“The shrinking of the middle class has been accompanied by an increase in the share of adults in the upper-income tier – from 14% in 1971 to 21% in 2021 – as well as an increase in the share who are in the lower-income tier, from 25% to 29%. These changes have occurred gradually, as the share of adults in the middle class decreased in each decade from 1971 to 2011, but then held steady through 2021.”
Charts reproduced with the permission of Pew Research Center
“A normally dry research report jolted the gold market this week, when it pointed to massive but so far unidentified sovereign buyers. Central banks bought 399 tons of bullion in the third quarter, almost double the previous record, according to the World Gold Council. Just under a quarter went to publicly identified institutions, stoking speculation about mystery buyers.”
USAGOLD note: With the amount of turmoil already evident and more uncertainty building, it should not be surprising that nation-states would move to protect their financial interests. The article mentions China and Russia as potential buyers, but one of Spence’s suggestions caught our attention – the big Persian Gulf oil exporters (Saudi Arabia, United Arab Emirates, and Kuwait). As he points out, those countries have reaped huge windfalls this year and are sitting on large piles of greenbacks received in payment for oil – not a healthy position to be in during inflationary times. For the time being, Spence’s “whales” are likely to remain a mystery, but no matter who it is, the strong central bank buying sends an important message. As Gresham summarized it, “bad money drives out good.”
Short and Sweet
Gold in the age of high-speed electronic trading
“The best thing you can do is know how to have a balanced portfolio.”
Ray Dalio, Bridgewater Associates
In an article headlined Robots conquered stock markets/Now they’re coming for bonds and currencies, Bloomberg finance reporter Lananh Nguyen tells us: “In the most liquid equity markets, more than 90 percent of trades are executed electronically, according to estimates from Greenwich Associates. That compares with 79 percent in global foreign exchange, 44 percent in U.S. Treasuries and 26 percent in U.S. corporate bonds, with the most room for growth in the latter two markets, according to [Kevin] McPartland at Greenwich.” [Link] Just this year, Morgan Stanley and Goldman Sachs requested counterparties forgive rogue, machine-driven trades that caused a $41 billion flash crash in a matter of seconds. Though concentrated in a single stock, such anomalous events serve as a cautionary tale on how a full-out, machine-driven panic might evolve on a larger scale.
Because gold does not rely on the performance of another party, it is detached from the matrix of interlocking counter-party risk and occupies a unique place on the financial balance sheet as an asset of last resort and the final arbiter of value. That is why nation-states and central banks hold large amounts of it on their own balance sheets and why funds and institutions are more and more moving to it as an offset against other trading strategies. Investors have always viewed gold as a reliable hedge against inflation and deflation. In the years to come, they might very well come to know it as an effective hedge against computer-generated financial mayhem as well.
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“Pure Gold Mining Inc. PGM-X shareholders face losing their entire investment with the junior miner filing for creditor protection after it failed to turn around its gold project in the notoriously hard-to-mine Red Lake district of Northern Ontario.”
USAGOLD note: Owning the shares of gold mining companies is not the same as owning the metal itself – especially if you are looking to gold as a long-term store of value. Pure Gold Mining is a case in point. You do not have to worry about your gold bullion coins going to zero value. We are not opposed to owning shares in mining companies, but we do take exception to their being touted as a substitute for gold coin and bullion ownership.
Gold drifts lower ahead of Thursday’s inflation report
Frank Holmes says ‘decentralized assets’ have never looked better
(USAGOLD – 11/8/2022) – Gold drifted lower in early trading as markets took to the sidelines ahead of Thursday’s consumer inflation report. It is down $3 at $1675. Silver is down 7¢ at $20.83. It’s been a good start to November for precious metals, especially silver. Gold is up almost $40 (+2.41%). Silver is up just over $1.65 (+8.56%). US Global Investors’ Frank Holmes believes “decentralized assets” have never looked better than they do now and that gold is priced “very attractively at under $1700 an ounce.”
“Investors have been diversifying with gold and silver for decades to limit their exposure to poorly executed monetary and fiscal policies,” he says in an advisory released yesterday. “As I shared with you last month, investors bought more American Eagle and American Buffalo gold coins between January and September of this year than in any other such period going back to 1999. I believe this is largely a reflection of Americans’ souring opinion of the state of the economy and the imbalance they see in monetary and fiscal policies.”
Gold and silver prices
Chart courtesy of TradingView.com • • • Click to enlarge
“Today, there is a spreading awareness that our monetary situation is rather rotten. Leaving things up to central bankers, who are obviously making it up as they go along, has not worked out very well. Most recently, these central bankers got very aggressive in response to Covid in 2020; and the “inflation” that has followed has not been very surprising. People generally find monetary affairs to be extremely confusing. But, in the end it really amounts to a choice of two alternatives: The Gold Standard, and the PhD Standard.” – Nathan Lewis, Forbes
“In the worst year for U.S. Treasuries ever, it is the ultra-long end that investors should be most worried about.”
