GOLD, HARD ASSETS AND DIVERSIFICATION

 

The 60 - 40 Stock to bond portfolio wherein the stock portion is well diversified through various sectors, and the bond portion is diversified through varying maturities and yeilds is now 100 percent correltated.

In other words 100 percent non-deversified.

This is because when debt levels far outstrip GDP levels any crisis can become a liquidity crisis and in a  liquidity crisis every financial asset is correlated.

But not Hard Assets.  Hard Assets are uncorrolated.

Because Had Assets (Art, rare books, rare coins, Real Estate, Collectibles etc) can not be bought and sold with the flick of a keystroke.  Some peopel hate that about true Hard Assets.  It doesn't mean they are illiquid.  Their liquidity requires effort and knowledge.   But the Auction schedule and private placement networks for good high end hard assets are plentiful and international.  And in a debt soaked world this is a marvelous advantage.

Gold sits in a unique position between a financial asset and a hard asset.  Real Gold is a hard asset.  Financialized Gold derivatives including ETF'S, Options, Futures, etc is a financial asset linked to gold.  These can be bought and sold with the flick of a keystroke, so they are more volatile than the underlying Gold.  Yet - and yet - after the initial volatility of panic - unless the crisis is terminal - the price will be drawn back towards the underlying price of the Real Gold that is stored in the vaults of the world's Central Banks and the world's Billionaire class.

Real Gold is a Real Hard Asset.  But there are many other Hard Assets that perform far better than gold.  However they are not as liquid.  And they are riskier.  AND they require real expertise.  You really can't rely on the expertise of an expert for these.  A generious expert will help you develope your own expertise and can get you started by supplying Hard Assets at a fair price.  But you will have to develop your own expertise over time.  

This is why it is best to delve into an area in which you already have some expertise.  Rare coins are excellent for those with a good grounding in History.  Rare books are excellent for those with a grounding in literature.  Collectibles are for the Popular Culture mavens.  Wines for the incurably pretentious.  (because you can't really drink them so you really don't know if they're any good.)  Wristwatches are great for the ostentatious.  They all tell the time the same, but certain ones let everyone know how rich you are.  

There's a hard asset for everyone.  Whatever appeals to your aesthetic, your education, and your disposition.

Choose one.  Because at the high end they're getting more expensive by the day as they tend to rise in value as the global debt levels rise.

GOLD IN CENTRAL BANK TERMS

 

Since 2014 Global Central Banks have net sold $400 Billion in US treasuries (reserves) and bought net 600 Billion of Gold (for their reserves.)

A) As the dollar becomes weaponized through sanctions and tarrifs it becomes increasingly undesirable as a reserve asset.  Gold holds no counterparty risk.

B) As the price of necessary commodities (oil, copper, etc) reach peak cheap values - (increasing demand must outstrip potential supply over time) it is important to hold reserves in a form that holds its value historically over time against these necessary commodities.  Treasury bonds do not.  Gold has done so.

Russia says that 90 percent of its trade is now conducted in the Rubel and the Yuam

China, Brazil, Argentian, India, Saudi Arabia, Indonesia have all initiated bilateral trade agreements in their own currencies.  

20 percent of the world's oil was sold in non dollars currencies last year, whereas over the last century the petro-dollar had been the force behind dollar dominance.

Of course, it can be argued, this is occuring at the margins.

The dollar is still the global reserve currency.

But then, all change in value occurs initially at the margins.  

The question becomes at determining the rate of change at the margins over time.

And the rate of change in the shift to gold and away from dollars for the Rererve Banks of the World is accelerating.

I'm not sure anything else really matters in determining the change in the dollar value of gold over time.

GOLD: THE BASE CASE

 

The base case is things going on exactly as they are now, not getting any worse.  And not getting any better.  That's the best we can hope for because for things to get better we need to elect a politician who is unelectable (willing to take things away from their voters - carried interest exceptions - stock buyback loopholes, corporate tax loopholes - entitlement reform etc, cuts to military spending).  An impossibility.

