Of 17th-century tulips, 21st-century stocks and ageless gold
During the Dutch Tulipmania, the price of one special, rare type of tulip bulb called Semper Augustus sold for 1000 guilders in 1623, 1200 guilders in 1624, 2000 guilders in 1625, and 5500 guilders in 1637. Shortly thereafter, the bottom fell out of the market and prices plummeted to 1/200 of their peak price – a mere 27 guilders. In the artwork above an individual, portrayed in fool’s garment, is shown trading a hefty pouch of gold for a handful of tulip bulbs. It is no mystery who got the better part of that bargain. History teaches us that no era is immune to financial mania including our own. As a matter of fact, a good many believe that we are fully immersed in a stock market mania (wherein many include bitcoin) right now.
Since the earliest days of the USAGOLD website (the mid-1990s), we have enshrined a quote from Thomas Bailey Aldrich at our home page: “The possession of gold has ruined fewer men than the lack of it.” Aldrich’s axiom has held true down through the ages. It applied in ancient Greece and Rome, in 11th century China, in the time of the Medicis, the Dutch Tulipmania, the South Seas Bubble and French fiat money mania, during the long string of panics in the late nineteenth and early 20th centuries (Aldrich’s time), the spate of post World War I and II hyperinflations (Austria, Germany, Greece, Hungary, et al) and it still applies today.
Repost from 7-21-2021
“When the time comes to ask the question – ‘What triggered the crash?’ – remember that this is the least important question. A market crash requires nothing more than a shift in investor psychology from careless speculation to even modest risk-aversion. A market crash requires nothing more than an increase in the risk premium demanded by investors, in an environment where risk premiums have become overly depressed.”
USAGOLD note: Hussman’s latest explores the nature of overpriced financial markets and ends with the premise that “the dogmatic activism of the Federal Reserve [is] at the very center of it all” – for better or worse depending upon your own exit strategy and/or whether or not you put in a hedge.
Gold pushes higher in quiet summertime trading
Central banks are buying the dip
(USAGOLD – 7/27/2021) – Gold pushed higher in generally quiet summertime trading as the Fed convened, yields continued their descent and the dollar weakened. It is up $7 at $1806. Silver is down 7¢ at $25.20. A Bloomberg report earlier this month on burgeoning official sector gold demand received scant attention among gold analysts. What makes it a matter of better than casual interest, though, is that the central banks appear to be buying the dip in prices this year – a preference that, if it continues, could carry longer-term implications for gold market fundamentals. Most notably, Brazil – the world’s ninth-largest economy – announced purchasing a hefty 41.8 tonnes of the metal last week.
Credit Suisse’s global equity analyst Andrew Garthwaite takes note of the trend in a recent report reviewed at ZeroHedge and offers a glimpse of the rationale behind the purchases. “Gold is a hedge against extreme financial deleveraging,” he says. “The level of government debt, deficit and corporate debt is extreme. We continue to believe that if the TIPS yield gets much above zero, that would start to cause the markets to worry about a debt trap and that in turn could lead to a major risk-off trade. This could then prompt a Fed response driving down real yields (and debasing money).…We think this will also cause central banks to buy more gold (as currencies are being debased). Central banks account for 12% of gold demand. If all central banks had a minimum of 10% in gold, then gold demand would increase 1.6x, on our calculations.”
Chart of the Day
Sources: St. Louis Federal Reserve [FRED], U.S. Bureau of Labor Statistics
Chart note: Some have begun monitoring the dizzying rise in the price of used cars and trucks as a bellwether for the overall inflation situation – up over 45% year over year as of the end of June. CNBC recently reported that used car prices and car rentals are “behind the biggest inflation surge since 2008.”
“Economist Stephen Roach warns Beijing’s crackdown against U.S.-listed China stocks will have widespread market implications.”
USAGOLD note: Roach believes that China’s crackdown on internal businesses could disrupt global supply chains with knock-on effects in every country that depends upon it for finished goods. Inflation, one would think, would ratchet higher as a consequence. CNBC posted this article on Sunday. During Asian trading hours, Chinese techs stocks plummeted while the broad-based Shanghai Composite Index dropped almost 2.5%. Roach calls the chill in U.S.-China relations “disturbing” and “the early stages” of a new Cold War. “You can’t,” he adds, “get away from the China connection” in terms of the global economic effects.
“Stagflation is absolutely the biggest risk for every investor.…Imagine how scary it would be for the market if we had stocks and bonds selling off together … a major problem because central banks can’t really come to the rescue and cut interest rates .” – Nancy Davis, Quadratic Capital Management
USAGOLD note: Alan Greenspan was among the first to warn that the economy could be headed for a round of stagflation like the 1970s and that was back in late 2018, early 2019. Stagflation is the combination of high inflation and high unemployment, i.e., what Ronald Reagan called the Misery Index. At its height in 1980, the Misery Index reached 22%. As of the most recent government reports, it stands at 11.29%, according to YCharts, and is climbing again. Gold and silver were top performers during the stagflationary 1970s.
