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From 1870 to 1970, the ratio of debt to GDP in the US averaged 1.48. Today, the ratio is 3.47, which means that the economy bears the weight of three times the debt that it did up until 1970. Not coincidentally, it was August 15, 1971 that the President Nixon made the dollar no longer redeemable in gold, which meant that the Federal Reserve could – and has – printed money like there’s no tomorrow.
Notice that the Money Stock growth rate was not great immediately after Nixon closed the gold window. Many members of the Fed knew the importance of not issuing too many dollars relative to the amount of gold held by the US because of the recognition of the need to return to the gold standard “someday.”
Over the decades, though, a country’s gold holdings became less significant. In the 1990s, the Bank of England dumped, literally, millions of ounces below $300 an ounce. Canada today has no official gold holdings, despite being a major gold mining country.
Alan Greenspan, Fed chair 1987 – 2006, ushered in a long period of low interest rates, which were accomplished by the Fed buying – with freshly printed money – bonds. As bond prices go up because of the buying, interest rates go down.
Greenspan was followed by Ben Bernanke, 2006-1014. The “Bernank,” as he became known, made comments about “helicopter money being deposited in bank accounts,” thereby stimulating the economy. It was under The Bernank that the Fed initiated quantitative easing (QE) that resulted in the Fed’s balance sheet growing by $4 trillion in only a few years.
Today, although the official budget deficit looks to come in at about $800 billion this fiscal year, the Treasury will have to borrow in the neighborhood of $1.2 trillion. Yet these numbers are rarely talked about on the many financial programs that abound. It is fair to say that the debt and the deficit are pretty much ignored.
Now Jerome Powell is Fed chair. Under him, in 2018 the Fed hiked rates four times and was set for another when the stock market took a hissy fit in December. That resulted in Powell turning from a hawk to a dove and became known as the “Powell Pivot.”
If the Fed moves to lower interest rates, it will do so by printing still more money and buying bonds, thereby adding to the debt that the economy carries. Interestingly, according to Keynesian theory, the government should be paying down its debt when the economy is robust. But that’s not happening. And, if the Powell Pivot is in effect, interest rates will drop further, resulting in still more debt being loaded on.
When the economy turns down — we’re now in the longest but weakest economy recovery ever — there will be a cry for still more money printing, which will cause a lot of suffering. Goldand silver will see higher prices as fear sets in. The Fed cannot print trillions of dollars without there being a lot of mistakes made.
It’s crazy enough when government debt sells at negative yields. But there are 14 junk bond issues in the eurozone trading at subzero rates.
Junk bonds are just what they sound like: junk — high risk issues which may not even payback the principal. They should yield 5% to 8% over Treasuries, if not more.
Bloomberg says that worldwide in excess of $13 trillion of debt trades with negative interest rates, mostly government issues. But now, even corporate debt is trading at negative yields.
Apparently, the craziness listed below has incepted just since the beginning of 2019. In any event, here is the subzero junk:
Ardagh Packaging Finance plc /Ardagh Holdings USA Inc.
Altice Luxembourg SA
Altice France SA
Axalta Coating Systems LLC
Arena Luxembourg Finance Sarl
EC Finance Plc
Nexi Capital SpA
LSF10 Wolverine Investments SCA
Smurfit Kappa Acquisitions ULC
OI European Group BV
Becton Dickinson Euro Finance Sarl
WMG Acquisition Corp.
The world’s central banks have printed so much money that the world is awash in it. And, it has to go somewhere, and that somewhere is mostly in bonds, which are more secure than stocks because bond holders have first dibs if the corporation is liquidated.
Even John Maynard Keynes could not have imagined a world in which bonds yielded negative rates. There is no doubt that much of the printed money since 2008 went into hedge funds that have funded enterprises (Uber, Tesla, Amazon are likely candidates) that are delivering products and services below their real costs. As this economy slows, those malinvestments will surface and result in precipitous fall in stock prices. Historically, gold and silver have been classic hedges against this kind monetary insanity
Gold is down $30 today because of massive selling on the COMEX on a day when illiquidity abounds. Because the 4th fell on Thursday, making for a four-day weekend, the manipulators took advantage of it. Monday will be a significant day for both gold and stocks as investors reassess their outlooks. The Dow Industrials are down 175 points as this is written.
A stronger than expected jobs report undoubtedly encouraged the manipulators. The economy added a better-than-expected 224,000 jobs in June. Job growth has averaged 172,000 per month this year.
Yet a Fed rate cut later this month is anticipated by most Fed followers. Too many signs of economic recession, not only in the US but worldwide, for the Fed to ignore. Additionally, the President continues to hammer the Fed with his tweets.
“China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!”
If we go down the road to still looser monetary policies (and we most likely will), gold and silver will respond with higher prices, regardless of what the manipulators do.
By many measures, the world’s economy is slowing, and some CBs — namely New Zealand, India, Malaysia, and the Philippines — have already lowered rates. Australia lowered June 4, the largest developed country to cut rates this year. In May, China lowered reserve requirements for small- and medium-sized banks, which pushed interest rates there to the lowest levels since 2009.
