This post here is the wakeup writing you can send your non-metals friends. This, hopefully, is the wakeup call for many. Feel free to share with non-metals friends all day long. I’d even love for some crypto people to even put 5% of their investments into gold and silver to join us.

The gold time machine

I have used this now a few times, but really need to pound the table with this for those not in the know. I’m hoping this section helps people understand the WHY part.

100 years or so ago, the $20 bill had the gold seal on it, where it was EQUAL to one ounce of gold. They were interchangeable. You would be able to go to a bank and exchange that $20 bill for an ounce of gold. This paper was then easier than lugging around chunks of gold.

If you were to open that vault today, you would find that the ounce of gold was almost 90x more valuable than the $20 bill. A few days ago it was 95x. A year ago, 100x. A few months ago, 80x. It appears that gold “fluctuates” in price wildly. However, when you start to understand what really happened, you begin to realize that the root issue here is that you need more currency units to buy gold than in 1920. Meaning – GOLD is not fluctuating, but the spasms of a fiat currency at the behest of a cloaked figure at the Fed can make funny gyrations in this price. Gold did not lose its value to anything. Paper lost its value to gold, by a LOT.

When this dawns on you, you realize that the SUPPLY of money in the system as well as the debt, continue up at an accelerated, accelerated rate. This, is what monetary inflation is. Many people – including many bright economists, don’t understand inflation at the ROOT. I took a lot of the economics classes taught by the Keynsians. They want to obscure exactly what inflation is, to the point that 100 people reading this will all have opinions of what inflation is. And they will all be different, to some extent.

When you understand that currency has a TIME DECAY associated with it – you start to wonder why anyone holds cash, at all. Cash is LIQUID. But, if you are storing cash in a safe, you are literally decreasing the spending power you have. Many would like to argue the concept of compounding interest on that dollar in a bank. I’m not talking about “investing” your currency into a yield-bearing device. I’m talking….CASH.

If you just hold that cash, it’s like storing electricity in a capacitor that might lose a charge over time. However, if you put the cash into one of three asset classes, you are finding a home for it. In GOOD times, you might want to invest in the stock market. Perhaps you take some profits from your stock market and buy a home! Perhaps in more uncertain times of poor stock market performance and job losses, you invest in the “money” class like gold to PRESERVE your spending power and not lose it.

In the example above with the safe, I used 100 years. It was an extreme example, but one you would not perhaps notice in 5 years or even 10. But that would mean that in theory, it would go up at a rate that was noticeable?

No. In fact, how currency comes into the system and sloshes around is the subject of this post, and will reveal why Gold…and perhaps..why today.

Gold plays “catch up”

I also have talked a lot about how an ounce of gold is worth a man’s fine suit. In reality, that gold is paying for the materials, labor, and there is a rough correlation going back hundreds of years. I also like to use two 1964 silver dimes that would get you a gallon on gas in 1964 and a gallon today. That is, that gold/silver and these asset classes compete for currency in the system. But none of these go on a “straight line”.

Let’s look at a gold chart quick going back….

We were on a “gold standard” for a long time where the price of gold was “pegged” to $20. And then later in 1934 to $35. Why? Because the government spent more than it had, and what it needed to do was reprice gold to then ensure it had enough gold to take care of the IOUs. But then Bretton Woods happened, and then later in 1971 the USD went off of the gold standard. To be honest, I understand why. I am not calling for a “gold peg” today, here, now. We need to understand first how asset classes and currency work.

I believe your “gold inflation hedge” is simply this asset class seeing more cash is coming into the system OR catching up, relative to cash printed that was much higher than anticipated.

What you then notice is a mad rush to gold in the 1970s, culminating in a massive 1980 peak. What this was, essentially, was anyone who understood money understood how gold was undervalued to other things. It caught up to, and then very much went way beyond “fair value”, to everything else. Let me explain….

If there are three asset classes, one can imagine a bucket with 2 dividers in it. The dividers are set at different heights.

