The Case for Gold
By Don McAlvany, The McAlvany Intelligence Advisor
As gold fluctuates between $1300 and $1350, investor interest in the first quarter of 2019 remains at multi-year lows. Not since the early 1970s (just be- fore a 25-fold, nine-year up-move from $35 to $875 per ounce), or 2001 (just before a 10-year, 7.6-fold up-move from $253 to $1930) have the fundamentals impacting gold been so bullish. And yet the great majority of investors are mesmerized with the highly vulnerable (and manipulated) stock market, and almost totally ignoring the gold and silver market.
The incredible (and very frustrating) fact of life is that the great majority (whether in financial, political, moral, or spiritual matters) is almost always wrong – doing the wrong thing at the wrong time. So, in financial matters, they buy at high prices and sell
at low prices. This was the most frustrating thing for this writer as a stock broker on Wall Street many years ago. It’s worth repeating: the majority is almost always wrong. So, the most basic principle of investing is: when everyone wants it – SELL IT; and when nobody wants it – BUY IT!
The following analysis was written by this writer’s old friend, Bert Dohmen – the highly respected financial advisor who has been writing the Wellington Letter for 42 years. (Bert and I first met in 1979 as he, I, John Exeter, and Ronald Reagan were speakers at a financial conference in Honolulu.)
A. OUR GOLD ANALYSIS CONFIRMS A LONG-TERM TREND
Investor interest in gold has dropped since the 2011 peak of around $1930/oz., as has the price. The low of that correction was around $1045. It was brutal, with many gold mining stocks plunging 70% to 90% during the decline. We want to emphasize what we have said for over 40 years: gold is highly manipulated by the big bullion banks – and consequently very volatile. Therefore, fundamentals are not always what determine the price. So don’t use leverage (including leveraged ETFs) in your gold investments.
Contrary to popular opinion, gold and silver are not primarily hedges against a crisis. A crisis may cause all salable assets, including precious metals, to be sold in order to get cash. Cash is the most desirable asset to hold during a crisis. What is gold good for? In our opinion, gold is primarily an inflation hedge as currencies are debased by governments that can’t pay their bills.
Gold is very good at sniffing out future inflation.
In early 1978, the inflation-fighting head of the Fed was replaced by William G. Miller. He had been the CEO of a big conglomerate that prospered on borrow- ing lots of readily available money for acquisitions. He declared that he would not fight inflation with “tight money,” but would do it through interest rate policy. For Wall Street analysts, that meant rising interest rates – which would be detrimental for most investments, including gold. For us, it meant the opposite because investors would seek out hedges against inflation.
The common position of most analysts was that gold would decline because gold pays no interest to the owner. We had the opposite view, and believed the Fed chairman was saying that money would be very loose, though more expensive. To us, that meant a “green light” for much higher interest rates, but also for inflation. We surmised that people would buy inflation hedges like gold, and even stocks would serve as an inflation hedge for a while. We forecast the prime rate to soar to 20% (which was reached in early 1980), and that inflation would rise to double-digit levels. It happened!
B. GOLD – BULLISH PROSPECTS FOR THE LONGER TERM
SENTIMENT: Bullish sentiment for gold and silver was at a multi-year low late last year and in early 2019. Very few people were/are interested. That’s usually the time to take a fresh look, technical and fundamental, and if everything lines up, go against the bearish majority. The allocation to gold among money managers and the public was at its lowest point in October 2018, at least since 2016. Also important is that in spite of the extremely low interest in gold, the gold price in 2018 was higher than at the gold low in 2016. We call this a very important long-term, bullish divergence.
There are commercial traders and there are speculators (i.e., “non-commercial”). The commercials are usually correct at turns while the non-commercials are usually wrong. The fact that non-commercials had record short positions in 2018 confirms that a lot of short covering may soon occur, to be followed by actual buying. That suggests demand should increase.
Sam Zell, well known investment advisor and founder of Equity Group Investments – and never a gold advocate (until now) recently said in a Bloomberg TV interview: “For the first time in my life, I bought gold because it is a good hedge. Supply is shrinking and that is going to have a positive impact on the price…. The amount of capital being put into new gold mines is almost nonexistent. All of the money is being used to buy up rivals.”
1. ROARING INFLATION WILL BOOST THE PRICE OF GOLD
The argument of gold bears is that as the global economies go into deep recessions, there will be great disinflation, and prices of all assets will decline. That could happen temporarily. However, that will be the reason for the world’s central banks to step on the accelerator with massive stimulus attempts. The last crisis caused central banks, including the Fed, to produce about $15 trillion of stimulus through artificial credit creation. To pull the world out of the next crisis will take much more, perhaps two or three times as much money printing (i.e., $30-45 trillion), because of the record amount of debt globally.
During the last crisis, we saw how inventive (i.e., inflationary) the ECB, the Bank of Japan, and the US Fed can be in a crisis. Such massive intervention will reduce the purchasing power of the major currencies, causing gold prices to rise. In fact, it is very significant that the gold price in some major currencies (actually a total of 72 currencies) is already at or near a new all-time high. These include the currencies of Britain, Canada, Australia, South Africa, India, Mexico, and others. You don’t hear that in the mainstream media.