So what is the base case?

Inflation.  This is when a Central Bank monetizes massive government debt.  Over time this destroys the confidence in a fiat currency's purchasing power.

The starting point for this inflation is deglobalization.  The reversal of the trend that kept rates low while massive debt was amassed globally.

The starting point for this inflation is ultranationalism a trend that keeps demographics shrinking just when they most need to expand to keep inflation under control.

The starting point for this inflation is 2 to 3 trillion in yearly government deficits. 

The starting point for this is 46 trillion in corporate debt.

The starting point is 40 percent of this 46 trillion in corporate debt being currently insolvent.

The starting point is when 2 trillion dollars of corporate debt financed near zero percent has to be refinanced ot 6-9 percent over the next 2 years.

The starting point is a trillion dollars of yearly government interest payment on the cumulative debt.

It's starting out when the total deficit outstanding is 700 percent of yearly revenue.

Eventually as the economy slows and the Fed drops rates to grease the economy and to allow all this debt to be refinanced at more manageable interest rates - 

Then who will retain confidence in the Fed and the Currency as inflation rises while the economy slows and the currency loses purchasing power vs real things?

This is the base case: It is called STAGFLATION.

The worse case is we continue to weaponize the dollars as the global situation becomes ever more warlike ande confrontational.  This will cause other countries to dedollarize more rapidly which is highly inflationary for us.

The even worse case is a global trade war that puts tarrifs on everything making inflation many times worse for us.

The even worse case is a political establishment that causes the Fed to drop rates back to Zero, even as inflation rises.  Then long rates keep rising under the financing avalanche.   This will cause the stagflation to morph into hyperinflation.

So base case or worse case.

Choose your poison.

Both are great for gold - if nothing else.

GOLD GETS REALLY HIT FOR THE FIRST TIME SINCE BREAKOUT - WHAT'S UP?

 

Gold is getting walloped right now.  

A) it is technically severely overbought.  But OverBought things can stay overbought for long periods.

B) This is the weakest seasonal period.  But sometimes gold can move up during weak seasonal periods.

So why now?

Invidia earnings.  The new fantasy is AI.  Everybody in the West is High on AI.  No need for Gold because AI will transform Western Industry and Productivity and gernerate a new financial golden age.

They're not buying this in the East, where Gold is still at the heart of investing strategies.  China, India, the Middle East and Japan.  They account for about 75 percent of all physical gold purchases.

Of course the Asians are just not as sophisticated techincally as us Westrners, right?  

Just walk through the Campus of MIT or Cal Tech and you'll see nothing but Asian students.  So how come they're being so thick about AI?  (Even though they're the ones developing it)

Well, what can AI do?

It can collate.  It's amazing at collating.  Huge data bases are collated in seconds!!!!!!!!

And image recognition.  It's great at that.  Which is great for deep fakes that confuse political enomies.  So if you're a terrorist it's super.  If not, it's not so useful.  Except fot maybe better graphics for games.

So how does this collation translate into real applications?

So far, it doesn't.  Because it sucks at thinking.  Thinking involves providing CONTEXT to all those collated factoids. 

Context is incredibly complicated.  But without it all those factoids are meaningless.  

If you study Ancient Greek, you finds quickly that you can translate a long sentence in two completely different ways, with two completely unrelated meanings.  And both are gramatically correct - with verb and noun endings that correspond perfectly.  How do you know which meaning is correct?

CONTEXT.  In fact entire texts can have different meanings if you get the context wrong.  

The same with THINKING in general.  It's all about providing well conceived context.

But we humans don't even undestand how the brain provides and analyzes context.  Until we do, there's zero chance we can teach AI to replicate the process.  

And only the most sophisticated and highly intuitive human thinkers are good at providing context.  (That's why the internet is filled with ill conceived garbage passing itself off as analysis.)

