GOLD'S SECRET WEAPON

 

Gold's seccret weapon is no secret at all, but somehow is left out of the equation when most analysts talk about gold.

The CENTRAL BANKS of the world all store quantities of gold as a RESERVE CURRENCY.

They don't hold bitcoin, or silver, or stock, or cowry shells, or livestock, or any of the other things that your hear about serving as money.

They hold gold.  In large quantities.  All of them. 

And now that the United States has weaponized all forms of paper currency against Russia, all the central banks of the world are seeking to up their reserves of the one form of money that can not be weaponized: Gold.

Gold trades on gold exchanges in most every country of the world.  A central bank that has gold can not have its reserves confiscated or simply nullified by dercree.  They can't have their reserves hacked or cyber attacked.

And when quantum computing becomes a reality some time in the next five years, all paper assets will be vulnerable.  Especailly Bitcoin.  Gold will not be vulnerable.

This alone will be a massive driver of the gold price for years to come.

Ignorant people question whether gold is still money because you can't pay your rent with it.  But as long as the central banks of the world consider it the safest for of money - it is money in the bank.

And for the private investor it holds the same function as it does for central banks: it can not be weaponized.  Gold in your personal possession can't be hacked, or cyber attacked, or confiscated.

Yes, there was a gold confiscation back in 1930.  But citizens voluntarily complied.  That wouldn't happen today.  Not in the modern decentralized and global economy.  

Gold is the private citizen's wealth protector just as it is the wealth protector of the Central Banks of the world.

Won't Rising Rates Crush the Hard Asset Boom?

 

Conventional investors stay away from hard assets because, the argument goes, they provide no yeild.

Absolutely true.

After all, if you put a million dollars into a bank CD, after a year you have a whole $1000 for free!  Woo hoo!  The problem is that your million is worth $10,000 less in real purchasing power.  

But what if rates rise to 2 percent?  Well then you get $2000 dollars but your million is still woth $10,000 less.

But wait, what about Junk Bonds. you could get 6 percent threre, take on immeasurable risk and only lose $4000 in purchasing power over the year.

Or what about a massively debt laden dog liker ATT that pays a steady 6 precent and only costs market risk, default risk, and you still lose that pesky $4000 in purchasing power.

Arguing that thse investments will look more and more attractive as rates lift off of zero and head towards one or two percent are not very convincing.

Moreover, there are three huge flaws in the rising rate scenario.  

One is that the better part of inflation is currently the result of a massive supply chain disruption that is only getting worse, not better, as the world de-globalizes.   Raising rates does nothing to ameliorate this disruption.

Two is that rising rates slow an economy that is debt laden as the entire world economy is. especially the US economy.  The Fed's idea that this won't happen is absurd.

Three, the fable that the US consumer is in great shape only works on a average consumer basis.  The mean US consumer is debt strapped and struggling.  In other words put nine average US consumers in a room and then have Elon Musk walk in.  The average consumer in that room will be in terrific shape.  But nine of the ten are still near broke.  Or more accurately, six of the ten are near broke, three are doing fine as long as they keep working their tails off and one is super wealthy,

This means US companies will not be able to continue to pass on commodity prices to their customers as almost every analyst claims.  As earning contract and commodity inputs remain high everyone will feel the squeeze.

Thus rising rates will do much to slow the economy and very little to slow inflation.

This will do nothing to slow the hard asset boom.  

Nada.  Zilch.  

Quite the opposite.  As inflation remains high and the the economy slows, that hard asset boom will only be fueled.

If rates were to rise near the real cost of holding money, say 10 percent, then we can start to have a real conversation about hard assets slowing,

It won't happen this decade though.

The least volatile gold investment:

 

The most volatile gold investment is gold stocks.  These can crash if there is a market crash even if gold goes up.  Second most volatile is paper gold.  Paper gold is at the mercy of the bullion banks who, in the short run, control the price of the paper gold market through the futures market.

Real Bullion gold moves more slowly as the premiums can simply expand when paper gold is taken down artificially.  Peope are not apt to sell their real gold during short term articicial swings - especially during times of real world risk.  Still bullion can suffer swings in the short run.

But the bullion investment that really moves with the least amount of volatility is the Bullion Based limited issue graded coin market.

This is because the collector value of these coins stabilizes swings in the bullion value.  If someone owns a high grade rare one ounce coin, certified and graded, they don't really care all that much about short term swings in the gold market.  The long terms trajectory of gold is much more important.

So - how do you get started learning about this market:

Here is a rudimentary primer on some of the most popular forms of this bullion: in arbitrary order.  It should be noted that all the coins below appear regularly in Heritage and Stacks auctions of collector coins.  That means they are liquid.