For US investors, the price of gold in terms of US dollars is most important. However, the price in terms of other important currencies should never be ignored. If inflation is the most important factor affecting gold, let’s look at the prospects of monetary inflation over the next ten years or so. According to the government (Bureau of Economic Analysis), cumulative inflation since the year 2000 has increased price levels by a hefty 48%. (That number was obtained using “official” governmental statistics, which are always dramatically understated.)
Using Dr. John William’s Shadow stats numbers, price levels today are actually about 250% higher than in 2000. However, the loss of real income is much greater when using actual inflation instead of the intentionally faulty CPI. The difference is the continued adjustments by the government in the calculation of the inflation statistics. They have an incentive to make it appear much lower than it is. A trip to the supermarket once every couple of months brings reality home to those who don’t look at statistics.
The smart, wealthy people know how to protect their wealth and even increase it through inflation. That’s one of the reasons for the wealthy getting wealthier while those who don’t read to stay informed (or read only Wall Street propaganda) become poorer. In the EU, there are still about $7 TRILLION of government bonds held with negative interest rates, intentionally produced to stimulate the economies. That has never been done in the history of mankind. Imagine, the buyer of the bonds, who is actually lending the money, pays interest to the borrower. Where does this make sense? What will these central banks do in a recession to stimulate the economies? Endless money creation, as we see in Venezuela?
Furthermore, the scam continues because the government forces us to pay taxes on the illusionary, inflation-produced price gains. When you sell your home or stocks after 20 years, much of the gain is actually inflation produced, not a real gain at all. But we pay tax on that illusion. In effect, the government creates inflation and then benefits as we pay higher taxes because of it. President Trump is now talking about “indexing” capital gains taxes to inflation to end this terrible governmental scam.
Longer-Term Conclusion: When the next Quantitative Easing of the Fed and other major central banks explodes credit creation in order to try to prevent a depression, consumer prices will explode higher. Just look at Venezuela. Everyone is a millionaire in that currency, but they can’t afford to buy food because inflation is around 300,000%. Gold is an obvious hedge against such inflation, and has been for several thousand years. With bullish sentiment on the precious metals so low, and the gold price in currencies of important countries already near or at new record highs, it’s only a matter of time before the US dollar price of gold shoots upward.
2. GOLD IS TECHNICALLY BULLISH
The bottom in the precious metals has been forming since early 2016. As can be seen from the chart of the ETF for the gold miners, GDX, it had a quick rally that year and then went into another sideways pattern until January 2019. Now the chart appears to be getting ready for a stronger up-move. A bullish potential in- verse “head and shoulder” pattern has formed. A breakout above the 30 level (from the current 22.50) would confirm the bottom and project a move to the 40 area. That breakout would also mean that the early 2016 low was a false downside breakout on a major (longer-term) scale. Such breakouts usually have very strong moves in the opposite direction, in this case upward.
Look at the long-term (monthly) chart of gold bullion since the year 2000. It had a huge rise from around $250 to over $1930 in 2011. That was followed by a substantial 50% correction starting in 2012. A decisive breakout above $1412 would project a potential move to the $1562 area.
Even more important, the chart strongly suggests that the low of the year 2015 was the bottom of the correction from the top in 2011. It was a Fibonacci 50% retracement of the prior rise that started in 2001. That is normal in a secular bull market. That suggests that the next big up-move could challenge the old high, and eventually even break through.
But the second part of our forecast in 1981 said that according to our very long term cycle study, that bear market would be followed by a 30-year rise in gold. We even said we had no idea what would cause it, but that it would happen. If our remarkable forecast made in the year 1981 still holds true, gold could have a continued secular bull market until 2030. That means the gold bull market has about 11 more years to go. Of course, cycles can shift to the right or the left, but the bear market cycle was right on target.
3. THE NEAR-TERM OUTLOOK
According to our colleague Wolf Richter, “In 1999 short positions rose five-fold to hit a then record level of 80,000 contracts. Gold rose from $250/oz. to $290/oz. over the course of two months. Short positions spiked again in July 2005 and January 2016, with gold prices rallying 12 percent and 14 percent respectively over the subsequent three months.” Gold and silver have performed nicely over the three months as the stock market plunged, acting as a good hedge. It is interesting to note that while the stock market did have a snap back rally since late December, the precious metals did not weaken as we would have expected – at least not yet.
C. CENTRAL BANKS ARE BUYING
According to official numbers, in 2018 Central Banks bought 651 tonnes (metric) of gold. That was an increase of 74% from 2017. Central bank gold purchases in the last quarter of 2018 were the highest on record. While central banks, which have a great insight into global monetary policies, have quickly accumulated large amounts of gold, the average investor has lost interest in gold. The purchases of the gold American Eagle coin is a good indicator of public appetite for gold. When it is this low, it usually is a good bottom and a sign that good opportunities for the gold bulls may be ahead. Gold miners have trouble making money below $1200. That means marginal deposits don’t get mined, diminishing global production.
