REAL INFLATION?

 (FROM THE DAILY PFENNING) 

I’ve told you all this before… But Clinton put the onus on Greenspan to come up with a plan to lower inflation… Greenspan hired the Boston Commission, who came up with hedonic adjustments to the inflation calculator, and voila! Inflation was lower, and so were interest rates….  The biggest change was to allow substitutions for the items in the basket that were used previously , when their prices got too high….

For instance, if steak got too expensive, they would say that mom’s would substitute hamburger, so that’s what they did, they substituted by taking steak out of the basket of goods, and adding hamburger…. And so on through the years…. They took out housing and substituted rents, they played these games with the Inflation Calculator… So, if they want to figure out to get inflation going again, calculate it like it was pre 1995….

John Williams at Shadowstats.com does a fantastic job of calculating inflation the way it was calculated Pre 1995… Right now, he’s showing that CPI (consumer inflation) is above 4%.... While the CPI that is hedonically adjusted is just .3%....  And don’t forget what I showed you a couple of months ago where the Chapwood Index…. They show the real price increases in goods & services for the top 50 cities, and just for the top 10 their 2020 inflation average is 10.8%....

THIS GOLD BULL HAS BARELY BEGUN

 

If you think gold has had a good run up over the last year, here's a chart that should give some perspective.  It shows that in inflation adjusted dollars gold has barely budged.  We have entered a period of unlimited out of control Federal Spending under the Trump regime.  They pay lip service to holding the line on aid to the working class and broke States.  But for corporations and banks the spigot is wide open to the tune - so far - of Ten TRILLION dollars.  The Budget Deficit this year alone will be four to five times that of any previous administration.  And now the central banks of the world have pledged openly to hold rates at zero or below for years and years to come.

Here is some historical information from the four previous gold bull markets. 

Bull #1  June 1970 – Aug 1974   gold advanced from $36.56 to $154.50.  The rate of increase was 422%

Bull #2  May 1976 – Feb 1980 gold rose from $127.00 to $850.00.  The rate of increase was 669%.

[Between Jan 1979 and Jan 1980 gold pulled back 11 times at a rate of 3% or more.  During the same time period silver pulled back 12 times at a rate of 5% or more;  (source Jeff Clark).  Investors need to expect corrections along the way!].

Bull #3  July 2001 to Aug 2011 gold rose from $267.000 to $1.925.00 The rate of increase was 720%. Bull#4  Oct 2015 to who knows when   $1,070 to who knows how high.  The expectation for minimum targets for the gold price during the current bull market, from the $1.070.00  starting point, based on history, ranges from $4,500.00 (at 422%), to $7,700.00 (based on 720%). 

Why Digital Currency and Block Chain will send the price of gold soaring.

 

There's this idea floating around the digitization is the enemy of physical gold.  The argument runs that "innovations" such as block chain technology and the move to global digital currency will undermine the value of holding physical gold.  Physical gold is a relic from another era, the argument runs.

The problem with this argument is that the very technological breakthroughs that enable the inventions of things like Block Chain and digital currency will soon undermine their viability.

How so?

Well the next innovation which is a year away, two years away, five years away. depending on who you ask, but is coming as sure as the sun will rise, is Quantum Computing.  The upshot is that with a Quantum Computer every single existing Digital Currency, including block chain, including the most sophisticated .online banking and trading programs will be able to be hacked in minutes.

Nothing Digital is safe.  All forms of digital transaction will have to be secured through in person verification otherwise nothing will be secure.

But won't there be some sort of Quantum Currency?  Would you bet your life savings that whatever it is won't be hackable by Quantum Computing 2/0?

Which leads us all the way back to physical gold and silver as the only secure store of value.

As the French say: The more things change, the more they stay the same.

LONG TIME GOLD HATER WARREN BUFFETT INVESTS IN BARRICK GOLD

 Barrick Gold’s stock is popping 10% Monday after legendary investor Warren Buffett’s Berkshire Hathaway revealed a stake in the gold miner’s stock. 

Berkshire added a $562 million position in Barrick Gold in the second quarter, according to SEC filings Friday. While the position is small for Berkshire — which owns more than $89 billion in Apple stock — the conglomerate is the 11th largest shareholder of the gold mining company, according to FactSet. 

This was an unusual move considering Buffett, a long-time value investor, has long professed a dislike for gold, preferring assets that have cash flows or pay dividends. 

Buffett on gold:

“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Looks like the last of the big time gold haters has suddenly changed his mind.

