GOLD: TRADING ON MATH VS TRADING ON SENTIMENT

 

If you trade stocks, you're trading sentiment.  First and foremost.  Yes, you're trading on earnings and innovation and brand.  But all of that is entirely dependent on sentiment.  For. stocks, sentiment is at all time positive highs right now.  And that is after 15 years of positive sentiment.  So positive sentiment has become firmly entrenched and things like Earnings multiples and disposable income really don't make any difference to anyone.

If you trade gold, all that matters is math.

For example, the trade deficit is just the sum of all goods and services purchased abroad.  That's math.

And the amount of the trade deficit exactly equals the amount of the capital surplus. In other words: The amount we puchase from abroad equals the amount of dollars we sell abroad.  That's math.

You can't say, "well we'll purchase less goods but keep selling dollars."  That is a nonsense sentence.

For gold, when we stop selling dollars abroad, that is exactly that amount of dollars NOT BEING USED BY OUR TRADING PARTNERS TO BUY OUR FINANCIAL ASSETS.  ESPECIALLY OUR DEBT.

That erodes the buying power of the dollar proportionally because we can not service our debt by that amount.  So we have to buy that debt ourselves with printed dollars.  That erodes the value of our currency.  And it sends rates higher.  Which makes our debt even more expensive to service.  Which erodes the value of the currency.

Over time, gold must appreciate by that amount that the currency is depreciating.

That's a math trade.

The same with the Budget Deficits,  When a big budget bill adds 5 trillion dollars to the debt over time.  That erodes the purchasing power of the US dollar proportionally.

Over time gold will appreciate by that propotional amount.

That's a math trade.

Of course, you can make up fantasy stories like "When you cut people's taxes you actually get more tax receipts so you can run a bigger deficit and it will get paid for."

That's just a story.  It's a type of sentiment.  So stocks can take comfort from it even though it's not true.  Stocks may rise on it.

Gold only moves because of math.  So that story will not keep gold from rising as the currency depreciates.

Of course, when the retail buyer plunges into gold, as happens periodically, gold can get a sentiment boost.  But ultimately it will fall back to reflect the purchasing power of the underlying currency.

This is because all the central banks of the world know more or less how much they are debasing their currencies and they purchase gold to protect the value insofar as they are able.

In that way gold has held it's value over that last 5000 years of human history.  

To be clear human history is only 5000 years old.  That is not to say gold wasn't used before that by civilizations.  It was.  We know that from paritially deciphered languages,  But languages we undersand (History) going back to Ancient Phoenician (1000 bce) Ancient chinese (2000 bce)  Ancient Egyptian (3000 bce) and Ancient sasnskrit (3500 bce) all record the use of gold as the monetary metal of choice.

Once upon a time, silver was also used as a monetary metal.  But that was back before financialization created so much debt that only gold had a sufficient value to offset the value of the debt,  That is why the value of gold is now 100 times the value of silver rather than 10 times.

Of course, if sentiment turns completely against a currency because faith in the government that issues it erodes irrecvocably, then the value of gold can soar to any level.

But that is because the value of the currency crumbles.

It is still a mathematical relationship.

HOW TO INVEST IN GOLD

If you're reading this you're probably already on the gold train.  However, there's a lot of confusion even among long time gold investors about the best way to protect yourself with gold.

Here's the salient point about this particular gold move in this particular economy:

CENTRAL BANKS ARE BUYING BULLION.  AND THEY ARE EVER INCREASING THEIR PURCHASES.

YOU SHOULD TOO:  CENTRAL MINT GOLD COINS AND BARS.  US EAGLES.  CANADIAN MAPLES.  KRUGERANDS.  PHILHARMONICS.  ST GAUDENS.  LIBERTYS.  SOVEREIGNS.  FRENCH ROOSTERS.  ETC.

Ther corallary to this: CENTRAL BANKS DON'T BUY GOLD STOCKS.  CENTRAL BANKS DON'T BUY SILVER.  

That's not to say you shouldn't.  Maybe you know a lot about gold stocks and silver shortages etc etc etc.

But Gold Bullion is the only TIER ONE CENTRAL BANK RESERVE ASSET other than the US Dollar Denominated Debt (and possibly Bunds.)  

So don't overthink this one.  Just do what the central banks of the world are doing because they have driven this entire gold move.  Asian private citizens also buy gold.  European private citizens are buying gold now.  US citizens are not.  Eventually they will.  So that is alot of money that has yet to come into this market.  

Maybe some will rotate into gold stocks or silver,  Maybe not.

