The high stakes of rising inflation

the-high-stakes-of-rising-inflation

Project Syndicate/Otmar Issing/11-30-2021

graphic image inflation ahead sign“The argument that today’s inflation is only temporary assumes that global unemployment remains substantial, and that trade unions are weak. In that case, there would be no reason to expect that wages will increase significantly, leading to a sustained rise in prices. But that may not be the case, because the global economy is at a turning point: conditions may be shifting from deflationary to more inflationary overall.”

USAGOLD note: Issing is the former chief economist for the European Central Bank. His argument gets us back to the theory making the rounds earlier in the year that we are in the early stages of an important paradigm change –  from a global disinflationary environment to a new age of inflation. Of course, such considerations make a compelling argument for diversification in precious metals.

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JP Morgan says oil could hit $150 a barrel

jp-morgan-says-oil-could-hit-150-a-barrel

MarketWatch/William Watts/11-29-2021

“OPEC+ – the combo of the Organization of the Petroleum Exporting Countries and other major producers, including Russia – ‘has returned to a position of positive leverage, which it will defend by keeping inventories low, the market in balance and taking action to support optimal reservoir management through paced volume growth,’ the analysts said in a Monday note.”

USAGOLD note: If $150 oil becomes a reality, expect inflation to kick into high gear. Energy is a component of pricing for just about everything – and on a global basis.

line chart showing oild price 2012 to present
Chart courtesy of TradingEconomics.com

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USAGOLD
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USAGOLD ranks among the most reputable gold companies in the United States. Founded in the 1970s and still family-owned, it is one of the oldest and most respected names in the gold industry. The firm’s unblemished, zero-complaints record and solid reviews with the Better Business Bureau testify to the exceptional customer service and professional excellence which sets it apart from the competition.

USAGOLD specializes in gold and silver coins and bullion delivered to our client’s safekeeping. For over 48 years, we have resolutely advocated owning precious metals for asset preservation purposes rather than speculation. Admittedly, this philosophy does not resonate with all prospective gold and silver owners, but if it does with you, we think you will find our firm a kindred spirit.


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What drives the price of gold? Part 1

what-drives-the-price-of-gold-part-1

The Gold Observer/Jan Niewenhuijs/11-18-2021

“In my opinion it is important to understand the current framework, if only to question its longevity. Since 2006 the price of gold in U.S. dollars is inversely correlated to (expected) real interest rates derived from the 10-year U.S. Treasury Inflation Protected Security (TIPS), as you can see in the chart below. This correlation is what I refer to as the current framework.”

USAGOLD note: Niewenhuijs explores the factors determining the gold price – a solid briefing for the beginner and a refresher course for gold investing veterans. Highly recommended.

overlay line chart showing the real rate of return and the gold price 2017 to present
Chart courtesy of Merk Investments

 

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Record selling by insiders is setting up stocks for a big fall, says contrarian investor

record-selling-by-insiders-is-setting-up-stocks-for-a-big-fall-says-contrarian-investor

MarketWatch/Barbara Kollmeyer/11-18-2021

graphic image of a red flag waving“People are really underappreciating the degree of risk that they’re taking because now that we have — especially for the really big megacap names — even greater overvaluation than we’ve had before, the downside risk is extremely high.” – Steven Jon Kaplan, Morgan Stanley

USAGOLD note: Kaplan’s opinions, says Kollmeyer, run contrary to the typical message from Wall Street that investors should “keep at it.”

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The US Treasuries market is a dangerous place to dream

the-us-treasuries-market-is-a-dangerous-place-to-dream

Financial Times/ Gillian Tett/11-18-2021

photograph of $100 bills and an hour glass“The question I am referring to is whether the US Treasuries market is robust enough to handle the shocks that might arise from those first two problems. For while the US government bond market used to be considered to be the world’s most liquid and deep asset class, in March 2020 that cosy assumption was smashed apart.”

USAGOLD note: Those first two problems have to do with exiting quantitative easing and whether or not we will be getting a new Fed chairman at the turn of the year. The latter problem was settled yesterday with the reappointment of Jerome Powell, but not the question of how the markets will receive it. Tett goes to the heart of the matter at the link above – an important read. It is surprising how the bulk of financial media tries to avoid the very fundamental questions she raises.