GOLD COIN AND MEDAL UPDATE

The most significant auction in historical gold medals in recent history has just been completed at Stacks Bowers Auctions.  The Duke of Lansing collection featuring many high grade British gold coronation and jubilee medals brought historically high prices.  The Charles II coronation and William and Mary coronation in gold pictured above both brought just a touch below $40,000.  Each of these is the finest of these rare issues to have been auctioned in recent memory.  Many others hammered at record levels.  

  this George VI medal in SP 64 brought $28,800.  Last year at the New York International the same medal in the same grade brought $16.500.  With a mintage of only 274 pieces in this high grade the medal is certainly worthy of such a high bid, but the jump from year to year is remarkable.

Even the silver coronation medals are following suit.  Last year a George I silver coronation medal in sp 63 sold for $2000.  This year an SP 64 sold at Heritage for $7000..

These high prices were not confined to the medals selection. Both at Stacks and Heritage high grade coins of interest brought historically high prices.  

The reason for this jump in prices should be obvious to anyone who has been tracking global central bank activity.  The Federal Reserve Bank in the United States alone has printed 10 trillion dollars this year in order to acquire the bad debt of US and International Corporations and Banks that it deemed necessary to preserving the global financial system.  The ECB and the Bank of Japan and printing money at a similarly Furious pace.  Concomitantly the price of bullion gold is at record levels in nominal terms through when adjusting for real inflation (not the absurd central bank inflation figures) the price is sure to go much higher.

So you can look at it as real assets are inflating at a terrific rate - or the value of paper money is being destroyed at a terrific rate.  It amounts to the same thing.  And the trend is only accelerating

WHY THE BIG BANKS COULDN"T KNOCK THE GOLD PRICE DOWN THIS SUMMER: FUTURES BUYERS ARE TAKING DELIVERY!!!!!!

(Kitco News) Trading behavior is changing in the gold space with investors preferring physical versus paper while at the same time investing more in ETFs than futures, according to Commerzbank.

Traders issued the largest delivery notice on record at Comex, declaring their intent to deliver 3.27 million ounces of gold against the August Comex contract.  

“According to traders, 102 tons of gold were delivered to the holders of expiring gold future contracts on the Comex last Thursday – this also fits the picture of changed investor behavior,” said Commerzbank analyst Carsten Fritsch. “Physical deliveries on the Comex have been rising for months: they totaled just 26 tons in February, 98 tons in April and as much as 171 tons in June.”

This trading pattern shows that investors prefer physical to paper gold, Fritsch pointed out. 

Despite the want for physical, no shortages are expected, the analyst added. “Still more gold is being shipped into the COMEX warehouses than delivered on a net basis. Currently over 1,100 tons of gold are being stored there, so no shortages of standard bars are to be expected, even if investor demand remains high,” he said. 

Another shift in the trading pattern has been investors’ preference for gold ETFs versus future contracts, according to Commerzbank. 

“Clearly there has been a shift in investor preferences: rather than investing in futures contracts, they are opting to put their money in gold ETFs,” said Fritsch.

Massive inflows are the proof with 155 tons, which is half of monthly global mine production being reported in July alone, the analyst said, citing Bloomberg data. 

DO YOU VALUE GOLD AS A COMMODITY OR AS A CURRENCY?

As gold nears $2000 again, there is much speculation as to a "fair value" and what to expect next.

There are many billionaires like Ray Dalio, Jim Druckenmiller, Paul Tudor Jones, Jim Rogers etc who are still aggressive buyers of gold.  Most of these base their decisions on fundamental analysis having to do with expanding money supplies and debt loads in the major economies.

Then there are many technical analysts like Bob Prechter of the Elliot Wave school, and TV personality Jim Cramer's favorite chartist Carley Garner who fee that gold is on the verge of a major bust and has no real intrinsic value at all.

The real difference in analysis comes down to whether you view gold as a currency or a commodity.

Historically gold was the major global currency for at least 3500 years of recorded history.  Silver was also used in about at 10 to 1 ratio as a secondary currency.

Paper chits or IOU's were also used insofar as they were convertible into gold..

In 1933 The United States had issued so many paper chits they decided to freeze the price of gold and make private ownership illegal because they could no longer honor the conversion of paper into gold.

From this point on the Federal Reserve bank and the US Treasury created a system of floating paper money uncorrelated to anything but the "Good Faith" of the US Government.

All the governments of the world still used Gold as the currency of last resort.  All Governments of the world stored gold in their central banks for use as currency of last resort and for large international payments.  And all paper was still supposed to be convertible into gold at a controlled price.

