The below is a macro economic analysis of the conditions we are seeing today. This is not financial advice – talk to your financial advisor, but this is meant to show how someone can see the world’s events playing out right now and how gold can be an important asset during this time.
I’ve been accused of being a permabull, and I get it. Sometimes I even embrace it – but there are times where I’m fully deployed LONG and times where I draw back my trades, hold my core items, and have cash ready to deploy. I probably lose a LOT on the trading side by not shorting, but I’d prefer to leave that to people who are professionals. I am NOT fully deployed today. I am in a LOT of cash. But the setup is here, now, which many of us have been waiting for.
Often times when I’ve called for the big moves it was chart based or macro based – or even fundamentals. But we now have all converging at once creating BOTH a mega fear play as well as a massive risk off scenario to come. This is the time when those who mess with COMEX prices cannot bend the spoon with their minds, and as they realize they are getting overrun, must then quickly buy back their shorts which then creates a steamroller up.
I wrote the other day about the inflation roller coaster, but I wanted to add a chart of labor numbers to this and wrap this in a bow for those who are new to this and may not quite understand where we are in the game.
Gold as an inflation hedge
Put another way, as your paper money supply runs higher, it then injects more currency into your economic system. As it runs through the system, it then has those who got more currency units first, able to bid up goods and services with no ill effect to them. Those further down the food chain in the Keynsian systems feel the effects of inflation more. This is called the Cantillion effect.
If you know money supply is going to go up, you will realize that prices will be bid up. In a “risk on” situation where growth appears to be hot (in this case, ever decreasing interest rates allowed for cheaper money to be borrowed), you can see money favors going into stocks, anticipating higher revenues and profits. When economies run too hot, “air brakes” of sorts are put into effect to raise rates to intentionally slow growth. When this happens, the cost to borrow goes up, profits diminish, and businesses have to lay off workers due to decreasing demand. This then creates a “risk off” situation where money is going to places where it can preserve wealth during a down turn, such as treasuries or gold.
Treasuries provide yield, so back in the day when they were 5-10%, it was nice to buy into these and collect yield on your cash. As more people buy these, the yield goes down and the value of this asset goes up. Eventually, when conditions seem to get better and stock/asset prices are lower, you can win on selling your treasuries for higher value than you paid for it. Now, with gold, you do not have the yield – BUT as history shows, as the M2 goes up, you can see the ASSET of gold’s price go up. Similar to how the values of bonds increase in risk off, so does gold’s. But gold also has a “fear play” involved with it, so if you are really concerned of crashes, war, or other major economic events – gold may catch a real bid.
So as an inflation play, you can see houses as an asset also rise with M2. So do stocks. But you can see how there’s cycles of risk on and risk off AS M2 is going up. One can make an argument that gold is highly liquid and has a very high economic energy density to it, so it is great at capturing vast sums of wealth during economic uncertainty.
What you see above in the blue line is because a recession had been averted since 2009 or so, the risk on play got REALLY overstretched. Now that we are due for a recession, it is reasonable to conclude that 10y rates will go down and gold will go up. We are at the area now where we can potentially anticipate a fed funds rate top is near, and with this, they would only stop hiking due to dire economic conditions. Meaning, gold can sniff this out. And has before. With the “pivot” of rates down expected at SOME point in 2023, you can see that gold will be going up as the stock market will try to find a bottom.
I just heard a good portion of Chris Rutherglen on Palisades – we speak the same language, but I believe he has prettier charts than me. He was using the 2Y and I was using the 10Y. He also uses TIPS, and I don’t venture there, yet, but I should.
You could make an argument that any asset, in a sense, is an inflation hedge as all of their values can essentially be bid up as money supply increases. However, you can see those oscillations of Dow to gold.
However, gold also provides insurance against currencies failing. To me, that is the advantage to hold over treasuries or any other kind of risk off item. While we cannot really default with printing the money, holding gold is a backup plan to if/when the currency fails. And THIS you can see worldwide for thousands of years.
So – to define it SOLELY as an inflation hedge may be incorrect. It is also in my opinion insurance on currency as it is still a method of settlement that can exist, AND central banks are buying it. IF no central bank held gold, then I’d potentially worry about its long-term sustainability.
