More Craziness and Where It Might Lead

Gold and US Treasuries continued their rallies last week as stocks declined.  The yellow metal rallied 1.11% while the usually more volatile silver advanced .88%. 

The Dow Jones Industrial Average fell about 1.5% while the Standard and Poor’s 500 declined 1%.

The chart below is a chart of an exchange-traded fund that tracks the price action of the US Treasury Long Bond.  Note from the chart how parabolic the run-up has been.

We have drawn Bollinger Bands on the chart.  This indicator was invented and refined by John Bollinger.  It is a useful indicator to provide an analysis of a particular market.

When prices reach or exceed the upper Bollinger Band, they are overbought.  Conversely, when prices reach or exceed the lower band they are oversold.  Observe from Chart One that the US Treasury long bond is really overbought as prices no exceed the upper Bollinger Band.

Another observation from Chart One.  The wider the spread between the upper Bollinger Band and the lower Bollinger Band, the greater the volatility in a market.  Examining Chart One, given the spread between the upper Bollinger Band and the lower, we conclude that this market is very volatile.

Narrow Bollinger Bands, reflecting periods of low volatility, often precede breakout moves in price which can be either up or down. 

In this case, the move was a dramatic upward one.

The US Government Bond market, along with the gold market are in breakout rallies, as I have been suggesting would likely occur for most of this year.

While predicting when a breakout might occur is precarious, the market fundamentals have been favoring this for a long while.

Interestingly, the yield curve is now almost completely inverted.  The 30-Year US Treasury Yield fell to a record low last week, falling below the 2% threshold before closing the week just above 2%.

The one-month US Treasury bill closed the week yielding 2.05%, higher than the 2.01% yield on the 30-year bond.  Historically speaking, a yield curve inversion has been a reliable predictor of a looming recession.

One thing is sure.  The financial and economic times in which we live are quite simply crazy.  If you don’t think so, perhaps you don’t have a clear understanding of current world financial and economic facts and circumstances.

As I have discussed in the past, more than $15 trillion of world government debt is currently yielding negative interest rates.  That means that when you loan the government money for a period of time, at the end of that period, you get back less than you loaned or invested initially.

In the Country of Denmark, the second and third largest banks are now offering mortgages at negative interest rates.  (Source:  https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-year-mortgages-with-negative-interest-rates.html)  This from the CNBC article reporting the development:

Jyske Bank A/S, Denmark’s third-largest bank, announced on Monday, Aug. 5, that it is offering 10-year mortgages at a rate of negative 0.5%.

Another Danish bank, Nordea Bank Abp, also said that it will begin offering 20-year fixed-rate mortgages with 0% interest, as well as 30-year mortgages at 0.5%.

No, the banks are not working for free, loan fees still allow for a banker to make a profit.

No matter how you slice it though, this is crazy.  It goes completely against the basic rules of finance.  Which means it won’t go on forever. 

If you’re looking for a prediction, I’ll reference the words of the late economist, Herbert Stein, who said: “If something cannot go on forever, it will stop.”

Yet, at the present time, negative interest rates are the “new normal”.

Even former Federal Reserve Chairman, Alan Greenspan, is jumping on the negative interest rate bandwagon.  This from another CNBC article (Source:  https://www.cnbc.com/2019/08/13/greenspan-says-there-is-no-barrier-to-negative-yields-in-the-us.html):

Former Federal Reserve Chairman Alan Greenspan said nothing is stopping the U.S. from getting sucked into the global trend of negative-yielding debt, Bloomberg reported Tuesday.

“There is international arbitrage going on in the bond market that is helping drive long-term Treasury yields lower,” Greenspan said in a phone interview. “There is no barrier for U.S. Treasury yields going below zero. Zero has no meaning, besides being a certain level.”

With global central banks engaging in unprecedented monetary easing, a record $15 trillion of government bonds worldwide now trade at negative yields. As uncertainty reigns, investors are looking for a safe haven for their money, even if it means getting back less than they gave.

If you’re looking for a reason for the gold market rally, that’s a good one.

In an investing climate like this one, owning some tangible assets makes sense.

But why would an investor even consider making an investment in a government bond when that government is fundamentally insolvent only to get back less than they invested?

A piece published on “The Daily Torch” offers a plausible explanation (Source:  http://dailytorch.com/2019/08/why-we-should-be-worried-about-alan-greenspans-negative-interest-rate-prediction-it-might-mean-the-end-of-capitalism/):

So, then a better question might be, under what circumstances would holding a negative interest rate bond be a good idea?

During the high inflation period of the 1970s and 1980s, high-interest-rate bonds were used as a safe haven asset to guard against inflation.

So, in a deflationary environment, the reason to hold bonds would be to offset even greater asset price decreases elsewhere. For example, if inflation was at -4 percent, holding a -2 percent bond could make sense in order to offset the deflation. Or if you purchase the bond with a -2 percent yield, and then the going rate drops to -3 percent, you could make money by selling the -2 percent bond, because it had increased in value.

That validates a forecast that we have made for a long time.  Ultimately, negative-yielding bonds would only make sense to own if the purchasing power of the currency were to increase.  That happens when there is deflation.

History teaches us that high debt levels lead to deflation.  That’s where we were headed when the Fed engaged in quantitative easing or money creation after the financial crisis.

Bottom line:  As Thomas Jefferson predicted more than a couple of centuries ago, we will have inflation, followed by deflation when private banks control the issue of our currency.

 “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”

                                                          -Thomas Jefferson

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.