Monthly Archives: August 2022

The US dollar is rising to dangerous levels – here’s what to do about it

MoneyWeek/Dominic Frisby/8-23-2022

Cartoon illustration good money drives out bad ed stein“After a month or so of welcome respite, the dreaded US dollar has got stronger again. It really is the scourge of everything. Stock markets have been walloped, the yen, pound and euro have been walloped, and commodities have been walloped.”

USAGOLD note: Frisby saved his best advice for the end: “Stay defensive, conserve capital, hunker down and await more benevolent financial climates.”

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As Ukraine war drags on, Europe’s economy succumbs to crisis

Reuters/Balazs Koranyi/8-23-2022

graphic image of single-file line reaching the edge of the cliff“But all that changed on Feb. 24 with Russia’s invasion of Ukraine. Normality is gone and crisis has become permanent. A recession is now almost certain, inflation is nearing double digits and winter with looming energy shortages is fast approaching.”

USAGOLD note: It is unknown to what degree the problems in Europe will affect the American economy and financial markets. What we do know, however, is that much of what is influencing Europe’s inflation and recession is present here, and in that respect, Europe might be providing a glimpse of the future.

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The Federal Reserve’s new weapon is solidarity. But does it have the backbone needed to drive out inflation?

MarketWatch/Robert Brusca/8-19-2022

photograph of the June14-15 FOMC meeting

“Whatever your favorite literary reference, the Fed seems to be out of its element and that is, in part, because markets judge you on what you do. The Fed had a very late start, then picked up the pace, but still has not done anything that would truly slow inflation or cause any political backlash. In short, the Fed has shown no backbone yet. It has only done what is easy.”

USAGOLD note: Wall Street knows not to fight the Fed, but it doesn’t know which Fed it isn’t fighting. Confusion reigns.

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Federal Reserve Watch: Is the Fed bluffing?

Seeking Alpha/John M. Mason/8-19-2022

stein cartoon of car driving off cliff

“Headlines in the Wall Street Journal on Friday read, ‘Wall Street Bets The Fed Is Bluffing In High-Stakes Inflation Game.’… To respond, the Fed sends out members of the Federal Open Market Committee to talk up the Fed’s commitment to fighting inflation and doing what is necessary to achieve the victory.”

USAGOLD note: Jawboning has limited staying power, particularly when one takes into account that the so-called messengers Mason references are simply stating their own views on where the Fed should be headed. Sooner or later, the market will be forced to factor in what the Fed does, not what the messengers say. On that score, he presents a number of charts and concludes the Fed’s actions are “confusing investors and market analysts.” Mason ends with a reference to Henry Kaufman’s recent criticism that the Fed is “failing to combat inflation with the resolve displayed by Paul Volcker.” In short, the central bank is bluffing.

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Gold closes out a lackluster month for all investment markets except the US dollar
YTD: Stocks, bonds in dumpster, gold down moderately, commodities the star performer

(USAGOLD – 8/31/2022) – Gold trended to the downside in early trading, threatening to revisit chart lows below the $1700 level where it has found support in the past. It is down $9.50 at $1717. Silver is down 37¢ at $18.10. Though  August has been a lackluster month for gold (down 4.4%), it has had plenty of company on the downside. Stocks are down 3.8%; the bond market is down 5%, and commodities are off 3.2%. The US dollar index remains the outlier – up 2.9% on the month. Year-to-date performances offer a much different picture, with the dollar and commodities solidly on the upside (+13.3% and +17.7%, respectively); stocks (-16.9%) and bonds (-21.7%) in the dumpster, and gold – a ranking member of the commodities complex – down moderately by comparison (-4.8%). It has not been a good summer, and with a complete lack of clarity as to the net effect of Fed policy still hovering over markets, a wait-and-see attitude prevails.

