Monthly Archives: October 2022

‘Strikingly tight’ copper market belies price drop, miner says

Bloomberg/Yvonne Yue Li and James Attwood/10-20-2022

graphic image of pick and shovel symbolic of gold mining industry“It’s ‘striking how negative financial markets feel about this market and yet the physical market is so tight,’ said Richard Adkerson, chief executive officer of Freeport-McMoRan Inc.”

USAGOLD note: A familiar refrain often heard among gold market analysts and investors.…… In fact, such was the subject of Monday’s Daily Market Report. Freeport-McMoRan is the world’s largest publicly traded copper producer. Gold, as it turns out, is not the only market with a major disconnect between physical demand and paper pricing.

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Here’s why the US dollar may be closer to a peak than markets think, even as inflation rages and the Fed remains hawkish

MarketsInsider/Jennifer Sor/10-23-2022

chalboard showing inflation pattern as chart with symbols for various currencies“But examples of dollar peaks in the 1970s and 1980s may be more applicable to today since those periods also saw high inflation, [Goldman Sachs] analysts said in a note on Thursday.”

USAGOLD note: Seems logical…… The article at the link above gets into Goldman’s full rationale. Given the well-entrenched inverse correlation between the dollar and the yellow metal, one would think a peak in the dollar index would be good news for gold investors.

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How Cold War II could turn into World War III

Bloomberg/Niall Ferguson/10-22-2022

photograph of ancient Roman columns“History shows that nothing causes fiscal and monetary instability quite like multiple big, long conflicts.”

USAGOLD note: Ferguson offers considerable historical perspective on empires in this lengthy essay and ends with a warning that “we must not make the mistake of assuming that the US is an indestructible empire, for there is no such thing.” With that, he echoes the thinking of important historians of the past – Gibbon, Toynbee, Quigley – among others.

 

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Short and Sweet

For the record……
Gold in the age of inflation
The star investment of the fifty-year era and the most reliable store of value

photograph of Richard Nixon conduction meeting of his cabinet in 2971

“Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”
Alan Greenspan, November 2014

On Friday, August 13, 1971, then-president Richard Nixon, after a secret meeting at Camp David, devalued the dollar, suspended gold convertibility, and thereby launched the fiat money system and the age of inflation. Shortly thereafter, the president commented, “we are all Keynesians now.” (Please scroll to “The great Keynesian coup of August 1971” for more detail.) It is a notable coincidence – perhaps even fitting – that we would mark the 50th anniversary of the “Nixon shock” on Friday, August 13, 2021. To mark the occasion, we reprint the following from the July 2021 issue of News & Views, our monthly newsletter:

There has been considerable, and some would say tedious, discussion on the subject of inflation over the past several weeks. The Fed wants it. The markets await it. Investors and consumers worry about it. If it does come, the Fed thinks it will be transitory. Others believe it will persist. That said, the current discussion ignores an established historical reality: We already live and have lived with it for a very long time. The Age of Inflation began in August of 1971 when the United States disengaged the dollar from gold and ushered in the fiat money era. Thereafter, the inflationary process has progressively eaten away at our wealth and the purchasing power of our money. Now, some of the best minds in the investment business tell us that it is about to accelerate and that if we ignore it, we do so at our own peril.

To mark the occasion of the fiat money system’s golden anniversary, we offer two instructive charts. One is something of a myth-buster in that gold has decisively outperformed stocks during the fiat money era. Many will be surprised to learn that gold is up 4,500% since 1971, while stocks have played second fiddle at 3,375%. The other reveals at a glance the pernicious, ongoing debasement of the dollar and gold’s role as a hedge against it. The dollar lost 85% of its purchasing power since 1971, while gold, as just mentioned, gained nearly 4500%. If that does not serve as vindication of gold’s portfolio role in the era of fiat money, I don’t know what will. At the same time, consensus has it that cyclically, stocks are closer to a top than a bottom, and gold is closer to a bottom than a top.

