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.

The GOLD PIVOT - Nobody rings a bell.

 

If you listen to all the popular technical analysts you hear that gold must retrace to $3500 to $3800 for a back the truck up moment when all is clear to load up on gold again.

Back the truck up moments only appear in fantasy land.  Or at the end of long crushing bear markets.  And then nobody will back the truck up.  They'll be driving off in the opposite direction and they'll laugh at you if you disagree.  That was gold back in 2002.  I remember because luminaries like Richard Russel (RIP) and James Rickards (who's currently predicting gold at $27,000) were urging clients to buy gold at $350 and few were listening.  Most were jeering.  

But in the middle of bull market corrections, back the truck up moments never occur.

And that's where we are now.

The war had been the most recent wild card affecting the gold price.  But as it grinds on in its forever fashion with brief kinetic explosions and then hastily patched truces, gold begins to assimilate and acclimatize to the short term trading effects and reverts to its long term purpose as the true and only effective Debt and Currency Debasement Hedge.

Because the only certainty about war is that it is massively inflationary.

It is very expensive to wage war.  And the supply chain disruptions - especially when involving oil - cause huge spikes in the cost of food and fuel - and most everything else.

And in the world's most indebted economy (perhaps history's most indebted economy) with 40 trillion dollars of sovereign debt and another 150 trillion in unfunded liabilities and a banking system laden with tens of trillions in mark to model debt that needs to be refinanced this year and perhaps most troubling a TWO TRILLION DOLLAR PRIVATE CREDIT HOLE that is in the process of imploding as I write - and it will all have to be bailed out by the Fed - the added burden of WAR DEBT and Disruption will only put the gold price on steroids.

When?

Now.  

I can't tell you gold skyrockets it ten minutes, but let me give you some numbers that analysts who got the gold bull right before it happened as predicitng right now: James Rickards: $27,000, Simon Hunt: $35,000, Michael Oliver $8,000, Ed Dowd $10,000, and luminaries like Stanley Druckenmiller and Ray Dalio are urging investorts to move at least 20 percent of their entire portfolio into gold to hedge the inevitable debt crisis.  Even stock jockey banks like JP Morgan, UBS, and Wells Fargo have year end gold prices above $6000.

So don't wait for a back up the truck moment.

That moment came in 2002 and it's not coming back until some sort of new currency system is ushered in by whatever governments survives the debt implosion.