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Perspective
By Rich Checkan
I don’t know about you, but our Christmas preparations are in full swing. The lights went up the Saturday after Thanksgiving, and they have been burning 24 hours a day since. We cut down a beautiful, full, and well-shaped tree this weekend. And next weekend we will make more cookies than any of us can possibly eat.
But… that’s not the most exciting thing that’s happened since mid-November. The most exciting thing over the past few weeks is the run that gold and silver have been on.
Gold was up a little over 3.2% in November, but it did manage to touch a new all-time high in U.S. dollar terms over the weekend at $2,152.30. And silver, as it tends to do in bull markets, out-performed gold in November… up 12% for the month!
Of course, as can be expected, they both pulled back this past Monday after gold hit its new high. Profit-taking is to be expected.
What’s Fueling the Move?
We talked about this over the past few months. There are a combination of things influencing gold and silver prices.
Of course, there are safe haven flows due to the ongoing wars between Russia and Ukraine and between Israel and Hamas. Further, I’m certain there is some safe haven buying as a result of general social unrest worldwide.
But that’s just the tip of the iceberg.
The pause in interest rate increases by the Federal Reserve has been positive for gold and silver prices, as well as the growing belief that the Federal Reserve will start to lower interest rates as early as June of next year.
Time will tell, but the markets are certainly believing that narrative right now.
But there’s still more.
Treasury yields have come down. The 10-year note receded from 5% down to 4.25%. And the U.S. dollar has weakened significantly in a short period of time. The U.S. dollar Index fell from near 107 to below 103 in less than a month.
This weakening trend is largely the result of concerns over the $33.6 trillion debt in the I.O.U.S.A. and the very real concerns about how the financing of that debt will play out in years to come. The annual debt service is right around $1 trillion dollars at these elevated interest rates, and there is waning interest in buying this U.S. debt at auctions.
The world is realizing that U.S. debt is a bad investment when Congress has no desire to balance a budget… no desire to live within its means.
Lastly, there is the continued concern about bank solvency. With unreported losses due to Treasury holdings on the balance sheets of virtually every bank in the U.S., many are beginning to think we are one liquidity crisis away from a new, larger bout of bank failures.
That liquidity crisis may well be triggered by “Jingle Mail.” No… I am not referring to Christmas cards and presents. I’m referring to commercial real estate owners sending the keys to the office buildings back to the lenders in the mail as they walk away from their loans. After all, why would they refinance empty buildings at new higher interest rates?
How High Can We Go?
That’s a great question.
I personally believe we could see a doubling or tripling of the previous all-time high in gold… $1,921 per ounce in September of 2011. I would expect something around $3,500 to $5,000.
Silver could very well move somewhere between $50 and $100.
But I don’t expect either to occur just yet.
As discussed in previous articles and videos, the Central Banks have been supporting the gold price for the past two years. In 2022, they bought more gold than at any time in the past 60 years. In 2023, they are on pace to buy more than in 2022.
That buying has given a strong and resilient base of support for the gold price.
However, I truly believe the market needs the support of investor buying before it can move significantly above current levels AND maintain those higher prices.
To date, the investor has been absent from this market. Premiums have been falling for gold and silver products, and the World Gold Council recently announced a year-on-year decline in bar and coin demand (what investors buy) of 14%. Premiums don’t fall, and bar and coin demand doesn’t slip when investors are buying hand-over-fist.
Dealers have reported small investor liquidations since July. Personally, I believe this is a sign of how stressed the individual consumer is right now. Federal Reserve Chairman Jerome Powell would have you believe the increased consumer spending is an indication of the resiliency of the consumer and the strength of the savings and balance sheets of consumer households.
I disagree.
Spending is up because consumers are buying exactly what they bought last year… their needs. But this year, everything is more expensive.
Further, I believe the liquidations of gold and silver dealers are seeing are an indicator that consumers need money to make ends meet. They will not tap into home equity to refinance because that would cause their interest rates to climb from 3% to 8%. And, as we have seen by the record level of credit card debt topping $1 trillion, consumers have already maxed out their credit cards.