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The following was the lead article in the May 2021 edition of News & Views
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Super-rich doomsday preppers ahead of the times
And the not-so-super-rich are now following in their footstepsgraphic image showing medieval castle shadowed by stacks of gold and silver coins

“Survivalism,” wrote Evan Osnos in a 2017 article for The New Yorker, “the practice of preparing for a crackup of civilization, tends to evoke a certain picture: the woodsman in the tinfoil hat, the hysteric with the hoard of beans, the religious doomsayer. But in recent years, survivalism has expanded to more affluent quarters, taking root in Silicon Valley and New York City, among technology executives, hedge-fund managers, and others in their economic cohort.”

We have always taken exception to the mainstream media’s portrayal of the ordinary gold owner as “the woodsman in the tinfoil hat”. . . etc. Many among the media are utterly amazed to learn that people like Steve Huffman (Reddit, CEO), Peter Thiel (PayPal founder), and the long roster of other luminaries mentioned in this New Yorker article are identified as “preppers” in one capacity or another. They would probably be even more amazed to learn that many of this same group are likely to be gold and silver owners. We say “likely” because precious metals owners by and large are a group reluctant to advertise their ownership.

As it is, they take a place alongside a wide range of Americans who own precious metals – physicians and dentists, nurses and teachers, plumbers, carpenters, and building contractors, business owners, attorneys, engineers, and university professors (to name a few.) We know because that is the description of our clientele here at USAGOLD. Gold ownership, in short, is pretty much a Main Street endeavor. In a Bankrate survey taken last June, one in seven investors (14%) chose gold or other precious metals as the best place to park money they wouldn’t need for more than ten years – making it the fourth most popular category. Similarly, a 2020 Gallup poll found that 17% of American investors rated gold the best investment “regardless of gender, age, income or party ID. . .” One might assume that if Bankrate or Gallup took a similar poll today, even more investors would give the precious metals a thumbs up given what has occurred over the past year.

Those well-to-do preppers, as it turns out, were uncannily ahead of the times. A little over three years after the New Yorker article was published, large numbers of the not-so-super-rich followed in their footsteps – setting up “bugout” retreats in the countryside and small-town America (though for reasons unforeseen in the article) while a good many fled the big cities permanently for safer environs. That mindset – the general flight to safety – has echoed loudly in the precious metals markets. The World Gold Council reports global retail gold investment demand running at record levels in 2020. As for silver, just last week, the Silver Institute, a research organization not given to hyperbole, forecasted an eye-catching 26% increase in physical silver investment for 2021 based on current trends.

Bankrate Survey of Investors
bar chart showing Bank Rate Survey of investors on where to put money for ten years
Chart courtesy of BankRate.com • • • Click to enlarge

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Crypto can ‘destabilize nations’ and ‘undermine’ U.S. dollar dominance, Hillary Clinton says

crypto-can-destabilize-nations-and-undermine-u-s-dollar-dominance-hillary-clinton-says

MarketWatch/Chris Matthews/11-19-2021

graphic image of a digitalized crypto dollar zeroes and ones“One more area that I hope nation states start paying greater attention to is the rise of cryptocurrency — because what looks like a very interesting and somewhat exotic effort to literally mine new coins in order to trade with them has the potential for undermining currencies, for undermining the role of the dollar as the reserve currency, for destabilizing nations, perhaps starting with small ones, but going much larger.” – Hillary Clinton

USAGOLD note: Bridgewater’s Ray Dalio may have been on to something earlier this year when he said “outlawing bitcoin is a good probability.” He reasoned that “every country treasures its monopoly on controlling the supply and demand. They don’t want other monies to be operating or competing, because things can get out of control.”

