Short and Sweet
‘No one questions its value. . .’
“No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counter-party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.” – Alan Greenspan, former chairman of the Federal Reserve
Image courtesy of the British Museum Collection/Lydia, croesid, ca 550 BC
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“Amazingly, shares have never recovered their value relative to gold [after the 2000-2001 dot-com collapse]. Relative to bonds, it would have taken until 2015 for stocks to come out ahead, and they would even have dipped behind again very briefly during the Covid selloff two years ago. Buying the dips in that bear market was a way to lose money on any basis.”
USAGOLD note: Authers raises the caution flag on current stock market dogma, i.e., buy the dips. We will add to the above that the Dow Jones Industrial Average did not revisit its 1929 highs until 1954 – 25 years later.
Gold slides below the $1850 mark in quiet trading
Bridgewater’s Dalio says, ‘you have to have a certain amount of gold in your portfolio’
(USAGOLD – 5/26/2022) – Gold slid below the $1850 mark in quiet trading as financial markets processed yesterday’s Fed minutes and braced for tomorrow’s PCE Index report. It is down $8 at $1848. Silver is down 8¢ at $21.99. Ray Dalio, who heads up Bridgewater Associates with $160 billion under management, recommends a well-diversified portfolio as the best approach to the current economic upheaval. “You have to have balance,” he told CNBC in an interview at the Davos conference, “and I think you have to have a certain amount of gold in your portfolio.” As CNBC points out, that recommendation echoes his call three years ago that “the precious metal will be a top investment in the years to come.”
“[T]hose that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold,” he said in an advisory posted at Linked-In in July 2019. “Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better-balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio. I will soon send out an explanation of why I believe that gold is an effective portfolio diversifier.” At the time of that Linked-In post, gold was trading in the $1400 range.
Chart courtesy of the World Gold Council • • • Click to enlarge
If you expected bitcoin to beat gold as an inflation hedge, you understand neither gold nor inflation
“It’s safe to say that skepticism about Bitcoin is rising amid a stretch in which the value of the “coin” has fallen. After hitting an all-time high of $68,000 last November, the price has more than halved. As this is being written, one can be purchased for $28,000. To which some will mutter that this wasn’t supposed to be.”
USAGOLD note: He then tells how gold has held its own while bitcoin has tumbled relentlessly. The mystery is why so few understand the real reasons why. “To be clear,” says Tamny, “gold doesn’t rise as a result of inflation; rather gold’s rise is the signal of inflation.” If you look closely at the chart on gold, and with a fresh eye, you will note that gold first rose above the $2000 level in 2020 after it became clear that the Fed was going to print massive amounts of money to waylay the pandemic and a cratering economy. It anticipates, as Tamny suggests, and it does not necessarily need to inflation to catalyze its anticipation. A very well-written, well-conceived (and short) dissertation on why gold should be a part of the thinking man or woman’s portfolio.
Chart courtesy of TradingEconomics.com
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”
Notes on the Next War: A Serious Topical Letter
“The US Federal Reserve and financial markets are experiencing a long overdue reality check on inflation and interest rates. But markets have barely begun to take into account how far the world has changed.”
USAGOLD note: A realistic appraisal of where we stand now from Franklin Templeton’s chief investment officer, Sonal Desai. To think that the Fed will ease policy again in the short term, she says, is a “severe degree of wishful thinking.” She then adds an important kicker. It is a mindset that “seems to inform the central bank’s own outlook.” Hhmmm…….
‘I feel like I am reliving the summer of 2008.’ Strategist David Rosenberg sees bear market sinking the SP 500 to 3,300
“The U.S. stock and the bond markets are finally in the process of catching up with our views. We always believed these past two years represented a fake bull market built on sand, not concrete. And frankly, we also remain steadfast of the view that the inflation scare is going to pass very soon — the bull market is in extrapolation and hyperventilation by economists, strategists, pundits, and media types who can’t seem to see past the tips of their noses.”
USAGOLD note: Rosenberg sees the slowdown as already underway, cratering stocks and increased demand for bonds. He does not mention gold in this short article. However, in early 2020 he predicted it would soar to new historic highs – with $3000 “not beyond the realm of possibility.”
“Raising interest rates is not going to solve the problem of inflation. It’s not going to create more food. It’s going to make it more difficult because you aren’t going be able to make the investments.” – Joseph Stiglitz, Columbia University
USAGOLD note: So where does this leave us? We are reminded of Keynes’ realization late in life. “I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.”
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“The danger in these types of collapses goes beyond the losses to individual investors who happen to hold the coins. Such losses are indicative of a wider global liquidity crisis emerging. It’s a reminder of how deeply interconnected today’s markets are. It comes back to contagion.”
USAGOLD note: Rickards’ observation that there is nowhere to hide is well-taken, although in a relative sense, gold, as shown in the chart below, has done a better job preserving thus far this year than other major assets.
Gold, stocks (SPX), and bonds (TLT) price performance
(%, year to date)
Chart courtesy of TradingView.com
“‘This bubble superficially looks like very much like 2000, focused on U.S. tech, led by Nasdaq going to incredible highs,’ Grantham added. Grantham’s comments come after his January commentary that the stock market is in a “superbubble” and he expected the S&P 500 to plunge about 45% from current levels to a mark around 2,500.”
USAGOLD note: Grantham is calling for a recession – “mild or severe is the question.” He says that what we have now is like the 2000 bubble, but “dangerously likely to morph into the 1970s.”