This is a bad situation, and once again, the Federal Reserve is misinterpreting the data. This is as bad a reading on what’s happening around them as when they created, misdiagnosed, denied, blamed others for, then finally acknowledged inflation.
They reacted too late then. They are missing the point again here as well.
Have the Gold and Silver Ships Already Sailed?
No. Not a chance.
The general assumption is the gold price is high because it is at previous all-time highs. But that is not a fair assumption.
From the moment it was once again legal to own gold in the U.S. until the bull market peak in January of 1980, gold appreciated 550%.
Then, from January 2001 through the bull market peak in September of 2011, gold appreciated 650%.
For this bull market, no matter what you use for a starting point, we are just getting moving. If you go back to gold’s price low in December of 2015 at $1,050, gold is up 105%. If you use gold’s break-out above $1,500 per ounce in 2019 as your starting point, gold has only appreciated 43%.
For gold, bull markets tend to be significant in both time (a decade) and price appreciation (550% and 650%).
So…
When I hear people claim the price of gold is high right now, I think they cannot be more mistaken. When I hear people claim gold is high because the price is at all-time highs, I think they cannot be more mistaken. When I hear people say they want to wait for gold’s price to come back a bit before buying, I think they cannot be more mistaken.
Gold had been trading in a narrow range for a few years. During that time, it tested support to the downside at $1,600… $1,800… and $1,900.
To me, right now, right here, at these prices, gold is cheap. I believe it is an opportunity to buy well before the next leg up. Your wealth insurance premium is low right now.
And your profit potential in silver… which really hasn’t gotten going yet… is enormous.
Call us at 800-831-0007 or send us an email today so we can help you get your precious metals allocation in order.
Let us help you Keep What’s Yours!
And… most importantly… from all of us here at Asset Strategies to you and your family and friends… best wishes for a Merry Christmas and a Happy, Healthy, and Prosperous New Year!
—Rich Checkan
Editor's Note: Adrian Day is president of his eponymous money management firm, offering discretionary accounts in both global markets and resources. He also manages the Europac Gold Fund. To see if a managed account might be right for you, call ASI and we'll make the connection. Call 1-800-831-0007 for more information.
Feature
The Stars are Aligning for Gold and Gold Stocks
By Adrian Day
The economic, monetary and political environments are lining up in favor of gold and gold stocks. And of these, contrary to what many believe, geopolitical tension is perhaps the least important, at least for any sustained move, and certainly for the stocks.
It Makes Sense Why the Gold Stocks Underperformed
There has been disappointment among gold investors ever since Russian invaded Ukraine. That war, plus rising inflation, was thought by many to be the ideal environment for gold to soar. Geopolitical events from 9/11 onwards tends to have only a short-term impact on the price, with the gold price returning to previous trend in short order. This was very clear with the Russian invasion of Ukraine, where gold returned to pre-invasion levels within two months. And when inflation is picking up, the market looks ahead to the central banks’ response.
But gold’s action over the past year and a half has not been so bad. It was up from the period before the Russian invasion until before the Hamas attack on Israel, and nearly 20% for the 12 months prior to that attack. This was in the face of the most aggressive monetary tightening ever as well as a strong dollar, two factors that are decidedly negative for gold.
But the stocks lagged, again disappointing investors. That should not be a surprise, when one considers who was buying gold and why they were buying. Most buying over the past 18 months has been from central banks, as well as very wealthy families and institutions in the Mid East and Asia. They were buying for safety not for speculation. Thus they bought gold bullion and not gold stocks.
The Political, Economic, and Monetary Environment Favors Gold
What about now? No question geopolitical tensions are supportive of the gold price, though less so than many believe; other factors are more important.
• U.S. disfunction, both political and financial, is significant, given that the U.S. is the world’s dominant economic and political power.
