Cause And Effect or Effect And Cause?
Time, not financial analysts, will tell...
“Who needs physical gold?”
This was the question posed by Rupert Rowling, the Bloomberg reporter tasked to interview me when Gold Is A Better Way was published. My answer then was, “every long-term investor in the world.” Rupert told me that his readers care about the short term and that while he liked the book he wasn’t even sure he could cover it without me making short-term predictions about the gold price. According to Rupert, that was what Bloomberg readers he was writing for were more interested in.
I refused to make a short-term call. The book review from Bloomberg was never published.
My takeaway from the experience is that the narratives from the market are almost always short-term. That’s what sells. That’s what traders are seeking.
We don’t care about what happens in the short term. Our subscribers take a long-term view and why we remind our readers of the longer-term scoreboard. Gold has outperformed the Dow 2 to 1 since the GIABW book was published.
Despite all of the stress, all of the changing tunes, all of the ping-ponging back and forth, the stock market is in the exact same place today as it was two years ago. The S&P 500 is now landlocked near the 4100 point level and the Dow Jones around the 34,000 point level, the exact levels witnessed in April ‘21.¹
Twenty-four months of “slap and whap” sideways whiplash for equities has netted a worse outcome for fixed-income investors. Bonds have lost more than 20% of their value in the last two years.²
For all of the negativity during that time, the 60/40 portfolio is only down about 8%.
We have recently read endless financial copies about the bearishness residing within the market. We keep seeing headlines about how “everyone” is short. The reality is that the first quarter witnessed the third-largest equity buying in history. While it may be true that most people have a bearish outlook, investors have been buying, not selling.
The S&P’s total return for March was 3.67%. Had it not been for the disastrous decline in Financials, the gain in March would have been closer to 5%.³ April has witnessed the S&P 500 climb an additional 2%.⁴
Most investors haven’t changed their strategy at all. The 60/40 reigns supreme. We believe this is a leading indicator that we have yet to see the bottom. Bear market bottoms don’t typically form until there is a full capitulation. It’s why the second half of this year could present a giant wake-up call for passive investors asleep to the realities of our situation.
Gold prices are always the first to wake up.
Two years ago we published our Special Leverage Ratio Report where we highlighted gold’s major stepping stones. We predicted that the ongoing moves higher in gold prices were just the beginning of a very long bull market for gold.
We wrote:
Government debt and deficits have exploded higher in recent years. To the point, Gold Is A Better Way was published 32 months ago when gold was $1200 per ounce. The Decade Report, based on the national bestselling book The Great Devaluation, was released to our subscribers in January 2020 when gold prices were $1500 per ounce. This Leverage Ratio Report was released to VIP subscribers on April 15th, 2021 when the price of gold was $1750.
These movements higher in gold prices are important stepping stones that we will look back on in the years ahead as the story continues to evolve. They are also the way we seek to be judged. The conclusion of Gold Is A Better Way is printed within the title. We believe gold is a better asset to own for long term investors. Gold will forever be a safe haven and insurance policy, we believe will also continue to be the best growth asset one can own in the portfolio. This is especially as it sheds its “insurance policy” skin and steps into its true position as the asset to own as currencies continue to devalue.
Leverage Ratio Report (April ‘21)
Where are we two years later?
We’ve all heard the saying, “Only time will tell.” Over the last 24 months, while stocks are flat and bonds are down 20%, gold prices are higher by 15% currently sitting near $2000 per ounce.
Time is proving our thesis correct. So too are the actions of global central banks.
A headline from the Financial Times last week stated, “Central banks load up on gold in response to geopolitical tensions.” The subheading to the headline read, “Reserve managers' purchases rose 152% last year and they expect to keep buying.
Source: https://www.ft.com/content/631003da-2bf0-4e08-aece-6a8ade9260d2
The headline inspired us to reflect on the idea of cause and effect.
Are gold prices higher because of geopolitical tensions? Or, is it more likely that we have geopolitical tensions because of inflation and devaluing G7 currencies?
The market is always seeking the story. “Transitory”, “inflation is embedded”, “soft landing”, “hard landing”, “no landing”, “banking crisis”, “recession”, are all ways in which the market looks backwards to attempt to explain its movements. The narrative is almost always useless because it’s looking in the rearview mirror and mostly offers a reflection of what has already occurred.
We suggest looking forward.
Follow the narrative of The Great Devaluation for your answers about what has already occurred, and for your best answers to what is coming next, follow the wisdom of Gold Is A Better Way. Our story has not changed. If you are a long-term investor you will want to embrace its prophecy.
Four and a half years ago when Gold Is A Better Way was published there was no reason to buy gold. Gold prices were below $1200. Now they are at the psychological $2000 threshold leaving some to wonder, is this the same old ceiling, or the new floor?
We see this as simple math. A significantly weaker dollar is in our future.
The progression is not difficult to predict. Rising deficit spending into a declining GDP in an era where the Fed is stuck holding rates higher for longer will bring recession and lower equity valuations. The combination will lead to even higher deficits and a weaker dollar. Our expectation is that the dollar index will ultimately fall below 70 in the coming years, a 30% decline from current levels.
Why?
The only way to pay for unpayable debt and deficits is with printed dollars that are worth less.
As the dollar becomes worth less, gold prices will become worth more because it will take more dollars to buy the same amount of gold. This, by the way, may be the very solution our country needs. As the dollar weakens, the U.S. will likely become stronger. A weaker dollar will drive more investment at home and could spark a new American industrial movement. It will allow foreign investors to become buyers of our Treasury bonds again.
As the dollar falls over time, we see a potential for a massive increase in the price of gold from today's levels.
The section below from our Special Leverage Report explains why:
Sources:
3. https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes/
Written by Adam Baratta
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