Risk off and Risk on
I mentioned risk off a bunch up above, but what do I mean? Think about when we have stock market draw downs. Recessions. Depressions. Wars. What this essentially means with “risk on” is that you can see Apple potentially opening up new factories, selling millions of more units than the year before, and profits going up. But if you can see conditions in the economy faltering which might lead you to believe Apple may cancel any new factories – and perhaps close some, WHILE you are seeing sales going down, it then may signal to you to sell out of Apple.
Then, you are holding cash as a currency. Currency is sort of like an electrical current over distance. It loses effectiveness over “distance”, but in this case, time. I did this slide show for my talk with Jim Forsythe last year, and I wanted to show how many people think as money (cash) is actually currency. It needs to be put into something as it devalues over time.
To imagine this, imagine 100 years ago you had a $20 bill and an ounce of gold and put it into a safe. At the time, that $20 had the equivalent value of the oz of gold. Today, when you open that vault, you’d need approximately 84 more $20 bills to equal that oz of gold’s value. The mistake here is thinking that gold (or stocks, or houses) go up in value. Rather, the inflation, over time, due to the increase in M2 money supply, requires more currency units to buy those items. You don’t see it at 2-3% per year, but over 100 years, you can clearly see this.
There are times where there is risk on, and those with risk off. Currency is moved between the asset classes above. If an asset class is highly overvalued, during the opposite cycle it moves into other items. So, with the chart a few above with the blue line for the DJIA way overstretched, you can see that it will come back to the line. It does this by selling out of these items – and going to cash – and then cash will then move to “money” or property. Given property is ALSO overstretched, we can potentially see excesses from both of these classes going into “money”. First, that’s gold, then silver – and then I believe all kinds of other commodities. Why?
The last decade or so with risk on, money has flowed to property that was undervalued after the GFC as well as stocks that took a beating. Gold, silver, etc was sold off with “risk on” coming. But commodities overall lost a ton of investment dollars during this risk on period. This meant with this LONG stretch of low rates, you could get a 5x in some equities during that time. So this meant a ton of exploration was shut down with gold, silver, nickel – you name it. The lack of paper support for these items also drove the price of these into the dirt.
One can see we are strongly approaching a risk off period.
Because of that REALLY long risk on time, this blew up the ballons extra big – in both housing and equities. But it has now created a lot of REAL problems in getting commodities needed to make things.
You then also have copper issues…
Then you can see crazy charts of lithium, palladium, nickel. The list goes on. All of these metals are in high demand, and if we are to have another start up of the economy in 2024 or so, we will need a lot of investment into these commodities and the mining of them if we are to be able to provide a sustainable move up in the economy.
Gold – not so much, as gold has an industrial usage, but all of the bars in existence can just get bid up infinitely. What happens with this, is not so much an industrial demand, but a monetary demand happens here which then entices miners to mine more.
I THINK…in this risk off event, you can see the below happening, in order..you will first see the “monetary metals” shine as the economy slides, but over time, anticipating better economic times you may see these others wake up.
- Gold moving. This starts the monetary need for the metal. As prices rise, it incentivizes miners.
- Silver moving. The relationship here with gold and money is historic. Obviously, there is an industrial demand for silver that would decline during a recession.
- Platinum. Very loose value of money, but mostly industrial. As car sales screech to a halt, the need for this evaporates. But there’s really low inventories in the COMEX right now and I could see those who buy platinum coins gobbling up a lot of what is left over.
- Palladium. High usage with cars – going to see a strong move down with the economy.
- Copper. Copper has had some monetary history, but nothing really in that lane today – but anyone seeing a potential re-start of an economy near the bottom would see the need for copper on another run up. Copper may follow the economy much lower now.
- Nickel. Obviously had monetary usage in our money supplies, but people now are hoarding nickels as their scrap value is worth more than the face value. One needs to see the structural issues here to see that demand for batteries will require this deficit to be addressed. As a base metal, it also may slide lower with the economy.