• Global debt, but particularly in the U.S., is likely to only get worse. In the U.S., increasing Treasury issuance come about not only because of ever-increasing deficits but also because of the Treasury’s recent propensity to finance at the short end, meaning, more bills and notes need rolling over each year than if the Treasury has financed with longer-term bonds. At the same time, the traditional buyers of longer-term Treasuries are no longer buying. Not only is the Federal Reserve not buying; but nor are China, Japan or Russia; and even U.S. banks are buying far fewer. Hence, recent Treasury auctions have ranged from “soft” to “downright bad”, with lower coverage and longer tails.
• It is as inevitable as anything in the economic world that the U.S. is heading inexorably towards a recession. All the economic signs are there, from rising consumer debt and write-offs, to weak manufacturing. Technical indicators, such as the inverted yield curve and the Leading Economic Indicators Index, are pointing to a recession. The fact that we have not had a recession yet does not mean the “soft landing” proponents are correct. The average time from the start of a tightening cycle to the onset of a recession, going back to the 1960s, is 22 months, so we are only now coming up to that average. There is every reason to think the lag could be longer this time, given that the long period of very loose monetary policy and ultra-low interest rates gave households and businesses the opportunity repair balance sheet, refinancing at lower rates and extending maturities. To believe that rates can go from zero to 5.5% in little more than 18 months and not cause economic damage is just wishful thinking. Contrary to common perception, recessions are positive for both gold and gold stocks, with gold up during all but one of the past nine recession, and gold stocks up in most, and generally outperforming the broad market.
• At the same time, inflation is far from vanquished. The latest reading of the core PCE––the Fed’s preferred inflation measure–showed a month-on-month increase of 3.7% annualized. That’s close to twice the Fed’s arbitrary 2% target. But the situation is worse than that of course. Most consumers think the notion of a cost-of-living index that excludes food and energy is nonsensical to begin with. And even using the government’s figures, we see inflation slowly moving back up. This will likely continue, both because of base effects from higher levels last year and also as the cost of energy works its way into all the goods in the stores. I expect inflation to be stubbornly above the Fed’s target for the next several months at least.
• The combination of a sluggish economy and stubborn inflation––a stagflation–is perhaps the best scenario for gold, gold stocks and other commodities to benefit.
• After the most aggressive rate hiking cycle ever, the Fed is close to the end. Whether there is one more 25 basis point hike in December or not is almost irrelevant. It is most unlikely that the Fed will raise rates more next year. They may continue reducing the size of the balance sheet–-the second arm of their tightening program–but difficulty selling long-term Treasuries may cause the Fed to halt this balance sheet reduction.
• Lastly, in our brief overview of the main economic circumstances, is the strong dollar, which is a headwind for gold. In fact, the dollar index has declined since a peak at the beginning of November, and as the Fed pauses while perhaps other central banks tighten some more, the dollar’s comparative advantage will weaken.
Other than monetary tightening and a rising dollar, all the other factors are, in varying degrees, positive for gold. The last two factors that are gold bearish–-monetary tightening and a stronger dollar–-appear to be ending. So the environment is decidedly gold bullish at this time, and moving towards a stagflationary period, even more so.
Stagflations Favor Gold and Other Resources
In a stagflation, the best performing assets are gold, gold stocks, oil, other commodities, and resource stocks, in that order. We are buying gold stocks across the spectrum, emphasizing the major miners and royalty companies which are the first to move and more certain to move at the beginning of a gold bull market. But we are also buying quality single-asset developers for their takeover potential, and well-financed exploration companies that have never been more undervalued.
We are also buying oil and gas stocks, both because of increases in the commodity prices but also because of ongoing M&A activity in the space. We are buying the defensive global integrated majors; independent E&P companies; and high-yielding royalty companies. We are also buying copper companies, again both because of the potential for dramatic increases in the copper price and also for potential M&A.