But follow the central banks.  They get that debt levels are such that they must Inflate or Default.  The only thing that will protect the value of thier currency is Gold Reserves.  So they are buying.

That is the only thing that will protect the value of your asset base.

After you have a satisfactory level of bullion, you should consider a pure a leveraged play on bullion:

That is bullion based collector coins: PERUVIAN 100 SOLES.  FRENCH 5 FRANC SOWERS.  BRITISH 5 SOVEREIGNS and BRITISH MASTER ENGRAVER RESTRIKES.. FRENCH GOLD ANGEL 100 FRANCS.  These are all bullion issues of relatively short prints that have already increased in gold in high grade.  Some of these now sell at 2-3 times bullion.  Five years ago they all could have been bought at bullion prices.  More recent issues of very low mintage can still be bought very near bullion.  So the risk is still very low on those issues that hevent yet caught on.

From there you can move back in history.  Fifteen years ago Alexander Thet Great Gold Staters from 300 BC could be had for 3-4 times bullion in lower grade.  Now they are worth much more.   But there's still room for profit if you know what you're doing. 

But this is a specialized market.  It takes expertise.  If you don't have any expertise - stay away.  

And start with bullion.  And if you just stick with bullion you'll be fine.

GOLD'S ROBUST YIELD

 

The stock jockey rationale against gold is that it has no yield.

This is a misunderstanding of yield.

A financial yield is the income an investment generates over a period of time.  Gold's current yield this year is 25 percent.  Last year it was 27 percent.  That's pretty good.

A 10 year treasury yields about 4.5 percent and is trending higher so the price of this invesment is trending lower.

In a booming economy that yield might be indicative of economic health and might signal less of the need for gold - especially if the debt situation was well under control

In an economy that is currently growing beneath the 1 percent trend growth - this yield is indicative of debt market that is nervous - perhaps frightened about the health of the underlying currency.  Especially when the debt has exploded to 125 percent of GDP and is trending rapidly upwards.

Then the 4.5 percent yield (trending higher) is indicative of a powerful need for Gold as a hedge against debt and currency instability.

Because that's what gold is: AN INSTABILITY HEDGE.  In debt crisis gold is the only monetary hedge.  And make no mistake, by massively increasing our debt (the big burdensome bill) and incentivizing other countries to dump our debt (that is what Tarrifs do when you have the reserve currency, and that's math not opinion) we are rushing head first into a debt crisis.

Throw in a chaotic trade war that has already destabilized the global economy and you have a global rush out of US debt and into GOLD.  

To be sure, gold has appreciated 8 percent a year since 2000 while stocks have appreciated 7 percent.  

But with stocks trading a record multiples and the stock mania at all time highs (as measured by the VIX and by the percentage of stocks that make up the net worth of the US invsestor) while US and Global GDP are trending down towards zero with Global Debt at 300 percent of global GDP, and you have a recipe for massive financial instability wherein the gold price can only move upwards both in real and relative terms.

And with gold currently returning about 25 percent - that seems like a worthwhile yield - as a reward for moving into the ultimate safe haven investment.

Big Burdensome Boondoggle

 

The US Congress is fighting hard to add 5 trillion dollars to the massive fiscal deficit plaguing the debt soaked economy our children will inherit.  

That's on top of the 2 trillion dollars a year they are spending now - (not counting the 100 trillion dollars of of off budget unfunded liabilities that gernerations have paid into - but which has already been spent by our profligate congress (social security, medicare.))

What about Doge?  Oh yeah they saved 60 billion dollars by cutting all spending on Science (who needs clean air and water and food - if you're a billionaire you can live on top of a mountain in Aspen and drink mountain stream water and have your foie gras flown in). 

But congress has been spending like this for the last 50 years - so what's the probelm?

Here's the problem: Congress had a 20 percent Paul Volker interest rate to cut every time the economy slowed.  That lasted a good 50 years.  Now,  that is gone.  

And Congress had a globalized economy wherein we were happy to sell our dollars all around the world so that our trading partners could subsidize our debt thus keeping rates low (the Capital Surplus that is the other side of the balance sheet to the Trade Deficit).  That is gone.

Now, as the economy slows with real rates negative (under the cost of real inflation) and with nobody to buy our debt but the Fed or the US banks subsidized by the Fed (same thing) - all we can do to fight a slowdown is flood the economy with printed dollars and thus create MASSIVE INFLATION.   

