FXStreet/Dhwani Mehta/2-19-2020

“No rush to build substantial positions, many are looking to opportunistically add to positions. Helping to keep dips shallow and the market well supported. . . [G]iven lingering macro uncertainty, gold’s appeal as a hedge and diversifier is also in focus, allowing prices to stay resilient despite a strong dollar and equities hovering at all-time highs.”

USAGOLD note:  A buy the dip mentality among professional money managers is something buyers of physical coins and bullion should keep in mind. It argues against waiting for a major correction to buy – particularly if you are unhedged. Too, the opportunistic adding to positions could become much more aggressive in the event of a stock market correction. Large pools of capital could suddenly be deployed in the gold market.

Degussa Market Report/Dr. Thorsten Polleit

“To cut a long story short: In a period of a real crisis, in case of massive market turmoil, the investor would indeed be served best if and when he has direct access to physical gold. Purchasing physical gold is fairly easy, and storage facilities can be obtained at reasonable costs. It may well be that Gold-ETFs meet institutional investors’ preferences and match their regulatory requirements. For all other investors, however, there is no compelling reason why Gold-ETFs should trump holding physical gold.”

USAGOLD note:  Dr. Polleit makes a point similar to the one we have made here on numerous occasions:  Holding gold in the form of an ETF is not the equivalent to holding gold in the forms of coins and bullion.  The first is a safe haven commitment.  The second is a speculative bet on the price. We should mention that USAGOLD offers independent storage of gold and silver and that the costs are comparable to maintenance fees at most ETFs.  At the same time, you can take delivery of your coin or bullion holdings whenever you wish. (Please call for details.)

Image courtesy of Degussa Goldhandel

Repost from 2-13-2020

Banyan Hill/Matt Badiali/2-19-2020

“I’ll be shocked if we don’t see $2,000 per ounce by the end of the year. I’m not a gold bug. You won’t find me bringing every conversation back to the benefits of gold bullion. But I’m bullish on gold today. That’s because I think it will hit its all-time-high price this year.”

USAGOLD note: Baldiali offers a variation on the last man left standing theme to which we have alluded on occasion here.

King World News/Eric King interview/7-26-2016

USAGOLD note:  Yes, the date of the interview as posted above is correct. It still has enduring value, though, and speaks directly to the situation in financial markets today. Jean-Marie Eveillard offers insightful observations on the European Union and gold.  On the latter, he suspected in 2016 we were in the first stages of a new bull market and he was correct.  At the time, gold was trading in the vicinity of $1320 per ounce and it had risen in the previous six month period from a low at $1050. “Gold,” he said, “represents an attempt to protect one’s self against extreme outcomes.”  We invite you to listen carefully to the voice of reason . . . .

Repost from 2-14-2020

Financial Times/Martin Wolf

“Start then with inflationary fire. Much of what is going on right now recalls the early 1970s: an amoral US president (then Richard Nixon) determined to achieve re-election, pressured the Federal Reserve chairman (then Arthur Burns) to deliver an economic boom. He also launched a trade war, via devaluation and protection. A decade of global disorder ensued. This sounds rather familiar, does it not? In the late 1960s, few expected the inflation of the 1970s.”

USAGOLD note:  True, “in the late 1960s, few expected the inflation of the 1970s.”  But the few who did profited enormously by purchasing gold at $35 per ounce just before the United States devalued the dollar and holding it through the following highly inflationary decade. It rose nearly 25 times.  What the current president is attempting to do today de facto is what Nixon had the luxury of doing de jure by simply raising the official dollar price of gold.  The current president given his proclivity for easy money must envy the way it was in 1971.  That aside, the subheadline to this article is the one that caught my attention: Some fear the fire of inflation; others the ice of deflation.  Either way, as we have said many times here, gold historically has been an effective hedge against either – fire or ice.

Repost 5-16-2019

Daniel Lacalle

“Why should investors and economists care about stagflation risks? Because central banks have no tool to combat it, and fiscal policies do not help. One can argue that central banks have no tool to combat economic cycles, but no one can disagree that stagflation cannot be solved with money printing, low rates, and government spending. Those measures exacerbate the issue.”

USAGOLD note:  A simply stated, fundamentally sound argument . . . Alan Greenspan several months ago also warned that stagflation is where we are headed. The last historical example of stagflation?  The 1970s . . . . The best hedges during those times?  Gold and silver . . . . Lacalle also offers indications from a variety of countries that stagflation might have already arrived.  It has simply been cloaked by the data.

Please see:  Gold as a stagflation hedge  – United States (1970s)

Repost from 2-12-2020

Financial Times/Colby Smith and Jennifer Ablan

“A surge in the dollar to a four-month high against other currencies has added another potential barrier to US growth, as the Federal Reserve weighs the risks to the economy of the intensifying coronavirus outbreak.”

