GOLD AND THE CURRENT MARKET CONDITIONS

Addicts all over the world are the same in one dramatically pivotal way….they get caught up in the chase. Chasing that next high. Chasing that first high. Chasing their past. They’re future. Chasing the dreams dancing in their heads. The pretty pictures they paint for themselves of how it will all be bright and beautiful and better, someday soon. The problem is, of course, that while they’re busy doing all that chasing, they never see the dirt underneath their fingernails. They never smell the stench on their filthy clothes. Never notice how they rant to themselves in the middle of city street in their underwear about nonsense. They just chase and chase and chase. And end up sleeping out in an alley, in the freezing cold of winter.

Countries can be addicts. Economies can be addicts. Central bankers too.

We are currently in the one of the longest, if not the longest, periods of monetary easing in the history of mankind. The fed has pumped an historic level of money into the system in hopes of staving off the great recession. And it most likely saved us from “The End”, back in 2008-2009. The problem is that the fed didn’t stop. They continued to ease, pump more and more money into the system, as did other central bankers all over the world. And we all watched as the markets rebounded, confidence was restored, housing prices began to go up again, and most of us began to feel somewhat ok with the way things were headed. We could see a way out. We suddenly believed that the ship would right.

But for many countries all over the world the ship sank. Right now, in various economies all over the world, there is real economic pain being felt by millions of people. And unfortunately, I think that monster is swimming its way to our shores as I write this.

The US economy, the global economy and the Fed are addicts, all addicted to historically low interest rates, “free” money, practically non-existent inflation, and the pretty pictures in their heads of a better, brighter tomorrow just around the bend. But when you stop and listen to that homeless crazy person rant on the sidewalk outside your “charming” studio apartment that only has a small roach problem, you might be scared that what he’s saying is starting to make sense.

The US Economy is coming to the end of a long term debt cycle, which I explained in detail in my previous post, but I’ll summarize below:

The top of the long term debt cycle occurs when 1) debt service payments are high and/or 2) monetary policy doesn’t spur credit growth.

 

Long Term Debt Cycle Summary:

With a slight expansion in GDP growth, interest rates at 0.25%, a large money supply with inflation practically non-existent, the main worries right now for me are the inflated Stock Market (a lot of potential down side) and a high government Debt to GDP (but when didn’t America have huge debt issues ;-). Still, the machine in America is humming along. We’ve been battered since that start of 2016. But consumers are still buying. Companies are still hiring, although we just saw a large drop in hirings this past week. There is no blood in the streets…yet.

My next level of thinking though says that we might have already seen the peak in this cycle. And part of me wonders if it was also the peak of the Long Term Debt Cycle. We have a scary condition here with roughly 0% inflation, high asset prices, falling GDP growth, basically 0% interest rates and the 10yr falling off a cliff.

One can never be sure, and timing the end of the long term cycles in difficult. However, the Long Term Debt Cycle has been growing for decades now. At some point, it will reverse, and come crashing down.

I think that time is coming sooner rather than later. To be prepared for that, I would put at least 10% (or more, if you’re so inclined) in the shiny little metal known as gold. Why? With many central bankers around the world messing around with negative rates, gold with no yield actually has a positive carry.

Is Gold an Investable asset?

But how is gold even an investable asset? What is it in our brains that activates when photons from the sun travel millions of miles, bounce of a shiny hunk of metal ad reflect into our eyes? Why does that bring us (many of us, anyways) so much joy? Excitement? Thrill us like little children on a sugar high? For the fish, I could see that it was all about survival. An easy way to search through the murky world of the lake and find the next bit of protein that would keep them alive for another day.

But as Jim Rickards stated in the recent Investors Podcast 2 part series (which I highly recommend everyone listen to), we shouldn’t think of gold in dollar terms. We should do the opposite and think of the dollar in gold terms. Let me explain:

If 1 ounce of gold cost $1300, you can flip that around and say that $1 buys 1/1300th of an ounce of gold. The advantage of this way of thinking is that it illustrates the effect of inflation on the price of gold. And more fundamentally shows that a bet on the price of gold rising is essentially a put on the dollar. If $1 buys you 1/1300th of an ounce of gold today, and tomorrow that same $1 buys you 1/1350th an ounce, well the purchasing power of your $1 has decreased. That $1 buys you less gold today than it did yesterday. The dollar has depreciated.

In keeping with that line of thinking then a gold play is essentially an indirect currency play. And if you agree with that then you have to keep in mind what moves currencies. Take a look at my previous post on that.

However, as most of you probably already know, Buffett does not like investing in gold. He views it as unproductive investment that only appreciates when fear is spreading. However, fear is not the only thing that drives gold prices. Supply and demand does. There has been limited investment in finding and developing new gold mines. And it takes decades to bring a new mine online. Gold bulls believe these facts will produce a lack of supply and thus a rise in price.

If the stock market crashes, there will be less demand for US dollars, plan and simple. As the dollar slides, gold will rise. Not to mention the proclivity of investors to retreat to the yellow metal as a haven in times of trouble.

Call me a crazy homeless bum, but the apocalypse is upon us. No, I don’t mean aliens from the planet Zenon are coming to snatch our bodies, or anything crazy like that. I just think we might see a complete reversal of the global economy and end of the capitalism as we know it today.

Ok, that might be a bit dramatic. But mark my words, dark days are coming. You’ve been warned, my friends. You’ve been warned.