1) 

The French hundred franc gold angel, nearly an ounce of gold.  Issued between 1878 and 1913 with a few very short print years 1887-1896.  The short prints can be very valuable in high grade.  Normal years were minted between 10,000 and 20,000.  Graded in mint state these go above bullion.  In MS 63 or better the premiums widen out considerably to twice bullion or better.  It's an attractive and widely collected coin, also available in 20 and 50 franc denominations.

2 )

The peruvian 100 soles minted between 1950 and 1970 this coin is more recent but larger at about 1.347 ounces per coin.  Also an attactive design based on an earlier issue, this coin was minted betweend 126 and 23,000 depending on the year.  Short print years are of course much more valuable.  Because it is more recent and was never really a criculating coin like the french angel, it can appear in grades up to MS 67.  The higher the grade the more valuable.

3) 

The Mexican 50 pesos coin is 1.2 ounces of gold issued 1931-41 in larger quantities of 180,000 to 716,000 and then reissued in the millions between 1943-47.  Still in high ther original issue years go for more than 1.5 times bullion, as tbis issue is popular.  In very high grades MS 65 or better, the original issues, espcecially lower mintage years can go easily twice bullion.

4)  

British collectable bullion.  This is a huge and enormously popular market.  The basic denominations are half sovereigns, soveriegns, two pounds and five pounds pieces.  Basic sovereigns traded at a heavy premium to bullion even in common years and AU condition.  Rare years, rare mintmarks, proofs etc can be very valuable.  It is a large and complex market, going back hundreds of years, and including gerneral issues and issues in short print from this very year.  

5) 

Austrian mint 100 coronas, about one ounce of gold. The basic issue wasn minted 1909 -1914 in small quantities between 1200 and 11,000 but most years closer to 1200 and in high grade is more than 3 times bullion.  But there are other issues, like the Lady in the Clouds, and the cornation year issue etc that are much more valuable in high grade.  There are also modern restrikes that go for bullion prices.

6)

China Mint Gold Pandas and other assorted issues, beginning in 1982 to present day.  The 1982 panda at about 17,000 pieces goes for easily twice mint in MS 68 or 69.  Short print years especially of known very short prints like the half ounce 1995 can go for several times bullion in high grade.  Other very short prints of popular designs like Unicorns can also go for several times bullion in high grades.  It is a vast and complex market worthy of study before entering

7) 

Paris Mint modern issues of classic designs.  The most popular of these are the 5 franc gold sowers, and the 10 or 50 franc Hercules types.  These are limited issues of between 5 and 400 from about 1971-1979.  Three years ago they traded for slightly above bullion.  Now in MS 68 or 69 they go for between 2 and 4 times bullion depending on the year and mintage figure.  

8)

British Mint and British Protectorate mints restrikes on classic designs.  These are contemporary issues at 1 ounce to 5 ounces is small mintages of btween 75 and 400 pieces.  And in MS 69 or 70 these can go for several times bullion as the original designs go often in the hundredes of thousands of dollars.  These are prized by collectors who will never be able to afford originals.

9)

Dutch Mint, US Mint, Australian Mint etc short print one and two ounce coins of popular and well executed dies.  Every mint is getting into it.  This means that the number of issues are multiplying likely diluting the value of all issues.  But some issues just grab collector attention.  So choose carefully,

HOW TO BUY GOLD

 

Now that gold has entered the minds of main stream analysts, pundits and financial advisors - most of whom completely missed the move from $250 to $2000 over the last 20 years - people wonder - well, how do I buy Gold?

There is only one answer to that question though you won't get it from most advisors.  You buy Gold.  Real gold.  If you're American, pony up and buy Eagles.  There's a bit of a premium there but it only expands as Gold becomes increasingly popular.  Because Americans like Gold Eagles.

You can buy Krugerrands or Pandas or Maples too.  They premiums will be less than eagles but an ounce of gold will always be worth an ounce of gold.

If you buy tracking stocks like GLD what happens is that during the first scary downdraft where gold drops 50 or 70 dollars in a day, you sell your gold.  Then when it goes up 100 over the next week you buy it back at the high and it drops 50 and you sell it again.  That's human nature.

If you own Real Gold when the paper gold drops 50 dollars in a day the real gold doesn't drop nearly that much because the premiums expand (during a bull market).  Because holders of real gold don't sell during these absurd volatile moves that are most often a result of Bullion Banks like JP Morgan organzing raids on the futures price.

For those who doubt this really happens just look at the court cases.  JP Morgan has been convicted 3 times in the last few years of manipulating the price of bullion.  But they just pay tiny little fines so they keep doing it, as it makes them a fortune.

Then there are the gold stocks. These are another form of paper gold. Paper gold is Paper, not gold.  If you're into gambling in the risk markets they're fine.  But if you want to protect your porfolio with a Hard Asset, they are worthless.  They often track the price of gold, but in a market downdraft they often don't.