USAGOLD note: As one analyst quoted in this article points out, the 30-year Treasury pays 4.1%, and so does the five-year. So why buy the 30-year, particularly in an inflationary environment? McGeever worries the problem at the long end could “quickly spread to the rest of the bond complex and financial markets more broadly…” This article, in general, warns that there are serious problems in the bond market that could get out of hand.
30-year Treasury yield vs 5-year Treasury yield
Chart courtesy of TradingEconomics.com
“A liquidity crisis is brewing within the $24 trillion US Treasury market, and the turmoil has the potential to sink stocks as well as cripple financial markets more broadly, according to analysts.”
USAGOLD note: If the scenario above becomes reality, the 60%-40% stock and bond portfolio will suffer extreme damage. The investment business will never be the same. All the easy formulations will go out the window as we move deeper into a new financial paradigm.
“The end of the Federal Reserve’s campaign to raise interest rates is approaching, according to Morgan Stanley strategist Michael Wilson, who until recently was a prominent stock market bear who correctly predicted this year’s slump in equities.”
USAGOLD note: We’ll have a better sense if Wilson is right or not later this afternoon……
Short & Sweet
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.” – Alexander Fraser Tytler, Scottish historian, (1747-1813)
To end right, start right.
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“Claus Vistesen, an economist at Pantheon Macroeconomics, said the latest inflation figures were ‘a proper Halloween nightmare for the ECB.'”
USAGOLD note: This article does not mention the 6.6% jobless rate in the Eurozone. The Misery Index there – inflation + unemployment – stands at 17.3%. By contrast, the Misery Index in the United States is 11.7% and 8.3% in China. (All according to Trading Economics data) Europe is the first of the major economies to exhibit clear signs of stagflation.
Gold marginally lower to kick off big week
Saxo Bank foresees ‘powerful tailwinds for gold and silver in 2023’
(USAGOLD – 11/7/2022) – Gold is trading marginally lower to start a week featuring an election on Tuesday, consumer prices on Thursday, and a slew of speeches from Fed officials – eleven in all – sandwiched in between. If you were not totally confused about the economic state of affairs going into the week, you are likely to be by the time it ends. Gold is down $5.50 at $1678. Silver is down 20¢ at $20.74. Saxo Bank is sticking with its long-term bullish outlook for precious metals which it sees as being fueled by some major shifts in the way the global economy operates.
“Driven by a new geopolitical situation,” it says in a report released overnight, “where the world is splitting into two parts with everything evolving around deglobalization driven by the need for self-reliance. Together with the energy transition, we are facing a decade that will be commodity and capital intensive and where scarcity of raw materials and labor will keep inflation elevated for longer, and higher than the 3% level currently being priced in through the swaps market. Such a scenario combined with the risk of an economic slowdown forcing a roll over in central bank rate hike expectations, sending yields and the dollar lower, may in our opinion create powerful tailwinds for gold and silver during 2023.”
“Sales of Maple Leaf gold coins at the Royal Canadian Mint are up, according to the latest quarterly report from the RCM, released Nov. 18. Sales during the third quarter of fiscal year 2022, which ended Oct. 1, were 14% higher than in the same period the previous year. The RCM sold 354,300 ounces of gold during that 13-week period, compared to 310,400 ounces in the comparable period a year ago. Silver bullion sales for the same period were down 2%, to 9.6 million ounces (compared to 9.8 million during that stretch of 2021).”
USAGOLD note: All the major national mints are reporting strong quarterly gains in bullion sales – the U.S Mint, Australia’s Perth Mint, and the Royal Canadian Mint. The Perth Mint is reporting the strongest sales of the three.
A general tendency towards more inflation
‘Ultimately, the power to create money is the power to destroy.’
WASHINGTON, DC – AUGUST 5, 1980: Federal Reserve Chairman Paul Volcker reads the financial page as he waits for a hearing.
(Photo by James K. W. Atherton/The Washington Post via Getty Images)
“They should have known inflation was broadening and becoming more entrenched,” LPL’s Quincy Krosby recently told CNBC. “Why haven’t you seen this coming? This shouldn’t have been a shock. That, I think, is a concern. I don’t know if it’s as stark a concern as ‘the emperor has no clothes.’ But it’s the man in the street vs. the PhDs.” What we find odd about all the complaints against the Fed and its tardiness in dealing with inflation (because an election happens to be around the corner) is that they ignore what might have happened had the Fed acted earlier. The same concerns about recession and unemployment would simply have surfaced then instead of now. If Washington is worried about inflation, wait for the public reaction when unemployment and bankruptcies begin to rise.
