October 04, 2019
“I don't see any conceivable path where Gold and especially Silver are not multiples higher in the years ahead. That's just my humble opinion.”
I shared this on Twitter this week, and in the course of my many articles for Sprott Money I have explained why. Simply put, the US public and total debt, including unfunded liabilities, is gigantic and rising fast as deficits continue to explode higher. This is simply unpayable. The US is not going to suffer the humiliation of an outright default, especially when they have a printing press. The most likely solution is to inflate it away by printing the dollar into oblivion.
The recent stress the soaring treasury bond issuance has placed on US financial institutions, given that foreigners are now net sellers of US debt, became evident recently in skyrocketing repo rates. The Fed was forced to intervene with liquidity injections to bring repo rates back down to normal levels just above the Fed Funds rate. Some believe that this is the beginning of QE. As long as the Fed can manage the repo market with temporary liquidity injections as needed, I believe QE is still down the road yet. That said, I have repeatedly stated that QE is inevitable given the debt debacle unfolding.
However, rising populism and inequality in the US virtually guarantees that the people won’t accept QE solely for the rich again and hence we have “MMT”: Government spending financed directly by the Federal Reserve. This will likely include ‘free’ monthly checks in the mail for everyone, also known as Universal Basic Income, free education, free healthcare, you name it! All paid for with dollars printed out of thin air by the Fed. Sounds fantastical but such ideas are echoed by many of the leading US Presidential candidates. I believe we will see MMT rolled out, but not because it works, but as a final desperate attempt by the Keynesians to boost growth and inflation in a sea of debt and deflationary pressures. In my opinion, this is “Helicopter Money”, plain and simple. I’m not alone in this expectation either…
Courtesy of Deutsche Bank Research and Jim Reid:
When that happens, say goodbye to the dollar. The US may even experience Hyperinflation as a result. Either way, hard assets like Gold and Silver would soar under such conditions. China and Russia figured this out ages ago. Hence, why I’m a long-term bull on precious metals. Follow the smart money.
With this in mind, I have also posed the question in the recent past, will you really care if you bought Gold at 1300 or 1400 when it’s at 5000 or 10000? Will you care if you bought Silver at 13 or 18 when it’s at 100, 200, or 500? These are the kinds of numbers you should be considering when policies like MMT are rolled out. So if you don’t own any physical gold or silver, I recommend you buy some as insurance against such outcomes because if precious metals reach such prices, you know a catastrophe is playing out. Gold and Silver are the new TINA imho, “There is no alternative”.
The big picture is extremely bullish for precious metals, but what about the short-term?
Gold and Silver have both enjoyed tremendous rallies since November last year. They both finally peaked recently and have fallen 6.5% and 14% respectively since. Now they are rallying off their lows of 1465 and 16.94. The question is are they both done on the downside and are heading much higher or do we still have lower to go.
Last week, I provided 3 primary scenarios I am following in Silver. To avoid repetition, please read the article for the details as the key levels remain the same: https://www.sprottmoney.com/Blog/silver-gets-knocked-down-before-it-goes-on-to-win-the-fight-david-brady-26-092019.html
Among those scenarios, I outlined the case for a deeper drop in a worst-case scenario. That could look something like what happened to Gold in 2008.
As I shared on Twitter on Wednesday, I'm not saying this is going to happen but it is a risk. TIPS prices are the inverse of real yields, when they fall, real yields rise. Beginning in March 2008, TIPS began to fall and real yields rose. Real yields spiked higher in August and did not peak until November. Gold, which was near perfectly correlated to real yields on an inverse basis, fell almost 30% from March to November.
This occurred at the same time that the stock market was in the midst of one of the worst bear markets in history. If Gold is a safe haven, shouldn’t it have risen? At the same time, the Federal Reserve was continuing to slash interest rates from 2.50% to 0.40%. Aren’t rate cuts supposed to be beneficial for Gold given that it does not provide a yield? Finally, why were real yields spiking higher if bond yields were relatively stable and the Fed was cutting short-term rates?
There are several possible reasons for Gold’s dump. Real yields can rise when bond yields fall if inflation expectations fall more rapidly than yields, which was obviously the case here as the economy plunged into recession. As stocks were plummeting and banks were going bankrupt, losses mounted for leveraged investors who were forced to sell and take profits on gold to cover their losses.
Lastly, the Bullion Banks had built up a record net short position in Gold ahead of its drop in 2008 and repeatedly intervened in 2008 to drive the price down. Shock-like declines are drops of 2% or more in less than 20 minutes. There were 12 such shock-like declines in Gold that year. To put that number into perspective, the average number of declines per from 1984 to 2013, excluding 2008, was less than 1. The selling in 2008 was completely abnormal and certainly not due to liquidity needs elsewhere. Such sales are executed steadily over time not all at once in the space of 20 minutes. The data that proves the Bullion Banks manipulation of Gold and Silver markets over decades can be found in “The Gold Cartel” by Dimitri Speck, a renowned quantitative specialist.
Does any of this sound familiar? It should. Commercials were record short Gold last week:
Could inflation expectations crash? Sure looks like it based on the recent economic data, most notably the ISM. It signals inflation is about to head south in a big way. Courtesy of Remi Tetot @RemiGMI:
With respect to real yields, TIPS (Treasury Inflation-Protected Securities) prices are the inverse of real yields, they rise as real yields fall and vice versa. Gold is near perfectly correlated to TIPS now: 0.97. There is a clear risk is that TIPS could break trendline support since November, when the rallies in Gold and Silver began. If it does, the metals could fall further than people expect.
Let me emphasize that this is just “a risk” to be mindful of. Whether we fall further or not, Gold and Silver are going multiples higher in the next few years. Any dips, especially sizeable ones, are a gift imho, given what lies ahead.
Until then, if we don’t break 1465 and 16.94 on the next move down in Gold and Silver, then a massive rally to new highs is likely under way. If we do break those levels, my targets on the downside remain ~1423 and 16.50 for the bottom and lift-off to follow.