In 1971 Richard Nixon closed the gold window for good in the United States.  Gold was no longer money available for the settlement of commercial transactions.

The Question is: is it still a currency?  If not it's value is purely emotional and sentimental, which is the argument of many technical chartists. 

 If its value is emotional and sentimental what is it's value?  Honestly, I have no idea,

And if it can not be used in the settlement of trade, how can it be a currency?

The answer is: it is a currency because it is held by the central banks of all the major global governments.  Why do they hold it?  Because it is an asset that as readily convertible into every major currency, it is durable, divisible, immutable, and has a 3500 year track record of holding its value over time.  In short, all the conditions that Aristotle laid out for currency in 500 BCE.

And right now Gold is the only asset held by the central banks of the world that are holding many trillions of dollars worth of liabilities in the form of bad debt they've taken onto their balance sheets to bail out the over leveraged banks and corporations of the world.

So if you accept the premise that gold is still a currency then what is the value?  

First, you can ask yourself what price would gold have to go to in order to make the central banks of the world solvent?  This is not an easy question, but surely the answer is much higher than it is now.  And this is the reason many billionaires who are looking at the global economy and seeing great value in gold disagree with many chartists who are looking at their computer screens and computing stochastics and wave counts and relative strength indicators and seeing a commodity trading at perilous levels.

Gold's Best Friend Ever, hard at work destroying the value of the dollar

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Perhaps the single greatest thing preventing gold from taking off into the stratosphere has been the strength of the safe haven status of the US Dollar.

Since gold is first and foremost a hedge against instability, as long as the US Dollar had also been a hedge against instability, Gold's primary function had serious competition.

The dollar has long had serious debt problems to contend with.  However, it had been backed by the strength of the respect that the US Government has commanded internationally, as well as the respect for the depth of our financial markets.

Until now.

Now the US Government is the laughing stock of the developed world with a President who thinks Science is a hoax, a free press is the enemy of the people, and that brown and black people are inferior.

He has also long believed that a weak dollar benefits real estate - which it does, and since his wealth is held in real estate he is all for destroying the value of the dollar.  Which he is rapidly succeeding in doing.

A Global de-dollarization effort is underway.  Contracts for commodities like metals, food and oil have largely been settled in dollars,  This has given the dollar a special status around the globe.  Every country needed a reserve of dollars.  This has also helped support our massive debt.

But Trump's trade wars, and  his lack of respect of international treaties and institutions have initiated a global move to settle contracts without dollars. Which means countries around the globe do not need a reserve of dollars.

At the same time Trump's historic ineptitude in dealing with a virus is crippling the once vaunted US economy.

So as countries around the globe de-dollarize and our economy sinks, the dollar is quickly losing its special status as the global reserve currency, and its value is sinking.

Whatever other damage this is doing to our economy, it is probably the single greatest thing to happen to gold in the post war era.

Because when investors get nervous now they look away from the dollar.  So where else can they look?  The euro has structural problems.  The Yuan is gaining strength but the Chinese economy is still relatively closed.  The yen is burdened with even more debt than the dollar.

Gold is becoming the currency of choice, as its status as a safe haven currency loses its greatest rival.

U.S. budget deficit shattered one-month record in June as spending outpaced revenue by $864 billion

An extraordinary assault on US Fiscal Solvency is under way under the Trump administration and because of all the other crises, this one gets little play in the media, yet it may be the most damaging of all/

The Federal Government is now running close to a TRILLION DOLLAR DEFICIT PER MONTH/  Meanwhile the FEDERAL RESERVE BANK OF THE UNITED STATES OF AMERICA if standard accounting practices applied would be running a parallel annualized deficit also close to A TRILLION DOLLARS A MONTH - when you account for the fact that they've taken over 10 trillion dollars of Bad Debt onto their balance sheet to support this imploding economy.

When the Fed took on Three Trillion Dollars of bad debt after the crisis of 2008 they promised to "normalize their balance sheet as soon as appropriate."  They briefly tried to do so in 2013.  The stock market immediately began to crash it what was dubbed a TAPER TANTRUM.  The Fed immediately desisted proving once and for all that their true mandate is to support the risk assets of the very very Rich.  (They've since insisted that much of the bad debt was repaid, without ever opening their books to back up this claim.)

Where is the talk of a normalized Fed balance sheet now?  There is none, because, frankly, it would be regarded as an absolute joke.  

Where is the talk of fiscal responsibility of the Federal Government now?  There is none.  It would be a joke.  The only talk is how many trillions of dollars more do we print up to stave off a depression?