Then there are gold royalty companies.  Some will claim that when you own them you own proven veins of so many ounces of gold that gives you a leveraged gold play.  Except you don't.  You own an electronic chit that often moves with the price of gold but sometimes doesn't.  Even with proven veins of so many ounces of gold.  Because in the end you only own paper - or the electronic chit.  And when it goes against you - as it will at some point because gold is very volatile in the short run, you will sell your gold.

Stock is the illusion of ownership.  It is really just a gambling chip whose face value changes from day to day.  That's fine.  But it is not a hard asset.  You have to go to some effort to acquire and sell a hard asset.  Some see that as a disadvantage.  I see it as a huge advantage because it takes a lot of the impulse out of buying and selling.

So how do you buy real gold?  You go to an established bullion dealer with a good reputation and a long track record of honesty and you buy it.  Then you take it home and put it in a safety deposit box or a deposit vault or a safe or put it somewhere safe.   Forty ounces of bullion coins is really so small It fits in a tiny corner of your safety deposit box.  No big deal.

If you want a lot, use a vault.  There are many such services in every big city.  Or just bury it in your back yard noone will ever find it there.  And gold is inert so if you bury it it won't harm it in the least.

If you're aleady familiar with the gold market and have some knowledge of the different types of bullion you might consider the graded limited issue hsitorical bullion based market.  These include ounce or near ounce coins such as French 19th century 100 franc gold angels graded MS 62 or higher, or Peruvian 100 soles graded MS 63 or higher, or Autrian 100 coronas from the turn of the century graded ms 60 or higher or 100 Bolivares from venezuela from 1886-89.  Or the French gold 5 francs with the Sower image that were minted in tiny qunatities from 1970-1980.  In MS 67 or higher these have been going for over seeral times bullion regularly at auction.  Even some current issues in small mintages with restruck images like Una and Lion or the three Graces from the British Mint are selling at many times their bullion price.

In high grade there are many issues that have become so popular with collectors that they have established auction track records that make them quite liquid at often several times the bullion price.  

But that maket is for those who are already knowledgeable.

Start with Eagles.  And then study.  There's a whole world out there of bullion based investing that has become extremely popular In Japan and China as well as the United States and Europe.

Only Real Gold is as good as gold.

LET ME COUNT THE WAYS

 

The United States is mired in an astonishing economic complacency.  Probably because there is an entire generation of investor that only thinks the market can move in one direction: UP.

After all we have the FED ready and able to bail out any and all problems by buying up an and all risk assets to keep the prices from ever falling.

Even now as the FED promises to tighten to fight inflation the markets keep going up.  What could go wrong?

Well, Let's count the ways:

A) Russia, keeps up it's aggressive ways until the world is sucked into World War Three.

B) The Russian banking system fails under the stress of sanctions.  The fallout spreads through the world wide banking system forcing a massive multi trillion dollar bailout.

C) The Fed's rosy 2.8 GDP projection turns out to be no more accurate than most of their predictions and their current tightening tips the US economy tips into recession, forcing the Fed to ease in the midst of massive inflation.

D) Inflation keeps rising as Food and Oil and base metal prices remain elevated for the foreseeable future pushing the broad middle class towards bankruptcy, and creating worlwide famines.

E) US Politicians continue their bitter partisan divide until the next election cycle is contested, derided as corrupt, and the country loses faith in its own democracy.

F) High oil prices prompts a new round of fracking and drilling which causes to the climate to further deteriorate manisfesting in increased fires, floods and other natural disasters which decimate entire populations.

G) As inflation tips worldwide trend growth below 1 percent, the quadrillion dollar debt derrivatives market discovers a massive amount of mispriced debt creating a massive liquidity crisis.

Are any of these scenarios likely?  Yes,  They're all quite possible if not likely, but the chance of one of them coming true is all but certain.  If only one comes true we are looking at economic difficulties that are not at all reflected by current asset prices.

If a few of these come true we'll be looking at a repricing of assets that is quite literally off the charts.

Happy investing.

TWO GRAPHS THAT DEPICT THE ENTIRE ECONOMIC CASE For HARD ASSETS

 This is a graph of the Velocity of Money in the US economy.

 Velocity measures how many times a dollar changes hands.  Each time it changes hands in investment it adds t.o the GDP.  If our dollars are not changing hands but are being hoarded for payment of  debt such as mortagages, car payments etc - or simply hoarded by billionaires who have no use for it but to keep score against other billionaires - then the economy is no longer growing.  

Below is a graph depicting how many dollars of debt it takes to create a dollar of GDP:

In an efficienty economy such as the one Reagan inherited after Volkers raising of rates back in 1980, a dollar of debt created several dollars of GDP.  Thus turning America into a Debtor Nation made temporary economic sense.  Temporary.  