“My studies of the 17 major financial crises since the founding of the Republic reveal that over-optimism is an important driver of the bubbles that eventually become busts. As the legendary investor, Sir John Templeton, once said, ‘The four most dangerous words in investing are ‘This time is different.’ Such was the mind-set that real estate prices could only rise (2008), dot-com companies would forever grow and be profitable (2001), or that the Russian government would never default (1998). “
Robert F. Bruner,
“What bond-market guru Mohammed El-Erian said Friday was enough to make bond investors listen like they’re in an old E.F. Hutton commercial.”
USAGOLD note 1: El-Erian adds his voice to the group warning that inflation will be persistent. He adds that the Fed should take its foot off the accelerator. The Fed, however, finds itself between a rock and a hard place on that score. If it does take its foot off the accelerator, the stock and bond markets are likely to take a major tumble. If it doesn’t, inflation is likely to continue building in the economy.
USAGOLD note 2: About a year ago, in an earlier Bloomberg interview, El Erian gave a thumbs up to gold saying: “It’s a bit like what happened to big tech. People like it because it’s defensive. People like it because it’s a reflation trade. People like it because it’s inflation protection. What we are starting to see with the narrative about gold is starting to be like the narrative about big tech. It gives you everything.”
“John B Calhoun set about creating a series of experiments that would essentially cater to every need of rodents, and then track the effect on the population over time. The most infamous of the experiments was named, quite dramatically, Universe 25.”
USAGOLD note: Some unexpected results from an unusual experiment conducted in the 1970s showing that a socialist utopia in which all the mouses’ needs were benevolently provided ended in extinction. Felton offers a riveting account of what exactly happened in the mousetopia of Universe 25. “I shall largely speak of mice,” writes Calhoun, “but my thoughts are on man, on healing, on life and its evolution.”
“So, has the Fed now adopted a hawkish stance? Should markets be spooked? At WisdomTree, we don’t think so. What the central bank has done amounts to forward guidance, a mechanism for managing market expectations. This was extremely important for the Fed to do to maintain its focus on stabilising prices and maximizing employment without risking becoming the cause for major market volatility. Monetary accommodation from the central bank remains at crisis levels – something that is no longer required for an economy that is starting to find its footing.”
USAGOLD note: Gold rallies often come suddenly, sometimes seemingly without cause, and quite often when sentiment has ebbed to its lowest. As we often say, the best time to buy precious metals is when everything is quiet, i.e., time like now. “Gold’s price decline following the central bank’s latest meeting,” says Wisdom Tree, “may seem like an overreaction in hindsight.”
Rainy day investment
“In an economy buffeted by the ups and downs of farming and fishing, the people [of India] are used to buying gold after bumper harvests or fishing seasons and selling it after lean ones.” –– Vivek Kaul, Live Mint
Dr. MoneyWise says: “It’s all very simple. Own gold for a rainy day. Use it if and when that day arrives.”
Repost from 7-21-2021
“The Economic Affairs Committee of the U.K.’s House of Lords, of which I’m a member, has just issued a report on the challenges of using large-scale bond purchases as an instrument of monetary policy. Its title pointedly asks: ‘Quantitative Easing: A Dangerous Addiction?’ In a word, our answer to that question is ‘yes.’”
USAGOLD note: We posted the original press release from the British parliament on this subject Monday. Mervyn King, the highly respected former governor of the Bank of England, believes quantitative easing should have been used as a temporary measure and that it should now be “dialed back” with authorities “helping investors to plan accordingly.” All of that is taken as sound advice. Much of the damage, though, has already been done as QE’s excesses filter through the economy – not the least inflation coupled with an unhealthy sense of moral hazard.
Repost from 7-20-2021
“Readers may be excused for thinking something similar about the latest stories about looming, threatening, surging, terrifying inflation. Yes, the inflation forecasts were surging months ago, and hit 8-year highs. Had they continued there would be grounds to worry. But they haven’t continued. On the contrary, they’ve been falling for two months.”
USAGOLD note: How anyone could assemble an analysis on the performance of various assets during the inflationary 1970s and exclude gold and silver is a bit puzzling. Arends includes energy stocks (+73%), REITs (+36%), T-Bills (-6%), utilities (-9%), the S&P 500 (-16%), corporate bonds (-23%), and 10-year Treasuries (-38%), but excludes gold (+922%) and silver (+596%). By the way, inflation “forecasts” may have fallen for two months, but inflation itself, as we all know by now, is surging.
Repost from 6-7-2021
“The problem is that markets have come to expect central banks to use their buying power to smooth over any hint of trouble. Governments may be tempted to lean on monetary authorities to use it to keep borrowing costs low indefinitely.…Those disparate expectations add to the unease fueled by economists who for years have warned about the long-term effects of quantitative easing.”
