“[O]n October 19, 1987, it got ugly in a hurry. Unsettling financial developments, including a widening trade deficit in the U.S., ‘portfolio insurance,’ lofty equity valuations and, perhaps most importantly, the rise of computer trading, slammed the stock market with a toxic combination that led to one of the worst trading days in history.”
USAGOLD note: The chart is worth the visit – uncanny would be a good description. October is the month when markets have been known to go bump in the night.
“[Carmen] Reinhart, who took her new role in June, is best known for her work with then-Harvard colleague Kenneth Rogoff on the last financial crisis in their 2009 book ‘This Time Is Different: Eight Centuries of Financial Folly.’ It made the pair the go-to resource on the history of government defaults, recessions, bank runs, currency selloffs, and inflationary spikes.”
USAGOLD note: This warning from one of the world’s top authorities on the history of economic breakdowns will carry significant weight in the financial community. Rogoff has issued similar warnings of late particularly with respect to how the dollar might fare through all of it. He thinks the greenback could relinquish much of its status as the world’s reserve currency.
“This was the week we witnessed the funeral of austerity. Those who used to worship at its altar now urge countries to throw caution to the wind. Fiscal orthodoxy, practised over decades since the debt crises and inflation of the 1970s and 1980s, has been replaced with fiscal activism.”
USAGOLD note: This is not a minor change – not for the U.S. economy (Please see the post immediately below), the global economy, or with respect to how you structure your portfolio for the future. There is little doubt how the upcoming deficits are going to be financed.
“Deflation is a threat posed by a critical breakdown of the financial system. Slow growth and recurrent recessions without systemic financial disturbances, even the big recessions of 1975 and 1982, have not posed such a risk. The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousin of extreme speculation and risk taking, in effect standing by while bubbles and excesses threaten financial markets. Ironically, the ‘easy money,’ striving for a ‘little inflation’ as a means of forestalling deflation, could, in the end, be what brings it about. That is the basic lesson for monetary policy. It demands emphasis on price stability and prudent oversight of the financial system. Both of those requirements inexorably lead to the responsibilities of a central bank.”
Keeping At It: The Quest for Sound Money and Good Government
–– Gold Classics Library ––
Fiat Money Inflation in France
How It Came, What It Brought, and How It Ended
Andrew Dickson White ends his classic historical essay on hyperinflation, “Fiat Money Inflation in France,” with one of the more famous lines in economic literature: “There is a lesson in all this which it behooves every thinking man to ponder.” This lesson — that there is a connection between government over-issuance of paper money, inflation, and the destruction of middle-class savings — has been so routinely ignored in the modern era that enlightened savers the world over wonder if public officials will ever learn it. In this essay, Dickson White explores France’s hyperinflation at the end of the 18th century in exhaustive detail – its politics, its economics, and the social consequences which led, in the end, to Napoleon’s rise as emperor. It also details gold’s performance as a hedge during the period – a history that explains the French people’s ongoing attachment to gold from that period through the modern era
1812 Napoleon 1 (Bonaparte) 40 franc gold coin
“There are already signs of a flight to safety with both the dollar and the yen rising sharply, and gold on the rise too. US treasuries have also jumped, as investors seek a place to hide.” – Susannah York, Hargreaves Lansdown
USAGOLD note: A comprehensive overview that considers a long list of variables having to do with the U.S. election and the potential outcomes from an investment point of view. Please see the related posts immediately below.
Repost from 10-16-2020
“JPMorgan Chase & Co. says the stockpile of developed sovereign debt with a negative yields adjusted for inflation has doubled over the past two years to $31 trillion. As the Federal Reserve prepares to let prices run hotter to fix the pandemic-hit labor market, the Wall Street bank has a message for investors: Get used to it.”
USAGOLD note: The global bond market is valued right at $100 trillion. Thus 31% of the total delivers a below zero real rate of return. The bond market is stood on its head with the final outcome yet to be determined.
Repost from 10/10/2020
“The stock market is riding high, taking Joe Biden’s widening lead in the polls as a sign to discount the odds of a contested election. But some investors say it’s too soon to count out turmoil just yet, and that gold is poised to benefit from the uncertainty.”