Let’s say there are 12 gallons in this bucket. This is the TOTAL money supply. You would THINK that each class would have 4 gallons, at rest, for fair value. At issue is this – the dividers are policy and rates, which tend to hold up certain asset classes and deprive from others. Consider an artificially low interest rate might allow industry to expand and fund inventory for next to nothing. This low rate environment also might allow someone to buy a new home, cheaper relative on monthly payments – but this then inflates the nominal value of the home.

Likewise, this bucket can get agitated, the water can slosh about, and the walls change height. Now, we add more water to the bucket. At first business had 5, property had 4, and money had 3. But now we are dealing with a LOT more water – perhaps we go from 12 to 18 gallons, and policies that are not friendly to business. In THESE RARE situations, you then have people who see the walls changing, and realize money (gold and silver at 3 gallons) are undervalued to business (at 5 gallons). As we know more gallons of water are to be added, we then pile into the gold sector – anticipating a catch up of gold. This can then have gold at 9 gallons, property at 6 gallons, and business at 3 gallons. While this is extreme – this is precisely what 1981 looked like.

People realized, OMG! Gold is SO overvalued relative to the stock market, and sold gold to get into the stock market and real estate.

This battle has been ongoing essentially since gold was de-pegged from the USD in 1971. As “inflation” (read, more water being added to the bucket”, we can see there have been times that real estate, gold, and stocks have sloshed around fighting for these currency units. This chart is tracking Dow and Gold with M2 and debt.

The chart shows precisely what I’m talking about, above.

Many do not understand inflation, at all, and see THIS – this is the RESULT of MONETARY inflation on goods and services – this is the sloshing around effect…they see PRICE inflation on certain things.

With all of this, gold’s “inflation hedge” is actually a time when the undervalued gold sees a time where policies/walls in the bucket change either anticipating a lot more water coming into the bucket, or economic times change and people get out of overvalued stocks/real estate to PRESERVE what they have in the form of money in a “financial battery”.

While many crypto people are programmed and gaslit to think of gold as a “dead relic” because of the performance from 2011-2021, they are missing the part where gold played MASSIVE catch up to inflation, OVERSHOT, and then consolidated back. Our recent QE policies, COVID spending, etc has now added another $6T to the bucket.

This currency went to “risk on” with stocks, crypto, and even people buying rental homes at jacked up prices for AirBNBs.

Let’s take a look and compare.

Undervalued versus overvalued

For this experiment, I’m going to use some prices and also then look at ratios. I would contend that crypto is part of the “property” class. It acts in a sense like a leveraged Nasdaq tech stock – when NASDAQ moves up, this has a levered move up – and down, the same. But for the sake of this, let’s put crypto in the property bucket. I can fight with your ideologies all day long, but you have to understand the properties of this asset more resemble speculative beach front property at the moment.

Let’s look at gold, dow, and real estate from 1971. I also added “M2 money stock” on this in yellow.

Gold is the green/red candles, the gold line is real estate, and the blue line are stocks in the Dow. You can draw these a LOTTT of different ways by shrinking them, but this is a good idea of how this whole thing works.

You can see how gold got overstretched in 1980. You can see how real estate went WAY high in 2005 and then corrected back. You can also see how stocks played catch up from 2009.

What remains here then is gold is relatively undervalued to real estate and stocks, given the M2 in the system.

Let’s first take Dow to gold. This is the most obvious of all of them. One can argue that the only time, in the last 50 years, that it was better to sell stocks and buy gold was 2001, right after the dot com bubble where stocks were beaten to a pulp.

One could also argue that low interest rates which allowed for housing prices to expand – thus “creating” more currency in the system allowed for “smart gold” to track a good deal of real estate move up. Let’s look at the RE to gold ratio

You can see how gold was high in value to real estate in 1979/2012, and you should have sold gold to buy real estate. In 2000-2006, you could see you should have sold overvalued real estate to buy gold. In this chart, I used RE equity to gold which shows how low interest rates can inflate the property values. This is showing that the ratio has a LOT to fall before I would sell gold to buy real estate.