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Gold drifts marginally lower despite high Eurozone inflation readings
Barclays Bank sees rising global debt levels as a key driver for gold going into 2022

(USAGOLD – 12/2/2021) – Gold drifted marginally lower in early trading despite surging wholesale (+5.4%) and retail (+4.9%) inflation in Europe and mounting concern about the economic impact of the Omicron variant. It is down $3 at $1780. Silver is up 15¢ at $22.54. While press reports are blaming the higher than expected Eurozone readings on rising energy prices and supply bottlenecks, a good many see rising government debt levels and central bank stimulus measures as at the heart of the problem. Barclays Bank chief market strategist Mark Moser sees the rising global debt levels, in turn, as a key driver for gold going into 2022.

“I wouldn’t be surprised if, over the next 12 months, you see the gold price going up by another ten to 20 percent,” he says in an interview with Arabian Business, “I think with the deficit increasing so much during the Covid crisis, we’ve seen fiscal stimulus pretty much everywhere and that means the debt level is up around 20 percentage points, pretty much everywhere in the world. It means that interest rates are going to stay low for a long time, the Fed is talking until 2023 at least, and that means it’s a very good environment for gold.”

Chart of the Day

overlay chart showing price increase in percent for coal, oil and natural gas
Chart courtesy of TradingEconomics.com • • • Click to enlarge

Chart note: Concern is elevated that we might be in the middle of another energy crunch – a problem reflected in the price of coal, natural gas and oil, as shown in the chart. “Gas prices in Europe,” says Irina Slav in an article posted at the OilPrice.com website, “are breaking record after record. The U.K. is facing supply shortages reminiscent of the late 1970s winter of discontent. Chinese factories are shutting down because of power shortages, and the outlook is grim. In fact, it may be the first crisis of many.”

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We are in the biggest equity bubble ever

we-are-in-the-biggest-equity-bubble-ever

The Gold Observer/Jan Nieuwenhuijs/11-29-2021

“The weighted average of seventeen stock market cap to GDP ratios reached 162% at the end of the third quarter of 2021, which is the highest ever since 1870. It’s unlikely it has been higher previous to 1870, because economies were not as intertwined then. Most likely, equity bubbles were more local. In addition, before 1870 countries were commonly on a metallic standard that prevented long periods of excessive speculation.”

USAGOLD note: Nieuwenhuijs joins the list of research-oriented commentators who see the current stock market as the most overvalued in history. The chart below is telling.

line chart showing Equity Market Cap to GDP ratios 1870 to present

 

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Why fragility is the new reality for the stock market

why-fragility-is-the-new-reality-for-the-stock-market

Wellington Management/Brian Hughes and Gordy Lawrence/June 2021

cartoon of lemming going over a cliff, one has a gold parachute“We’ll start with the punchline: An imbalance has developed between the supply of and demand for liquidity, and as a result we’ve seen a significant increase in the potential for the public equity market to jump from a state of calm to one of chaos.”

USAGOLD note: This is the full report Wigglesworth cites in the post below. Wellington raises concerns likely to resonate among our clientele. The “punchline” above serves as warning how quickly things can change – from calm to chaos. Under such circumstances, one would do well to be the lemming with the golden parachute. A must read ……

 

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Notable Quotable

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“For we have reached a critical point. In a sense, it is true that the mists are lifting. We can, at least, see clearly the gulf to which our present path is leading. Few of us doubt that we must, without much more delay, find an effective means to raise world prices; or we must expect the progressive breakdown of the existing structure of contract and instruments of indebtedness, accompanied by the utter discredit of orthodox leadership in finance and government, with what outcome we cannot predict.”

John Maynard Keynes
The Means to Prosperity (1933)

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Markets are more fragile than investors think

markets-are-more-fragile-than-investors-think

Financial Times/Robin Wigglesworth/11-28-2021

graphic representation of a tsunami“Investors have been blithely skating into the Christmas period, basking in another remarkable rally across financial markets. But the ice underneath may be thinner and brittler than many realise, as Friday’s violent sell-off showed.”

USAGOLD note: I think most get a sense that something might be lurking under the financial markets’ bed and that when it shows itself, things could get ugly in a hurry. Wigglesworth goes on to cite an analysis from Wellington Management that emphasizes the mismatch between demand and supply liquidity. In short, all’s well when the markets are calm, but the moment the selling begins, it can get overwhelming in a hurry – the fragile market hypothesis.