But the policy of using debt to create GDP has been taken to such an absurd extreme by Reagan and every subsequesnt US administration - aided and abetted by a Fed devoted to lowering rates below the cost of money - so that now no matter how much we add to the debt we get nothing but the most temporary boost to the economy.  

Trump added 3 trillion dolalrs of debt pre covid with tax cuts for the wealthy and got two quarters of GDP boost which then immediately subsided back to below 2 percent trend growth.  And that is with a drastic undercounting of Inflation.  If the real inflation figure - as computed for example back in the 1990's were used, we would have been in an economic contraction for the last six years.

We can not borrow our way out of our probelms anymore.

But we can not staunch the borrowing because to do so would require raising rates to the cost of money (plus a risk premium) so that would mean raising rates to about 10 percent.  Ha ha ha.  It will never happen.  We'll never even get to 1 percent.  At least not until the risk markets completely crash.  Then it won't matter.  But then we'll be in a depression so it won't help.

Tough spot.

That's why smart money is desperately seeking out HARD ASSETS.  

Because hard assets have no counterparty risk.  They can not be devalued by government decree.  They can not be watered down by the random creation of similar hard assets.  (Not the real ones like Old Master Paintings, or Historical Coins and Medals or Diamonds, or Gold, or Historical Artifacts and documents etc).

That's why the boom in hard assets is likely to continue for the foreseeable future.

And that's why only Hard Assets can serve as a hedge to the current economic conditions.

Gold starts to Move

 

Gold just finished a push upward back to all time highs and then immedialtely dropped back below $2000.

The upward move was motivated by a combinatioin of war, inflation and pressure on a stock market that old timers like Jeremy Grantham refer to as a SuperBubble.

But this is just a prelude for Gold.  

Because Gold is not a hedge against war or inflation.  War and inflation cause instability in the financial system.  It is the Instability the Gold hedges against.

If you look at the inflation you'll see it has been forty yearts in the making.  Ever since Paul Volker raised rates to the level of actual inflation - where they theoritcally belong in a free market economy - every subsequent Fed Head from Greenspan onward has simply lowered rates at every mild bump suffered by the economy.  Thus rates have been kept systematically negative compared to where they would be if they reflected real inflation  plus a Risk Premium for lending money.

And every minute rates are below the actual cost of money Debters are being paid to borrow money.  So they do.  And Debt piles up and piles up to the current unimaginable levels that could and will never be repaid.  

When you include Debt Derivatives the global debt load is in the Quadrillions.  I don't even know how many zeros that is.  It doesn't really matter any more.

Now rates are at Functional Zero and inflation is bad enough that everyone is beginning to notice.

That's the key.  People are noticing.  Not just in starving third and second world countries.  But right here in the USA.

People noticing that it is becoming difficult just to feed their families and pay rent.  Right here in the USA.  Not the wealthy top 10 percent that own 90 percwnt of the ASSETS.  But everyone else.

There is no solution.  Because to raise rates to the real cost of money would crash the Risk Asset Universe and then everyone will lose their pensions, their social security and all their investments and then even the Wealthy will become much less wealthy.  Shudder.  

Now add in War.  An insance actor from a Second World Country - himself the richest man in the wolrd - but his country is languishing - so he starts a war that cannot be won - but also can not be lost since he has a nuclear stockpile.  Enter the New Global Arms race.  And enter permanent commodity dislocation as the two countries at war account for most of the global grain supply as well as much of the oil and gas and base metals.

This is also a very unstable situation.

But - That's not all.  Add in the fact that right here in the USA there is a major political party that has an element that is very sympathetic to Russia and Putin.   An element that longs for a strong Authoritarian leader to save us all from WOKENESS (whatever the hell that is).  An element that insists our electoral system is broken, and that our financial system is becoming broken by Socialists (whatever they are) And that is extraordinarily UNSTABLE.

Because the efficacy of our very system is being querstionred by some of those in charge of the system

That's a lot of instability.  

So why is gold mired around $2000?

Because we Americans are optimists,  We believe in America's finncial superiority.  The markets always go up.  The dollar is always King.  And our leaders will ultimately prevail - at least economically.  We cant' concieve of a situation where the economy collapses.

After all it collapsed twice in the last 20 years and both times the FED just bailed it out, First with 3 trillion,  and the  with 10 Trillion.  All given to the wealthiest 1 perent.  (is that the socialism that frightens people?) And on top of that a few hundred billion also given to bail out the masses.  

So the idea that the government can endlessly bail out any probelm has become embedded.

But how do you bail out inflation when you can't raise rates without crashing risk assets?

And how do you end war when part of the the establishment supports those who perpetuate the war?

And how do you stabilize a political system when half the country doesn't believe it works anymore?

I'm afraid these probelms have no current solution.

And when others become afraid these problems have no current solution - that instability will propel gold up for the next leg of this rally.