Let’s now take the RE to Dow to see where that is.

You can see here that this metric is also stretched to point to RE’s favor.

This shows me:

  1. Gold to stocks are VERY undervalued
  2. Gold to real estate is undervalued
  3. Real estate to stocks are undervalued

By proxy, this tells me that stocks are VERY overvalued to gold, and overvalued to real estate. While real estate can come down in a recession here, it would tell me that stocks would come down a lot more. This also means that gold loses a lot less to both, and could also go up.

To the moon

I know there’s a lot of hyperbole in this. Everyone thinks their stock or their pet rock will jump in value. Above, I have showed how undervalued gold is relative to the other two major items.

What is of interest here is that all indications of a slowing economy and stagflation are here. You are seeing headlines daily of job losses. You are clearly seeing new home contracts being cancelled. At 6-7% 30 yr mortgage rates, homes are becoming unaffordable. Remember the inflated costs to get the lumber and materials to build the homes? This has pushed prices up – and now higher mortgage costs from perhaps only even a year ago have doubled the monthly payments required to buy these houses.

What I and many others are seeing is an accident waiting to happen…

  1. Zombie companies can no longer rollover debt. Many of these companies got their nickname for a reason. They will have to lay off many employees, go bankrupt, or be bought in M&A in “rescue” packages
  2. Many companies have been cashed up to weather the storm. But, they do not know how long the storm is going to last. As sales drop, they will begin to layoff “excess” employees and provide early retirement for those deemed less impactful
  3. Many who lose their jobs may either back out of buying a house or sell their homes. This can add supply to a market. More supply, and lower RE prices. “Motivated” sellers can lower the comps for the whole neighborhood.
  4. Less new homes built means less mortgage origination, less sales of real estate, and many construction jobs getting laid off.
  5. Potential de-leveraging of the system as risk increases through credit tightening. This can be increase margin requirements for trading accounts (stocks change margin requirements) and futures accounts to reduce the amount of speculative activities. This is a “credit tightening” event.
  6. As job losses mount, those without jobs need to liquidate homes, stocks, etc.
  7. Supply chain worries with a fracturing BRICS+ and G7+ world have potential for price inflation on goods as less supply is available to “friendly” nations.

There are people out there who are contrarian who now see a “melt up”. There’s one significant number which should bother them.

Remember what I was talking about with water being added to the buckets? That is the environment we have seen for my entire lifetime and then some. But now, what we are seeing for the first time – in possibly a LONG time – is currency being syphoned out of the bucket.

Full stop here.

If you hold stocks, and they are overvalued relative to….everything – and the current economic conditions are potentially showing that things are about to get worse, why are you YOLOing Apple?

Historically, we are at significantly elevated P/E ratios. One can see historical numbers of the S&P ratios of about 15.

What the above chart shows is that the price to earnings ratio – when peaking – usually has a recession associated with it. That is, the PRICE of the stock starts to out kick the coverage of the actual money the company can generate. High P/E ratios can exist for several reasons – consider a high ratio for Tesla, where early share owners ponied up money for the EXPECTATION of higher earnings and thus EVENTUALLY have earnings which reduced the P/E ratios to market. The OTHER way you can see this, perhaps, is if owners of these stocks piled in and then earnings sagged – and with this, it elevates the P/E ratio.

In this case, we are starting to see a lot of earnings misses. Over time, this will elevate the collective P/E ratios of the stocks. At some point, the collective hive mind is going to pull the rip cord. Likewise, if your dividend stock is “safe” and giving you 2-3% yield, but the 10y is giving you 3.5-5% (potentially), it makes sense to remove that risk of the company stock and roll that into a 10yr.

Those who are the “contrarians” here I think might be missing the mark. If I tell you the sun comes up every day, and you take a contrarian view for the sake of being contrarian, you will be very wrong financially on that bet.

