The Fed Blinked – Gold And Silver Are Going Higher

Price inflation has been badly misrepresented by CPI figures and have been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap. – Alasdair Macleod, “Ten Factors To Look For In Gold In 2019

The following is an excerpt from the latest issue of the Mining Stock Journal, which included an analysis of a  highly undervalued, relatively new and unknown junior mining company advancing a gold-silver project in Mexico.

As I have suggested in the past (in more detail in the Short Seller’s Journal), the Fed is retreating quickly from rate hikes and balance sheet reduction (QT). The Fed deferred on raising rates at its FOMC meeting this week. What I found somewhat shocking, however, was the removal of reference to “further gradual rate increases.”

Perhaps more shocking was the reference to the possibility of re-starting the money printing press:  “…the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy…” That statement translated means, “we’ll have to print more money eventually.”

This should be extremely bullish for the precious metals sector. The only issue is the timing of the next big move higher. That depends on the degree to which the banks can continue controlling the price with gold and silver derivatives.  No one knows that answer, not even the banks. At some point, as occurred from 2008-2011, the western banks will be unable to suppress the natural price rise of gold/silver. That said, the Chinese and the Russians could pull the rug out from under the western manipulation if and when they want. That will happen eventually as well.

Alasdair Macleod wrote a brief and insightful essay from which I quoted and linked above describing key factors in 2019 that could push the price of gold significantly higher. Most of the factors are familiar, especially for subscribers to my Short Seller’s Journal. First and foremost will be the Fed, along with Central Banks globally,  reverting to easy monetary policy.

Notwithstanding official propaganda to the contrary, the U.S./global economy is rapidly slowing down. Many areas are contracting. Government spending deficits will soar as tax revenues fall behind the rate at which Government spending is increasing.

At some point, the Government will plead with the Fed to help finance Treasury issuance (this will occur in the EU, Japan and China as well), creating another acceleration in monetary inflation/currency devaluation. This will act as a transmission mechanism to inflate the dollar price of gold. Smart investors understanding this dynamic, and who have the financial resources, will move dollars out of financial assets and into gold. See 2008-2011 for an example of this process.

Gold has outperformed almost every major asset class since 2000:

Gold has outperformed most other assets since 2000 because Central Banks globally began to implement extreme monetary policies in response to the global stock market crash in 2000 led by tech stocks. As John Hathaway, manager of the Tocqueville gold fund, describes it, “gold has been a winning strategy since monetary policy became unhinged nearly two decades ago.”

In addition to the fiscal and monetary policies implemented globally in response to deteriorating economic and financial conditions, Alasdair identifies four factors directly affecting the price of gold this year.

One factor not widely perceived or understood by the markets is the gradual and methodical shift away from using the U.S. dollar for trade and as a reserve asset by Russia and China. It’s clear that both countries are swapping dollar reserves for gold and conducting an increasing percentage of bi-lateral trade with their trading partners in each country’s sovereign currency.

As an aside, gold has been soaring in most currencies besides the dollar. At some point, this shift away from using the dollar as a reserve currency will remove the “safe haven asset” status of the dollar, causing a considerable decline in the dollar vs global currencies. Concomitantly, the dollar price of gold will soar.

Another factor identified by Macleod is price inflation: “price inflation has been badly misrepresented by CPI figures and has been averaging closer to about 8% annually since gold topped in Sept 2011. Since then the purchasing power of the dollar has declined by about 43%, so that in 2011 dollars the gold price is $740. No one seems to have noticed, leaving gold extremely cheap.”

In my view, the price inflation factor as it affects investor attitudes toward gold will be a “slowly then suddenly” process. Investors and the population in general tend to move in herds. Currently the headline Government CPI is accepted and discussed as reported. At some point,  a large contingent of mainstream institutional investors will decide the Government’s measurement of inflation is wrong and will begin to buy gold and silver. The masses will soon follow. We saw this dynamic leading up to the parabolic move by gold in 1979-1980.

The third factor is “monetary inflation.” Most people think of price when they see the term “inflation.” But the true economic definition of “inflation” is the rate of growth in the money supply in excess of the rate of growth in economic (wealth) output. This in essence reduces the value of each dollar. Think about it terms of an increasing amount of dollars made available to chase a fixed supply of goods and services. That’s the monetary inflation that causes “price” inflation. Rising prices are the manifestation of monetary inflation.

As discussed at the beginning, at some point the Fed will be forced to re-start the printing press or face the consequences of a rapid economic and financial collapse.  Macleod points out that “these are exactly the conditions faced by the German government between 1918 and 1923, and the likely response by the Fed will be the same. Print money to fund government deficits.”  Recall that the policies used by the Weimar Government eventually led to hyper price inflation. The hyperinflation did not occur until the early 1920’s. But the policies leading to this condition began in 1914, when Germany World War 1 started and Germany’s huge war debt began to pile up. This is strikingly similar to the huge U.S. Government debt outstanding currently.