We mentioned above why the gold stocks have lagged over the past two years even as gold performed reasonably well. This has changed dramatically in the last two months, when gold stocks have outperformed bullion, something we expect in a new bull market. It is worth noting that silver has also outperformed gold, another indicator of a strong market. Until the gold stocks moved, they were very close to their lowest valuations in 30 years, whether price to cash flow, or price to book value. They remain very good value.
In short, the economic, monetary and political environment strongly favors gold, while the gold stocks remain very good value, even as they start to outperform bullion. As the Federal Reserve and other central banks halt their tightening, even before inflation is conquered, gold and gold stocks come to the fore.
Hard Stuff
Are You Ready to Consider a Precious Metals IRA?
It’s more important now than ever that you have a plan for your retirement and protect your wealth until then so that you don't outlive your money. Have you ever considered adding the wealth preservation powers of precious metals to your retirement plan through a self-directed IRA?
If so, there are some things you need to consider before you start seeking out IRA trustee administrators…
1. Time Horizon
How close to retirement are you? The common wisdom is that the further away from retirement you are, the more time your investments will have to accumulate wealth. The best time to start owning precious metals in an IRA was yesterday. The second-best time is today.
This doesn’t mean that a self-directed IRA for precious metals is off limits if you are closer to retirement. Yet, it is important to keep in mind that IRAs are tax deferred, not tax exempt. When you reach April 1st immediately after you turn 72 years of age, you are forced to begin taking distributions. As you get older, the percentage you are forced to take out increases, and you will be forced to take out more money at unknown future tax rates.
Whether your retirement years are quickly approaching or decades away, it’s never too late or too early to add the stability of precious metals to your retirement portfolio.
2. Insurance vs. Profit
Precious metals are perfect for an IRA because they are best for long term investing goals. Many consider gold to be a form of wealth insurance, meaning that it is a store of purchasing power, in a form with high liquidity, for a potential financial crisis you hope to never have.
If your purpose for owning gold is wealth insurance, then buying at the lowest premiums available, holding it, and letting time do the work over decades will increase your purchasing power. Core holdings should remain untouched for the remainder of your life. Once you’ve filled this quota, any additional funds you allocate towards precious metals can have some profit potential, but this is really more of an added benefit for investors who are thinking in the long-term.
Since 2000, gold has outperformed standard "paper" investment assets like stocks. Last year, when all assets deflated, gold and silver remained steady, while stock and bond markets experienced a significant downturn. In an inflationary environment, gold tends to out-perform risk assets by increasing in value at a much faster rate. While the day-to-day spot price of gold will fluctuate and the market goes through cycles every decade or so, the long-term value of gold has continued to rise in a steady, sustainable pattern over long periods of time.
3. How Much Retirement Wealth Are You Looking to Protect?
Allocating some of your funds to precious metals in an IRA will protect your retirement savings against the volatility of other riskier asset classes. You can combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
The World Gold Council among others has conducted a number of studies where they included various percentages of gold in portfolios with various stock, bond, and currency mixes. What they found is having roughly 8% to 12% allocation to gold tends to increase overall portfolio performance while decreasing overall portfolio risk.
If you have a quite sizeable portfolio, then diversification is essential. Holding physical gold can be done in both your personal portfolio for liquidity and accessibility as well as in an IRA to diversify your holdings.
4. Where Are Your IRA Funds Currently?
Your precious metals cannot be held by you directly; they must be held through an IRA trustee administrator in an approved depository. If you currently have a traditional IRA, you may need to create a separate self-directed IRA with an IRA trustee administrator with a working knowledge of the IRS guidelines for including precious metals in an IRA.
If you already own gold, silver, platinum, or palladium, you may be storing at home, or in a depository. Precious metals for an IRA cannot be held at home and unless the depository you work with already has an established relationship with your IRA trustee administrator, you may need to do research on finding a trusted facility that can accommodate you.
At ASI, we have been helping clients to include precious metals as part of a diverse retirement portfolio since the IRS code first allowed it in 1986, and we can help to connect you with a IRA administrator you can trust to safely and securely hold your metals.
