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The Evolving Gold Narrative: 2011 vs. 2016

The Evolving Gold Narrative: 2011 vs. 2016
By Sprott U.S. Media 4 years ago 13936 Views

September 7, 2016

Bill Gross just called out Janet Yellen as the penultimate market manipulator.

Gross, former head of PIMCO and current manager of Janus funds, recently echoed Rick Rule, assigning blame to the Fed for deferring short-term pain at the expense of long time gain. Mr. Gross’s comments are timed as the Fed continues to debate whether to raise interest rates after years of keeping them anchored in an effort to stimulate the economy and generate inflation. Instead, Gross said, the Fed has merely inflated asset prices while actually harming the economy.

His solution for investors? Avoid stock and bonds, move toward gold and tangible assets.

We’re glad Mr. Gross has finally caught up.

But as this has been an ongoing narrative for gold investors since 2011, we asked Rick Rule what has changed in the gold story.

Rick explains: “In 2011, there was an entire narrative around the gold market, when gold was at $1,900, and that narrative was partly about U.S. markets; that is, higher incomes in places like India and China that had historic cultural affinity to gold. But, the other part of the discussion was really about the ability of U.S. Treasury securities and the U.S. dollar to retain the degree of hegemony as savings instruments that they had always enjoyed. The narrative in 2011 was that U.S. Federal Government on-balance sheet liabilities, at $16 trillion, were unsustainable, and worse, the off-balance sheet liabilities of $55 trillion were similarly unsustainable (and those numbers didn’t include state and local debt or pension obligations or stressed individual corporate balance sheets).”

Today, on-balance sheet liabilities are no longer $16 trillion. They are estimated at $19 trillion.

And investors somehow seem more sanguine at that higher level. Off-balance sheet liabilities, similarly, have moved from $55 trillion to $90 trillion.

The perception of sustainability is partly explained by the ongoing strength of the US dollar, which was all too uncertain in 2011. Rick explains, “I would suggest to you that is not a consequence of the strength of the U.S. economy or our collective balance sheet, but rather the weakness of the competition. I don’t think I have to recount the difficulties that emerging and frontier markets have faced, or the difficulties that Japan and Euro-zone face.”

In terms of the macro case for gold, its market dominance has eroded. In the 1980s, at the peak of that manic bull market, gold and gold related equities enjoyed an 8% market share of investable assets among U.S. savers and investors. The median and mean converge over the last three decades at about 1.5%. The current percentage is 0.33%.

And with national mouth-pieces like Bill Gross suddenly remembering the benefits of gold and other tangible investments, will we see a reversion to the mean? According to Rick, “I’m not suggesting that it will immediately get back to 1.5%, but even if we got back to half of mean, that would double demand for gold and gold related equities in a market where the U.S. still counts for 24% of the world’s investable assets.”

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