Bank of England Governor Mark Carney warned today that the UK’s economy is slowing. He noted that “second quarter will be considerably weaker,” partially because of the drag from the UK exiting the European Union. Also disclosed today was that UK builders suffered their worst monthly decline in a decade.
In the US, there are now about 7.25 million fewer jobs than when the recession began back in 2007. Also for the US, real GDP coming out of the 2008 World Financial Crisis has been the lowest of any economic recovery. Many investors are counting on the Fed to cut interest rates in an attempt to keep the economy growing and stocks rising, but that may not be the case.
At some point, concerns about the slowing economy will overtake optimism about the Fed lowering interest rates. Additionally, there is much discussion among the Democrat presidential aspirants about how the Fed’s 2008 purchase of many banks’ troubled assets having flowed to Wall Street, with Main Street left high and dry.
Consequently, we can look for Congress to propose programs that stimulate lower and middle income workers, which may result in former Fed chief Ben Bernanke’s plan to helicopter funds directly into the accounts of those workers.
Even if direct deposits are not implemented, there will be stimulus programs aimed at increasing lower and middle income spending, which will be inflationary.
Yet there will come a time when fears of a massive recession overwhelms the optimism about Fed rate cuts. That’s when gold and silver will see still further rises in price.
Trump is committed to tariffs. If he were levying tariffs on only China, that would be bad enough as China is one of the tech manufacturing centers of the world. But, Trump is not going after only China. He has implemented tariffs on products imported from nations that have long been friendly, such as Canada, Mexico, Germany, India, and Turkey. Moreover, he imposed tariffs on steel and aluminum from most countries, and on solar panels and washing machines.
A trade war is developing as most countries have retaliated by levying tariffs on goods imported from the United States. This will slow world economic growth as it will cause many dislocations. Manufacturing facilities will be shuttered as the tariffs increase, and the manufacture of those items will be shifted to another country not tariffed, which will again incur the cost of building another facility.
Basically, tariffs cause inefficiencies as production is disrupted to avoid the tariffs. Additionally, there is the ton of record keeping that is involved, which produces no wealth.
Right now, stocks are trading at near record levels (Dow Jones Industrials) because the Fed has signaled possibly two rate cuts this year. The latest GDPNow estimate (June 28) from the Federal Reserve Bank in Atlanta shows GDP growth of only 1.5% for this quarter, which ends this month. If GDP comes in below 2%, look for a Fed rate cut in at the July 30-31 FOMC meeting.
Some analysts are talking about another QE program that will cause negative interest rates. According to Bloomberg, $13 trillion of debt is yields negative interest rates around the world. If the Fed cranks up another QE, that number will grow.
And, gold is trading higher, up $130 this month, based on several factors, one being the Fed embracing a loose monetary policy. Gold has always responded to reckless monetary policies. Further, there is the prospect of a worldwide recession, which will most certainly guarantee loose monetary policies at all central banks.
Gold is reacting well to all these potential calamities, as it should. Its price is up $130 this month but is still $500 off its 2011 high. Lots of room for upside movement. Paul Tudor Jones, famed investor, publicly stated that if gold reaches $1400 it will go to $1700 quickly.
After having said on TV that gold is “his favorite investment” over the next 12–24 months, Paul Tudor Jones bought $82 million in gold shares, as reported by Bloomberg. Earlier in June, Jeffrey Gundlach, known as the “Bond King,” said, “I am certainly long gold.” Gundlach sees a recession on the horizon, and he expects the Fed to lower interest rates.
Now, another lesser-known stock market commentator – actually a “trader” with a daily blog – sees gold’s breakout as “generational.” Writing on 6/21/19, Jared Dillian declared in his Daily Dirtnap:
“This is a generational breakout. My conviction is high. All of you should be excited about it, but nobody is excited about it. I did not get one email about gold yesterday, even after gapping above resistance. This is the trade of a lifetime and there’s literally zero excitement about it. That’s because everyone has taken nothing but abuse for the last eight years.”
He’s certainly right about all the abuse gold investors have taken over the last eight years. Often gold investors were ashamed to say that they owned gold. But things are changing. And, Dillian notes that there is no “excitement about it.” I’ve often said the time to buy any investment is when it is ignored.
With the Fed concerned about a recession, lower interest rates are expected. Some analysts are even talking about negative interest rates on US bonds. Actually, when you consider the rate of inflation, which lowers the purchasing power of the money received when a bond matures, we’ve already had negative interest rates many years.
Such a climate sends people into gold and silver because there is no way to know how far down the Fed will force interest rates into negative territory and how long they will keep them there. Meanwhile, gold is up $120 in less than 30 days, and silver is up $1. At this level, there may be some fluctuations in the metals, but there’s still a lot of upside left in this run. Paul Tudor Jones said that if gold breaks $1400 “it goes to $1700 rather quickly.”
