Gold sits near $4,400 an ounce. It has been in a bull market since 2000, when it traded under $300, and at one point topped $5,000. Before that it was in a bear market from 1980 to about 2000. The recent drop from around $5,000 or $5,500 down to $4,000 looks like the 1970s pullback, when gold fell from $200 back to $100 (after starting at $35) and then climbed all the way to $850. So we are still early in a much bigger move, and the rate of the rise is steepening.
The long view makes the case. When the Federal Reserve was created, gold cost $20 an ounce. It is now more than 200 times higher. Gold itself has not changed - what changed is how many Federal Reserve notes you need to buy it, because so many have been printed. That is inflation, the loss of value in paper money. If gold can go from $20 to $4,000, it can go from $4,000 to $800,000, since that is the same multiple. The only open question is speed: another hundred years, or much faster? Debt is exploding, so it will likely be faster.
Hyperinflation is a real risk. In all of recorded history, no fiat currency has ever avoided becoming worthless. If the dollar becomes worthless, gold's price is effectively infinite, because you would not sell gold for paper that buys nothing. Even short of that, if the dollar loses 99% of its value from here, gold has to rise 100 times just to hold its current worth. Holding cash is not a safe, neutral choice.
Miners set to outperform the metal
Will miners beat the metal from here? Yes, and I have thought so for a long time while being wrong. For years the metal beat the miners. Individual companies won, but the industry indexes - GDX, GDXJ, XAU - lagged gold. Mining costs rose as fast as gold, so profits stayed flat or came under pressure. That period of underperformance is now over. Miners have done better this year and crushed gold last year, when gold itself had a great year.
Newmont (NEM) recently hit a new all-time record high even though gold was still about 20% below its own record from earlier in the year. Investors are no longer worried about gold crashing, which was a heavy drag on gold stocks. They are starting to see that future earnings could be far higher than today's. A stock price is the present value of all future earnings. Once you accept that high gold prices are here to stay, or will rise, future earnings jump, and so do fair stock prices. That re-rating happens before gold hits its next record.
Leverage cuts both ways - weak operators can still destroy money even in a bull market. But a wave of buyouts is coming, with smaller companies taken over by the majors.
Looking to exploration for extra gains? Not pure exploration - those companies may find nothing. The first targets are companies that have already found the gold but have not brought it into production yet, or that produce but stay small. Over the past decade the major miners - Barrick (GOLD), Agnico Eagle (AEM) - built up cash and cut debt, but underinvested in capex and exploration. Now they will buy to rebuild their project pipelines. Smaller companies lack the money and would need bank loans, and banks demand they hedge their gold to cut risk. The majors fund development from their own earnings and skip the hedging demand.
Silver breaks out
Silver? Bullish. It broke above $50, a level that had capped the market since the Hunt brothers tried to corner silver in 1980. Even in 2011, when gold reached $1,900, silver could not reach $50. This time it cleared $50 and shot to $125 - a big overshoot - then pulled back and never touched $50 again. It now trades in the $60s, around $65, consolidating the breakout. $125 is not the high; new record highs could come next year. That is more than a double from here, a big move to make a fresh high.
Hard to find pure silver companies? There are few pure silver plays. Most major gold miners also mine silver, and many get copper too. Silver counts as a byproduct that lowers their gold production costs. The more they earn on silver, the higher their profits mining gold, so all of them gain from rising prices.
The debt crisis behind it all
The country now spends roughly $1.2 trillion or more a year on interest on the national debt, and probably more already - it is a moving target that grows if the Fed hikes rates. By the time Trump leaves office, interest will likely top $2 trillion a year.
$2 trillion is 40% of tax revenue. If rates rose far enough, interest could eat 100% of tax revenue, leaving nothing for anything else. It cannot actually reach that point. Before it does, there will be a debt crisis, and a debt crisis means a dollar crisis.
What does the United States look like in that crisis? It does not look good. The standard of living collapses under runaway inflation. The whole consumer, debt-fueled bubble economy implodes. Widespread job losses follow. The setup becomes a powder keg for riots and civil unrest, especially with food shortages, power shortages, and price controls.
Housing and the 2008 replay
Big impact on housing? Of course. Housing depends on interest rates, because most people can only buy by borrowing. The key number in a home purchase is the monthly payment, driven largely by the mortgage rate. If mortgage rates jump, people cannot afford homes unless prices fall sharply - and prices will fall. That hurts everyone who already owns and the banks that lent against those homes. Borrow $500,000 to pay $550,000 for a house now worth $300,000, and you are $200,000 underwater with no equity. Why keep paying, when other bills are due and you are just handing money to the bank? The bank has no incentive to evict you either, because it does not want the house. This will be worse than the 2008 housing crisis.
Can the Fed repeat 2008 - lower rates and QE1, 2, 3? No. If the crisis is a dollar crisis and a sovereign debt crisis, then any QE bailout or rate cut makes it worse. The only cure for a dollar crisis is higher interest rates and austerity - government spending cuts. The government cannot bail out real estate; it has to make it worse. Instead of throwing a drowning man a life preserver, it has to throw him an anchor.
Does the dollar rise first? The rise already happened. The dollar's next big move is down. The dollar index sits around 100, a little below. It fell to about 70 in 2008, then a record low. The next leg down will take out that low.