CNN Business/Matt Egan and Chris Isidore/5-27-2022
The startling forecast comes as US gas prices have surged to record highs in the aftermath of Russia’s invasion of Ukraine, casting a shadow over the economy. ‘There is a real risk the price could reach $6+ a gallon by August,’ Natasha Kaneva, head of global oil and commodities research at JPMorgan, told CNN in an email on Tuesday.”
USAGOLD note: The national average is now $4.52 per gallon. If the price goes to $6 by August, it would amount to a 37% increase in two and half months. The public howl over inflation would likely become very loud.
Cartoon courtesy of MichaelPRamirez.com
Short and Sweet
New smart money queues up in the gold market
First institutions and funds came over to gold’s corner, then central banks. Now, one of the more important stories in the gold investment arena as we begin 2021 is the developing interest among a whole new grouping of professional investors – pension funds, private wealth management, insurance companies, and sovereign wealth funds. “It’s a bit like what happened to big tech,” says highly respected economist Mohammed El-Erian. “People like [gold] 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.” These groups bring considerable purchasing power and market savvy to the table. One immediate result might be more buying interest on price dips. Another might be a better blend of investment psychology and objectives that could have a settling effect on the market overall.
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“‘Gold is an important asset for central banks as it is a refuge asset and has no credit risks,’ said Bank of Portugal board member Helder Rosalino on Tuesday during the rare media visit to the facility, guarded by armed police officers.”
USAGOLD note: Portugal’s central bank reserves include 383 tonnes of gold, the fourteenth largest stockpile in the world.
Gold takes a breather after six straight days of gains
In Gold We Trust: ‘For gold, recessions are typically a positive environment.’
(USAGOLD – 5/25/2022) – Gold looks to be taking a breather this morning after six straight days of gains. It is down $12 at $1857. Silver is down 36¢ at $21.83. The dollar is firm ahead of the Fed minutes release later today contributing to gold’s downside. Also factoring into today’s pricing is options expiration on the June gold and silver COMEX contracts. Bloomberg reports recession overtaking inflation as the number one concern among market participants. If that be the case, the safe-haven trade might get a boost in the days ahead.
“For gold,” says Ronald Stoferle and Mark Valek in their just-released “In Gold We Trust” report, “recessions are typically a positive environment.…If we look at performance over the entire recession cycle, it is notable that in each of the four recessionary periods gold saw significant price gains on average in both US dollar and euro terms.…Moreover, it is striking that, on average, the higher the price losses of the S&P 500, the stronger gold performed. Once again, this worked well during the most recent recession in 2020.”
Chart courtesy of TradingView.com
“There is no prospect for a material reduction in inflation unless the Fed aggressively raises rates, or the stock market crashes, catalyzing an economic collapse and demand destruction.” – Bill Ackman, Pershing Square
USAGOLD note: Another ominous warning from a member of Wall Street’s best and brightest. With some apprehension, we recall Bank of England Governor Andrew Baily’s recent admission that he felt “helpless” about controlling inflation. That leaves only one of the two options Ackman cites……
“U.S.-based gold investors may be frustrated by the dollar’s strength. With consumer price inflation raging at a 40-year high, shouldn’t the price of gold be shooting to the moon? Simple logic says yes. Gold is a venerable hedge against inflation. Consumer price inflation is raging out of control. Therefore, gold, as priced in dollars, should be adjusted upward. But that’s not what’s happening. At least not yet. After hitting $2,039 per ounce in early March, the price of gold, in dollar terms, is down 9.7 percent. If you’re sitting on a pile of cash, now’s certainly a good time to trade some of it in for gold bullion coins – and silver too.”
USAGOLD note: By and large, those who are accumulating gold for long-term asset preservation purposes take advantage of corrections and quiet periods such as we are in now in the way Gordon suggests.
“Rome fell because the dictators ruined the Roman economy and the institutions that had made it prosperous. Rome was falling apart before the barbarian invasions. How did the Caesars do that? They were profligate spenders. As emperors with absolute power usually do, they thought big: infrastructure (roads, temples, palaces), a huge bureaucracy, and, as the key to maintaining their power they had a very large, loyal, and well-paid army. As a consequence, massive government spending far outstripped revenue. They had what today we call a deficit problem.”
“Spiraling food and energy prices are squeezing households around the world, while central banks are tightening monetary policy to rein in inflation, exerting further pressure on indebted nations, companies and families. When combined with the spike in volatility in financial markets and persistent threat from climate change, the IMF said the world faces a ‘potential confluence of calamities.'”
USAGOLD note: This may be the gloomiest forecast on the economy ever published by the International Monetary Fund. A confluence of calamities, we will add, that has been in the making for a very long time.
“I’m not often glad I am no longer the young person in the room, but this month I am. If you have only been knocking around in markets for, say, 15 years, you are seeing the collapse of everything that you have been told is true and have observed to be true about markets.”
USAGOLD note: As the new verities fall one after the other and Somerset Webb returns to an old verity saying that what is new to most market participants is actually old and a return to the 1970s. “With that in mind, ” she says, “hold gold.” But that is the bottom line in a very interesting longer analysis of the economic times at the link. The Misery Index – the combination of inflation and unemployment – became the poster child of the stagflationary 1970s. As it rose, so did the price of gold, as shown in the chart below.
The Misery Index and the price of gold
(% change from year ago,1970s)
Sources: St. Louis Federal Reserve [FRED], ICE Benchmark Administration, Bureau of Labor Statistics