Gold and stocks price performance
(In percent, 1971-2021)

area charat showing gold and stocks 1971 to June1 2021 in percent
Chart courtesy of TradingView.com • • • Click to enlarge

Gold and the purchasing power of the dollar
(1971 to present)

overlay area chart showing the value of the dollar and gold since 1971
Sources: St. Louis Federal Reserve [FRED], Bureau of Labor Statistics, ICE Benchmark Administration • • • Click to enlarge


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A political backlash against monetary policy is looming

Financial Times/Martin Sandbau/10-23-2022

ramriez cartoon on the Fed making a slight overcorrection on inflationCartoon courtesy of MichaelPRamirez.com

“Three weeks ago, Sanna Marin, Finland’s prime minister, retweeted a link to an article by a Finnish academic together with the following quote: ‘There is something seriously wrong with the prevailing ideas of monetary policy when central banks protect their credibility by driving economies into recession.'”

USAGOLD note: Marin’s criticism goes to the heart of the matter…… It raises the fundamental question how the Fed got itself into the position of having to defend its credibility in the first place. It wasn’t simply that it printed money, but that it printed money and encouraged fiscal spending then tried to downplay the resulting inflation as something likely to be short-lived. Now, in the name of restoring it credibility, it is advancing a policy that could damage its credibility even further.

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Gold weakens marginally as we enter Fed Week
 ‘You might want to go into gold.’ – Nouriel Roubini

(USAGOLD – 10/31/2022) – Gold weakened marginally as we enter the stormy waters of Fed Week. It is down $3 this morning at $1644. Silver is down 7¢ at $19.26. There is a school of thought among investors that the Fed might be preparing for a future pivot on inflation and many will be looking for clues in Wednesday’s statement and press conference on its validity. Stocks and bonds have rallied on that presumption while precious metals have taken a more circumspect approach. Economist Nouriel Roubini is among the group that believes that the Fed is headed for an abrupt change of heart. The central bank, he says in a recent Bloomberg interview, is likely to “wimp out” on its inflation stance and push the economy, as a result, into the worst monetary crisis since the 1970s.

For years, Roubini shied away from gold despite his notoriously gloomy outlook, but now he recommends it. “You might want to go into gold,” he says. “It has not done very well in the last year but once inflation becomes unhinged when the central banks are going to blink, and until now central banks have played tough. That’s why gold has done poorly, because the real rates were going higher. Then gold is going to outperform like other precious metals, like probably many commodities. But the commodities are going to be hurt by the recession. So gold is actually less cyclical.”

stein cartoon of a couple headed down a steep 401k roller coaster track

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Notable Quotable

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“There is nothing we can take for granted in this inflationary crazy economic environment, no rules of thumb that can really guide us. My father was a thrifty man, a truly great man, but also a believer in long-term value and truth. Yes, he loved gold and silver coins too, and very much so. He accumulated them throughout his life. As I look at that today, it is extremely obvious that this was one of his best financial decisions. He was never a day trader or a rah-rah techno champion. He clung to that which he could really trust, really own, really control. That seems like a good way to think even now.” – Jeffrey Tucker, Daily Reckoning

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cartoon image of a row of leering jack o lanterns

Happy Haloween to all the ghosts, goblins, ghouls, and gold bugs who haunt these pages!

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Favorite web pages
Charles DeGaulle’s famous ‘Criterion’ speech

photo classice profile of Charles de GaulleGiven the increasing frequency and severity of international currency imbroglios and one emerging nation-state after another falling into monetary disrepair, it is not difficult to visualize more and more of these states looking to hold gold in their reserves as a matter of national defense. One recalls Charles DeGaulle’s famous criterion speech on gold in this context. Though such a holding would not cure internal problems derived from excessive debt and the debasement of their own currencies, it would offer something of a shield for all nation-states against the currency debasement of other nation-states, just as it does for private investors who take the same course of action.

[LINK]

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Giustra sees bitcoin as a threat to sovereign currencies

Finbold/Justinas Baltrusaitis/10-22-2022

graphic image of a melting bitcoin“They are going to create their own central bank digital currency like everybody else in the world and they’re not going to want competition. I see Bitcoin as an anti-sovereign fiat play and if I’m right about a monetary reset where everybody’s going to something else that incorporates digital currencies in whatever they create, the last thing they’re going to want is the competition from Bitcoin,” he said.

USAGOLD note: Though this article attempts to pose billionaire Frank Giustra as a champion of bitcoin, what he is really saying is that investors should be attuned to monetary authorities acting at some point in the future to remove it as competition for sovereign currencies. It is a cautionary tale. Giustra is a long-time advocate of gold ownership as a hedge against currency debasement.