But what is Intutive?  Nobody understands this either.  Until we do, how do we teach a computer?

Right now, AI essays are a garbage pail full of word soup.  Kind of like a speech you'd hear at a typical political rally.  Lots for phrases, no meaning.  And AI poems are far worse than Hallmark.  Read one some time.  And AI wikepedia type entries have far more made up factual innacuracies than even Wikepedia itself.  It's worthless.

Yes, Invidia is making real profts - but by sellling billions of dollars of chips to companies liked Meta,  that have no real way to monetize this AI.  

So maybe the Asians are not so dumb in missing out on this AI fantaticism.  (Even though they make most of the chips)  Maybe right now it isn't so transformative.  Perhaps one day.  But right now it will not provide any miracles.

The same debt bomb is exploding in the same debt soaked global economy.  The same strong men morons are being elected all over the world to beat our supposed oppenents into submission while the real enemy is still DEBT.  And the same strategy of buying votes and weapons with ever more debt is the only answer ourn politicians have.

Nothing's changed.  

It won't be long before that's apparant.  And the same protection against debt is still Gold.

That's what the Asian economies get. 

Maybe somebody the West will come around to this point of view too,

Gold makes a new all time closing high. Nobody in the US notices

 

Gold is a stability hedge.

Long time commodity investors understand this.  It's not an inflation hedge - unless the inflation is particularly destabilizing.

China and Russia and India and the Middle Eastern countries and the Eastern European countries are all experiencing inflationary pressures and they are all hyper aware of the current instability.  Most of these countries are buying gold through central banks or sovereign wealth funds and through active campaigns to encourage their citizens to buy gold.

They understand this is the ultimate hedge against the emerging global instability.

The dollar is still the world's reserve currency.  Yet much of the world views this as a source of instabilty and seek to hedge against it.

The United States is also experiencing a destabilizing inflation - but somehow the faith in the dollar as a source of global stability remains high here.

Faith in the government and the judiciary is at all time record lows.  Faith in congress stands at 15 perdent.  Faith in the Fed has dropped to 40 percent.  Faith in the Supreme court is at 35 percent.

Yet 62 percent of Americans rate their own economic health as comfortable.  They have a lot of dollars.  So what's to worry?

62 percent see the instability in the crumbling institutions around them but they feel they'll personally be fine.

American exceptionalism means that everbody thinks they will be the exception with regards to the emerging global instablity.  Ands faith in the power of the world's reserve currency lies at the bottom of this.

Therefor Americans still don't believe they need stability insurance.

But America has a severe debt problem.  Having the reserve currency helps because you can print money to purchase your own debt.

But this is a highly inflationary exercise.  Which gets worse and worse because the more you print to buy the debt the more debt you have, the higher the rates and the greater the debt service and the more debt you have so the more you have to print so the more debt you have...

There is no way out of this.  It doesn't matter who we elect.  It doesn't matter who's running the Fed.   

We'd like to think it does.  But it really doesn't.  

The inflation is the way out because it inflates away the debt.  It also erodes the standard of living for everyone but the billionaire class.

Especially for the younger generation that inherits this mess.

The mess is only now starting to manifest because it takes a critical mass of debt to tip the balance from stability to instability.

Most of the world thinks we're there.

America doesn't quite see it that way.

We'll soon see who's right.

Gold News you may have missed:

 

Central banks bought 16 tonnes of gold in March; Sovereign Wealth Funds are getting in on the action – WGC

Central bank demand continues to transform the gold market as official sector purchases increased by a net 16 tonnes in March, according to the latest data from the World Gold Council.

 

The updated monthly purchasing data was released less than a week after the WGC published its Gold Demand Trends for the first quarter, showing that central banks bought 290 tonnes in the first quarter – the strongest start to any year on record.

