I was inspired to write this after a YouTube video with Michael Pento on Palisades Gold Radio said he’s been out of gold and miners for awhile now. That floored me. And, I’ll explain why. Now, everyone has their own rules and methods to investing. This comment struck me as odd, but at the same time, made sense – from a certain perspective. I’m going to present to you the other side of the case from us commoners.
For those newer to investing – the major case for gold is when NEGATIVE real rates are seen. That is, the 10yr minus the rate of inflation. Today, the rate of inflation is measured by the CPI. If you look at this on paper, you see the 10yr at 1.50% and the CPI at 1.3% or 1.6%, depending on the rates you are looking at.
The most VERY basic of elementary school math can show you that at 1.6%, this presents a -0.1% real rate, which isn’t much at all. When you factor in storage costs for gold, this is about a wash. The lower this number goes, that is -5 is lower than -.1, the better it is for gold. Meaning – the government says “give us your money for 10 years, and we will PROMISE to pay you 1.5%, but with inflation at 1.6%, we promise to take more money from you than you give to us in spending power”. Why would you hand over money, to get less spending power in return? Yeah….
What has been mixed up, recently, is many people have seen the 10yr shoot up and then bail on gold and silver because, “hey, look, I can get a decent yield on my dollars and gold and silver are pet rocks that do not present a yield. Gold costs me to store it, so it’s not worth it”. They are, in a sense, goldfish that look at the board and see 1.5% and 1.6% and just flip the switch to sell paper paper silver and gold. I would contend, strongly, that they need to really concentrate harder. Many of these guys make in quarterly bonuses more than I will see in my entire earning career, combined. So they have a set of rules they use. Easy button, if you will. But there are always sharks out there looking for the -$37 oil play, and I present to you a mammoth one is in the making. For whatever reason, Wall Street seems to be ignoring it at the largest levels.
The problem with this is that you are trusting the CPI number to convey to you inflation. And that is the entire flaw in the thinking here.
My THEORY is that the PERCEIVED real rates are what will drive gold and silver, NOT the “actual” real rates. You financial people who are all many multiples more rich than me, and have fancy degrees I believe are selling all of this paper gold and silver and really missing the big picture. And, you are about to repeat some really bad things that happened in history at the expense of hitting your quarterly numbers.
Dinner table inflation
What you are missing is that while corporate elites are selling gold and silver because they see a “roaring” economy (propped up by the Fed, obviously), they are playing dangerous games with numbers they either don’t understand, don’t care about, or don’t want to learn about. Again – these people can buy and sell me 100x over. They are playing within the rule book. And that same rule book brought down the dotcom boom and contributed to me being laid off for 15 months – and ALSO contributed to the housing bubble, and me getting laid off in 2008. And this rulebook caused a major crash in 2020. And will cause another in 2021 – but this one we may not recover from.
These people can legitimately say to me, “Nate, you have NO IDEA what you are talking about” – and be 100% right.
But it doesn’t mean they aren’t missing something.
What exactly ARE they missing?
If you are selling paper silver and gold on the COMEX this is not the same as selling real silver and gold. This is the ROOT of what they are missing. Why would the masses be buying gold and silver all over the world? Because of PERCEIVED inflation at the DINNER TABLE. These people do not really believe the 1.6 CPI numbers. This is distrust in government, at its basic form. And – they SEE prices going up, and this leads them to find tools to hedge against inflation. THIS is why India and China for centuries bought gold and silver, in many forms, including jewelry. I’m getting multiple reports now of gold leaving the shelves in Asia as well as in the middle east. This is a form of “arab spring” with the internet community now collectively understanding the issue – and buying en masse.
Below, is an example of what people all over the world – 8 billion souls – are seeing.
David Brady is one of my new favorite analysts. He nailed a few things recently, to my dismay. Have to tip your cap when sentiment is roaring in one way and you have someone standing alone in a corner saying, “hey guys…hold on”. Silver was $28 and he was screaming it had to get to $24 again. It dipped into $24 range, and may go further, yet. I’m sure he’s going to be wrong on some things – but I like how he’s using 5 different methods to try and find solutions rather than just relying on technicals.
A few weeks ago, I also posted what I was seeing with inflation. And people are now saying oil might hit $100 a barrel again this summer as more things open – all of the below are produced with petroleum products and therefore these prices may be much higher come the summer time. This is REAL dinner table inflation that WILL BE FELT.
Take a look at the 12 month performance of these items:
Food price: 14.69%
Industrial Inputs: 30.81%
Russian natural gas: 26.84%
Beef: -20.86% (this puzzles me?)