Even with the correction that began in early summer, commodities have been the star performer thus far this year. Myrmikan Capital’s Dan Oliver offers some insight on what might be driving that performance. “Central banks,” he says in a lengthy analysis released yesterday, “have little ability to reduce commodity prices (and therefore the price level of goods) when they are driven higher because of bad regulation (as in the US), military destruction (as in the Ukraine), or political sanctions (as against Russia). Raising interest rates to inhibit demand to match lower supply makes financing commodity projects harder, reducing future supply, and, therefore, increases the costs of living still further. Only an act of desperation, such as throwing the economy into a depression to lower demand more than reduced supply can lower prices. But low prices also inhibit supply growth, meaning any recovery will send prices higher than before.”

(Editor’s note: In the September edition of News & Views, we address in some detail the controversial factors at work in the gold market with respect to Fed policy and inflation/stagflation. The lead article is titled  A market edict delivered from Mount Sinai, or a repeat of the 1970s? and posted in the clear at this link. We offer a sign-up at the bottom of the newsletter for those who would like to receive future editions.)

Gold, commodities, US dollar, stocks, and bonds performances year to date
overlya chart showing gold stocks commodities dollar and bonds year to date
Chart courtesy of TradingView.com

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Posted in Daily Market Report, dailyquotes, Today's top gold news and opinion |

Notable Quotable

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“We live in a technological golden age but in a monetary and fiscal dark age. While physicists discover the so-called God particle, governments print and borrow by the trillions. Science and technology may hurtle forward, but money and banking race backward.”

James Grant
Grant’s Interest Rate Observer

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A major low for silver

MoneyShow/Clif Droke/8-18-2022

Photo stacks of silver bullion coins

“Recent CFTC Commitments of Traders (COT) reports reveal that commercial hedgers (the so-called ‘smart money’ in the silver market) are at one of their lowest levels of holding short positions in years. (See chart below.)… Moreover, [the Silver Institute’s World Silver Survey 2022] predicts total silver supply this year will exceed 32,000 tons, not enough to match the more than 34,000 tons of silver demand projected, leaving a market deficit of around 2,220 tons.”

USAGOLD note: Though the price of silver has declined steadily throughout the summer, demand has remained extraordinarily strong. The sky-high premiums on modern silver bullion coins – notably the American Eagle now trading at a more than 70% premium – testify to that demand. Analyst Clif Droke now thinks the silver futures market might play a little catch-up. Droke also points out a notable decline in the LBMA silver stockpile now at its lowest level since 2016. The last time LBMA holdings got this low, the price rallied 17%. “Putting all the pieces together,” he says, “silver’s outlook is as positive as it has been in recent memory.”

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Pimco, Capital Group say era of low inflation is gone for good

Bloomberg/Libby Cherry and Liz McCormick/8-22-2022

chalboard showing inflation pattern as chart with symbols for various currencies“But the retreat of inflation from its peak isn’t likely to mark a return to the price stability of the recent past because of stark shifts in the world economy, according to a broad group of investors and strategists at firms including Pacific Investment Management Co., Capital Group and Union Investment.”

USAGOLD note: It remains to be seen whether or not we have already achieved peak inflation. With projections of a 19% inflation rate in the United Kingdom in the mix, evidence is beginning to mount that such calls might be overly optimistic. Pimco and Capital’s call for a new era of inflation is in keeping with similar projections from an expanding group of top-drawer analysts.

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U.K. inflation could surge to 19% by next year, Citi economist says

MarketWatch/Steve Goldstein/8-22-2022

photo showing a row of matches about to catch fire“Just as consumers are getting used to double-digit inflation, a new forecast says U.K. inflation could reach 18.6% early next year. The eye-popping forecast, from Citi chief U.K. economist Benjamin Nabarro, comes as U.K. electricity prices are set to surge once the Office of Gas and Electricity Markets lifts the price cap.”

USAGOLD note: Tempest in a teapot or the shape of things to come? Some of the forecasted 19% inflation rate can be explained by Brexit, political turmoil and money printing, but there are other factors in play that apply to all economies, including the United States.