- Lithium. As EV sales slow, my bet is this price drops quite a bit, but more mines will be invested in as economy improves back half of 2023 early 2024. But I think we won’t have the hockey stick move back up as mines may come online to produce a lot more than they have.
Bad economic times coming
Perhaps I should have led with this, but this has been the x factor that has delayed all of the above. I VERY much thought this was coming July 2020 and got to half cash, selling a lot of my mining stocks that went vertical and hooked me on mining stocks for life. But what I did NOT see was the level of QE that was coming. I did NOT see how vertical the debt would go.
But the time is here now to wreck the last 2 years of gains. All of the pumping that happened with near zero rates, is about to collapse. Well, it already did, but people don’t know it. The problem is, when you cut or raise fed funds rates, it takes awhile for this stuff to work through the system.
This chart here I believe shows an inflationary cycle and a deflationary cycle. Looks a lot like this.
You can make the argument that the inflation thing in red had a lot to do with the Vietnam war. We printed a lot more money than we had in gold. And, when gold was unleashed in the public, it eventually hit the value of debt in 1980. However, many of us following this space for awhile understand how gold is “managed”. It can’t be 100% controlled, but there are times, we have seen, where gold curb stomps paper players and takes them to the woodshed.
However, regarding the red and green areas, you are more or less seeing how inflation was kinda sorta stopped had a lot to do with Volcker and the Fed Funds rates – but around the same time globalism started to come into play. Years earlier, Nixon met with China to start to open that. Americans started buying a lot of Japanese cars and electronics in the 1980s. Walmart took off – sourcing a lot of goods from outside the US.
But what you can see is the constant easing of the FFR for 40 years also had an effect to continue to prop up the 2-3% inflation narrative. As deflation was happening around us, they needed to continuously lower interest rates to, in effect, promote more and more borrowing – increasing money supplies and juicing up asset prices.
But the red on the right of that chart is where we are, today. The FFR hike was to stop inflation – but as you could see from 1955 to 1979, inflation will happen when we are in a more nationalist posture of production. You can see issues today with supply chains breaking down. COVID started the fiasco, but one has to look to see Trump more or less being the catalyst for it with tariffs. I don’t think he had much of a choice. With the FFR at zero, and having record trade deficits, it was a matter of time before this country was going to run into massive unemployment problems.
The most recent economic “crisis” was in 2019 when Powell almost single handedly broke the economy. This was then known as the “powell pivot” which took rates back down to zero, at which you saw gold make a huge run up on.
Well, we went way past that number and now with another 50 basis points added, this line will be much higher. They talk about taking rates to perhaps 5% or higher. Well, how can you raise rates into a bad economy? You can’t.
My belief is that they juiced the unemployment numbers for two reasons:
- The fed mandates low unemployment. If they see unemployment rising, they would have to stop raising rates.
- With an election coming up, if you are showing lots of unemployment, things aren’t going well. If you can pretend things are well, people will vote for the status quo.
The below show problems with the numbers.
You can also see that there have been recent tech layoffs.
You can see sentiment in the market with put/call ratios seems to believe the market is heading south.
Got the above from Zero Hedge.
You can see how the car market is stopped, in its tracks.
You can also see how the “excess” of the 2020 QE that manifested in crypto is about to implode…with daily crypto stories of exchanges collapsing and good old fashioned bank runs happening.
The home market, with stupid high interest rates has effectively shut down sales. This is also not good for construction workers.
This has also stopped vacation travel – as Amy (@TexasRunnerDFW) on Wealthion has pointed out that AirBnB vacancies (called AirBnBust) have skyrocketed with bookings imploding. Four key takeaways from her discussion.
- With about 2-2.5m or so homes that are short term vacation rentals, there has not been a housing shortage. Rather, the housing shortage was a construct of people changing homes to short term rentals with people coming out of COVID and wanting to travel. This “scarcity” in homes then bid up prices in specific markets.
- Half of these homes had been purchased in the past two years, and this model is based on cash flows
- With the cratering of bookings, some of these homes may be sold immediately (eliminating the scarcity) into an illiquid market – driving down home prices for comps for all, where others will potentially be converted back to long term rentals.
- The net effect is downward price pressures on rentals and home values.