However, there is no dispute that we have elevated PE ratios, poor earnings coming, lots of layoffs, and elevated stocks to RE and gold/money. You have price pressures that MIGHT ease, but this is now facing new price pressures from potentially broken supply chains and energy costs which fluctuate on the headlines of the day. While you may see oil drop near term, you cannot borrow to expand plants and you have potential labor issues with higher wages demanded. IF the labor numbers are to be believed, your main issue then is trying to lure people away from an existing job by paying them more. However, I do not believe the labor numbers and feel that massive layoffs will be the story of 2023.

In my 2023 macro forecast, I felt the rates would be higher than most expect and last longer than one might expect. I would posit that THIS is the contrarian view to the consensus view that the fed will pivot soon and stonks go up in risk on. If you look at that M2 chart closely, you need to realize that credit is about to get harder to get.

Further evidence is mounting with BRICS+ that they are actively looking to use the dollar less. This doesn’t mean the dollar is going away, tomorrow. However, there is a lot of evidence that China and the Saudis are not only buying our treasuries less, but they are sellers. This chart as of a few months ago shows the top treasury holders.

If we look at China, Japan, and the Saudis, it shows us a story…

The Chinese here are off 34% or so from just 8 years ago. With geopolitical tensions rising and the US seizing Russian foreign reserves in 2022, this undoubtedly could lead to more de-dollarization.

This more recent stat has it at $870b. Could the Chinese dump this all tomorrow? Yes, but it makes more sense to get the most out of this to sell out over time or let these items mature and not buy new.

In the headlines recently was Japan selling UST to defend their yen. Also, the Saudis have significantly decreased their holdings over time as well.

With the Saudis now looking to sell oil in Yuan, and Russia selling oil for gold, the Saudis have drawn back their UST holdings.

This article shows that the Saudis now hold about $116B in treasuries. That’s down 36.9% in 2.5 years.

While it is true that a higher yield can entice private investors and potentially banks as a safe haven, you will be seeing foreign entities and the Fed selling into this. With increased deficits to fund, it appears that rates for the 10yr and others may continue to either march higher, or being sustained in these elevated ranges for some time.

In order to “cap” interest rates, it then makes some sense for the Fed/Treasury to have buyers of this debt – if you want to avoid Japan’s Yield Curve Control. IF this was a risk on event, you would expect private investors and banks to sell 3-4% yield treasuries to chase stonks. However, an environment NEEDS to be created to force buyers to buy Treasuries. IF you have the Fed selling Treasuries, AND foreign entities selling, this requires private investors and banks to buy. Meaning, the RISK OFF environment needs to be created. This is done by precisely that – Fed selling treasuries and keeping FFR high.

If you have M2 which is shrinking, with an increasing debt – you can envision how we can see 5-6% 10yr notes to entice those making 2% in dividend stocks to sell, and those with a 40+ P/E ratio to sell. I believe this FORCES a risk off environment.

Meaning, the contrarian view is not melt up to the eventual pivot. The contrarian view is sustained pain to drain the bucket of water and to reduce the asset inflation in the stocks class to help buy treasuries.

I believe, in this environment of “high” inflation at 6+%, a significant portion of risk off goes to gold. Likewise, many of these foreign entities who are not buying Treasuries or dollars anymore are buying gold.

This has created a situation that since the GFC in 2008, more and more countries are holding more gold in reserves.

As of 2019, before we printed $6T and seized Russian assets, the US was 61.9% of world currency reserves.

In 2021, the USD fell to 59%. That means, in 2 years, it dropped almost 3%.

This chart at Wolf Street shows the decline over time.

It is fair to say that by 2030, this could take us well under 50%, and perhaps even below 40% depending on the success of the BRICS+. The net effect on this, many could posit, is the exchange of USD for gold priced in USD. This would have an effect of less treasuries bought, but more gold being purchased.