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Investors warn of ‘disconnect’ as markets price in early Fed rate cut

Financial Times/Kate Duguid and Colby Smith/8-20-2022

graphic illustration of a a hawk and dove in flight“’It is, to me, a glaring market mispricing,’ said Rebecca Patterson, head of investment strategy at Bridgewater Associates. ‘Market participants are conditioned from previous cycles to expect the Fed to pivot’ to a more dovish stance, she added.”

USAGOLD note: We return to yesterday’s comment on this ‘disconnect’………Isn’t it time we developed definitions for the terms dovish and hawkish more suitable for the times? Is it hawkish or dovish to raise rates, but keep them a considerable distance from the inflation rate? In our view, it is simplistic to call the Fed hawkish simply because it raises rates. The central banks of Argentina, Venezuela, and Zimbabwe have been raising rates for years, yet their inflation rates are now 70%, 167%, and 257% respectively, and climbing. No one would be so foolish as to characterize their central banks as hawkish. Wall Street reacts to the act of raising rates as if it were a market edict delivered from atop Mr. Sinai when the real effect on inflation might be to moderate rather than throttle it.

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Gold drifts lower as markets wrestle with rising rates, stepped-up QT
Hanke warns of a ‘whopper recession,’ sustained high inflation into 2024

(USAGOLD – 8/30/2022) – Gold drifted lower in early trading as financial markets continued to wrestle with the ramifications of rising rates and stepped-up quantitative tightening scheduled to begin in September. It is down $5 at $1735. Silver is down 8¢ at $18.77. The gold market’s reaction to Powell’s comments Friday has been somewhat subdued compared to other markets, perhaps signaling that investors believe significant instability still lies ahead. Steve Hanke, an economics professor at Johns Hopkins University who has helped several countries establish new currency regimes, told CNBC yesterday that the United States is headed for a “whopper” of a recession in 2023 coupled with a high inflation rate that will persist into 2024.

He blames “sustained inflation” on “excess growth” in the money supply and the predicted recession on its subsequent contraction. (Please see the chart below.) “The bottom line,” he says, “is we’re going to have stagflation — we’re going to have the inflation because of this excess that’s now coming into the system. The problem we have is that the [Fed Chair Jerome Powell] does not understand, even at this point, what the causes of inflation are and were. He’s still going on about supply-side glitches… [and] failed to tell us that inflation is always caused by excess growth in the money supply, turning the printing presses on.”

M2 Money Supply
(Year over year change, billions of dollars)
linr chart showing year over year growth in the money supply in billions of dollars 2012 to present
Sources: St. Louis Federal Reserve [FRED], Board of Governors of the Federal Reserve System

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Notable Quotable

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“Why own gold? Because it makes sense, within a properly diversified portfolio, to have portfolio insurance. If you own a home, it makes sense to have fire insurance. Your investments are no different. And gold is now back, more relevant than ever. Since the start of the millennium gold, as expressed across a wide variety of currencies, has generated average annualised returns of over 9%.”

Tim Price
Master Investor

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China is now preparing to go to war

1945/Gordon Chang/8-19-2022

graphic of swing wrecking balls Taiwan China US“Moreover, the central government is trying to sanctions-proof itself. On April 22, officials from the finance ministry and central bank met with representatives of dozens of banks, including HSBC, to discuss what Beijing could do in the event of the imposition of punitive measures on China.”

USAGOLD note: When Nobel laureate Spence is asked what are the biggest risks to the US economy (See below), he responds, “expansion of geopolitical conflict. Something going wrong in Taiwan would be a disaster.” China expert Chang details alarming steps China is now taking to prepare for war.