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Market Overview

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Monetary and inflationary traps

monetary-and-inflationary-traps

Project Syndicate/Raghuram G. Rayan/11-23-2021

grpahic image of a red inflation sign with arrow higher and rising percentages“Notwithstanding the growing (but often unspoken) worries at the Fed, central bankers nowadays are reticent to see inflation as a problem. In the past, the current levels of inflation would have prompted them to square their shoulders, look determinedly into the TV cameras, and say, ‘We hate inflation, and we will kill it’ – or words to that effect. But now they are more likely to make excuses for inflation, assuring the public that it will simply go away.”

USAGOLD note: Rajan runs through a litany of reasons why the Federal Reserve is likely to tread lightly when it comes to taming inflation. “The current impediments to central-bank action,” he says, “will mean more and sustained inflation, and a more prolonged fight to control it.” Needless to say, if Rajan is right, that reluctance to act forcefully will fuel demand for the precious metals for some time to come. Rajan is the former governor of the Bank of India and currently a professor of finance at the University of Chicago.

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The tipping point and the new normality

the-tipping-point-and-the-new-normality

Incrementum/Ronald Stoferle/11-29-2021

photo of scatterred gold bars against clear background“A 25% price rise in 2020 and its role as a hedge in the Covid Crash speaks for itself. And now gold is down 3.5. But what is this 3.5 % against the 25 %, is this really so bad? No, and many other events speak in favour of gold. One of these is the gold purchases by central banks around the world. As Palantir’s interest shows, this is not limited to central banks. Comex gold delivery is also higher than it has been for a long time. And what do we see in technical analysis? The mother of all “cup and handle” formations. A breakout from this formation could mean a price of $2800.”

USAGOLD note: Stoferle offers some much-needed perspective on gold’s rangebound performance so far in 2021.

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Paulson warns of ‘dangerous’ world if China-U.S. tensions worsen

paulson-warns-of-dangerous-world-if-china-u-s-tensions-worsen

Bloomberg/Enda Curran/11-17-2021

graphic image of Cold stamped over Trade War.cn“We shouldn’t dismiss what a failure to do so might mean for the world. Great powers rarely desire to go to war. But history is replete with horrifying examples of how they stumbled into it, nonetheless. We can’t just count on cool heads and better angels.” – Hank Paulson, former Treasury Secretary

USAGOLD note: With everything that is going on the monetary front we tend to overlook the geopolitical particularly with respect how it might play in financial markets. Paulson says deteriorating relations between the United States and China “is likely to make the United States, China and the world more susceptible to financial crises.” Shaking that tree a little harder, would it be fair to say that the deterioration deepened long ago – at about the time China stopped buying U.S. Treasuries? In short, we might already be in a financial crisis the result of tensions between the two countries.

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Gold could be the unexpected secret weapon we need against antibiotic resistance

gold-could-be-the-unexpected-secret-weapon-we-need-against-antibiotic-resistance

ScienceAlert/Mike McRae/11-12-2021

graphic image of gold nanopartilce wire“Filling a germ’s pockets with gold could be a handy way to end an infection. Frustratingly, scientists have struggled to turn this nugget of knowledge into a practical antimicrobial therapy. Researchers from the Southern University of Science and Technology and Fudan University in China, and the University of Leeds in the UK, recently joined forces to repackage gold nanoclusters to make them more appealing to bacteria and less damaging to our own bodies.”

USAGOLD note: Though this is not the sort of news likely to put even a minor dent in the supply-demand picture, we do keep finding these very important technological uses for the yellow metal – all beneficial.

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The economy is great, but voters don’t believe it

the-economy-is-great-but-voters-dont-believe-it

Axios/Felix Salmon and Hans Nichols/11-14-2021

“The big question facing the White House between now and next year’s elections is whether it will be able to use America’s real-world economic health to boost President Biden’s economic approval ratings.”

USAGOLD note: Economic good health, like beauty, is in the eye of the beholder. A recent Harris Poll reports 36% of Americans believe the country is on the right track and 56% believe it is on the wrong track.

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