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The market in Treasuries is storing up trouble

Financial Times/Gillian Tett/10-20-2022

“This month, global investors have watched the wild gyrations of gilts — and British politicians — with mounting horror. But now that UK bond markets seem calmer — if not UK politics — investors should peek look across the Atlantic at the unfolding story in the $23.5tn world of American government bonds.”

USAGOLD note: Tett explores the ramifications of a Treasuries market long on supply and short of buyers……What happens next? Without some necessary reforms, as she sees it, the recent turmoil in the UK could serve as a “prologue to a much bigger American market drama.”

bar chart showing market value of marketable US debt
Sources: St. Louis Federal Reserve [FRED], Federal Reserve Bank of Dallas

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Noriel Roubini foresees ‘ugly’ mix of the 1970s and the Global Financial Crisis

Bloomberg/Joe Wiesenthal and Trach Alloway/10-20-2022

graphic image that reads stagflation ahead“Now, Roubini’s conviction is only growing that the world will be ensnared in a period of stagflation as central banks struggle to keep a lid on inflation expectations and will eventually blink in the face of things breaking in financial markets.”

USAGOLD note: Roubini says, “this is just the beginning of that pain. Wait until it’s real pain.” He is working with Atlas Capital Team to structure a digital currency backed by gold, US real estate, and US Treasuries. We like the gold part of that formula but think the other items just add unnecessary risk and instability. Stick with gold and silver coins and bullion as the chief bulwark against life’s uncertainties.

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Short and Sweet
How much gold is enough?

graphic design of gold coins as part of pie to show idea of diversification

Investors often ask about the percentage commitment one should make to precious metals in a well-balanced investment portfolio. Analyst Michael Fitzsimmons offered an interesting take on that subject in a recent Seeking Alpha editorial, “Assuming a well-diversified portfolio (which does include cash for emergencies),” he says, “my belief is that middle-class investors (net worth under $1 million), should own at least 5-10% in gold. I also believe that as an American investor’s net worth climbs, the higher that percentage should be because, in my opinion, he or she simply has more to lose by a falling US$. For instance, an investor with a net worth of $2-5 million might have a 15-20% exposure to gold; $10 million, perhaps a 30-40% exposure.” USAGOLD recommends, as it has for many years, a diversification of between 10% and 30% depending on your view of the risks at large in the economy and financial markets.

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Musk second-guesses the Fed

MarketInsider/Theron Mohamed/10-21-2022

graphic representation of a digitized dollar“Elon Musk has a new nemesis in the Federal Reserve. The Tesla CEO has slammed the US central bank for soldiering on with interest-rate hikes, despite what he considers growing signs the inflation threat is fading.”

USAGOLD note: Musk like everyone else in the business-finance realm is talking his book. He tells the Fed that inflation is contained because the copper price is down. Is that an accurate indication of what to expect on the inflation front? Musk, more than most, should be well aware of the problems in the global supply chain beyond copper driving up prices. At the same time, his concerns about the strong dollar, which he shares with a long list of nation states, are well-taken.

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Gold pushes lower in run-up to next week’s FOMC meeting
Lundin projects a $1.4 trillion federal government interest expense at 4.5% fed funds rate

(USAGOLD – 10/28/2022) – Gold pushed lower this morning as it often does in the run-up to FOMC meetings. It is down $12 at $1654. Silver is down 24¢ at $19.43. Gold Newsletter‘s Brien Lundin believes that the greatest impediment to future Fed rate hikes is the intolerable interest expense it would impose on the federal government. He says that there is “no doubt that the costs are going to soon soar well past $1 trillion” and put up a roadblock to any further rate hikes. (By way of perspective, total federal tax revenue for 2021 was $2.76 trillion.) The resulting negative real rate environment, he concludes, will be “extremely positive for precious metals and other tangible assets.”

“This is the direct result of a federal debt that has more than tripled since the Great Financial Crisis of 2008,” he contends, “and is 64% higher than the last time the Fed tried to raise interest rates. But today the Fed is raising rates at more than three times the speed it has at any time since the 1980s. .… If the consensus range were to be reached (4.5% on the Fed funds rate), the yearly cost to service the federal debt would reach toward $1.4 trillion, and rising. This is a stark reality that the market will now be forced to face, as we just received the initial third-quarter estimate of annualized federal interest expenses. The number is buried within the Bureau of Economic Analysis’ first estimate of third-quarter GDP, which was released just this morning. According to that report, the cost has soared to $736.579 billion.”