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Nobel winner Spence sees non-trivial chance of recession

Bloomberg/Natlia Kniazhevich/Michael Spence interview/8-20-2022

photgraph of Stanford's Michael Spence nobel laureate“We went through more than two or three decades of bringing more productive capacity online in developing countries. And every time demand ramped up, the supply side responded. There isn’t that degree of elasticity on the supply side anymore, which means that shifting from a demand-constrained world to a supply-constrained world is almost a regime change in the global economy.” – Michael Spence, Stanford University professor, Nobel laureate

USAGOLD note: A realistic assessment covering both the direction and degree of future inflation and recession. Spence sees a reset of asset prices, private and public, as inevitable.

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Image attribution: Robert Scoble from Half Moon Bay, USA, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0>, via Wikimedia Commons

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How to protect your wealth as inflation hits new record highs

MoneyWeek/Dominic Frisby/8-17-2022

“Inflation in the UK has just hit 10.1%, says the Office for National Statistics. That is five times the Bank of England’s stated target of 2%. FIVE TIMES! Sorry to shout. The joy of the public sector is that you can be this bad at your job and still keep it.”

USAGOLD note: A quick look down the roster of nations shows that most, including the United States, are nursing lending rates far below the inflation rate. Only China and, surprisingly, Brazil have their base lending rate above the inflation rate. Frisby’s conclusion? “The most obvious asset to own in all of this is gold.”

table showing inflation and lending rates leading nations states August 2022Table courtesy of TradingEconomics.com

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Expect the next bear-market downturn soon as traders underestimate inflation

Bloomberg/ Mark Cudmore/8-17-2022

cartoon image of airborne money bags“My underlying thesis since last year has been that we’re in an unprecedented inflation-regime shift. Such levels of inflation have been seen before (more than 40 years ago), but never in such a direct and speedy transition from decades of low inflation. So the market will continuously underestimate and underappreciate the scale of the problem. As part of that, I have regularly argued that front-end yields need to go significantly higher still. And, importantly, there’s no risk of a Fed put and it doesn’t matter when inflation peaks, but how sticky it is.”

USAGOLD note: To paraphrase a famous comment, paradigm shifts can only be recognized in retrospect. If we are in a new and unprecedented inflation regime, as Cudmore theorizes, Wall Street has yet to recognize it choosing to believe instead that somehow the Fed is going to keep a lid on it.

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Gold turns marginally higher in early trading
Rockefeller International’s Sharma says a new, post-dollar world is coming

(USAGOLD – 8/29/2022) – Gold turned marginally higher in early trading as the smoke cleared from Friday’s Fed-inspired Wall Street shellacking – at least for now. It is up $1 at $1741. Silver is down 18¢ at $18.80. The damage to the gold price Friday was not nearly as severe as what occurred in the stock and bond markets, and those markets look wobbly again this morning. As has been the case for much of the year, the dollar rose as most everything else dropped.

Friday’s action aside, Rockefeller International’s Ruchir Sharma warns that a major turnaround may loom for the US dollar based on a confluence of historical factors, much like what occurred under similar circumstances in the early 2000s. “What happened two decades ago,” he writes in a Financial Times editorial, “suggests the dollar is closer to peaking than rallying further. Even as US stocks fell in the dotcom bust, the dollar continued rising, before entering a decline that started in 2002 and lasted six years. A similar turning point may be near. And this time, the US currency’s decline could last even longer.” Kuchir’s editorial is headlined, “A post-dollar world is coming.”

Gold and the US Dollar Index
(%, 1971-present)
overlay line chart showing gold and US Dollar Index 1971-Aug2022
Chart courtesy of TradingView.com

Chart note: If Kuchir is correct that the dollar is peaking (and he makes a compelling argument), it will fall in line with the progression of lower highs shown in the long-term chart above. Those long-term lower highs have preceded lower lows, and those lower lows, in turn, have coincided with sharp increases in the gold price, particularly in the period 2000 to 2011.

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Posted in Daily Market Report, dailyquotes, Today's top gold news and opinion |

Notable Quotable

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“In a lot of cultures, the word for money derives from the word for gold. In China, the ideogram for money is the ideogram for gold.”