A Solvency Crisis is looming.  And not just in the US.  It is a global crisis.  The only question is what will protect your personal finances during a Solvency Crisis?

The shrinking dollar (another chart to illustrate the inflation super cycle. And a Politician who gets it!

Surreptitious intervention in the gold market by the U.S. government is the target of legislation introduced in the House of Representatives by Rep. Alex X. Mooney, R-West Virginia.

Mr. Mooney has introduced a bill HR 2559, Mooney also has introduced legislation to protect Americans against the Federal Reserve’s steady devaluation of the dollar — legislation to forbid federal taxation on the sale of gold, silver, platinum, and palladium coins.

In a letter to colleagues seeking support for his Monetary Metals Tax Removal Act, H.R. 1089, Mooney writes: “The Internal Revenue Service does not let taxpayers deduct the staggering capital losses they suffer when holding Federal Reserve Notes over time, so it is unfair to assess a capital gains tax when citizens hold gold and silver to protect them from the Fed’s policy of currency devaluation.”

THIS HUNDRED YEAR GOLD CHART SHOWS THE EFFECTS ON
THE GOLD PRICE OF A MASSIVE INFLATION SUPERCYCLE.  YOU
CAN SEE THE CYCLE GO BALLISTIC STARTING WITH THE
CLOSING OF THE GOLD WINDOW IN 197O,   

IN THE CHART BELOW YOU CAN SEE THAT AT THE SAME TIME WAGES AND SALARY AS A PERCENT OF GDP STARTED TO DROP PRECIPITOUSLY.

THE CHART BELOW ONLY SHOWS THIS PERCENTAGE THROUGH 2012.
IT DROPPED OFF A CLIFF IN TH LAST 3 MONTHS.

COINCIDENCE?

THE QUESTION IS: HOW CAN ONE BEST PROTECT ONESELF FROM THE MALIGNANT CONSEQUENCES OF THIS CYCLE?

STOCKS?  PERHAPS.  BUT STOCKS ARE AT THE MERCY OF THE EFFICACY OF THE FEDERAL RESERVE BANK TO ENDLESSLY SUPPORT THEM.  MAYBE THEY CAN.  MAYBE THEY CAN'T.

REAL ESTATE?  PERHAPS.  BUT REAL ESTATE IS SUBJECT TO THE VICISSITUDES OF OVERCAPACITY AND THE MORTGAGE MARKET.

THAT LEAVES REAL ASSETS: GEMS, OLD MASTERS ARTWORK, HISTORICAL ARTIFACTS, GOLD. 

WHY INVEST IN GOLD NOW?

This is a chart of the Gold price over the last 100 years.  This is the definition of an inflation mega-trend.  Except for the period after the depression when the gold price was fixed until 1971 when Nixon closed the gold window in1971, the line slopes ever upward.

The Financial community is very invested in convincing you there is no inflation, therefor zero rates are appropriate.

Look at the chart.  Does that look like there is no inflation?  Look at your personal finances.  Are things getting cheaper and cheaper?  Or is life getting more and more expensive?  I think unless you are so rich you can't tell the difference because it's all pocket change to you, the answer is obvious.

Are you afraid of getting in at the top here?  Then ask yourself this: is the inflation megatrend about to stop?  For that to happen rates would have to rise to the real cost of money which is currently about 10 percent year over year, plus a risk premium.  

But rates are controlled by the CENTRAL BANK.  They are not set by the FREE MARKET.  For the Government to allow rates to rise when the US deficit is 26 Trillion dollars and rising by 2 trillion dollars a year, and when the real economy is in a depression, and when the Central Bank's own balance sheet is carrying over 10 trillion dollars of debt - THAT IS IMPOSSIBLE.  

Ever since Volker temporarily halted inflation in 1979 by raising rates to 17 percent, every subsequent Fed head has simply slashed rates at any sign of a downturn.  This gave the impression of financial stability.  Meanwhile Debt piled up, Inflation in Real Assets skyrocketed, Malinvestment went wild, and the wealth gap careened out of control.

Now rates are at ZERO.

REAL RATES will only go lower.  While Nominal Rates will hover between ZERO and NEGATIVE.  

What are Negative Rates?  In theory they don't even exist.  Because it means you pay somebody for the privilege of loaning them money.  The catch is nobody will loan you money at any price because if you need it you probably can't pay it back.  But if you want to try to get a return on your money it will cost you, because the government is so broke it's the only way they can get money.

