "regiem change" being held up unrealistically as probabilities.  Yet the real probability is that this war goes on and on and metastacizes.

And then there is the debt storm with Debt Service being the largest portion of the current budget - and with an additional 5 trillion dollars of debt and an complete suspension of the debt ceiling being proposed as economic balm.

Everyone from Jamie Dimon to Ray Dalio to James Grant to Michael Pento to Neil Howe to Jim Rogers to Grant Williams to etc etc is warning that a debt bomb is in the process of detonating.  

Perhaps they are all wrong.  Still it seems that the must be some risk in the debt.  More than is reflected in the Vix' all time low reading.

The reason for this, of course is that eveyrone expects at the first sign of trouble the Fed will come in and bail everyone out.

And of course they will.

But the Fed's balance sheet is still at about 7 trillion dollars from previous bailouts.

How much bad debt does the Fed have to swallow before the US dollar plummets dangerously in value?

Is there no risk there?

When all these risks begin to be factored in to US investor calculation, gold will make the next move in this epic bull market.

GOLD: TRADING ON MATH VS TRADING ON SENTIMENT

 

If you trade stocks, you're trading sentiment.  First and foremost.  Yes, you're trading on earnings and innovation and brand.  But all of that is entirely dependent on sentiment.  For. stocks, sentiment is at all time positive highs right now.  And that is after 15 years of positive sentiment.  So positive sentiment has become firmly entrenched and things like Earnings multiples and disposable income really don't make any difference to anyone.

If you trade gold, all that matters is math.

For example, the trade deficit is just the sum of all goods and services purchased abroad.  That's math.

And the amount of the trade deficit exactly equals the amount of the capital surplus. In other words: The amount we puchase from abroad equals the amount of dollars we sell abroad.  That's math.

You can't say, "well we'll purchase less goods but keep selling dollars."  That is a nonsense sentence.

For gold, when we stop selling dollars abroad, that is exactly that amount of dollars NOT BEING USED BY OUR TRADING PARTNERS TO BUY OUR FINANCIAL ASSETS.  ESPECIALLY OUR DEBT.

That erodes the buying power of the dollar proportionally because we can not service our debt by that amount.  So we have to buy that debt ourselves with printed dollars.  That erodes the value of our currency.  And it sends rates higher.  Which makes our debt even more expensive to service.  Which erodes the value of the currency.

Over time, gold must appreciate by that amount that the currency is depreciating.

That's a math trade.

The same with the Budget Deficits,  When a big budget bill adds 5 trillion dollars to the debt over time.  That erodes the purchasing power of the US dollar proportionally.

Over time gold will appreciate by that propotional amount.

That's a math trade.

Of course, you can make up fantasy stories like "When you cut people's taxes you actually get more tax receipts so you can run a bigger deficit and it will get paid for."

That's just a story.  It's a type of sentiment.  So stocks can take comfort from it even though it's not true.  Stocks may rise on it.

Gold only moves because of math.  So that story will not keep gold from rising as the currency depreciates.

Of course, when the retail buyer plunges into gold, as happens periodically, gold can get a sentiment boost.  But ultimately it will fall back to reflect the purchasing power of the underlying currency.

This is because all the central banks of the world know more or less how much they are debasing their currencies and they purchase gold to protect the value insofar as they are able.

In that way gold has held it's value over that last 5000 years of human history.  

To be clear human history is only 5000 years old.  That is not to say gold wasn't used before that by civilizations.  It was.  We know that from paritially deciphered languages,  But languages we undersand (History) going back to Ancient Phoenician (1000 bce) Ancient chinese (2000 bce)  Ancient Egyptian (3000 bce) and Ancient sasnskrit (3500 bce) all record the use of gold as the monetary metal of choice.

Once upon a time, silver was also used as a monetary metal.  But that was back before financialization created so much debt that only gold had a sufficient value to offset the value of the debt,  That is why the value of gold is now 100 times the value of silver rather than 10 times.

Of course, if sentiment turns completely against a currency because faith in the government that issues it erodes irrecvocably, then the value of gold can soar to any level.

But that is because the value of the currency crumbles.

It is still a mathematical relationship.

HOW TO INVEST IN GOLD

If you're reading this you're probably already on the gold train.  However, there's a lot of confusion even among long time gold investors about the best way to protect yourself with gold.