And here's the dirty little secret about inflation: things only get more and more expensive relative to disposable income.  The INFLATION RATE that the government prints is not a meausre of inflation but the the rate of change of inflation (by their anemic measures.  In fact the BLS has been ordered to make sure their inflation prints are in line with the Regime's projections)   But all the inflation that's occured the last 50 years is STILL THERE.  It's simply growing at a faster or slower rate.  

Nothing will ever be less expensive than it is now.

And that includes the interest payment on the US DEBT.

And that is why even as the economy slows long dated treasury rates are rising and the dollar is sinking.

That is the behavior associated with  an emerging market economy.  Not the Reserve currency economy.

All the central banks of the world have noticed are dumping dollars and buying gold. 

Maybe you should consider the strategy.

Is gold expensive? S&P 500-gold ratio historical performance: The big picture:

 

THE CAPITAL WAR: WHO WILL WIN?

 

Everyone's  talking about the Trade War.  The fact is nobody wins a trade war.  Some lose more than others.  It's fun to talk about who loses most.  But that's not what will change the economic world.

What will change the economic world is the Capital War.

What is the capital war?

It is the other side of the coin of the trade war.

When you buy a good or a service you are also SELLING A DOLLAR.

The US has been selling its dollars all over the world for the last 50 years.  And we have been running huge CAPITAL SURPLUSES.

This is the heart of American Excetionalism.  

Why?

Because we have the reserve currency.  That means when all the other countries buy our dollars they use them to turn around and BUY OUR DEBT,   Because our debt is a Tier 1 Capital Reserve Asset.  

This underwrites our huge debt.  It also provides liquidity to the huge Eurodollar debt market.  And it keeps our rates low so we can refinance our debt cheaply.  AND When we sell our dollars we get cheap well made goods it return, which keeps our inflation rate low.

And most important: it provides tremendous liquidity for all dollar denominated Debt Markets.  

Without this liquidity the potential for a global debt crisis becomes dangerously high.

If liquidity dries up in the debt markets the only response is a massive infusion of printed money by the global central banks.  This will be highly inflationary.  Great for Gold.  Great for the super wealthy who own most of the hard asset market.  Not so good for everything else.

The US Capital Surplus (the other side of the Trade deficit) has been the single greatest Deal in recent economic history, bringing unpredcedented prosperity through unprcedented global liquidty.  That is why evey administration for the last 50 years have engaged in it.

Unitl now.

Now are undoing this deal.  

Why?

To bring back manufacturing which is only 20 pecent of our economy and will go to automated factories over the course of the next 20 years so few  jobs will be  created.

Doen't seem like a good trade.

Especially since now GOLD is also a TIER 1 reserve asset.

So now we are agressively demanding other countries not buy our dollars and thus not buy our debt.

And they are obliging.   

So what do they do with their excess capital now?

Well, they buy the only other Tier 1 reserve asset: GOLD.

HOW TO VALUE GOLD?

Now that gold has broken out into new all time territory the question remains: How do you  value gold?

How high can it go? 

How far can it fall?

Is it fairly valued here?

You can not answer this question without understanding the very first principle of gold valuation: 

GOLD NEVER MOVES.  THE PRICE OF GOLD OVER TIME IS ABSOLUTELY CONSTANT AND HAS BEEN SO FOR THE LAST 6000 YEARS OF HUMAN HISTORY from about 3500 BCE to about 1973 AD.

What moves NOW - since 1973 -  is the purchasing power of the Reserve Currency; the US dollar.

THE US dollar's stability was originally  pegged A) to NATO and B to the Petrodollar, the two underpinnings of a unipolar world.   Furthermore the US Treasury was the reserve asset of choice in a world wherein the US ran a trade deficit and a fiancial account surplus, which enabled other countries to keep buying our debt and financing our liflestyle.

At the same time the dollar's stability was regulated by the LBMA and COMEX.

NOW: NATO is dead.  The Perodollar is all but dead.  The US has weaponized Treasuries so nobody wants them anymore.  The world has become multipolar.  And the LBMA and COMEX have been neutured by stand for delivery Contracts as the world's reserve banks sell US Treasuries and load up on gold.

At the same time the US debt has spiraled completely out of control.

And it is a about to get much worse with a new round of tax cuts.

The "savings" from geting rid of some government workers will add to the debt as they will all have to go on the dole rather than providiing essesntial services.  And if there is no dole, the savings will simply go into "Sovereign wealth funds" which buy Crypto and other useless assets.

So in this new world what is the value of GOLD?

Nobody knows.

All you can know for sure is the direction things are moving.

And right now things are spinning faster and faster towards a world where nobody want Treasuries (except domestically as a short term hedge against recesssion) and everybody wants Gold.

Invest accordingly.