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.

War and Gold II

 

Despite the fact that kinteic war in the gulf  no longer serves US interests (if it ever did), there is no way of disengaging without ceding the Straight of Hormuz to Iran/China.

As long as ships are paralyzed the pressure on oil remains high and therefor so does the pressure on gold.

THis is very Deflationary.  It will lead to a   global economic slowdown, shortages of food and energy that will metastasize into famines and recessions, and possibly derpressions.

On the other side of this elquation is the fact that war itself is extraordinarily inflationary.  It is tremendously expensive for all participants.  This means a ratcheting up of debt levels everywhere.  And in the US it means ramping up the printing presses to levels never before seen in history - considering the current debt load and the unprecedented levels current of spending.

The US is already demanding an extra trillion for the war machine.  And once the war machine revs up it is insatiable.

Why?

Because in a debt soaked economy the only way to keep the risk markets from crashing is to keep the deficit spending levels soaring.  And the trillions for the war machine ends up in the risk markets.

This (money printing) is paid for as a regressive tax on working Americans.  And it benefits the billionaire class that controls the Military Industrial complex.

So, on balance, the initial thurst for Gold is down with the initial deflationary pressures but ultimately way up as the inflationary pressure of the war machine kicks in.

So, the trick is look through the initial Gold reaction to the ultimate Gold result.

WAR OIL AND GOLD

 

                

The Iran war is effectively over.  

The US can't escalate without sending oil to $200 over night, and Iran has demonstrated they are willing endure months of privation as long as they can make the global economy suffer witht them.  

The US can't tolerate any more suffering than necessary with food and energy costs spiraling out of control (along with everything else.)

So the war is over.  

That means the Straight of Hormuz is now under control of Iran/China/Russia.  It is to their benefit to allow oil to pass through the straight but it will be on their terms.  

This means A) oil is likely to remain closer to $100 dollars than the $50 dollars level before the war.  In fact, many analysts have it climbing steadily towards $150 as so much middle east oil has been taken off line and it will take many months just to get back on line.  This is excellent for GOLD because it means inflation will keep spiraling out of control.

B) The Middle Eastern countries will be able to begin selling oil again, so they can stop selling gold, and they will undoubtedly use the oil proceeds to buy back the gold they had to sell when the oil sales stopped flowing.  Again, excellent for gold.

C) the massive cost of the US war machine will add an extra TRILLION to the budget.  That is money that has to be printed out of thin air.  This is the best news for gold of all, especially gold priced in dollars - since it destroys the value of the dollar.

So, in all excellent for gold.  In fact, the perfect strorm.

Add to that, the certainty that a Fed dominated by the current adminsitration is sure to cut rates into this inflationary storm.  

That will add jet fuel to the gold bull.

The coming Gold Pivot: Inflation is the point

 

When will gold finally take off again?

The moment the new Warsh Fed begins cutting.

And he will cut all the way down to 2 percent.  And then lower.

There's a lot being made of Warsh being a data dependent and administration independent Fed Head.  That's a joke.  He's been put in to cut rates.  Everybody knows it.  Few can say it. Because that would make it seem like nobody cares about inflation.

Of course the administration does care about inflation.  They need it very badly.  It's the only way to deal with a trillion dollar burn rate every hundred days.  If they don't get the requesite inflation they get a debt depression and nobody wants that.

But nobody can acknowledge the need for inflation because that would spook a shaky consumer who would then desperately binge buy to front run the coming inflation which would provoke a hyper inflation.  And nobody wants that.  That's what's meant by managing inflation expectation.

A nice managed stagflation with aburdly understated government stats is the best we can hope for.  All the while convincing the consumer that the inflationary yoke is transient and will surely dissipate as soon as A) oil prices subside, B) the AI boom boosts productivity, C) the national reshoring of industry kicks in, D) The tooth fairy puts big fat refund checks under everyone's pillow.

But really, gold will skyrocket the moment Warsh starts cutting even while 90 percent of the hard working consumer base is barely hanging on pay check to pay check, while everything from housing to energy to insurance to health care to education to food costs keeps spiraling out of control.

So hang in there with your gold positions because Warsh will not disappoint.

China and Gold

 

It's no secret that China is driving the global gold price right now.  The central bank and sovereign wealth fund buying is global but China is the driver.  They have set up gold exchanges and warehouses strategically throughout the world; they have been selling US treasuries to buy gold and they have started to accept gold in payment rather than US dollars for certain strategic commodities.

In fact, the narrowing of the US trade deficit over the last 5 months is entirely due to the US exporting gold to China.

So what happens if to the gold price if China collapses, as many in the US are predicting?

It's a fair question, even though many of the US analysts who are predicting the collapse of China like Ed Dowd are also some of gold's biggest proponents.

The major argument for China's collapse is based on demographics.  The argument goes that the Chinese birth rate is rapidly decreasing so that you have a diminishing worker base supporting an increasingly aging population.

What this argument misses is A) the massive population in china still produces 4 times the number of youthful workers that the US population (also decreasing) produces.  There are 80 million Chinese under the age of 5 and only 18 million Americans.

But what this argument also misses in the structure of the Chinese economy is such that the aging population doesn't nearly consume the percentage of the output that the aging US population consumes.  First, it is about 1/5 as expensive to live in China so that the savings of the aged last much longer there, without nearly the same amount of government support.  Second the Health Care is set up in such a way that the young are supported equally with the aged unlike here in the US where nearly 50 percent of the health care outlay supports procedures for the aged which respresent about 15 percent of the population.

But most important, the Chinese economy does not run on prerpetual negative real rates which is a constant transfer of wealth from young to old, from worker to asset owner as it is here in the US economy.

Also, whereas the Chinese economy socializes the profits of the wealthy which benefits the younger workers, the US economy socializes the losses of the very wealthy which penalizes youthful workers.

This makes the Chinese economy more resilient for the youthful workers than many in the US seem to realize.  

The second criticsim of China has to do with the inefficiency of the central government which resulted in an overbuilding of the housing sector to such an extent that collapse is imminent.

This argument is generally put forth by analysts who have never been to China.  Those western analysts who live in the Far East like Mark Faber and Louis Gave tend to point out that the Chinese Central Committee has shifted away from putting resources into housing (for nearly a decade now)  towards building extremely efficient hi tech industries like Electric Cars, AI, robotics and aerospace that are at least competitive with western industry and in some cases superior.

Finally the Chinese have managed to stay away from perpetual forerver wars that eat trillions of dollars of resouces in completely unproductive endeavor and they have spent money rather on buying up the commodity minings and processing sectors around the globe.  In this way that have already achieved escalation dominance for commodities like Rare Earths and Silver that are crucial to the new hi tech industries.

This isn't to say China is in any way superior to the US, but I don't think there's any good  reason to feel the Chinese collapse is imminent.