The Currency Problem Behind Gold's Rise
This century the dollar has lost 95% of its value against gold. Gold started the century near $260-270 and now trades around $4,500-4,600. For the metals bull market to be over, fiat currencies would have to strengthen. That cannot happen given the debt load. Fiat currencies are dying. Betting against gold and silver means betting that fiat purchasing power will recover while government liabilities keep growing. That flips the question from chasing gains to protecting purchasing power.
Is the next big move far off, or has it started? It has started. The market has based after heavy chop and turnover. Silver's open interest has been washed out - the speculation seen in December and January is gone. A correction was due, though a 50% drop in silver was not expected. From here the base is building, and new highs in gold and silver are likely by year-end.
China, India, and the Push for Real Backing
China and India are important buyers, along with the rest of the world. They are exiting dollars, liquidating US treasuries they built up over years, and buying gold. The BRICS group wants a currency backed by something real - their proposal is a commodity-backed currency with 20% to 40% of that backing in gold. This monetary demand can hold up even when Western investors lose interest.
Silver: Industrial and Monetary Demand
Silver has two sides - industrial and monetary. The market has run a supply deficit for six years straight.
Will silver outperform gold because of the ratio? The gold-to-silver ratio sits near 67-68. It once hit 120, which is absurd. In the earth's crust the natural ratio of gold to silver is about 9 or 10 to 1, yet the market ratio is 67 to 1. One ratio is right and one is wrong; the market ratio is wrong. A return to the historical 16 to 1 is uncertain, but even at 20 or 25 to 1, silver would outperform gold 3 to 1.
Higher Rates and the Debt Trap
Historically, higher real rates hurt gold. This time is different because rates are rising against the most leveraged system in history. Debt outstanding is at all-time highs by every metric - debt to GDP, ability to service it. Debt is the foundation of the world's financial system, and it is being hollowed out. As rates rise, bond prices fall, and the collateral available to borrow against shrinks. Higher rates this time will blow up the debt markets.
People buy gold to hedge inflation, but its most important trait is that it cannot go bankrupt inside a system that is going bankrupt. As debt melts down, people will seek a safe haven that cannot fail, pushing gold higher.
Won't the Fed just cut rates, print money, and kick the can again like before? They will try everything, but they are powerless. They have been trying to suppress the gold price since the London Gold Pool in the late 1960s and it has not worked. The only real tool they have is printing more money. Easing may rescue markets for a while but further dilutes the currency. Gold becomes insurance against the rescue itself.
The Ponzi Structure of the Debt System
M2 and money supply cannot be allowed to decline. By definition new debt must keep being issued, because the system is built like a Ponzi scheme - without new money coming in, past debts implode and do not get paid.
What is different now versus 10 or 20 years ago - is it just size? It is size relative to the size of the economies. In 1980, when Volcker raised rates to strengthen the dollar and suppress gold, US debt to GDP was 30%. Now it is 130%, and it looks like that worldwide. The dollar is the world's reserve currency, so the reserve currency is now essentially insolvent. Rates are back to 2007 levels; all the QE and zero interest rate policy is behind us, with debt piled up and rates climbing.
The US now pays roughly $1.5 trillion a year in debt service and rising. For 30-40 years it paid between $300 billion and $500 billion a year in interest, and that figure did not grow with the debt because rates were falling the whole time. Rates have now bottomed and are heading higher - time to pay the piper.
Portfolios, Paper, and Physical Metal
Are you bearish on both stocks and bonds - the classic 60/40 portfolio? Yes. Advising only paper assets is a huge mistake. Advisors once gave lip service to 5% or maybe 10% in gold; now some suggest 60/20/20 - 60% stocks, 20% bonds, 20% gold.
How much should go into gold or silver? Whatever you don't want to lose. This is because of laws now in effect - the "Great Taking." Physical metal means actual metal, not GLD or SLV; those ETFs are paper. Paper metals are contracts, not physical. When your broker goes down, those shares go with it. Metal held in hand or in a non-bank vault cannot be taken away with the press of a key. Concentrating wealth in financial claims that depend on intermediaries adds counterparty risk that physical metal removes.
Japan and the Carry Trade
Is Japan's rate rise a concern, with capital possibly flowing back from Europe and the US and causing liquidity problems? Yes - this is the carry trade. Investors borrowed in yen because Japanese rates were far lower than anywhere else. The 30-year Japanese bond, once under half a percent, is now pushing 4.2%. At the same time the yen has been crushed in purchasing power, dropping sharply. Both sides of the carry trade are imploding. The borrowed money went into stocks, bonds, and real estate. A full unwind would be a disaster for nearly all markets as money is pulled out to repay those loans. When liquidity vanishes, assets that seemed diversified can suddenly move together.
Mining Stocks
Are high-quality producers attractive now, given metals sit well above the cost of the mines? Miners are making more money than ever and rank among the most profitable industries right now. Because of operating and financial leverage, mining shares move about three times faster than the metal in both directions.
Geography matters. North America has long been seen as the safest place for mines, but with fiscal problems in both the US and Canada, the mining industry could be ripe for nationalization. If a government needs gold or monetary reserves, the best place to get it is in the ground.
So mining stocks are only a speculative slice of a portfolio? Yes. Put no more than 20-25% into mining shares.
What will drive the precious metals space - institutional money or retail? Yes to both. In one word: fear.