The final factor mentioned by Macleod is simply, “Gold is massively under-owned in the West.” By 1980, institutional investors on average held 5% of their assets in gold. Currently the percentage allocation to gold (or fake gold like GLD) is well under 1%. All it would take for a massive price reset  in gold and silver is for institutions to allocate 1-2% of their assets to gold. I believe eventually that allocation percentage will move back to 3-5%, which will drive the price of gold well over $2000/oz.

17 thoughts on “The Fed Blinked – Gold And Silver Are Going Higher

  1. The Fed with the Treasury has been monetizing U.S. Treasury Bonds for years that have been sold off by China, Russia and all others. But this is all secret, private & non-transparent. This has has no or very minimal impact on inflation. So it has been proven already that monetizing U.S. debt has no impact on the USD or inflation or any other stock/bond/currency markets.

    IMO, there is only one thing that can take down the system and that is a global economic depression with world-wide corporate debt defaults and large foreign country/entity sovereign debt defaults that are big enough to hemorrhage the financial system into the ground.

  2. Dave, you put forth a good argument for higher gold & silver prices. I was wondering what your thoughts might be in regards to Platinum. The AU/PT ratio is way out of historical standards.

    1. Mike,
      I have been trying to figure the absurd AU/PT ratio myself. I understand that platinum price is down due to the elimination of diesel engines.

      Palladium is 15X more rare than platinum, why are the auto manufacturers insist on using palladium for the catalytic converter for petrol engines? I can understand using palladium instead of platinum when palladium was cheaper but why are they not switching to platinum which is now cheaper and more abundant than palladium?

      1. Yea, I just don’t get it either. Seeing how neither Platinum nor Silver are monetary metals (demand is almost entirely industrial in both cases) might explain the historically out of whack GSR and AU/PT ratios. The economy sucks and industrial commodity prices reflect that reality.

        I like Pt (and recently bought some) b/c a price spike is just one embargo away. South Afrika is a basket case and Russia is not too happy w/ the USA right now. Both are primary producers. I also get the feel downside is pretty limited. Right now you can buy ’19 plat eagles for spot +50. Once these sell-out the premiums will go right back to +120 -a double kicker of sorts.

  3. “The Stock Market Would Crash Without Central Bank Support”

    But WITH that support, and the equities markets moving up so far in 2019, does not support higher prices for G & S.

  4. Are you just another die-hard gold pumper with an agenda to peddle gold? Przemyslaw Radomski has posted a very credible article which states that gold and silver will crash brutally later this year. Apparently the crash has already started! The more you guys doggedly pump gold the more it inevitably goes down. All the evidence indicates that gold and silver have been lousy assets, having lost a huge percentage since 2011. They are store of nothing except pipe dreams for the lunatic fringe.

    1. Alberto Primo… LMFAO!!! Are you insane! The world is awash with worthless dollar bills and debt and you think precious metals are worthless? The Fed just abandoned its tightening regime. That should tell you something. Gold and silver reigns supreme as non inflatable money.

  5. Michael Ballanger is also saying that gold and silver are going to tank real hard. Since 2011 gold and silver have performed the same way over and over again. They occasionally bump up but with a downward trend line. Is there any reason to believe it will be different this time? The metals have destroyed the finances of countless people who have trusted them. There is plenty of reason to believe that within 6 months gold will be at $1050 and silver at $11. Thinking they are “going to the moon” as all the PM pumpers claim is wishful thining and delusion.

    1. I don’t understand your point. I dont’ give a shit what Ballenger and Radomski think. They’re forecasting skills are not any better than anyone else’s. Here’s a forecast: Gold will be higher in 5 years than it is now.

      Go mentally masturbate in Ballenger’s or Radomski’s comment sections. Oh. Wait. They don’t have comment sections in their public work.

    2. “There is plenty of reason to believe that within 6 months gold will be at $1050 and silver at $11.”

      Actually there are between very few and no reasons to believe those figures you mention, unless one believes the beliefs of people who don’t know what they are talking about.
      One quick point you and the people you quote obviously don’t know: The prices you quote are well below the cost to mine and refine these metals to .999 purity. They won’t sell below cost of production. If there was a horrifically fast equities market crash in a short period of time, the metals prices might drop very briefly, before a larger rebound.

  6. Dave what are your thoughts on royalty & streaming co right here? Been watching a lot of the recent Cambridge house conference. Maverix metals $MACIF & Metalla royalty streaming $MTAFF….?

    1. I only recommend two, which I detail in my Mining Stock Journal. My preference is the high risk/high reward of exploration companies.

  7. Alberto Primo… LMFAO!!! Are you insane! The world is awash with worthless dollar bills and debt and you think precious metals are worthless? The Fed just abandoned its tightening regime. That should tell you something. Gold and silver reigns supreme as non inflatable money.

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