- Vampire squid sucks up to gold
- U.S. dollar: Reserve currency status in peril
- Record-high gold? (chart tells the tale)
- Greg Guenthner on perfect timing
- Leveling Main Street’s playing field
- Fast-food franchise asks: Got coins (cluck)?
- Readers strike back: Better red than dead?… A Neville Chamberlain reference… Plus, Dave versus a “meat puppet”… And more!
The Establishment is getting worried.
From Bloomberg News this morning: “The U.S. dollar’s reign as the world’s reserve currency is coming under threat, as evinced by the recent surge in gold prices, according to Goldman Sachs Group Inc.”
Not exactly news if you keep up with our daily missives. But when the vampire squid puts out a report to this effect… well, something’s up.
“Gold is the currency of last resort,” the report says, “particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows.”
By most measures, the dollar is having its worst month in nearly a decade. Gold, meanwhile, is now in record territory above $1,900 an ounce… and Goldman just upped its 12-month forecast to $2,300.
Nor is Goldman alone in its dollar concerns…
“The concern isn’t whether the U.S. dollar will see an accumulated decline of 30% in the future, but whether there will be a blowup event that causes a sudden loss of confidence in the U.S. dollar, and its market to collapse,” says Zhu Min.
Zhu “holds the highest-ranking position ever held by a Chinese citizen at the IMF, the World Bank or the Bank for International Settlements, the international monetary system’s three multilateral pillars,” wrote our Jim Rickards in his 2014 book The Death of Money. “His career personifies China’s financial rise in nuce.”
At the time, Zhu was deputy managing director at the International Monetary Fund. He left the post in 2016… but as you can tell, he’s still kind of a big deal in the global power elite.
As Zhu explains it to the South China Morning Post, persistent COVID uncertainty could push U.S. companies into bankruptcy — causing a spillover effect. “The question of whether there will be a financial crisis will depend on whether a major company will be the next to go bankrupt, and thereby result in a jump in the corporate default ratio, leading to a sovereign debt crisis.”
Zhu isn’t hazarding a prediction about gold… but in light of everything else he’s saying, there’s only one direction gold can go medium and long term: up.
Of course, some elements of the Establishment are still in denial…
“Guess trillions in money printing is also a mystery,” quips Jim Bianco of Bianco Research.
Thing is, gold still hasn’t notched a record high yet — not if you adjust for inflation.
If you account for inflation, you can see that gold remains below the previous record in 2011. And by this yardstick, the actual all-time high came in 1980.
“I would be buying now and continue to buy,” rock-star fund manager Mark Mobius tells Bloomberg TV.
“When interest rates are zero or near zero, then gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold and you see the gold price will rise as uncertainty in the markets is rising.”
It’s true that gold produces no yield — that’s the long-time knock against gold from the likes of Warren Buffett — but in a world starved for yield, gold starts to look pretty good. “When the return on cash is nil or negative after inflation, gold’s income disadvantage disappears,” writes Jason Zweig, who pens “The Intelligent Investor” column in The Wall Street Journal.
Zweig recently took himself to task for dissing gold in his column five years ago — shortly before gold bottomed at $1,050 an ounce. (He likened it to “a pet rock.”)
But he’s still on some level a gold skeptic: “A surprisingly swift or unexpectedly strong economic recovery could push interest rates back up, hurting gold,” he says.
OK, but even in that eventuality — which looks increasingly remote from where we sit — can Uncle Sam afford to let interest rates rise?
The national debt is now $26.5 trillion — up from “only” $23.2 trillion at the start of this year. And the next round of “stimulus” will add at least $1 trillion to that total. (We’ll venture to say it’ll be closer to $2 trillion by the time the congressional sausage-making process is done.)
If the debt is rising relentlessly, it becomes imperative that the interest expense on that debt is kept to a bare minimum — which the Federal Reserve, working in concert with the U.S. Treasury — has the power to do.
So recovery or no, it looks good for gold — even at this week’s (nominal) record levels.
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Of course, in terms of timing your gold purchases… you might want to wait to “buy the dip.”
The run-up past $1,900 last week was breathtaking… and the spot price has turned crazy-volatile in the last 18 hours. It sprinted from $1,940 to $1,980 in electronic trading last night… then collapsed below $1,920 while the Hong Kong market was open. At last check, the bid was $1,949.
“I don’t think this is ‘the end’ of the precious metals story,” says our resident chart hound Greg Guenthner. “But they will need time to consolidate.”
The major U.S. stock indexes are all in the red, but not by much. The Dow has slipped below 26,500 — dragged down by the quarterly numbers from 3M and McDonald’s — and the Nasdaq sits a hair below 10,500.
But at 3,236, the S&P 500 is still holding the line on the 3,200 level we’ve been watching for weeks.
“The skills to trade in a pit just don’t translate to the present world of opportunity,” says our Alan Knuckman, with only a slight tinge of regret.
For years, we’ve described Alan as our floor-trading veteran. When he wasn’t at his lakehouse, he was in Chicago — continuing to rub shoulders daily with his old colleagues in the options and futures trading pits.
But Chicago’s no fun these days, he tells us: “A legendary local watering hole near the trading exchanges has seen the clientele dry up with only a few stragglers sticking it out. The CBOE has built barriers to keep traders six feet apart — and the CME Group isn’t starting again until Aug. 10.
“Yet here we are, adapting to the ‘new normal’ every single day. Adapt and innovate is the mantra of great traders! Technology has changed the game almost completely from when I first started.”