I believe that in the next 5-7 years, we are about to see stocks move lower, gold catch a strong bid domestically, but also gold internationally is going to pick up and drive the prices far higher.

I believe gold will far overshoot everything, as it appears there is a BRICS+ gold-centered system coming, in some form. What this may also do is far outstretch gold to its traditional value to other commodities. This will have an effect of selling gold for commodities – first up is silver. If you see silver at a 100 or 150 gold to silver ratio, smart people are then selling that gold to buy silver. This will happen with oil, copper, you name it.

Gold kicks in the door, and silver will clear the room.

The crypto guys like the idea of buying a shitcoin that does a 5x. Well boys, gold is setting up to be your next shitcoin play, and silver is setting up to be the Godzilla little brother that wrecks everything.

I have said repeatedly, recently – Rick Rule famously said about uranium that “the price goes up, or the lights go off”. With silver, “the price goes up, or every assembly line in the world shuts down”. I believe gold is going to run soon, and with this, you may see the GSR get even worse for silver. Perhaps 90-100. All this is doing, however, is providing more energy for the slingshot.

How to play this

There’s a lot of layers to this onion. IF we are indeed at a currency crisis, it makes sense to get some gold and silver in your possession. However, many may have problems doing this for a variety of reasons. Maybe silver is listed at $22 spot, but you cannot buy it for less than $30. Maybe you want in but you have roommates and you cannot secure hundreds or thousands of ounces in your room. Maybe you live in a crime-ridden area and worry about being robbed.

There are infinite ways you can play this. I have written an article on how to layer your gold and silver investments, which shows the principal ways you can do it.

When you buy physical – “you hold it, you own it”. But with that, comes risk. All of those people that say, “if you don’t hold it, you don’t own it” may live in rural areas and have a whole arsenal of guns. For most people, however, it becomes somewhat frightening to have anything of value in the house. This is when I intensely looked into this in early 2020. My article above was in mid 2021.

What I started looking at were things like vaulting services. On Monetary Metals website, you see…

Maybe you open an account with them and put $10,000 in there and pay $96 per year to store with them. However, you never see it, and if you want access to these things, you may have to sell full gold or silver ounces, then may have costs of selling and transferring your money.

Maybe you look at and use Mike Maloney’s company to do it? You can buy through their portal with some elevated premiums and store with them. Perfectly good to do!

You might have allocated or even segregated. Depends what you do with costs involved. There are certain schemes out there of “unallocated” which was actually in a sense selling you gold in a supply chain at some point which might have taken months for you to get out.

You have other items like Monetary Metals which lease out your metal and pay you interest on it, so you avoid the cost of storage. But what happens if the people they leased it to go bankrupt?

Pretty much any way you slice it, there’s risk holding PMs in some way.

One way I wanted to discuss with you here today is Kinesis. Why am I mentioning them? I am a KVT holder, so your usage of the system gets me a few nickels a month, but the main reason is to talk about how it is different from other methods of storing. IF you are a crypto guy, you can go to Kinesis, set up a KYC account, and transfer many of your cryptos there. You can sell on that exchange if you want, and then use that cash to buy gold or silver.

Why would you do this? I’m going to use an example here of someone who might have $100,000 in some form of precious metals investments. Maybe $10,000 of it is in physical. Maybe $20,000 of it you speculate with miners. Maybe $50,000 of it you put in different vaulting solutions. Maybe $10,000 you put into OneGold to play the price of gold/silver to maybe use the Apmex front end to get the physical someday? But maybe $10,000 of it could go to Kinesis to diversify your holdings.

Maybe you are a crypto guy with $50k in holdings. Maybe take 5% and put into Kinesis to diversify some of your risk into PMs? That’s $2500.

Now let’s go back to the gold/silver guy with $100,000 and he decides he wants to put $10,000 in Kinesis. Why would he do this?