What was missing
To have gold and silver run, what was needed, in my opinion, were macro events leading to an undeniable risk off scenario. I THOUGHT we were there with the “recession” in July announced – only for the Biden administration to change the definition of recession. Seems we get a lot of people changing definitions of things these days to suit their own narratives. This is dangerous, but for the sake of “juicing” the economy, they did what they needed to do to further their agenda. I don’t believe juicing economic conditions is a democrat or republican thing – I’m just pointing out that I believed we were here 5 months ago.
Looks to me like the markets started selling off in Dec 2021.
This chart indicates we potentially have a lot of downside to the markets coming in 2023. This could even see a 2200 on the S&P IF current trajectory holds.
That being said, all of the evidence above points to….
- Sustained higher interest rates
- Markets seizing with housing, cars, and even retail when you see Amazon numbers.
- Unemployment starting, that was masked.
- The begin of risk off moves to treasuries and gold
The x factor
The one real concern I have in my analysis here is that I mention the M2 money supply as it relates to inflation and assets like property, business, and money (gold and other commodities – as I define it). But in my above chart, I also correlate this with debt. I did that for a specific reason.
If you JUST look at money supply, you can see the Fed is trying to reduce its balance sheet and shrinking M2.
Now, this would then indicate that inflation is then over, and with this, deflation in all of those asset classes. However, I also correlated this with national debt. Because while M2 may be going down, it isn’t stopping the government from issuing new debt and spending.
As the movie quote goes….
“What we have here…is failure to communicate”.
As Happy points out, we are looking at potentially $1T just to service the debt costs in 2023.
Got a question for the group. Can anyone REALLY point to a politician on the national level right now calling to cut all spending? I defined myself years ago as a “social liberal and fiscal conservative” and there’s no such thing as either anymore. But with respect to spending, you now have people calling for “free everything” and cancelling debt. This all has a net effect of increasing deficits and losing control of the debt upwards. Meaning, the MMT crowd is trying to push this narrative.
And this is slamming against the BRICS+ group now of perhaps close to 100 nations which seem to be keen on getting out of a “Great Reset” and “MMT” type of reality. In a weird, weird way – any fiscal conservative in this country has to be cheering on the BRICS+ ideal of gold and commodities. It does not mean we are anti-American, at all – in fact, the USA could join that type of system given the amount of gold, oil, and commodities we have just fine. The main issue is, Europe would fail 100% in that system. And, we want to continue to maintain our alliances with Europe – who now seem hellbent on 100% green everything, negative interest rates, and destroying farming due to nitrogen levels.
Meaning – there is a catalyst now as well I believe where gold is going to be favored as a risk off over treasuries.
The future of gold
I mentioned above how gold and treasuries are favored risk off assets. But I also pointed out in the paragraph above how a “de-dollar” move appears to be happening right now with about half of the world’s population. It’s not going to happen overnight. But as the need for dollars decreases, and as faith in the dollar as the world’s reserve currency is tested, so is the demand for dollars.
We can see that China has been steadily decreasing its ownership of treasuries. Japan has had a cliff drop recently as it has been defending the Yen. Russia is out. Here are the largest holders…
Going to ask you a series of questions here…
- If the two largest treasury holders are Japan and China – and they are selling, who is buying these from them?
- If we are in a period of BRICS nations buying gold as a potential reserve currency asset (or medium of settlement. Or asset. Who cares the name of it) – then is this potential buying in place of treasuries? We just saw China named as the big gold buyer in Q3, would that previously have been in treasuries?
- If our inflation is 7.1%, why would you buy a treasury at 3.5%? Perhaps you would expect in a few years the rates would go down and the VALUE would go up as rates decrease. But with that approach you are not buying on the yield, but speculating the value will go up.
- If the Fed is aggressively trying to reduce their balance sheets, this can be done by selling treasuries, selling mortgage backed securities, not taking on new debt that matures off the balance sheet, or a combination of
- If real estate is dead, and rates are high, would they sell MBS into this, or wait for rates to recede a little?
- If the Fed Funds rates stay at 5 – how can mortgages come down if they cannot really issue loans below rates they already offer?