overlay line chart showing rising interest rates and the amount of interest paid on the national debt now at $736.5 billion
Sources: St. Louis Federal Reserve [FRED], US Bureau of Economic Analysis

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Notable Quotable

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“I have to say, the implications of a 59% jump in investment bankers buying gold for their personal portfolios has some alarm bells ringing. What’s going on at the banks? Are there problems looming? What do they know that we don’t? Something similar was going in the lead up to the Lehman crisis.… I don’t think it’s reason alone to go out, sell everything, buy gold and run for the hills. But it’s one of those telling insights, I’d say, to have at the back of your mind as you make your broader macro investment decisions.” – Dominic Frisby, MoneyWeek

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What should the Fed (and Congress) do now?

Cato Institute/Norbert Michel/September-October 2022

“For starters, monetary policy should not be viewed as wholly independent of fiscal policy. The Fed serves as a fiscal agent of the United States. Even though the Fed is legally independent, it is, in practice, always under political pressure to accommodate the government’s fiscal policies. In large part owing to accommodating a recent federal spending spree, an active choice by Fed officials, the Fed now holds almost 30 percent of the outstanding federal debt held by the public, up from 22 percent in 2014.”

USAGOLD note: And we can be pretty much assured that the Fed’s 30 percent holding will increase the next time a financial crisis hits……Michel is director of the Center for Monetary and Fiscal Alternatives at the Cato Institute. As for what the Fed and Congress should do now, he offers a long list of reforms most of which center around the Fed playing less of a direct role in the day-to-day functioning of the financial system and the economy.

 

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Why breaking the QE addiction is such a struggle

Bloomberg/Daniel Moss/10-19-2022

graphic illustration promoting QE FOREVER with fireworks“Few in Britain may want to hear it, but the financial crisis that rocked the country has a silver lining for the rest of the world. The dramatic intervention by the Bank of England reminds us that quantitative easing, the large-scale bond buying commonly associated with low inflation rather than today’s price surge, isn’t going away.”

USAGOLD note: It’s always the large gap between what one would like to do and what one has to do that weighs heavily in human affairs. What one has to do usually wins out.

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‘Fragile’ Treasury market is at risk of ‘large scale forced selling’ or surprise that leads to breakdown, BofA says

MarketWatch/Vivien Lou Chen/10-20-2022

cartoon of a man rolling out paper towels that are U.S. Treasuries“The world’s deepest and most liquid fixed-income market is in big, big trouble. For months, traders, academics, and other analysts have fretted that the $23.7 trillion Treasurys market might be the source of the next financial crisis.”

USAGOLD note: The pace is quicker and the volume louder on warnings about potential problems in the U.S. Treasuries market. Zero Hedge last week reported “ugly, tailing 20Y auction prices at highest yield on record as foreign buyers flee.” ……

 

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Short & Sweet
Palantir buys $50.7 million in gold bars
Firm offering ‘insights’ to the intelligence community hedging black swan events

graphic of a satisfied investor sitting atop a pile of gold bars

The prospect of sleeping better at night played largely in Palantir Technologies’ $50.7 million purchase of gold last month  – 28,000 troy ounces in 100-ounce bars. In a move that surprised Wall Street, the Denver-based firm founded by Peter Thiel and Alex Karp said it purchased the gold as a hedge against “a future with more black swan events.” It is interesting to note in the context of black swan events that among Palantir’s many data-based products, it offers the AI-ready Gotham operating system – a program, according to its website, that surfaces “insights from complex data for global defense agencies, the intelligence community, disaster relief organizations, and beyond.”

“Risk,” says US Global Investors’ Frank Holmes in a piece posted at Seeking Alpha, “is precisely the reason why Palantir Technologies decided to make an investment in gold. … [N]amed for the all-seeing crystal balls in Lord of the Rings – [Palantir] is also allowing customers to pay for its software in gold.” Holmes also cites a National Inflation Association subscriber note that the company’s decision “is only the beginning of what will soon be many major corporations diversifying their U.S. dollar cash into gold.”

In a detailed article posted at ETF Trends on the Palantir acquisition, Jared Dillian recommends a way of viewing gold we have advocated since the publication of the first edition of The ABCs of Gold Investing in 1996. “As gold investors (I hold a bunch),” he suggests, “maybe we should stop thinking about gold as a trade or an investment and start thinking about it as an insurance policy.”

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