 

However, it’s not just central banks that are getting in on the gold action. The WGC noted that the State Oil Fund of the Republic of Azerbaijan bought 3 tonnes of gold year-to-day. And the Monetary Authority of Singapore and Kazakhstan also each augmented their reserves by 4 tonnes. This indicates a persistent interest in gold across diverse economic contexts, from rapidly developing economies to established financial hubs.

The Big Short’s Michael Burry makes a $10 million bet in Sprott Physical Gold Trust

According to updated regulatory filings, Michael Burry’s Scion Asset Management is now betting big on precious metals. In the first quarter, Burry bought 444,000 units of the Sprott Physical Gold Trust (PHYS), which is valued at more than $10 million.

Scion’s PHYS holding represents slightly more than 7% of total holdings.

Zimbabwe introduces new gold-backed currency to tackle inflation

Zimbabwe has replaced its collapsed local dollar with a new gold-backed currency, the latest move by President Emmerson Mnangagwa’s government to tackle decades of monetary chaos. 

John Mushayavanhu, governor of the southern African nation’s central bank, admitted on Friday that money printing had wrecked the five-year-old Zimbabwe dollar as he launched the ZiG, its replacement. 

BRICS members India and Russia ditched the US dollar and settled payments worth $4 billion in local currencies. Russian exporters purchased Indian-made arms and equipment for defense purposes and cleared the payment using the rupee. The US dollar played no role in the cross-border trade making local currencies the sole beneficiary of the transactions.

Meanwhile: Putin Casts Russia and China as Defenders of Stability

Visiting Beijing, Russian leader seeks to shore up united front with Xi Jinping against Western pressure.Looming over Xi’s meeting with Putin this week are Western threats of more sweeping actions against his country if it continues sending certain goods to Russia. The US government says dual-use exports are enabling Russia to build up its defense industry.

“Russia is fundamental to China’s grand strategy,” said Manoj Kewalramani, who heads Indo-Pacific studies at the Takshashila Institution research center in Bangalore. While Beijing doesn’t want escalation, “there is a deep interest in making sure that Russia doesn’t lose the war,” he said.

When will the US public discover the Gold Bull?

 

The World's Central Banks are buying gold in tonnes.  The World's Billionaire class is buying gold in pounds.  The world's soveregin wealth funds are buying gold in large amounts - they don't publish amounts but it's possible to track what they're buying: Gold, and other hard assets.  

The world's investing class is buying Invidia, Amazon and Shopify.

The Gold bull doesn't really care.  The Central Banks and the billionaire class dwarfs the invsting class.

But it makes a difference at the margin.  It makes a difference for example to the premium that an ounce of gold sells for at Apmex to the average retail investor.  Right now the premiums are at all time lows!

At some point this will shift.

 And when those margins tip you can get really dramatic moves, especially in premiums.

To understand when this may happen you have to understand the pyschology of the US investing class.

Unlike most of the world, a war has not been fought on our soil since the mid 1800's,  Nobody here during the two world wars were really worried about losing everything.  And since the country is only 2 centuries old there isn't the same consciousness of the use of gold as a store of wealth over the thousands of years that other cultures have access to in their shared historical experience.

Still, about 50 years ago, before the interenet and social media, there was a sense in the US that to protect one's wealth one had to do a fair amount of reading - BOOKS! to get an understanding of what an investment ought to look like.  

Popular Opinion was an object of ridicule.  If many people thought something - it had to be wrong.  The less people who knew about your favorite band the cooler it was.  Fads and Trends were for losers. Conspiracy theories were for maladusted morons.  If you could debunk something using your own logical brain for 2 minutes then you could easily  conclude it was beneath consideraion.

Therefor, investments hads to be backed  by a considerable amount of justitied argument.

Not any more.

Now everyone identifies with large groups that think exactly the same things at exactly the same time.  Everyone gets their information from Social Media which funnels unsubstantiated lies, conspiracies, and investing absurdities.   The dumber and less substantive the better, because then it more firmly binds those that are emotionally wed to it as an act of faith.