Coconut oil: 42.05%
Iron Ore: 67.76%
This presents a dichotomy in measures of inflation – the national level of inflation measures that struggle to find inflation at the macro level versus the obvious inflation at the micro level seen at dinner table. I would contend Wall Street guys at this moment are going squirrel and only caring about CPI. That is a MASSIVE, MASSIVE, and COLOSSAL mistake of EPIC proportions.
What you are seeing is the government screaming that they can’t find inflation, and they are trying as hard as they can to see it – whereas prices are raging higher for people with no relief in sight. And the playbook in that case says, “sell paper silver and gold!!”. Yeah. About that…..
The CPI apparently was re-tooled several times to discount certain things. For example, back in the day they may have tracked the price of a filet mignon. Over time, they then changed this to perhaps NY Strip steak. Then sirloin. Then, they said “the hell with beef, that’s too expensive – let’s go with chicken”. Point is, it is in the government’s best interest to show low inflation which then reduces the 10yr, which then allows them to refinance debt and spend more. This also keeps their payments to those on social security low, and keeps their “cost of living” adjustments for employees and soldiers low. Where all of these people may be seeing 8% YoY costs of living increases in things like medical costs – the CPI won’t reflect this.
This is what the 10yr looks like over the last 40 years. This can be tied to demonstrating low inflation numbers. This number was 5% the last time gold and silver shot up in 2011. We are at 1.5% and you have to paper sell?? Really? Wow. Keep reading chief.
Shadow stats, on the other hand – uses the original inflation numbers which may keep in things like Filet mignon. This is what the inflation numbers look like then…
Check them out at shadowstats.com
The overarching point I’m trying to make above is that it appears that in reality, inflation is actually many points higher than officially represented. That is – this may be what is actually seen at the dinner table. And here’s where 8 billion consumers come in to play.
When you are considering inflation and deflation at the MACRO level – I get it. Job losses can lead to deflation. Higher interest rates can cause new house purchases to go down and decrease interest in buying new houses, thus putting more people out of work. They NEED to prevent deflation at the highest level to prevent a Great Depression with liquidity issues. Higher interest rates then make costs of borrowing higher which slows tech growth. So there ARE REAL deflationary pressures at the MACRO level. But this is DIFFERENT at the MICRO level. This difference in reported inflation versus REAL inflation has caused many millions of people to go from upper class to upper middle class. And from upper middle to middle. And middle to lower – and so on. THIS difference in REAL inflation and CPI is, to the best of my understanding – has essentially destroyed a lot of the middle class in this country. And – rather than FIXING the problem with recording REAL inflation measures, the answer is to print money and get people used to a form of universal basic income. All of this is solved with acknowledging REAL inflation. But, they will not do this willfully, at this time, because higher 10Yr rates can take everything down. So they have been LOCKED in this death spiral of decreasing 10yr rates stoked by artificial inflation numbers. This all ends with inflation being SEEN by everyone, and debt being inflated away. CPI may be locked at 1.8%, but most people will SEE the melt up going on from inflation.
These are not real markets.
What I would suggest then is that gold and silver have real world applications at the MICRO level when it comes to seeing inflationary pressures. That seeing 8% inflation in costs but no increases in salary are actually deflationary in a sense at the MACRO level because people can buy less “stuff” for their money.
Meaning – you can have inflation AND deflation existing, simultaneously.
This is where I think Schiff and Dent in their discussion are both right, and wrong, at the same time. They feel it is an either/or, when it is BOTH at the same time. And this is a collision that is about to be astronomical. Costs of goods for most people could continue to rise…and rise..and rise. At the same time, deflationary pressures at the macro level still exist with unemployment and mortgage defaults. For 40 years, you were watching the slow death of the middle class. What you are witnessing now, is the acceleration of that demise just as parabolic as those Tesla charts above.
I would also contend that I once read that 95% of all of the nation’s wealth is owned by 1% of the population. These numbers are probably different now. Maybe 85% by top 2% or something. The point is, an overwhelming majority of the wealth – and income – in this nation in concentrated into a very small group of people. Let’s call them Class A. These people may hoard money in offshore bank accounts. The velocity of that money stops.
There’s a middle class that may be on the bell curve as being a lot of the Joe Sixpack buying power in this country. These people buy $40,000 cars, buy new $300,000 homes, clothing for their children, groceries. These people over the last 40 years have been the class squeezed. Class B personnel are the engine that drives the economy as these are the rapid consumers that keep the Keynes velocity of money theory intact – that we first saw with Roosevelt and the Tennessee River Valley Authority in the 1930s. They spent money on infrastructure projects, then watched as laborers took that money and spent…and spent…and spent. The $1.9T stimulus bill now is to be followed by a $3T infrastructure bill to replicate that velocity of money experiment.