5. Storing Offshore May Offer Safety, Security, and Cost Less
Investors may find that storage of their precious metals for their IRA in an offshore depository will offer the most benefits in terms of storage costs and enhanced security.
Another great IRA option is the Perth Mint Certificate which can be placed in a self-directed IRA. Your gold, silver or platinum is held offshore in Perth, Western Australia and is guaranteed for safety by the Government of Western Australia and is fully insured at full market value at all times at no additional storage cost to you.
Are You Ready to Consider a Precious Metals IRA?
Precious metals are an excellent option for investors looking to balance out their retirement portfolios with a safe haven asset that historically performs well in times of inflation, dollar volatility, and geopolitical uncertainty. Right now, owning gold and precious metals is one of the best hedges against unprecedented inflation.
Call us at 800-831-0007 or send us an email to discuss your precious metals IRA options.
P.S. You’re almost out of time to take your Required Minimum Distribution from your precious metals IRA before the end of 2023, but we can help! You must start the process immediately to ensure it will be complete by year-end. Give us a call!
Editor's Note: Jon Wolfenbarger is a contributor at the Mises Institute. This article was originally published on November 30, 2023.
The Inside Story
It’s Time to Bust the Myth of Fed Omnipotence
By Jon Wolfenbarger
Economists, investors, businesspeople, and yes, even our wise politicians seem to believe that the Federal Reserve, using its various “tools” to create money out of thin air (which is illegal for mere mortals like us), can control the economy and financial markets any way it likes.
In particular, these people believe that the Fed doesn’t want a recession and a stock bear market, and the Federal Reserve can simply prevent these economic events from happening.
The Market Is Much Bigger than the Fed
However, the world doesn’t work that way.
The economy and financial markets are much bigger and more powerful than the Fed. The reason the Fed appears to “work” in preventing recessions and bear markets is that recessions and bear markets are typically much shorter than economic expansions and bull markets. It’s as simple as that. The market is ultimately in control, and the Fed just goes along for the ride.
Since the Fed is almost always creating new money, it just appears as though it is driving the economy and stock market to new heights.
Let’s compare the size of the Fed to the economy and financial markets to gain some perspective. The Fed’s total assets are $8 trillion. That amount is very big relative to my assets (yes, being able to create money out of thin air is very helpful in accumulating assets!), but it is still much smaller than the economy and stock and bond markets. The gross domestic product (GDP) of the United States is three times bigger than these assets, and global GDP is over twelve times bigger. The US stock market is nearly six times bigger, and the global stock market is nearly fourteen times bigger. The US bond market is six times bigger, and the global stock market is sixteen times bigger.
The Fed Has Been a Massive Failure
The Fed was supposedly given three main goals by Congress: (1) maintain a stable price level, (2) maintain full employment, and (3) maintain low interest rates.
If the Fed were really in control, we would always have something like 2 percent inflation (Also, why 2 percent? Why not 0 percent? Or negative 2 percent? Or some other number?), 4 percent unemployment, and 0.5 percent interest rates. The low interest rates are particularly important for the government since it has so much debt.
However, we obviously don’t live in the Fed’s “ideal” world.
If the Fed was really in control, how did they allow the Great Depression of the 1930s to happen? Or the “stagflation” of the 1970s with double-digit inflation and interest rates? Or the Great Recession of 2008–9? Or the high “transitory” (never-ending?) inflation we’ve had in recent years?
Perhaps most importantly for the Fed’s real constituents—the federal government and the banks—how did the Fed allow interest rates on ten-year Treasury bonds to skyrocket from 0.52 percent in 2020 to nearly 5 percent this year? How did the Fed allow Treasury bond prices to collapse 50 percent in three years? How did the Fed allow federal interest expenses to more than double to over $1 trillion in three years? How did the Fed allow the ratio of federal interest expense to federal tax receipts to double to 15 percent over the past two years?