Here's the salient point about this particular gold move in this particular economy:

CENTRAL BANKS ARE BUYING BULLION.  AND THEY ARE EVER INCREASING THEIR PURCHASES.

YOU SHOULD TOO:  CENTRAL MINT GOLD COINS AND BARS.  US EAGLES.  CANADIAN MAPLES.  KRUGERANDS.  PHILHARMONICS.  ST GAUDENS.  LIBERTYS.  SOVEREIGNS.  FRENCH ROOSTERS.  ETC.

Ther corallary to this: CENTRAL BANKS DON'T BUY GOLD STOCKS.  CENTRAL BANKS DON'T BUY SILVER.  

That's not to say you shouldn't.  Maybe you know a lot about gold stocks and silver shortages etc etc etc.

But Gold Bullion is the only TIER ONE CENTRAL BANK RESERVE ASSET other than the US Dollar Denominated Debt (and possibly Bunds.)  

So don't overthink this one.  Just do what the central banks of the world are doing because they have driven this entire gold move.  Asian private citizens also buy gold.  European private citizens are buying gold now.  US citizens are not.  Eventually they will.  So that is alot of money that has yet to come into this market.  

Maybe some will rotate into gold stocks or silver,  Maybe not.

But follow the central banks.  They get that debt levels are such that they must Inflate or Default.  The only thing that will protect the value of thier currency is Gold Reserves.  So they are buying.

That is the only thing that will protect the value of your asset base.

After you have a satisfactory level of bullion, you should consider a pure a leveraged play on bullion:

That is bullion based collector coins: PERUVIAN 100 SOLES.  FRENCH 5 FRANC SOWERS.  BRITISH 5 SOVEREIGNS and BRITISH MASTER ENGRAVER RESTRIKES.. FRENCH GOLD ANGEL 100 FRANCS.  These are all bullion issues of relatively short prints that have already increased in gold in high grade.  Some of these now sell at 2-3 times bullion.  Five years ago they all could have been bought at bullion prices.  More recent issues of very low mintage can still be bought very near bullion.  So the risk is still very low on those issues that hevent yet caught on.

From there you can move back in history.  Fifteen years ago Alexander Thet Great Gold Staters from 300 BC could be had for 3-4 times bullion in lower grade.  Now they are worth much more.   But there's still room for profit if you know what you're doing. 

But this is a specialized market.  It takes expertise.  If you don't have any expertise - stay away.  

And start with bullion.  And if you just stick with bullion you'll be fine.

GOLD'S ROBUST YIELD

 

The stock jockey rationale against gold is that it has no yield.

This is a misunderstanding of yield.

A financial yield is the income an investment generates over a period of time.  Gold's current yield this year is 25 percent.  Last year it was 27 percent.  That's pretty good.

A 10 year treasury yields about 4.5 percent and is trending higher so the price of this invesment is trending lower.

In a booming economy that yield might be indicative of economic health and might signal less of the need for gold - especially if the debt situation was well under control

In an economy that is currently growing beneath the 1 percent trend growth - this yield is indicative of debt market that is nervous - perhaps frightened about the health of the underlying currency.  Especially when the debt has exploded to 125 percent of GDP and is trending rapidly upwards.

Then the 4.5 percent yield (trending higher) is indicative of a powerful need for Gold as a hedge against debt and currency instability.

Because that's what gold is: AN INSTABILITY HEDGE.  In debt crisis gold is the only monetary hedge.  And make no mistake, by massively increasing our debt (the big burdensome bill) and incentivizing other countries to dump our debt (that is what Tarrifs do when you have the reserve currency, and that's math not opinion) we are rushing head first into a debt crisis.

Throw in a chaotic trade war that has already destabilized the global economy and you have a global rush out of US debt and into GOLD.  

To be sure, gold has appreciated 8 percent a year since 2000 while stocks have appreciated 7 percent.  

But with stocks trading a record multiples and the stock mania at all time highs (as measured by the VIX and by the percentage of stocks that make up the net worth of the US invsestor) while US and Global GDP are trending down towards zero with Global Debt at 300 percent of global GDP, and you have a recipe for massive financial instability wherein the gold price can only move upwards both in real and relative terms.

And with gold currently returning about 25 percent - that seems like a worthwhile yield - as a reward for moving into the ultimate safe haven investment.