Whatever its faults, gold generally holds its purchasing power. Historically, an ounce of gold has bought a man’s suit, and it still does. From Simon Black at sovereignman.com:
Warren Buffett, despite his extraordinary investment success, has a rather famous and long-standing love/hate relationship with precious metals.
Maybe it started with his dad– Congressman Howard Buffett of Nebraska– who, as a staunch advocate for the gold standard, argued to his colleagues on Capitol Hill that “paper money systems have always wound up with collapse and economic chaos.”
Warren himself acquired a record-setting 128 million ounces of silver back in the late 1990s… which he later sold at a profit in the early 2000s.
But to listen to him talk about precious metals these days, he’s always negative.
Nixon wanted to fight the war in Vietnam, not raise taxes, and not hike interest rates to finance it.
Arthur Burns, not Volcker was at the Fed.
American economist Barry Eichengreen summarized: “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one”.
Vietnam War and the Dollar Exodus Beginning
The dollar exodus had its beginnings way back in February 1965 when President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate of $35 per ounce.
Debt bubbles that grow faster than the underlying economy’s ability to service that debt invariably pop. From Charles Hugh Smith at oftwominds.com:
All of America’s bubbles will pop, and sooner rather than later.
Financial bubbles manifest three dynamics: the one we’re most familiar with is human greed, the desire to exploit a windfall and catch a work-free ride to riches.
The second dynamic gets much less attention: financial manias arise when there is no other more productive, profitable use for capital, and these periods occur when there is an abundance of credit available to inflate the bubbles.
Humans respond to the incentives the system presents: if dealing illegal drugs can net $20,000 a month compared to $2,000 a month from a regular job, then a certain percentage of the work force is going to pursue that asymmetry.
In our current economy, corporations have sunk $2.5 trillion in buying back their own stocks because this generates the highest work-free return. This reflects two realities:
1. Corporations can’t find any other more productive, profitable use for their capital than buying back their own shares (enriching the managers via stock options and the 10% of American households who own 93% of the stocks)
2. Thanks to the Federal Reserve and other central banks injecting trillions of dollars of nearly-free credit into the financial sector, corporations can borrow billions of dollars to play with at near-zero rates that are historically unprecedented.
So borrow billions at 2.5%, pour it all into buying back your own stock and reap the gains as your stock rises 10%. Recall the basic mechanism of stock buy-backs: by reducing the number of shares outstanding, sales and profits go up on a per share basis–not because the company generated more revenues and profits, but because the number of shares has been reduced by the buy-backs.
Current economic policies will obliterate the idea of retirement for many people. From Charles Hugh Smith at oftwominds.com:
What happens when these monstrous speculative bubbles pop?
Let’s start by stipulating that if I’d taken a gummit job right out of college, I could have retired 19 years ago. Instead, I’ve been self-employed for most of the 49 years I’ve been working, and I’m still grinding it out at 65.
By the standards of the FIRE movement (financial independence, retire early), I’ve blown it. The basic idea of FIRE is to live frugally and save up a hefty nestegg to fund an early comfortable retirement. As near as I can make out, the nestegg should be around $2.6 million–or if inflation kicks in, maybe it’ll be $26 million. Let’s just say it’s a lot.
You’ve probably seen articles discussing how much money you’ll need to “retire comfortably.” The trick of course is the definition of comfortable. The conventional idea of comfortable (as I understand it) appears to be an income which enables the retiree to enjoy leisurely vacations on cruise ships, own a boat and well-appointed RV for tooling around the countryside, and spend as much time golfing or boating as he/she might want.
FIRE retirees might opt for socially aware volunteer work or hiking trips in remote regions. Whatever the activities, the basic idea here is: retirement = no work = enough cash to do whatever I please.
Needless to say, Social Security isn’t going to fund a comfortable retirement, unless the definition is watching TV with an box of kibble to snack on.
We’ve reached a pivotal moment where all of the narratives of what is actually happening have come together. And it feels confusing. But it really isn’t.
The central banks have run out of room to battle deflation. QE, ZIRP, NIRP, OMT, TARGET2, QT, ZOMG, BBQSauce! It all amounts to the same thing.
How can we stuff fake money onto more fake balance sheets to maintain the illusion of price stability?
The consequences of this coordinated policy to save the banking system from itself has resulted in massive populist uprisings around the world thanks to a hollowing out of the middle class to pay for it all.
The central banks’ only move here is to inflate to the high heavens, because the civil unrest from a massive deflation would sweep them from power quicker.
For all of their faults leaders like Donald Trump, Matteo Salvini and even Boris Johnson understand that to regain the confidence of the people they will have to wrest control of their governments from the central banks and the technocratic institutions that back them.
This past week, Trump announced he had reached an agreement with Congress to pass a continuing resolution which will suspend the debt ceiling until July 2021.
The good news is that it will ONLY increase spending by just $320 billion.
What a bargain, right?
It’s a lie.
That is just the “starting point” of proposed spending. Without a “debt ceiling” to constrain spending, the actual spending will be substantially higher.
However, the $320 billion is also deceiving because that is on top of the spending we have already committed. As I noted just recently:
“In 2018, the Federal Government spent $4.48 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP. Of that total spending, ONLY $3.5 Trillion was financed by Federal revenues, and $986 billion was financed through debt.
In other words, if 75% of all expenditures is social welfare and interest on the debt, those payments required $3.36 Trillion of the $3.5 Trillion (or 96%) of revenue coming in.”
Do some math here.
The U.S. spent $986 billion more than it received in revenue in 2018, which is the overall “deficit.” If you just add the $320 billion to that number you are now running a $1.3 Trillion deficit.
Are investors and speculators edging towards the exits on Europe? From Tom Luongo at tomluongo.me:
Gold is calling out the insanity of the European Union. It is also calling out the insanity of the global economy. But really it’s all about the euro at this point.
Since breaking through the post-Brexit high of $1375 per ounce, gold has pushed higher. Yes, it’s been volatile. Yes, the forces of control keep trying to stuff gold back inside the box, as it were.
And they keep failing.
Last week’s price action was impressive, even if the close was less than stellar. In the world of financial commentary everyone is looking for proximate causes for spikes and dips.
But most of that is simply noise. I don’t care why gold touched $1450 last week, only that it did.
Because a bull market that shakes off a number of big intra-week corrections to then blast to a new near-term high is a healthy one; one climbing the proverbial wall of worry.
And what’s important here is that this is not an anti-dollar trade. It is an anti-euro one. The U.S. Dollar Index has fully shaken off all attempts by the Fed to talk it down, trading at 97.6, and threatening a back-to-back monthly reversal at 97.8.
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