USAGOLD note: It wasn’t that long ago that we were being told that the dollar was in for a difficult year.  Now it has switched to the opposite expectation.  How long before it switches back again? The longer-term trend is well in place. As for gold with respect to reports like the one linked above from Financial Times, its plight is only loosely connected to that of the dollar in the sense that the two generally tend to trend in opposite directions. In January 2001,  for example, the U.S. Dollar Index stood at 113.39. It now stands near 98.75 for a decline of 13% during the period. The price of gold, on the other hand, rose six times (from $270 to $1570). The disconnect between the two statistics – with gold vastly outperforming the basket of currencies used in the dollar index – is rather obvious.

Repost from 2-12-2020

Project Syndicate/Noriel Roubini/2-17-2020

“Of course, dumping US Treasuries would impede China’s economic growth if dollar assets were sold and converted back into renminbi (which would appreciate). But China could diversify its reserves by converting them into another liquid asset that is less vulnerable to US primary or secondary sanctions, namely gold. Indeed, both China and Russia have been stockpiling gold reserves (overtly and covertly), which explains the 30% spike in gold prices since early 2019.”

USAGOLD note:  We mentioned this Roubini analysis in yesterday’s DMR and repost the link here for those who may have missed it.  He goes on to say that Chinese diversification is likely to accelerate and that it “could trigger a shock in the U.S. Treasuries market.”  Moving from a policy of steady accumulation to something more aggressive could also trigger a shock in the gold market.  This is a must read for those who would like to gain a better understanding of the geopolitical forces at work in the financial markets at this juncture.

USAGOLD note:  With reference to the post and link above, i.e., Roubini’s take on China’s liquidations of U.S. Treasuries, China sold about $19 billion in U.S. Treasuries in December, 2019 and $56.8 billion for the full year.  On the full year, foreigners added $425 billion of U.S. Treasuries to their holdings, the largest inflow since 2012, according to a Reuters report.  Japan and Europe were the biggest buyers accounting for roughly half of foreign U.S. debt purchases.

Wolf Street/Wolf Richter/2-19-2020

“And who the heck bought all this debt?”

USAGOLD note:  Using Treasury Department statistics, Wolf Street breaks down who bought last year’s $1.3 billion addition to the national debt as follows:  Foreign creditors – $425 billion; the Federal Reserve – $344 billion; U.S. government agencies (like Social Security) – $178 billion; U.S. commercial banks – $131 billion; funds and institutions – $141 billion.  For the details in each category, we invite you to visit the link above.

Barron’s/Callum Keogn/2-19-2020

“Citi commodity strategists upgraded their six to 12 month level to $1,700 per ounce and said they expected nominal highs of $2,000 in the next 12 to 24 months.”

USAGOLD note:  Citbank reiterates its bullish call on gold for 2020.

Yahoo/Michael Nathanson/2-14-2020

“Along with the headline risks of recession, trade wars, political dysfunction, and more, there’s another risk, perhaps greater than all the others, that we used to talk about but don’t anymore. Remember the national debt and budget deficit? Well, those sums are far larger – and more dangerous – than in the ‘old’ days when we used to talk about them.”

USAGOLD note:  The forgotten crisis?  Forgotten, indeed.  Especially in an election year when both parties just as soon pretend it wasn’t so.  The post immediately below, however, alludes to knock-on effects that few are thinking about.

Bloomberg/Liz McCormick and Saleha Mosin/2-18-2020

“As the [Treasury] department copes with higher spending, large swings in the amount of money it has on deposit with the central bank have already undercut the Fed’s ability to keep bank reserves stable. Last year, one particularly big shift helped to drain so much liquidity from the banking system that it contributed to a spike in overnight lending rates.”

USAGOLD note:  One thing leads to another for the Treasury Department and central bank.  A bunch of little things pile up.  And then all of a sudden something big happens and you find out your sitting atop a genuine, full-out crisis.

Book Review

The Burning Stone
A novel by Jack Whyte

Inflation is a process rather than an event. One of the better-known examples of that axiom is the nearly two centuries-long debasement of Rome’s silver denarius – an inflationary episode Jack Whyte, a writer of historical fiction, skillfully addresses in his latest novel, The Burning Stone.

Set in Great Britain in the fourth century AD during the Roman occupation, The Burning Stone is a prequel to Whyte’s engaging, seven-book series on King Arthur – The Camulod Chronicles. Throughout the series, Whyte juxtaposes the rise of Arthur’s Camelot against Rome’s decline. This particular story is told through the lens of a young Roman from a wealthy family with banking, political and military interests who flees to Britain after his immediate family is murdered for reasons that remain a mystery for most of the novel.

After a series of fateful events involving his future wife, he becomes a blacksmith forging and fashioning the highest quality swords. Even as he assumes the life of tradesman-entrepreneur, he keeps contact with the Roman military in Britain and goes about the business of reordering his affairs as an expatriate Roman citizen albeit one who wishes to keep a low profile. The young blacksmith, Quintus Publius Varrus, one day receives a scroll from his uncle, an admiral in Rome’s navy, advising him to expect an important shipment from the continent in the near future.

