War and Gold: When will gold pivot?

 

To figure out when gold will exhaust this downswing you have to understand the mechanics of the war's effect on the economy.

First the war will continue because it is in the best interest of 2 of the parties to continue - Iran because the war unites a fractured country against an external enemy and Israel for the same reason.  It is in the US interest to end the war - but it can not do so without admitting defeat, or just leaving the Strait of Hormuz under Iran's control, which it will never do.

So the strait of Hormuz will remain closed and oil and inflation will soar.

Right now this is the war's main economic thrust - sending oil higher, debt higher, and thus long rates higher.  The rising oil price and the rising rates weigh on the gold price for short term trading reasons.  As rates rise, money rotates out of gold and into fixed income.  Algorithms have been written that effect this automatically.  In the short run the swiftly rising inflation concerns cause this rotation.  And gulf sovereign wealth funds must sell some gold to bridge the gap of the loss of oil revenues from the closed strait and destroyed infrastructure.

In the longer run - meaning months (not years) - the swiftly rising debt combined with the US militaristic policies that repell the rest of the world from buying our debt are stronly supportive of a higher gold price.

At some point as rates and debt rise, a debt crisis becomes ever more of a certainty.  Thirty trillion dollars of debt financed at under 2 percent are going to have to be refinanced this year - 2026 - at over 4 percent.  US Banks are carrying trillions of dollars of underwater loans in commercial real estate, in delinquent consumer debt, and in high yeild debt incurred by zombie corporations taking advantage of compressed spreads during years of ZIRP policy.

The incoming Warsh Fed has already comitted to easing.  They will receive little push back from the financial community in the face of this incipient debt crisis. Many hedge fund billionaires like Stanley Druckenmiller (who hired and trained Warsh and Treasury Secretary Bessant at his hedge fund) and Ray Dalio, are putting out videos warning that this debt crisis can not be avoided even with Fed easing.

But the Fed easing - even in the face of drastically elevated inflation - especially in the face of drastically elevated inflation - will certainly provide the fuel for the next - violent - leg up in gold.

As will the inevitable countless trillions in bailout money that the Fed will havee to provide to support the banking system.

The problem as an investor is if you wait for the easing you'll miss the move.  Because gold will undoubtedly move well in anticipation of this certain easing.

THE WAR AND GOLD

 

Gold has dropped precipitously since the beginning of the war.  This has confused many who assumed that gold is a hedge against war.

Gold is a hedge against monetary instability.  War produces monetary instability - over time.  So over time  gold is a hedge against the monetary instability produced by war - but it does not react to fighting itself.  The fighting in the short run seems to be causing some to sell their most profitable investment (gold) to stock up on weapons and oil.  Even with the massive sell off, gold is still the most profitable investment year to date!

But gold will react over time to the debasement of the currency that must occur to support the fighting and offset the tremendous increase in commodity prices: in this case especially, in oil, feritlizer, refining processes and food.  All essential expenditures for the average citizen.

Already, this fighting has resulted in an appropriation of 200 billion dollars for supplemental spending.  That covers the first 4 weeks of fighting. (and this is on top of the current  trillion dollars of spending every 100 days.  The most in US history.)

Already the cost of oil has gone from about $60 to aboutn $100.  Just in the first 4 weeks of fighting.

The United States has stated it has already won the war.  Therefor, we must conclude that victory in this war will do nothing to slow down the pace of war spending, since we still need the supplemnetal 200 billion dollars. 

And victory has done nothing to open the strait of Hormuz, so we must conclude that they will stay closed.  Therefor, over time, affected commodities like oil, refining capacity, and food will continue to rise in price.  Subsidies to the 80 percent that lives hand to mouth will be required, just as it was during covid.

So when will gold start to reflect the resultant degradation of the currency?  Well, most obviously when the new Fed comes in, and the new Fed chair begins to cut in support of the war effort in spite of the rise in inflation.

Surely, he won't do that?

Surely, he will.  Otherwise he would have not been selected for the job.  The odds on a Warsh rate  cutting regime according to Polymarket are 87 percent.   I would place them at 100 percent.

But it won't take that long.  Because the war will reinforce for global central banks urgent need to continue to diversify away from the currency of the country that is waging this most destabilizing war

And most obviously the global rise in long dated rates puts massive pressure on debt service which necessitates ever more printing of currency to service the growing debt..

There's no timing for this type of situation.  But gold will resume its rise sooner, rather than later.  Not because ot the death and destruction.  Because of the expense of the death and destruction in a world economy already stressed by excessive debt.

WAR IS EXPSENSIVE -

 

The old saw is that gold is a safe haven asset.

Maybe. 

But event driven investing is short term.

Long term, Gold rises as paper currencies are debased.  This is just common sense.

And nothing debases the currency like War.  