Herbert Hoover’s name is generally held with derision because he is blamed for the Great Depression. However, here’s one HH statement that all should agree with: “We have gold because we cannot trust governments.” Basically, a gold standard fails as a monetary system because the government is involved.
Under a gold standard, the value of a currency is based on gold. Governments are required (sic) to redeem in gold their paper money on presentation to the Treasury or a bank. Prior to 1933, a $20 bill could be redeemed for a $20 gold coin that contained 0.9675 oz. of gold.
With FDR’s Proclamation 6102, April 5, 1933, Americans could no longer turn in paper currency for physical gold. In fact, they were prohibited from continuing to hold gold coins. They had to turn them over to the government in exchange for paper currency. With Nixon’s “closing the gold window” August 15, 1971, governments could no longer redeem their dollar holdings in gold.
Our monetary system became fiat. The government (actually its apparatchik the Federal Reserve) could print however many dollars it wanted. Gold has seen three huge bull markets since 1971 because of reckless monetary policies made possible by our fiat monetary system. This is why the Fed could print $4 trillion to bail out the banks and insurance companies whose bad investments surfaced in 2008.
There is no reason to believe that reckless monetary policies will stop. In fact, there are reasons to believe that they will continue. Consider the discussion about Modern Monetary Theory and “debt doesn’t matter.”
Stocks have risen recently in anticipation that the Fed will lower rates in their July FOMC meeting or at least make a “dovish” statement about future interest rate decisions. And, gold is at $1350 for the same reasons.
A fiat monetary system is the worst, under which governments can print however many dollars they want. Don’t look for any serious talk about returning to gold anytime in the near future. It will take a crisis far worse than 2008. If any such talk is about a gold standard, remember Herbert Hoover’s admonition.
Since Nixon closed the gold window August 15, 1971, three massive bull market have rewarded precious metals believers handsomely. Each of these bull market runs have been preceded by reckless financial policies.
The official price of gold was $35 in 1971. By 1974 the free market put a price of nearly $200 on gold. Blame wage-price controls, the Arab oil embargo, and double-digit inflation, but much of the rush to gold was caused by Lyndon Johnson’s “guns and butter” during the Vietnam War. Johnson had refused to cut domestic spending to finance the war.
Under Jimmy Carter, deficit spending became worse and resulted in the highest peacetime inflation in American history, at double-digit levels. Gold climbed from just above $100 in late 1976 to $850 in January 1980. Silver hit $50.
The next bull run came with Fed Chair Alan Greenspan’s easy money policies. He took office in 1987 with the fed funds rate at about 7% and steadily gave us lower rates. Shortly before leaving office in 2006, the rate was 1%. Of course, we know what happened in 2008. Gold went from the $600-$700 in 2007 to $1900 in 2011. Again, silver touched $50.
To “save the world’s financial system,” the Fed printed $4 trillion, and other central banks joined in, with Japan’s CB and the Swiss CB actually buying equities. Some German bonds, because of massive ECB buying, have negative interest rates.
Reckless monetary policies are now viewed as mainstream. As the world’s economy slows, the billions of dollars in malinvestments will surface, and then we will see still another rush to gold – as fear sets in and the central banks print still more money.
In this clip, billionaire investor Paul Tudor Jones talks about gold being the investment for the next 12 to 24 months. In fact, he states that gold “has everything going for it.” A few days later, Bloomberg reported that Tudor pulled the trigger on an $82 million purchase of gold-related shares.
Silver, however, is the better investment, with a gold-silver price ratio (GSR) of 90. Historically, the GSR has been closer to 60. At $1345 gold, silver a GSR of 60 would put silver at $22.42. And, there have been times in the last decade when the GSR hit 40, which, at $1345 gold, would put silver at $33.62. Actually, when silver went to $50 in 1980, the GSR was 17.
Jones is probably aware of the GSR; however, there is no good way to put $82 million in silver shares because 70% of the silver mined comes as a by-product of copper, lead, zinc or gold (primarily copper). While there are mining companies that produce primarily silver, $82 million would have a major impact on their prices. Further, selling those stocks would be difficult without putting great downward pressure on them.
With a GSR of 90, silver is dirt cheap. A very neglected asset that is just screaming to be bought. In fact, over the last few months we’ve had wealthy clients place several orders for more than a million dollars for silver, and their reasoning went along the lines of “Silver is just too cheap not to buy.”
Throughout the centuries, silver has been used as money right along with gold. It is mentioned in the Bible more than 300 times. Nowadays, though, the industrial uses for silver far outstrips those for gold. And, silver’s antimicrobial properties for medical uses are starting to be recognized and used in a myriad of products.
But the really big boost in silver’s price will come when the “man on the street” starts buying (because of inflation, an economic scare such as 2009-2011 World Financial Crisis, or war). With, say $50,000, he would get about 36 ounces, literally a handful of coins. However, with silver he would get about 200 pounds. It’s a psychological thing.