The Fed has a long history of papering over busts to create booms and stifling booms to create busts, never through it all managing the economy half as well as Adam Smith’s invisible hand. Right now, it’s in stifling mode, but that could change at the first signs of real economic distress. “The Fed,” says long-time gold market analyst John Hathaway in a Sprott Insights interview, ”doesn’t have a dial. It’s an either on or off switch. They’re either switching off the economy and crashing financial assets and the economy, or their crying uncle and caving in, which will likely open the door to more inflation. I think either outcome is positive for gold.”
Historically, the Fed has opted for monetary inflation as its baseline policy because the alternative – an economic depression – is something no central banker wants to add to their resume. That is why, despite seven recessions, the dollar has lost 86% of its purchasing power since the world went off the gold standard in 1971. We are reminded, in this context, of an observation from former Fed chair Paul Volcker, the central banker who broke the back of the last runaway inflation in the late 1970s-early 1980s:
“We sometimes forget that central banking, as we know it today, is, in fact, largely an invention of the past hundred years or so, even though a few central banks can trace their ancestry back to the early nineteenth century or before. It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.” (From Deane and Pringle’s The Central Banks, 1995)
Bloomberg’s John Authers sees central banks’ recent inflation blunder as more than just a gaffe likely to be quickly forgotten. Beginning in the early 1970s, “in place of gold, currency’s anchor,” he writes in a recent editorial, “became trust in the central banks that issue them. Now credibility appears to be at an end. With central banks desperately ripping up their playbooks to try to rein in inflation that’s veered far beyond target, they’re admitting they’ve been wrong, and giving up on trying to steer the markets on their plans for the future. That’s alarming, because the precedent of the 1970s is not encouraging.” He concludes that “the word of Powell or Lagarde is no longer as good as Volcker’s, and it’s certainly not as good as gold.”
Similarly, Stanford historian Niall Ferguson believes the monetary policy mistakes of 2021 were even more extensive than those made in the late 1960s and early 1970s, resulting from “blinking under political pressure.” “I never met Arthur Burns — Volcker’s predecessor, but one, as Federal Reserve chairman — who preferred puffing on a pipe to cigars,” he says in an in-depth Bloomberg opinion piece. “But I think I’ve read enough about Burns to suggest plausibly that the current Fed chair, Jay Powell, has more in common with him than with Volcker. This is unfortunate and potentially disastrous for the US economy.”
Cartoon courtesy of MichaelPRamirez.com
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“Jamie Dimon, David Solomon, and Ray Dalio have sounded the alarm on a cash crunch, a looming US recession, and the Russia-Ukraine conflict.”
USAGOLD note: Dalio did not sugar-coat what could be next for the economy and markets calling UK’s recent meltdown the “canary in the coal mine.” He foresees a flight to haven assets saying the “dominoes are falling in a very classic way.”
“This is the direct result of a federal debt that has more than tripled since the Great Financial Crisis of 2008 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.”
USAGOLD note: 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.”
“A strong dollar is likely to weigh negatively on the US economic outlook and could alter how high the Federal Reserve ultimately raises interest rates, economists surveyed by Bloomberg said.”
USAGOLD note: The inordinately strong dollar has not been much of a deterrent to the Fed thus far, but that may be about to change according to the economists polled in this Bloomberg survey. They see a US spillover effect from the problems the strong dollar has caused in economies overseas.
Short and Sweet
Novice precious metals owners must decide where they stand on this important issue
“Precious metals are and always have been the ultimate insurance,” says Pro Aurum’s Robert Hartman in an interview with Claudio Grass. “They provide protection both against state failures and against mistakes in the monetary policy of the central banks. Every investor who looks into the history books sees that both have happened over and over again in the past centuries. From that perspective, investing in physical gold and silver is a common-sense precaution and a necessary part of any wealth preservation plan. Investors and ordinary savers ignore this at their peril and the failure to include precious metals in one’s portfolio is pure negligence.”
There are essentially two broad schools of thought alive and well in the gold market. The first holds that crisis is around the corner and, as a result, precious metals should be owned to profit from the event. The second holds that crisis is a permanent fixture in the market dynamic and that the portfolio should always include precious metals as the ultimate safe haven. The first buyer sees precious metals as investment products, i.e., buy now and sell later when the time is right. The second sees gold and silver, like Hartmann, as insurance products to be held for the long run. Some combine the two, allocating one part of their precious metals portfolio for trading purposes and another as a permanent, or semi-permanent, store of value. The novice precious metals owner must decide where he or she stands in this regard because it determines, in turn, which products to include in the portfolio and to what degree.
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