This is where Whyte’s tale takes a turn toward monetary economics and an insightful commentary on Rome’s currency debasement (see graphic below) as a symptom of, if not catalyst for, the empire’s ultimate demise. The inflationary process extended over the reigns of several emperors and went on for more than two centuries. The Roman citizen who had the wisdom to hedge that process ended up preserving and building his or her wealth. Those who did not, at some point along the way, suffered the debilitating effects of the resulting inflation.

In Whyte’s telling, Varrus’ grandfather, an advisor to Emperor Diocletian and a member of the ultra-wealthy Seneca banking family through marriage, was among those who chose to accumulate gold coins as a hedge against the on-going debasement of the silver denarius.* When Varrus opens the shipment from his uncle, he finds it to contain a very large hoard of Roman imperial gold coins and a letter describing his grandfather’s rationale for forming the collection.

“His heroes,” the uncle writes, “included giants like Cincinnatus and Cato the Elder, both revered for their unswerving loyalty, integrity, and civic duty. More humorously, and with genuine irony, he distrusted banks and bankers – unsurprisingly, perhaps, given that he wed into the wealthiest banking family in Rome. . .In keeping with that distrust, he was assiduous in hoarding his money, keeping its whereabouts unknown.”

“There are five thousand aureii in the box,” he goes on, “the oldest of them dating from the time of Octavian, Caesar Augustus, and the newest of them, in the fourth level down, minted during the reign of Marcus Aurelius. After that time the value of the aureus declined from year to year as the intrinsic value was degraded by unscrupulous speculators, so your grandfather refused to deal in anything more recent than the mintings of Marcus Aurelius.”

“The bottom layer of coins, though,” he says concluding his description of the chest’s contents, “contains nothing but golden solidi minted during the lifetime of Diocletian. There can be no deception there. The solidus is minted of pure gold, and though few of them were issued, there can no doubt of there validity in real terms, and my father valued them highly. That layer contains one thousand Diocletian solidi. There is no more valuable coin in existence, and I know of no one other than yourself, among all the people I know, who can claim to have a thousand genuine Diocletian solidi in their possession. Any one of the other coins in the box could fetch ten times their nominal value from a sharp-eyed trader.”

And so it is, according to Whyte’s tale, that great wealth was transferred at the time of Rome’s decline from one generation to the next.

– Michael J. Kosares

* “Now one interesting thing with all this inflation should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation — or perhaps we should say, because of all of this inflation — the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this other coinage just became increasingly worthless.” – Inflation and the Fall of the Roman Empire, Joseph R. Peden (2017)

Image courtesy of Visual Capitalist
Click to enlarge

OPINION

In 1700 years, as you can see in the chart above, not much has changed.  Since 1971, when the United States detached the dollar from gold and ushered in the era of fiat money, the dollar has lost 84.5% of its purchasing power over the nearly fifty-year period.  The 1971 dollar is now worth 15.5¢.   Gold in the meanwhile has risen from $35/oz. then to roughly the $1600 level today (with a stop at $1900/oz in 2011.) Over the long run, gold in the modern era has maintained its purchasing power as it did in Roman times, while the dollar, like the denarius, has been steadily debased. So it is by the circuitous route just taken, you now know how Jack Whyte’s depiction of the Roman inflation in The Burning Stone reinforces the argument for gold ownership today, and why we went to the trouble of presenting a review of his book on this page.

We should not become desensitized to the prospects of future inflation as a result of the lull we have encountered in recent years.  The loss of purchasing power goes on undeterred with some economists arguing now that it could accelerate in the near future. Even though price inflation is relatively subdued at present, monetary inflation continues unabated with consequences yet to be determined. In the inflationary process, it should be remembered that the line between cause and effect is not always a straight one. History teaches us that when inflation does arrive, it comes suddenly, without notice, and with a vengeance.

We hasten to add that at any point along the way in the Roman inflationary period, the hoarder who had stashed away earlier silver coinage would have effectively hedged the intermittent bouts of runaway inflation, as White’s story suggests.  Though more volatile than gold, silver in the modern era has functioned effectively as a safe-haven asset in the portfolio. A chart like the one above could be drawn with silver as the overlay instead of gold.

– Michael J. Kosares

Financial Times/Robin Harding/2-18-2020

“The big questions are whether a technical recession could turn into a deeper downturn; whether there is anything the government and the Bank of Japan can do about it; and where this leaves Mr Abe’s ambition to revive Japan’s economy as the prime minister’s own time in office draws to a close.”

USAGOLD note:  The latest numbers from Japan – showing a 6.3% decline in GDP for the fourth quarter of 2019 – bring to mind Jeffery Snider’s comments from a few days ago on the growing fear of recession. “It’s Germany and Japan first,” he says, “before others and then all the rest.”