How did the Fed allow the KBW Bank Index, Bank of America, Citigroup, and other banks’ stocks to fall more than 40 percent in the past two years? How did the Fed allow three of the four largest bank failures in US history to occur in 2023?
How did the Fed allow banks to lose over $500 billion on their investment securities in the past couple of years? How did the Fed allow itself to generate a negative net worth of $2.4 trillion?
Maybe the Fed really cares about the American people. Maybe it feels really bad about causing the Great Depression, the Great Recession, high unemployment, and high inflation. Or maybe it doesn’t care that much. Who knows what goes on in the minds of central-planning government bureaucrats?
However, it is obvious that the Fed did not want to lose so much money for the government, banks, and itself. If this doesn’t dispel the myth of Fed omnipotence in the minds of the American people, I don’t know what will.
The Fed Cannot Prevent the Coming Recession
Since the Fed does not control the economy, that means it cannot contain the coming recession. Why should we expect a recession? Here are eleven key reasons why I believe a recession is coming soon:
1. The money supply, as defined by the Austrian School of Economics, has been declining over 10 percent for more than six months. That is the steepest decline in the money supply since the Great Depression of the 1930s. Austrian business cycle theory explains why this should lead to a major economic “recession,” if not a “depression.”
2. Over the past eighteen months, the Fed has followed the higher short-term market interest rates and increased the federal funds rate at the most aggressive pace in decades. This always results in a recession.
3. Due to this rapid increase in short-term interest rates, the yield curve spread between long-term and short-term Treasury securities has been negative or “inverted” for over a year. That has occurred eight times since the late 1960s, and every single time, there has been a recession within a year or two.
4. The net percentage of banks tightening lending standards has risen to over 30 percent, which has always resulted in a recession.
5. The net percentage of banks reporting weaker loan demand has risen to over 50 percent, which has always resulted in a recession.
6. The Conference Board’s Leading Economic Index has been declining for eighteen straight months and is at levels only seen during recessions. That is the longest period of decline in the index outside of the major recessions of 1973–74 and 2008–9.
7. New housing starts have declined over 25 percent, and private residential fixed investment has declined over 10 percent, which happens in recessions and rarely outside of recessions.
8. Corporate profits have declined 4 percent, which happens in recessions and rarely outside of recessions.
9. Continuing unemployment claims have increased a whopping 28 percent year-over-year. Historically, every time continuing claims have risen more than 10 percent from prior year levels, there has been a recession.
10. Industrial production is now down 0.7 percent year-over-year. Industrial production always declines in recessions and rarely outside of recessions.
11. The Institute for Supply Management PMI manufacturing survey shows manufacturing has been contracting (below the neutral 50 level of the survey) for twelve months, and new orders have been contracting for fourteen months. According to Timothy R. Fiore, chair of the Institute for Supply Management Manufacturing Business Survey Committee:
The Manufacturing PMI registered 46.7 percent in October, 2.3 percentage points lower than the 49 percent recorded in September. The overall economy dropped back into contraction after one month of weak expansion preceded by nine months of contraction and a 30-month period of expansion before that. (A Manufacturing PMI above 48.7 percent, over a period of time, generally indicates an expansion of the overall economy.) The New Orders Index remained in contraction territory at 45.5 percent, 3.7 percentage points lower than the figure of 49.2 percent recorded in September. . . . The Employment Index registered 46.8 percent, down 4.4 percentage points from the 51.2 percent reported in September.
Conclusions
The American people are engaged in a massive case of wishful thinking when they believe the Fed can prevent a recession and stock bear market, given all the historical evidence to the contrary.
The huge rise in interest rates over the past couple of years, driven by the highest inflation rates in forty years as a result of the Fed’s incredibly irresponsible 40 percent increase in the money supply in response to a virus, is virtually guaranteed to cause a major recession and stock bear market, as I warned about over two years ago.
Now is the time to buckle up and prepare for the next Fed-created disaster.
As a reminder, preventing future economic disasters is rather simple (but not politically easy).
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