Peter Oakley
Royal College of Arts (UK)

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Sunday In-Depth
The Great Financial Shock of 2022
Today’s headlines serve as a constant reminder of why we own gold

cartoon image of an investor experiencing headline shock

Inflation, it has been said, comes as a thief in the night, and that it has. The famed British economist John Maynard Keynes warned of the dangers impressed upon an economy by inflation in his 1919 classic, The Economic Consequences of Peace. “Lenin was certainly right,” he wrote. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” Now we are suddenly faced with what could very well go down in history as the great financial shock of 2022 – an inflation rate approaching double digits in just a few short months and a steady stream of  headlines that serve as a constant reminder of why we own gold.

“The nature of inflation is widely misunderstood and misinterpreted,” writes former Wall Streeter Dave Kranzler in an analysis posted at Investing.com.  “‘Inflation’ and ‘currency devaluation’ are tautological — they are two phrases that mean the same thing.…Dollar devaluation has been occurring since the early 1970s. The value of the dollar relative to gold (real money) has declined 98%. In 1971, $40,000 would buy a 4,000-square-foot home in a good suburb. Now it takes $700,000 on average to buy that same home. Price inflation is evidence of currency devaluation.” 

Though the dollar has been in an uptrend against other currencies of late (recently hitting a twenty-year high and pushing the gold price sharply lower), its purchasing power in terms of goods and services is in sharp decline – and that, in the end, is the real reason why gold is now in such high demand. Kranzler says that the inflation wildfires are just getting started and to “hold onto gold and silver.” Similarly, veteran market analyst James Turk recently made some insightful comments during an Epoch Times interview on why gold has long served as a hedge against currency debasement.

“[Gold] does not suffer from entropy,” he said,  “It cannot be destroyed. All the gold mined throughout history still exists in its aboveground stock, which if formed in a cube could slide under the arches of the Eiffel Tower.…A gram of gold buys essentially the same amount of crude oil as it did in 1950. This result occurs because the aboveground stock of gold grows by approximately the same rate as world population, causing the supply and demand for gold to remain in balance with the supply and demand of the goods and services humanity needs. Nature provides everything humanity needs to advance, including money.”

Below, we offer two charts supporting the Kranzler/Turk argument. The first shows the performance of gold against the long-term decline of the dollar. The second shows the sharp acceleration in that decline over the past 12 months – a period during which the dollar has lost a stiff 8% of its purchasing power. 

Gold and the purchasing power of the U.S. dollar
(Log scale, 1971-2021)
overlay line chart showing gold and the purchasing power of the dollar in log scale 1971-jan22

Purchasing power of the U.S. dollar
(2017 – April 2022)
line chart showing purchasing power of the US dollar in percent 2017-present

Sources: St. Louis Federal Reserve [FRED], U.S. Bureau of Labor Statistics

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Posted in Sunday In-Depth, Today's top gold news and opinion | Tagged |

Stop misreading the Fed: It’s not getting cold feet about wrestling inflation to the ground

MarketWatch/Rex Nutting/8-19-2022

caricature of Moses delivering the ten commandments“The Fed remains resolutely hawkish (biased toward higher interest rates). There was no hidden, secret dovish message in the July 26-27 minutes. But some people found one anyway.”

USAGOLD note: Isn’t it time we developed definitions for the terms dovish and hawkish more suitable for the times? Is it hawkish or dovish to raise rates, but keep them a considerable distance from the inflation rate? In our view, it is simplistic to call the Fed hawkish simply because it raises rates. The central banks of Argentina, Venezuela, and Zimbabwe have been raising rates for years, yet their inflation rates are now 70%, 167%, and 257% respectively, and climbing. No one would be so foolish as to characterize their central banks as hawkish. Wall Street reacts to the act of raising rates as if it were a market edict delivered from atop Mr. Sinai when the real effect on inflation might be to moderate rather than throttle it.

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Posted in Today's top gold news and opinion |