- If our government pushes through these debt limits and continues to spend, who is buying this debt? It appears foreign holders are trying to buy gold, defend their own currency, or shy away from dollars.
- If banks could be seeing a lot of losses – can the government still force banks to buy treasuries at 3.5% when inflation is 7.1%?
- Who are bailing out the banks this time around?
- Does the average consumer understand what a bail in is, and understand the risk of a bail in given the series of questions above?
- What happens to our banking system when people understand what a bail in is, and the risk of a bail in given our government cannot stop spending?
- If all of the above happen – would there be a retail fear trade of gold and to a higher degree, silver?
My biggest concern at the moment is the denial of a bad economic environment by both the Fed and by the administration. This narrative is what’s being fed to main street at the moment. As more and more data comes out and people understand we are indeed in a recession and unemployment is picking up, we could see a March 2020 type of flush down. I’m in about half cash right now with core positions held only. I’m out of most of my junior miners which can be illiquid during a massive sell off. A risk to this approach is not being fully deployed and missing a strong move up.
Having lived through the 1,000 down days of March 2020, I can easily see this type of sell off happening again. The risk we faced then was almost full economic stop. What many don’t realize is that we are already approaching a full economic stop – but most have not been spoon fed this yet. I believe over the next 30-60 days, many will start to see unemployment numbers go up, job losses be on the cover of every newspaper, and begin to see the stock market head south with dismal Q4 and 2022 numbers to be announced in Jan/Feb. Strong misses by companies announcing mid to late January could be the start. I don’t expect Q4 numbers to be good, mostly based off of housing, cars, and Amazon having a really bad time of things. This puts risks of strong moves to happen between now and end of February.
With the gold price, I can see a move to the lower rail of the LT trend. I’d prefer this doesn’t happen, but in a strong sell off of everything, this LT trend line can act as MAJOR support.
This could potentially touch $1450-$1500, depending on how the lines are drawn by the computers. I believe this then triggers a short squeeze as this number is bought into, HARD. I believe many with serious levels of cash are also waiting for this number to go all in. This event could be what triggers us to $2500, and relatively quickly in a few months. At some point, you could see the Fed pause rate hikes and admit they overshot (in so many words). This could lead to 25-50 bps drops monthly – but the economy is still 4-6 months away from bottoming after that pivot is announced.
So I’m in a big holding pattern the next 4-8 weeks. I have rentals – so I would LOVE to be wrong here and everything melt up. However, I bought my gold stocks and silver for just this reason. I believe it is soon go time, but am concerned about a strong move down first. It is very possible there is a divergence like in March 2020 where markets go down and gold goes up, and vice versa – but that only happened for a few weeks before panic selling hit. Meaning, if we see divergence like the last few days, go into weeks – gold and silver bugs might be tempted to jump on the elevator up and get fully deployed. Then, the risk of the rug pull of everything takes them out too.
I can see a Defiance Silver at $.12 or so getting a 7x if gold hits $2100. So it is tempting to add a lot more here. The trap is that it goes up for 1-2 weeks and then rug pull – and you are not finding bidders at $.06. IF this is a sustained run, and IF it goes to $2500 gold, it could stand to reason that allowing this stuff to de-risk itself for a bit may have you buying at $.30 to see a $1.20 price at $2500 gold. Meaning, if you commit to higher risk here, you get a higher reward of a 7x, but if you wait a bit and reduce the risk, you might have a 4x. What you do here is a personal choice – but not without risk.
I believe the bad economic numbers that should continue to come in, and will come in, until a pivot happens could drive markets lower and a demand for risk off assets. I believe given the macro environment, globally, gold will be favored now more than it has before with respect to treasuries. One can see the wheels in motion globally to take on more gold. The recent negative economic data is now overshadowing the rhetoric of “we’re strong economically”. The fed’s own data with respect to unemployment has shown these juked numbers should be corrected, and digested with future policy moves by the fed.
It is also apparent to even the most casual observer here than our government cannot stop overspending what they get in with receipts. We can see a small army of IRS agents are being hired at the cost of billions of dollars, presumably to claw back every nickel made at a yard sale that is not recorded. It is clear that with a recession, it is unlikely a popular move to increase taxes. Likewise, elevated inflation may be here through most of 2023 as demand destruction is witnessed in real time.