Absurd?  Right?  That is what happens when the inflation megatrend spins out of control.  That is where we are.  What is the Policy Prescription?  There isn't one.  That is why gold is only at the very beginning of its mega-rise.

Gold's best friend tirelessly supporting the gold price every minute of the day

June and July are normally the months that gold sells off, because these are the months where Asian buying dries up so that the big banks can knock the gold price down with massive short sales of future contracts.    They tried, but failed, as gold has managed a muted if somewhat controlled rally.

Why?  Because though gold likes massive money printing, massive deficits, and unbearable debt loads all of which the Trump administration has delivered to the Gold Community, gold LOVES INSTABILITY.

Trump campaigns/governs (there is no distinction in the Trump Party) on Massive Instability.  His fourth of July speech was full of promises to Destroy his fellow citizens on the Left in the same way America destroyed Hitler, Stalin and Bin Laden. 

Why is Trump so set on supporting the Gold Price?   Who cares? 

As we get closer to the election Trump's rhetoric of Instability, his promises of Violence, Rigged Elections, and his laying the groundwork to contest his loss by declaring a National Emergency over election Fraud will send gold to record highs. 

Count on it.  This will be so massively destabilizing to the American - and global political and economic system the Gold Price is sure go go ballistic.

Let's say Trump actually wins the election.  His campaign of destabilization will continue unabated - and his refusal to deal with the carona virus will continue to destroy the real economy - also great for gold.

Let's say Biden wins and Ttrump graciously concedes (Ha ha ha).  The Fed's balance sheet will still be 10 Trillion dollars, the Federal annual deficit will still be 2 Trillion, and corporate taxes will go back up forcing even more money into gold.

The Trump damage has been done.  It's win win win for gold.

GOLD: THE LONG VIEW

The Long View is always the best view when considering any type of investment.  We live in a world of day traders.  Most of the major corporations and banks are day traders in the sense that they're most concerned with the next quarter or perhaps, at most, the next year or two.

The Federal Reserve Bank is also most concerned with the here and now.  The present set of circumstances.  They want to iron out and "normalize" any shock.

This is short term thinking.  Short term thinking can work for years.  But we now live in  world where short term solutions have led to such extreme capital mis-allocation that the short term effects of short term thinking are becoming exposed.

The Fed's balance sheet is now north of 10 trillion dollars.  The Federal yearly deficit is north of 2 trillion dollars.  The balance sheets of the general public are such that 70 percent of the population can't afford to miss a single paycheck without going into crushing debt.

Add in a pandemic, a clueless and malignantly corrupt administration, and an atmosphere of global civil unrest and you have a situation where short term thinking won't serve very well anymore.

The trouble is coming up with a long term view that is serviceable.

If you're trying to solve societal and global economic dislocations, that's pretty tough, as societies and global economic structures are not organized in ways that are all that similar to the past 3000 years of history.

If you're trying to protect your own finances the past 3000 years of history can be instructive, because the concerns of household finances (Oikos-nomos or economy) are not that different from generations past.

You have your house itself.  You have your dependents.  You have your fixed costs.  You have your income.  You have your store of wealth. 

The store of wealth is the big issue for long term security.  A store of wealth has characteristics as true now as they were 3000 years ago in classical Greece.  Your store of wealth most have INTRINSIC VALUE = VALUE that has passed the test of time.  Things that have been valuable for hundreds ot thousands of years. 

For example: Time Tested Master Artworks.  Important Historical Documents and Artifacts.  Gold.  Gems.

Your store of value also should be durable, portable and divisible in order to be most useful. 

Some Artworks that are tiny.  Gold,  Some Gems.

As the situation becomes increasingly difficult, wise investors always move back towards that which have always worked. 

The problem is, if you don't get out ahead of the situation, these stores of value become increasingly difficult, and more expensive to acquire.

GOLD SEASONAL SELL OFF

Gold Seasonals dictate a selloff for Jun-july.  There is little buying of physical gold in Asia: China, India during this period.  This enables the large Bank/Trading Firms who get unlimited cash from the Federal Reserve Bank at 0 percent to sell huge amounts of Future contracts into the market, causing a a paper crash so that they can steal the money of small traders, without fearing that delivery concerns might screw their trades.  

It happens every year.  I was beginning to fear that the massive destabilization of American Life caused by the Trump Administration would scuttle this year's selloff.  But the Banks are more powerful than the chaos.  And they've begun to take gold down.  It won't go down in a straight line because of the massive Trump chaos.  But they'll get it down.  

Be prepared as this will create a buying opportunity of a lifetime in August.