And every year, using ShadowStats numbers, you may see 2% growth in wages, but 4-8% growth in inflationary costs. These people, year over year over year, are getting poorer and the engine stalls with layoffs. In order to “fix this”, stimulus is then provided directly to the people in a Keynsian chain of events. Money to the people, then they spend on goods, and this then props up the economy. An infrastructure bill later may promise to put more people back to work, and in return, fix the GDP issues.
What I would suggest is class A personnel are selling paper gold and silver, and class B personnel are buying physical gold and silver as they are clearly seeing this inflationary pressure. Now, not to complicate matters, but I’m aware many class A personnel are buying physical gold and silver. The point being, is class B people may make up 7 billion people worldwide.
Where the main issue here for an investment thesis is – is that the large hedge funds of the world – and those running funds – should be watching where the FEAR of inflation is being felt. In reality. And – they need to understand that physical buying of gold and silver due to PERCEPTION of inflation is what matters. In this case, many people worldwide understand
To them, the reality is the 1.5% 10 yr is now in competition with 8% inflation they are seeing, real world, which gives them a -6.5% real interest rate. I believe this is what the Wall Street people are overlooking. To them, it doesn’t matter. What only matters is the 1.6% the government tells them. And that is the thinking that will take down banks. They are not being proactive with this and looking at the bigger picture.
And THESE 7-8 billion are the people buying en masse – or at least now an army of 40,000 which is sure to expand exponentially as word gets out. And your paper sales are doing absolutely nothing but infuriating the very people who are seeing inflation. They are seeing the paper commodity games. And the rigged prices. And the “cake eaters” if you will then trying to tell them that no inflation exists. This is how 1789 happened. And that is the blindness that many people like me fear that is being overlooked. None of us want destruction of these institutions. But I’m hearing from technical people, “this could be a flash crash to $1600”. In what universe, with -6.5% real rates, would someone unload shotgun blasts of selling paper gold? Who in their right mind in what risk department sees that as a good idea? “Hey – the 10yr hit 1.5%, gotta sell”. I guess they missed where the 10yr was 10% in the 1970s as gold raged higher. Only a 20% rate stopped gold. And right now you are telling me you are tapping out at 1.5%? Really? Look at the real world negative rates. That’s the play you are missing.
I would contend, therefore, if you are a professional investor, you might want to actually look at what REAL inflation numbers are for the people who are buying physical gold and silver – and then ask your risk departments what happens when paper game selling meets physical game buying. This ends in your bank or hedge fund failing. Not today. But as the masses beyond this 40,000 person social club grows with awareness – for every person purchasing one ounce in physical, your risk profile increases exponentially. And these people cannot be told that their inflation is only 1.6%. That ship has now sailed. And you need to do something about it, and that’s to get on the right side of this trade, and soon.
So….please, continue to give us class B people more discounts and we will happily take them. We are literally buying up every ounce on earth. Just ask any retailer. Or wholesaler. Then….you might want to get on the right side of this trade and ignore the 1.6 CPI number. That is there in order to help them refinance, and should NOT be used as an indicator when determining negative real rates in response to gauging what the real world is seeing.
Oh…industrial users. Good luck in a few months when all of your production lines shut down due to lack of metals.
I understand all of you are smarter than me. Your car is worth more than my house, I get it. I think many of you need to look back on the cause of the Great Depression and where we are in our current cycles. I’m trying to tell you there is a global movement now to buy all precious metals. This is not to manipulate markets – it’s the fact that we know that gold and silver are hedges against inflation. And selling paper is not going to end well for you if this continues. Please, I beg you to talk to your risk departments.
Please look up Bear Sterns. Then, ask yourself how long until JPM is buying you at a massive discount after your metals desk is decimated. You are on the clock.
I am reminded of a phrase I heard Rick Rule say. He talked about something being inevitable versus imminent. While I FEEL the PM price explosion is imminent – it may not be. However, this is an inevitability. Nothing can be done to stop this inevitability. How imminent is this? Don’t know. I feel this could literally be any day where rip your face off moves start up. I believe, the paper shell game is coming to a close, and soon, and it’s because those selling paper futures are misunderstanding REAL inflation rates that consumers are seeing versus the CPI that the government reports.
My contention is investors at the highest level need to shift from CPI to shadowstats.com for calculating REAL negative rates. That may change their minds, and very quickly.