If you look at the current war, missile drones cost about $20,000 to $50,000.  Russia and China can supply Iran with unlimited  missile drones.  The cost of the defense systems agains these drones - like the Patriot missile system costs a billion dollars for a the battery and an addtional 4 million dollars per missile.  If the US wants to continue to arm its Middle East allies against the Iranian barage, the cost will be astronomical.

That doesn't take into account the cost of mainting war ships in the gulf and sending our own fighter jets across the world to drop bombs.  Then there's expanding the military and getting troops across the world.  Maintaining supply lines...

Then there's the disruption of supply chains and the increase in commodity prices, especially oil price - even though, over long periods of time, energy is abundant.  It doesn't matter, because when there are big discruptions in supply chains the transporting of energy can become prohibitively expensive.

Then there's the loss of trust between nations.  This too is inevitable, and this has an adverse effect on the cost of doing business.  Treaties get broken.  Trade alliances are ruptured.

It's all very expensive. 

And where does the money to pay for it all come from?

We print it.  Plain and simple.  We print it.

That means everyone pays for it by having our currency debased.

It also means we have to issue more and more debt.  But as our society because increasingly belicose, we find there to be decreasing interest in other countries in buying our debt to subsidize our wars.  So we have to buy all of our own debt.  This debases the currency even more.

In fact, at some point this leads to hyperinflation.  If we're very lucky perhaps we can control that for some time by opting for a torpid stagflation.  That's really best case scenario, and we're not far off from it right now.

None of this is very controversial or original, but somehow it gets lost in the race to justify all the dealth and destruction.

If you can't see how that, over time, must incresase the value of Gold, well, then maybe you're better off buying something else.

Tarrif ruling explodes the exploded deficit: Gold and Silver explode

 

The most important aspect of the SCOTUS tarrif ruling involves the trillion dollars of revenue the administration was budgeting to offset their military expansionism.  Already running a 2 trillion dollar yearly deficit the extra trillion (through only 175 billion has been collected) was supposed to make the global military expansion - with ICE at home and wars across the globe - deficit neutral.  

Now, on top of having to fund thousands of court cases that will result in billions of dollars of refunds, the military  ventures both domestic with ICE and foreign with wars in South America, the Middle East and potentially with CHina/Russia, will all have to be funded with deficit spending.

I'm not going to go through the math.  Do it yourself.  But the numbers are so vast and fantastical that if you compare the size of the beficit spending to the size of the gold and silver markets you'll find it necessary to multiply existing monetary metals valuations by mind numbing denominators.

And what this implies is that silver too is becoming a monetary metal.

This is debatable because most central banks are not using silver as a monetary metal.

But China and the US have both designated silver as a critical mineral that must be hoarded for national security purposes.  This is because it is by far the most efficiant electricity conductor of all the metals and as such is vital to every critical tenchnology from Electric Cars to AI to advanced weapons systems.

The fact that is was a monetary metal for 3 thousand years of human history means that for many private consumers acrosss the globe it is still used as a store of value, even if the central bansk no longer use it that way.

But now that gold is firmly over $5000 and climbing it is clear that for many outside the top 1 percent silver is a viable way to hedge against the persistent and ever increasing monetary debasement.

As long as governments continue to deficit spend this trend will continue.

MICHAEL BURRY: SOME OF THE GOLD VOLATILITY DUE TO BITCOIN COLLAPSE

 

The gold volatility continues knocking gold back down towards (shudder) $4800.  Still, double where it was a year ago.  But with no change in the fundamental story which begins with the central banks of the world buying as much gold as they can source.  China's gold binge is only accelerating with Chairman Xi posting to the government website a proclamation maintaining that China's strong currency will be backed by GOLD which will serve as the underpinning of China's strong economy.

So why the continued volatility?  Michael Burry of the Big Short fame, opines that much is due to institutions that unwisely "invested" in Bitcoin being forced to cover losses by selling profitable gold and silver positions.  This can only continue so long though, as the US corporate institutional support for gold is  but a tiny fraction of the Central Bank support.

It does, however,  point out a falicy in the Bitcoin as "digital gold" argument.  Because bitcoin has no use value other than as a means of money laundering by the criminal class of both private and government varieties.  Private and government criminals can get money out of countries to safe havens, and government criminals can set up meme coins (validated by the bitcoin narrative) as a means of accepting untraceable bribes.

But otherwise bitcoin is a digital pet rock. (though a rock has some use value as a weapon or a bookend or a doorstop.)

Gold is used by the central banks of the world as a reserve currency and by Eastern and Mideastern and BRIC goverments ever increasingly as a settlement currency for commodity trades.

So as crypto implodes there will continue to be some volatility in precious metals, but as the "digital gold" falacy becomes increasingly obsolete that money will shift into gold as the only efficacious monetary  debasement trade.  So over time the crypto implosion can only benefit the gold price.