  1. Very low premiums to buy on the exchange from sellers.
  2. Zero cost to store at this vault. There are potential YIELDS to hold your metals here, based off of usage of the entire system and split amongst different yields. It might pay pretty low, but maybe someday if the system catches fire, yields go up. Higher yields then promote people to mint and bring more gold/silver into the system, so this is a self-governing situation.
  3. You can send KAU/KAG directly to someone, sort of like a Venmo. For example, I filled up a pickup truck of firewood at my buddy’s house, I could send him 2 KAG as payment or perhaps .75 KAU
  4. If you have 100KAU or 200KAG, you can get your metal shipped to you for a fee.
  5. You can SPEND this with a virtual card. In all of those solutions above OTHER than Kinesis, you might have to sell whole ounces, stocks, and perhaps send proceeds to your bank for the next day or several days out. This allows NEAR immediate access to your gold/silver, and it can sell FRACTIONS of an ounce, instantly, to pay for the costs at the pump, so to speak.

Meaning – this is a means of accessing the spending power of vaulted metals, real time.

What I WANT to do with Kinesis is this….

  1. Perhaps send $2000 to them per month
  2. Use $1000 in groceries, clothing, going out to eat, movies, etc.
  3. Keep $1000 per month there
  4. As I get to 200 KAG or 100 KAU consider getting the metals sent to me.
  5. Perhaps leave $10,000 there stored, and anything above that I sell to then put into real estate, stocks, etc.

Why? Remember the vault above with the 100 years? The considerations below are…

  1. Any cash you put in there into metals could RAPIDLY move up one day in value. For example, you put in $23 to buy a KAG and a month later silver is $36. When you go to the pump for $24 worth, previously it would have sold 1 KAG. Now it would sell .67 KAG.
  2. If you are storing cash in metals here, you have to consider the “invisible” decrease in purchasing power year to year. This “financial energy” is stored in these metals and your purchasing power is preserved.
  3. With a Weimar-like hyper inflation – or even Venezuela, Turkey, Argentina – even preserving your purchasing power week to week could significantly help you. Imagine buying $1000 of silver one month that could get you a month of groceries. The next month you go to the grocery store and prices have doubled. But your KAG would have potentially tracked this inflation too and therefore the groceries do not cost you any more of your stored purchasing power.
  4. Consider optionality where you always put your $2000 per month in, but one month silver went from $24 to $18 on paper games. Your purchasing power of the dollar buys more silver, and instead of buying groceries that month with the Kinesis KAG on the virtual card, you use your bank debit card. In this manner, you can buy metals when your purchasing power with the dollar is better, and at times when those metals go up, you can sell these at the pump to get more bang for your buck.

Kinesis has risks – just like every other method of holding metals. As long as you understand these risks and diversify your metals holdings – any one are can fail (which you do not want it to) but you aren’t putting all of your eggs in one basket. Kinesis is a relatively new company, deals with an exchange which has its own challenges in the world now with regulations, and getting adoption. Here is a link to their auditing. Someone like me will use a fraction of my holdings with Kinesis and use the virtual debit card (when available in the US) to buy monthly expenses. As the platform matures in development, adoption, and regulation, I will be dialing up my usage.

IF you are a crypto guy, Kinesis may be a good way for you to potentially ride up the gold/silver elevator in the next few years to come. They aren’t going to 50x like your last shitcoin, but they can provide access to hedging against your high risk cryptos while providing a potential nice upside move like in 1980 and 2011.

If you are a boomer with millions in vaulted gold, wouldn’t it make sense to have 5% or so of this type of thing in a vault where you could easily spend portions of your PMs?

Disclaimer – I am a KVT holder and this is NOT a paid advertisement for Kinesis. Having a conversation with someone on Twitter the other day inspired me to write this for crypto people and newer people to demonstrate how gold is most certainly not dead, and how Kinesis is the 2.0 version of anything crypto – as not many people understand how this platform is backed by gold. Someday I would love to perhaps work for them, but today this is a fan showing people how Kinesis should be part of a DIVERSIFIED metals portfolio.