So if his open-outcry trading skills that served him so well in the 1990s aren’t relevant in the present day?
“The tens of thousands of ex-floor traders found a new way — or were out of the business because they had no edge over everyday investors.”
Alan’s takeaway: “Technology has empowered Main Street investors just like you! Even a pandemic shutdown can’t stop you from booking profits.”
You know the Great Coin Shortage is serious when you can trade in your spare change for the same amount in bank notes plus free food.
“A Chick-fil-A in Virginia is offering customers food vouchers in exchange for coins,” Fox Business reports, “to avoid going cashless amid a nationwide coin shortage due to the coronavirus pandemic.
“For every $10 of rolled coins, customers will receive the same value in paper bills in addition to a Chick-fil-A card for a free entree during select hours on Wednesday.”
The offer is available at the Wards Road location in Lynchburg until its coinage supply is once again up to snuff.
Elsewhere, we see Community State Bank — with seven locations in southeast Wisconsin — is literally offering free money: If you bring in $100 in coins, you get $105. (Sorry, maximum $500 in coins. What, you think these are still the days of getting a free toaster when you open an account?)
“Buffoonery,” says the subject line of the first entry in a packed mailbag today. We generated a lot more heat than we expected with our end-of-the-week musings about the new cold war with China.
“So comrades… Better red than dead?
“I suppose if Reagan had said nicer things about the Ruskies…the people would have dissolved the USSR sooner. Today, they are just a gas station with nukes.
“Sounds like you endorse the Neville Chamberlain approach to totalitarian governments… where left in charge… we'd have all been speaking German (with maybe just a little Japanese accent).
Which BTW… may have worked out better for Western civ.
“As it stands now… your grandchildren will be speaking… assuming they are allowed to live… Mandarin.
“To be fair… it doesn't really matter. The U.S. is a beautiful Colonial house from the outside. Completely devastated by termites from the inside.
“We are FREAKING DOOMED! Economically… culturally… and morally.
“Five–10 years tops. Less if the Chinese-owned, totally corrupt, brain-dead, meat puppet Biden is elected.
“So very glad I'm a child of the ’50s.”
“Saw you toast my comment on ‘reds’ — not under the bed, though, dude,” writes the reader who inspired our musings on Friday.
“No red scare here, just reality if you want to take time to get your head out and look around. Actually, you ought to learn a little history — you know, things that happened before 2015 or so in your case. Your arrogance and, in some respects, ignorance are both alarming and dangerous.
“But (yes, here it comes) you do have a good perspective on macroeconomics, as we used to say in the ’60s. So keep The 5 coming.”
The 5: Well, thanks for not throwing out the baby with the bath water, as so many people are inclined to do these days.
We’re not sure which pre-2015 events you’re referring to. But we’ve been wary about Washington escalating tensions with Beijing going back to Hillary Clinton’s “pivot to Asia” in November 2011. Actually, even before that.
Besides… events at present are such that we’re a little more concerned about the aspiring Maoists in our own midst than the actual Maoists who oversee a military budget barely a third the size of Washington’s.
“Thank you for putting the kibosh on people worrying about what the Chinese government is doing,” another reader writes in counterpoint.
“Notice how the administration and writers such as your correspondent’s ilk always refer to a danger not to ‘America’ but to ‘American and Western interests,’ whatever they are. With Washington claiming hegemony over the entire world and outer space, ‘interests’ could be anything, no definitions needed. No ‘buts’ about it!”
The 5: Richard Maybury, one of the greybeards of the newsletter biz, picked up on this “interests” language way back in the 1990s.
“At one time,” he wrote, “American troops were expected to risk their lives fighting for liberty. Later the cause worth dying for was downgraded to democracy. Now it is interests…
“When I am deciding what I think of a U.S. military operation in some far-off corner of the world, I always ask the question, would this be worth my life? If the answer is no, then I don’t think it would be worth anyone else’s life either. One thing I can tell you with great certainty is that I would not be willing to die for an interest.”
Something to think about when our leaders tell us it’s vital whether it’s China or the Philippines that controls Scarborough Reef, for instance…
“Your second-to-last sentence in last Friday’s 5 said it all,” writes one of our longest of longtimers.
[Of course, now we have to look up what we said; when you write nearly every day, it’s impossible to remember. Oh, yes: “[George] Washington would surely be looking down on present-day America and wondering why our leaders, Republican and Democrat alike, are so keen to stir up trouble overseas when there’s a world of problems to contend with here at home right now.”]
“Why does the average American not see that?
“And what does that tell you about the future of America?
“Sooner or later another real bloody nose will be dealt out as it was in Vietnam and is continuing in Afghanistan.”
“We Want Dave, We Want Dave!” reads the subject line of our final entry today.
“Dave, your good sense is way beyond the two stupid U.S. political parties. Your insights about VISIBLY meddling in affairs with China and Iran are valuable and accurate. Demagogues globally act in parallel fashion.
“Current leadership is self-centered. The only replacement is weak at best. How did we get here? Division, selfishness, pomposity. Feels like mental disorder at both individual and social levels.
“Your clarity of thought makes us want to run YOU for the highest office in the land.”
The 5: In keeping with this e-letter’s anti-partisan stance and general abhorrence of politics, I will take a page from the late Pat Paulsen: If nominated, I will not run. If elected, I will not serve.
Best regards,
Dave Gonigam
The 5 Min. Forecast
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