Why Gold Is Rallying?

The big news in the markets last week was the continued breakout in gold prices to nearly $1500 per ounce and the continued rally in US Treasury Bonds.

Gold spiked nearly 4% last week while silver rallied nearly 5%. The yield on the 30-Year US Treasury Bond fell to 2.26% from 2.39%.

The US Dollar declined slightly.

For several years, I have been suggesting to clients that they consider accumulating gold and silver since world economic fundamentals favor metals in my view.

Not so much because metals are worth more, but because there is massive devaluation of world currencies currently taking place.

Given existing public debt levels around the globe (see below), we expect this trend to continue and for metals and other tangible assets to be a good place to store wealth in order to preserve purchasing power.

Over the long haul, this has proven to be a good strategy.

Take gold for example. 

In 2000, gold was selling for about $290 an ounce.  Today gold is selling for nearly $1500 per ounce.  In US Dollar terms, that’s an increase of about 500%.

In calendar year 2000, had you taken $1500 and put it in your sock drawer, today you’d still have $1500.  But, that $1500 would buy a lot less than it did in the year 2000. 

Here is an example to make the point.

The base price of a 2000 Ford Mustang Coupe was $16,710.  By comparison, the present base price of a new Ford Mustang Coupe is $26,395.

That’s an increase in the base price of a Mustang over 19 years of 57.96%!

However, if we price the Ford Mustang Coupe in gold, we get a completely different picture.

In 2000, it took about 57 ounces of gold to buy a base model Ford Mustang Coupe.  In 2019, with gold at nearly $1500 per ounce, it takes about 18 ounces of gold to buy a base model Mustang.

If you possess 57 ounces of gold today, the amount of gold it would have taken to buy a Mustang in 2000, you can now buy 3 Mustangs and still have about 3 ounces of gold, or $4,500 leftover.

Over the long term, over many time frames, gold has been a better place to preserve purchasing power than US Dollars and even better than stocks.

In 2000, the Standard and Poor’s 500 was about 2200.  Today, as of this writing, the S&P 500 stands at 2918, an increase of about 33% in terms of US Dollars.  By contrast, as we’ve already discussed, gold has increased by 500% in terms of US Dollars over that time frame.

According to Charlie Bilello (Source: https://kingworldnews.com/formerly-vocal-gold-bears-are-in-hiding-a-world-of-bubbles-plus-the-road-to-1800-gold/), over the last 20 years, gold has outperformed Berkshire Hathaway with Berkshire Hathaway returning 387% and gold returning 488%.

My forecast is for this trend to continue.

The current global monetary policy is currency devaluation.

Recently, President Trump labeled China as a currency manipulator alleging that the Chinese were manipulating its currency to gain a trade advantage.

The reality is that all fiat currencies are being devalued via manipulation. 

Worldwide, there is a race to the bottom as far as currencies are concerned with currencies losing absolute purchasing power as time passes.

 Each week, I track the value of the US Dollar Index.  While the US Dollar Index has held up well recently, it’s important to remember that this index measures the purchasing power of the US Dollar relative to the purchasing power of the fiat currencies of the six major trading partners of the US.

Just because the US Dollar Index rises, it doesn’t mean that the purchasing power of the US Dollar is increasing on an absolute basis. 

It’s not.

As we’ve just demonstrated, to calculate the absolute purchasing power of the US Dollar, one needs to use a tangible asset comparison.  Gold is the most commonly used and widely accepted tangible asset comparison.

In a recent piece published on “King World News” (Source:  https://kingworldnews.com/greyerz-most-people-dont-understand-the-scale-of-the-collapse-that-is-in-front-of-us/), Egon von Greyerz wrote:

Most people don’t understand that the value of their money in the pocket is deteriorating all the time. They live under the illusion that prices are going up, which is totally erroneous. It is not prices that are going up but the value of money which is declining rapidly. The example of the house above going up 50x in 48 years is a good illustration. In real terms, the house has not gone up in value at all. It is the value of the money that has collapsed in all countries since Nixon closed the gold window. 

If governments and central banks were honest, every year they would publish a table illustrating how much value the currency has lost in relation to gold, which is the only money that maintains its purchasing power. But since governments never do this, I will do it for them. Below is a table of the gold price for a selection of countries. 

Note from Mr. von Greyerz’s table that since 1971 when then US President Richard Nixon closed the gold window, world currencies have lost 90% to 99% or more of their purchasing power in real terms.

Since 2000, the best fiat currency in which to store wealth has been the Swiss Franc which has lost only 68% of its purchasing power.  The US Dollar, as evidenced by this chart and the Ford Mustang example above has lost 80% of its purchasing power.

History teaches us that currency devaluation is a slippery slope.  Once it starts it doesn’t stop until faith in the currency is ultimately, eventually and inevitably lost.

And, based on our research, there has never been a fiat currency that has lost more than 90% of its value that has ever reversed direction.

Looking at the numbers, this won’t be the first historical example of a fiat currency recovery either.

Global debt levels presently are simply staggering.

This chart suggests that global debt levels are now approaching $250 trillion, rising by $3 trillion in the first quarter of 2019.

Those debt levels cannot be paid with ‘honest’ money which leaves only two options:  one, default on the debt or two, create currency.

Since easy money and currency creation have been the preferred policies to this point, I expect that they will continue to be the preferred policies.  That is until they won’t work anymore.  Then, the reset will come.

At the reset point, tangible assets and assets with links to tangible assets will be needed to survive and prosper.