It is also apparent there may be problems with liquidity with trying to sell future debt, and going “no bid” may be a thing. While one can say this may force the Fed to buy, it is also reasonable that consumer banks are forced to buy this debt to try and keep rates from skyrocketing. This puts banks at risk of loss here – as the inflation rate of 7% is higher than the yield of the underlying asset, and there’s no stopping of spending from the government – and further supply of treasuries then would place the banks in a position where they would lose on the value of the treasuries as well.
It stands to reason that with the Dodd Frank act after the 2008 GFC that the government no longer wanted to “bail out” banks, and therefore “bail ins” were written into law. At the time of this writing, CBDCs are still not anywhere near implemented and banks have currency controls which may mostly prevent “bank runs”. It stands to reason that those who have followed all of the logic above may try and take their cash and put a portion of it into precious metals to hedge against downside risk of the USD.
Furthermore, with $150T in unfunded liabilities, we just saw the administration bail out 100k teamsters and their pension fund at $37B. There are probably another 40m on pensions and we have zero ability to bail all of them out.
All of the evidence above suggests that as more and more people accept the economy is not in a correction, but a downturn, you will see a rotation from stocks and cash into precious metals. It is apparent that our spending is spiraling out of control and the costs to service that debt are spiraling out of control. As long as we can print our own currency, we cannot default nominally, but this could be the very beginning of the structure of how hyperinflation starts. Rather than demonstrate fiscal responsibility with spending, we will choose to try and bail anyone and everything out we can. This only further puts pressure on treasuries, banks, and downward dollar pressure against all assets given the amount of dilution that is about to take effect.
2023 looks to be a launching pad for the precious metals. However, AS the realization is hitting people as to what is happening, the immediate gut reaction is to sell off and get to cash. However, I feel that this is short lived to hold all in cash, as the diminishing value of this currency by the day will dawn on holders of it. This will lead to portions of this cash finding its way to gold. I also believe we are at the beginning of the divergence of gold/silver from the equity markets.
It is therefore rational to believe that in 2023 we can start to have monumental moves higher in precious metals. At the same time, we will be seeing a recession and either disinflation or deflation in prices. This holds true for energy, as less plants will need high amounts of energy, less travel is taking place, less goods are being delivered – and therefore we could see much lower oil prices. This bodes extremely well for gold and silver miners – who have still seen relatively elevated prices, but margins have been destroyed with high fuel costs.
In my opinion, which is NOT financial advice, my analysis is showing that big money could move into the sector. This bodes well for:
- Gold and silver bullion at the retail level.
- ETFs with exposure to the metals – many will run to SLV, regardless of how we feel about it
- Vaulting services
- Gold and silver miners (first at the GDX/GDXJ/SIL/SILJ level)
- Gold and silver digital currencies (like Kinesis, LODE, CACHE, Glint)
I believe that even when a pause in rates happens, and then an eventual talk of reduction of rates, that you are looking at another 4-6 months of going lower in the markets before the bottoms are found. HERE is where I’m very interested in the commodities I listed above.
With the BRICS+ nations also seeming to get away from dollars – and trade partners are now in peril, it stands to reason that when the economy does restart 4-6 months after a pivot, that you will see rates fall back down and with this, supply chains are not able to source what they used to at cheap prices from the same partners. Given the structural deficits, and lack of investment, it stands to reason that prices of these items will be much higher to then allow for exploration/development of sources. Additionally, many jobs may be brought back onshore here with a lower dollar and rising unemployment. This has goods costing more than they did pre-COVID, and with this, you can expect another round of inflation as costs rise.
Unless our energy problem is solved beyond green rhetoric, we will risk massive inflation running like it did in the 1970s.
Disclaimers – I own several LT rental units and am long silver and silver/gold miners as well as Kinesis. The above is macro analysis and not financial advice, nor is it meant for you to YOLO into anything above and then blame me when it fails. As always, talk to a financial advisor and do your own due diligence.
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