USAGOLD note: Checking the polls in mid-October 2016, we see that Hillary Clinton led Donald Trump by sixteen percentage points ……… Three weeks is not a long time in an ordinary life, but it is an eternity in an election year. Too, as this article emphasizes, no matter who wins the result will probably be contested.
Repost from 10/8/2020
“This crisis started in the nonfinancials and is therefore more damaging to the economy; its severity is likely to lead to a banking crisis far larger than the Lehman failure and possibly greater than anything seen since the 1930s depression. Commercial bankers are now waking up to this possibility. For them, the immediate danger is associated with this quarter end, when demand for credit to pay quarterly charges increases significantly, just passed. Already, businesses are in arrears as never before, with many shopping malls, office blocks, and factories unused and rents unpaid. It is this problem, shared by banks around the world, which due to the severity of current business conditions is likely to tip the banking system over the edge and into an immediate crisis. The extent of the problem is likely to be revealed any time in this month of July.”
USAGOLD note: Macleod paints a picture of runaway stagflation – the 1970s on steroids.
Cartoon courtesy of MichaelPRamirez.com
Repost from 7-20-20
“In our case, the stock market, which used to be a measure of the economy, has become a policy target. As a result, it has lost its value as a measure of the real world.” – Vincent Deluard, StoneX, head of global macro strategy
USAGOLD note: This article is about the stock market as a predictor of presidential election outcomes, and it goes to great lengths to disavow its utility in that regard. The best part of the article, though, is not the conclusions it draws but the very perceptive quote from Deluard above. It raises questions that go far beyond the stock market’s value as an election predictor.
Repost from 9-2-2020
“The big thing I would emphasize is that the traditional stock-bond relationship is changing. That’s a fancy way of saying a 60/40 portfolio is not going to work as well as people think. You don’t have a natural hedge anymore when you put 60% in equities and 40% in bonds. At this point, the stock market really has to stumble in a big way, and you are not going to get as much help from the bond market. That’s why portfolio construction between bonds and stocks needs to be rethought. Gold can be a part of the solution, but gold is still a very uncorrelated asset. The negatively correlated asset for stocks used to be bonds, and there really isn’t any other one.”
USAGOLD note: Even if gold were only “part of the solution” for professional money managers – a fraction of the solution – it could add up to a major influx of capital into the ultra-thin gold market (as compared to stocks or bonds). It won’t be a 40% shift in portfolios to gold, but even a 5% allocation would likely impact the gold price significantly.
Repost from 10/10/2020
Blinded by the Money Illusion
“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.” – Janet Yellen, Former Federal Reserve chairwoman
With those words, Janet Yellen put investors around the world on notice, though probably not in the way she intended. In the past, such smug assurances have been enough to send contrarian villagers heading for the safety of the nearby woods. The informed student of financial history knows that panics, manias, crashes, and collapses are as common to investment markets as thunderstorms are to placid summer afternoons. To think that suddenly we have banished their recurrence for ‘our lifetimes’ smacks of the kind of misguided hubris that contributed directly to the 2008 meltdown and subsequent untold financial hardship. Just about the time most everyone came to the conclusion nothing could go wrong, everything went wrong …… and in a hurry.
from the July 2017 edition of
News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
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“It could have been technology stocks such as Amazon and Zoom, of course; or government bonds; or cash; or a property, preferably in the countryside. As the Covid-19 crisis rippled around the world and locked-down economies crashed into one of the worst recessions ever recorded, there were plenty of different ways investors might have tried to ride out the storm. But there was one asset they could easily have overlooked, and yet which would have outperformed almost any of them: silver.”
USAGOLD note: Year to date the S&P 500 is up 6.29%. Gold is up 24.54%. Silver is up 34.2%.
Chart courtesy of TradingView.com • • • Click to enlarge
Repost from 10/8/2020
Gold continues to bide its time in run-up to the election; Hathaway calls record ETF gold flows ‘paltry’ compared to global assets under management
(USAGOLD – 10/16/2020) – Gold continues to bide its time in the run-up to the U.S. election with safe-haven demand acting as a positive influence and ongoing gridlock over the stimulus package acting as a deterrent. Overarching all, the pandemic seems to be reasserting itself in both the United States and Europe. Gold is level on the day at $1911. Silver is up13¢ at $24.48.