But even though, right now the social media fascination is with electronic wizardry like AI (that so far can only collate really quickly) or EV's (which right now are only affordable to the billionaire class) to Crypto (which right now has no application outside of gambling and money laundering) -

 EVENTUALLY these fascinations will shift along with an attention span that can only be measured in nanoseconds.

Eventually some incredibly beuatiful avatar of an eighteen year old girl with a made up "hit song" and 2 bllion followers will tell everybody she is into reall physical gold.  And so is her NBA star boyfriend,.

That's all it will take.

And then some beautiful 25 year old analyst on Bloomberg will pick up the same message, and we're off to the races.

The investing class will finally jump on the gold train that left the station about six months ago.

Hopefully by then it won't by too late to help the investing class.

The Pivot already happened: we're there.

 

While everyone is waiting for confirmation that the Fed will pivot and debating wether the next move should be up or down and what is really going on with inflation blah blah blah...

The pivot already happened.

The Fed got rates as high as they possibly could - but not to crush inflation.  The Fed rate policy just tamps down on Bank Lending.  The Fed got rates as high as they could so that they have some nominal amunition to use during the next crisis.  To make everyone think they're still in control.

But the crisis is here.  The debt levels are so out of control in the government,  corporate and household sectors, that debt service is nearly impossible at the current rates.  Look up the stats for yoursself.

The Fed knows this.  They can't say it.  It would cause a panic.  They have to say everything's fine, nothing to see here, just keep spending...

But they're not idiots.  They understand the debt levels as well as anyone.  The problem is there's nothing they can do about it but try to slowly get real rates more and more negative so that the debt can be slowly inflated away.

That's the best possible outcome.

But it's tough.

Because the political class has every incentive to try to make the GDP figures as high as possible.  And the only way they can do that is to print money off the books and funnel to the asset owning classes so that they can spend.

Right now Biden has already prepared a trillion dollars to funnel through the FHA in the form of cheap home laons to those who would never qualify for a bank loan so they can spend going into the october election.  Where does that money come from?  We print it.  The Treasury/Fed/Executive branch has a lot of leeway in hoow they can print and funnel money into the economy - off balance sheet.

If Biden is reeclected he'll keep doing it.

If Trump is elected he'll keep doing it.

And Trump is also already preparing massive spending programs in the form of dollar devaluations, tax cuts for the largest corporations, and new laws that will support exports while making imports much more expensive for the American consumer. All higly inflationary.

Both candidates are preparing massively inflationary policies.  

Because the if you undercount inflation - which the government systematcally does, the inflation shows up as a massively overestimated GDP.

That doesn't change anything for the debt strapped, cash strapped US consumer.  But it it's great for talking points and it makes the rich ever richer.  Becasue Asset inflation is part of overall inflation.

Why do we do this?

That's all our political/economic system is equipped to do.

This is not radical thought.  This is stuff everyone knows.  This is why the Billionaire class from Ackman to Dalio, to Einhorn to Paulsen to Rogers to Zulauf to Rothschild to Druckenmiller to most Chinese and Indian billionaires are all piling into gold.  These are  not "gold bugs."  If I included gold bugs like Schiff etc the list would go on for ever.

This is also why China, India, Russia, Saudi Arabia, and many others are purchasing massive amounts of gold though their central banks,

Not to fight inflation.   But as a hedge against the instability that is sure to flow from the massive inflation.

We're there.

It won't look like a straight investing line.  It never does.

But we're there.

And it will go on until the central banks of the world decide the system is no longer working for any but the top 10 percent - and eventually the top 5 percent, and then eventually the top 1 percent - which is not populous enough to fight off the resentment of everyone else for whom the system no longer works.

Then something will change.  Who know what.  And who knows what to invest in for that system.

But that's a ways off.

Meanwhile buy gold