USAGOLD note: Central banks are between a rock and a hard place with no easy way out. A former president of the Philadephia Fed branch worries about “the politicization of the central bank.” Many think that under the Biden administration we are already there – that in fact the Fed and White House have already merged.
Repost from 6-7-2021
“We’ve seen a strong start to Q2 for silver market, with the metal easily outperforming the S&P-500, as well as the yellow metal. This is a very bullish development given that the strongest periods for precious metals occur when silver is not only outperforming gold but also the S&P-500. In addition, we are now 12 months into a new multi-year breakout for silver, and we are working towards a very similar setup to what we saw in 2005.”
USAGOLD note: 2005 was the year silver then trading in the vicinity of $7.50 per ounce began its historic move to $48 in 2011.
Gold, silver and the Standard & Poor’s 500
(In percent, one year)
Chart courtesy of TradingView.com • • • Click to enlarge
Repost from 7-20-2021
“Once our ‘activist’ central bank ventured into bolstering the securities markets and using unconventional measures to reflate the economy, it was going to be extremely difficult to refrain from venturing into all types of measures to support various groups and causes. Add QE to the toolkit, and it will become virtually impossible not to be compelled to allocate Fed money to satisfy political interests. After buying Trillions of Treasuries, supporting markets in MBS, muni bonds, corporate debt, ETFs and stocks was going to be inescapable.”
USAGOLD note: Noland takes us on a much-needed trek back to the basics in his latest weekly rendering. Washington might question and pressure the Fed at some level, but does it really in its heart of heart want the central bank to put the screws to inflation? Our guess is that it would scream even more loudly if that were the case. For its part, as we have said all along, the Fed finds itself between a rock and hard place on monetary policy, and perhaps both the markets and Capitol Hill sense its predicament.
Repost from 7-20-2021
“US government debt has broken with tradition and pushed higher despite inflation surge.”
USAGOLD note: This article explores the reasons for that historical anomaly. On Monday, the yield on the 10-year Treasury dropped to 1.198. On July 1st, it was 1.52% – a dizzying descent. One cannot rule out the presence of the Fed as the bond buyer of last resort and, thereby, aggressively encouraging the trend.
10-Year Treasury Yield
Chart courtesy of TradingEconomics.com • • • Click to enlarge
Gold advances cautiously ahead of this week’s Fed meeting
Fidelity International says gold may be on track to rescale last July’s record highs
(USAGOLD – 7/26/2021) – Gold advanced cautiously in early trading as bond yields dropped, the dollar weakened and the markets prepped for this week’s Fed meeting. It is up $3 at $1806. Silver is up 12¢ at $25.35. Most expect the Fed to remain on the dovish side of the policy ledger this week, particularly with coronavirus making its way back up the list of policy concerns. Fidelity International, the overseas arm of the 75-year old Boston-based investment house, recently joined the ranks of institutions extolling the virtues of gold ownership.
“Currently trading at almost exactly $1,800 per ounce,” it says in a recent report, “gold has yet to quite rescale the record high levels it saw last July at just over $2,000. In an environment of rising inflation and mounting concerns over the Delta strain, however, it could be on track to do so. Inflation reduces the buying power of paper currencies, including how much gold can be bought for a given amount of paper. Given that gold is in very limited supply and can’t be devalued in the way that paper currencies can, its value should tend to rise as the prices of goods and services increase.”
Chart of the Day
Sources: St. Louis Federal Reserve [FRED], Federal Reserve Board of Governors, ICE Benchmark Administration
Chart note: As you can see in this chart, declining real rates have had a direct effect on the price of gold, particularly noticeable in the period after the 2007-2008 credit collapse and the pandemic-induced economic crisis that began in early 2020. The inflation-indexed real rate of return on the 10-Year TIPS finished at -0.98% on Friday. With inflation on the rise, the negative real rate of return will accelerate unless the Fed and/or bond market pricing push yields higher at an equivalent rate.
“UBS found 57% of U.S. investors believe inflation will accelerate over the next 12 months — a higher percentage than any other region. The Swiss bank probed 2,999 investors with at least $1 million of investible assets, conducting its survey globally from June 23 to July 12, according to its statement Wednesday.”
USAGOLD note: UBS cited precious metals as one of the alternatives likely to benefit from investor inflation concerns.
“It’s already embedded in financial assets – sequestered in the rising prices of bonds and global equity. (Going to give myself and extra point for using sequestered without talking about Co2, darn.. just lost it..) That trapped inflation is now leaking into the real economy – just like a leaking barrel of toxic sludge dumped in a river. The mechanism is simple: investors holding financial assets are increasingly distrustful of valuations (which are impossibly high due to repressed interest rates), so they are switching from financial assets to real assets – like private equity and debt, property, and outright ownership of real assets.”
USAGOLD note: Though we do not doubt leakage is occurring, it is at the moment a very slow process, as implied in the headline atop this post. As a result, there is still untapped potential in some underpriced assets – most notably gold and silver. Blain’s latest is a good read at the link……