As an aside: Zero Hedge posts this analuysis of bitcoin: Richard Farr, chief market strategist and partner at Pivotus Partners, has issued a stark prediction for Bitcoin (BTC-USD), setting a price target of zero for the cryptocurrency.

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Anatomy of a fabricated crash.

 

Gold and silver crashed 20 and 40 percent respectively in the course of 2 trading days.  Bear market, right?  Massive technical damage, right?

In normal times, perhaps. 

Not now.  These moves were simply the product of an unprecedented manipulation that transferred hundreds of billions of dollars from the hands of leveraged small and mid sized speculators into the hands of a few bullion banks (JPM, HSBC, BAC) and a cadre of government traders for the benefit of central banks, sovereign wealth funds and well connected political executives. 

How?  Simply by raising the margin requirements on silver and gold trades 8 times in 4 weeks, until everyone trading on margin (Borrowing money to trade) got squeezed out of their positions and went broke, while the Government connected Bullion traders front ran the margin announcements with massive short selling that they covered at the bottom of the squeeze.

This was done first to make a ton of money for those who always make a ton of money in today's rigged financial markets.  But also because the futures exchanges have become stretched to the breaking point by large financial institutions standing for delivery for gold and silver contracts when the exchanges are trading at somewhere between 35 and 50 times the paper promises over actual deliverable ounces in storage.  This squeeze enabled the exchanges to temporarily source gold and silver at much lower prices to service current  delivery obligations.  

The fact is, while the paper price dove during this operation the delivery price on real gold and silver as quoted on the Shanghai exchange went down at a much small rate.  The premiums simply exploded.

So this is obviously a temporary fix.  But one that the exchanges and corrupt government agencies can replicate any time as long as smaller traders continue to trade on margin.

However, over time, if the paper price and the physical price continue to diverge the paper exchanges will eventually cease to function and only those holding physical bullion will retain their hedge against the thoroughly corrupt fiat system. 

This is why central banks, sovereign wealth funds and billionaire concierge facilities are buying bullion hand over fist  Because once the paper exchanges break down real bullion will become extroardinarily difficult to source and hence extraordinariy valuable.

So what's the upshot here?

A) DON'T TRADE PRECIOUS METALS ON MARGIN!

In fact, if you're going to trade paper gold and silver in a market the has to go up over time as long as the fundementals remain in place, always trade in small enough quantities that you can survive the inevitable corrupt government sponsored raids.

B) Buy real physical metal and stick it in a (allocated) vault.  Don't trade.  Invest.

 

A GOLD CRASH?

 

Gold briefly touched $5600 and then plunged in 48 hours all the way down to $4800.  An historic plunge unmatched in dollar terms, marking extreme volatility for this supposed safe haven asset.

On the other hand, you could say that over the course of the last year gold has moved steadily from $2500 to $4800 with brief bouts of weekly volatility.  Like almost every other asset during every other period in history.

It all depends on your time frame.

If you are a gold trader and you got in recently - well you got whacked.  The moral is: don't trade gold.  Unless you are trading for a central bank or a bullion bank you're out of your league.  

If  you are a gold investor and you've been in for the long haul, this is barely a hiccup.  If you're a new gold investor just hang in there.  Every condition that has been driving gold up over time is not only in place but intensifying.

Debt is spriraling out of control everywhere and especially in the United States.  Federal debt is growing at a trillion dollars every 100 days.  And consumer debt is at all time highs and growing rapidly.  Consider this: GDP is rising while real wages are falling!!!  GDP simply measures SPENDING.   So spending is rising while wages are falling.  What bridges that gap? DEBT.

Deglobalization is intensifying.  Those who only consider only the trade deficit think this a great.  But anyone who considers the other side of the balance sheet - the CAPITAL ACCOUNT DEFICIT knows this is a disaster for real inflation.  Just as it is a disaster for the value of the dollar.  Those 2 sentences mean the same thing.

And geopolitical tension are boiling.  The country is being torn apart by hatred.  Just as we are attacking enemies and one time allies alike, riving the world with hatred.

Those who celebrate this as the Neo Mercantalism and the rise of a realpolitik are missing s most important point about mercantalism which is this: There was a give and take to the colonial system that fueled 19th century mercantalism.  It may have had brutal aspects but colonializing powers often brought some stability to target areas: they brought industry and paved roads and schools and brought vaccines and modern medicine and hospitals and clean water, and electricity, just as they seized natural resources, and exploited native populations.  This worked for all parties to some extent.  The NEW 21st century MERCANTILISM is closer to neolithic barbarism seeking to bring nothing and take everything from rivals.  And everyone is a potential rival.  This brings nothing but instability everywhere.

So what has changed to bring the gold price a bit lower?  Nothing.  It's a market.  Markets are volatile because human appetites are volatile.

Only fools and those with a very real knowledge/power/monetary advantage seek to trade them.

So invest, and hold on, as long as the underlying conditons are intensifying.