“In simple mathematical terms,” writes long-time gold market analyst John Hathaway in a study posted at Gold Eagle, “the gold market could not clear at current prices if 1% of the $100 trillion or so of institutional assets under management were to move into the physical metal. Record year-to-date inflows into gold-backed ETFs have exceeded any previous year. But in dollar terms, this amounts to a paltry $51.2 billion requiring the acquisition of 936.2 metric tonnes of gold (according to Meridian Macro Research). By contrast, a $1 trillion inflow into gold bullion would require 18,000-19,000 tonnes, equal to roughly six years of annual world gold production. A shift of this magnitude by asset allocators would require a bullion price of $5,000-$10,000 an ounce.”
(Editor’s note: Though it might be difficult to imagine gold trading at those levels anytime soon, the figure does graphically illustrate gold’s under-utilization as a financial asset. The $1 trillion figure Hathaway cites represents only 3% of the more than $35 trillion under management in global pension funds, for example. By way of a broader perspective, according to Toptal Finance, insurance funds globally have another $30 trillion in assets under management. Mutual funds house about $40 trillion and sovereign wealth funds about $7.5 trillion.)
Chart of the Day
Chart note: As you can see, the national debt as a percent of GDP now stands at almost 136%, according to the St. Louis Federal Reserve – and the growth rate has gone vertical. “In the short term you have to spend what it takes to minimize the recession and keep the economy afloat,” Brian Riedl, a senior fellow at the conservative Manhattan Institute for Policy Research recently told the Wall Street Journal. “But the soaring debt to GDP ratio is totally unsustainable, even if interest rates remain low.” How all of this translates to the rest of the economy and financial markets – particularly the bond market – remains to be seen.
“Cash over the long run is the worst-performing asset class and therefore the riskiest asset class. So where do you go? To me, going to any one asset increases risk. So the best way to deal with the challenging environment I foresee is by diversifying well. . . [G]old is just an alternative currency to fiat paper currencies. If your portfolio is likely to perform poorly in the adverse environment I’ve been describing – less effective monetary policy, the need to run larger fiscal deficits and monetize them, and challenging politics – the behavior of gold as alternative cash has some diversifying merit.”
How much gold is enough?
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.
Coins & bullion since 1973
“Ahead of a potentially disputed result on November 3, fund managers are casting around for new harbours to shelter from a potential storm. Popular strategies include short-selling currencies that mirror stock movements; derivatives that provide insurance against falls; and emerging market bonds that offer a higher yielding, though riskier, hedge for equity holdings.”
USAGOLD note: An argument could be made that such strategies unwisely introduce even more risk to the portfolio than existed before such “hedges” were introduced ……
Repost from 10-8-2020
“Traders consider the passage of another round of stimulus to be bearish for the dollar and also inflationary, two bullish conditions for gold. As the dollar declines, it takes more dollars to buy the same amount of gold, and some see gold as a better store of value when inflation is on the rise. However, a lack of compromise may leave gold bulls waiting for another catalyst and prices may continue to languish.”
USAGOLD note: Even a qualified buy recommendation from Charles Schwab is something to behold …… Many gold market old-timers will think this a misprint, but we assure you, it’s not. Next thing you know Warren Buffett will be buying stock in a major gold mining company. [smile]
Repost from 10-8-2020
“‘It’s our currency, but it’s your problem,’ John Connally, Richard Nixon’s treasury secretary, told the world in 1971. Four decades later, the dollar’s weakness threatens to incite a full-blown currency war that could distract policymakers from their key task of mending the post-pandemic global economy.”
USAGOLD note: In a currency war, unlike the military variety – in this case the dollar vs. the euro – it is the loser that gets the spoils (not the winner) and the territory gained is greater exports. Bloomberg says the dollar will be the winner in this war – or is that loser?
Repost from 9-3-2020
“’It’s worse because the revenue shortfall is uncertain and horrific,’ says [Volcker Alliance’s Richard] Ravitch, now a director of the Volcker Alliance, a nonprofit group that advises on effective government. ‘There’s an enormous loss of revenue going on, and we don’t know how long it will last.’ … The question now: How many municipal bond issuers—cities, states, and others—won’t be able to repay investors?”
USAGOLD note: Another silent crisis brewing at the corner of Wall Street and Main ……
Repost from 8-29-2020