1. RUSSIA:
Last year, US Treasury bonds had a strong decline followed by a big rally. Part of the reason for the decline, in addition to what we wrote above, was probably Russia selling almost all of its US Treasuries, about $100 billion worth. What did Russia do with the proceeds? It apparently bought gold. That is an important move when you consider all the other things Russia is doing to be totally independent of the US. Russia realizes that the “Deep State” in the US wants another cold war.
The Central Bank of Russia has reduced its exposure to the US dollar. It transferred about $100 billion into euro, Japanese yen, and Chinese yuan according to a report by RT. Russia has only about 17% of its reserves in gold. Other major countries have on average 65% of reserves in gold. To get up to levels of other major countries, Russia needs to do a lot more buying of gold. The share of the US dollar in Russia’s international reserves portfolio significantly decreased in just three months between March and June 2018, from 43.7% to a new low of 21.9% according to the Central Bank. Apparently, Russia’s economists have concluded that eroding the value of the dollar is the only way for the US to pay for its huge borrowings and the interest thereon. They want to protect Russia’s financial assets, although they have their own internal problems.
2. VENEZUELA
Reuters news agency recently reported that Venezuela had requested its 14 metric tons of gold from the Bank of England. It’s been two months and Venezuela is still waiting. According to Reuters’ unnamed sources, Venezuela’s gold bar withdrawal delay is being caused by the difficulty and cost in obtaining insurance for the gold shipment. Additionally, the Bank of England wants to know what Venezuela plans to do with its gold once it receives it. Last week, Russia sent a big airplane to Caracas, reportedly to help Maduro move 20 tons of gold out of the country. It looks like he is planning a getaway.
D. GOLD VERSUS THE US STOCK MARKET
Ever wonder which sector has performed better since the year 2000? In a chart where the price of Gold and the S&P 500 are adjusted for inflation, gold has outperformed stocks by a wide margin since the year 2000. While the S&P 500 Index went from an index value of 100 in the year 2000 to 200 by the end of 2018, gold soared from 100 to a high of over 450 on the index chart, before dropping back to about 300 last year.
Recently a major gold miner, Barrick Gold, bought a large African gold miner, Randgold, making the combination the largest gold mining company in the world for a brief time. It trades under the symbol GOLD. Shortly thereafter, Newmont Mining (NEM) bought Goldcorp (GG), now making it the largest gold miner in the world. The reason is that, at recent prices, the mining sector has been in a big profit crunch. Higher prices are necessary. And it looks like they will happen.
E. COUNTRIES WITH HYPERINFLATION ARE INCREASING
Globally, we are seeing economic basket cases go- ing into hyperinflation. Venezuela, one of the most oil-rich countries in the world, has hyperinflation of over 300,000%. The socialist paradise is collapsing. If someone had predicted 20 years ago that Venezuela, with the third highest oil reserves in the world, would go broke, with 3.5 million people leaving because there isn’t enough to eat, with inflation perhaps around 300,000%, people would have considered that laughable.
Iran is now on its way to hyperinflation as well.
The Iranian currency is already plunging as new money inflows dry up. With new sanctions, what foreign firm would invest there? A plunging currency causes soaring inflation. This is how it started with Venezuela. Foreign capital leaves, the currency plunges, food prices soar to unaffordable levels, leaving the country broke along with all of its people. The 80% inflation rate could easily soar to 800% in one year. That might reduce the appetite of the Mullahs to finance global terrorism, to build nuclear weapons and big new rockets to deliver them. After all, you can’t eat the rockets and A-bombs. Thus, the nuclear problem the world has with Iran might resolve itself economically. Or Iran’s leaders could decide to start a war to distract the attention of its citizens.
What country is next for hyperinflation? Mexico is a good candidate. Now Mexico has the first socialist president in decades. It too has a lot of oil. But after Mexico kicked out American oil companies years ago, the oil business was left in shambles. That’s very similar to what happened in Venezuela. Mexico’s people are also very poor, which is the reason the country encourages people to invade the US, get a job, and send dollars back home to Mexico.
The government has been extremely corrupt for decades. Some DEA officials call it a “Narco-democracy.” Recently a Narco witness testified that the last president of Mexico received $100 million from the most notorious drug lord, El Chapo. Just watch the Narcos series on Netflix to see what really goes on, based on true stories of Mexico and Columbia. Socialism usually results in poverty for all. And then it causes run-away inflation as the government can no longer pay its foreign creditors.
This will happen in Mexico under its new socialist president, Obrador. He is encouraging the invading caravans that are storming the US borders. Perhaps that will result in retaliation from the White House, eventually, stopping all aid to Mexico and even imposing sanctions. Lo and behold, Mexico goes broke. Hyperinflation will be the result. In the meantime, one way people compensate for lack of economic opportunities is by smuggling drugs. That is happening in Mexico as many people decide it is the only way to earn sufficient money for their families. This will only get worse.
Another way is to steal the government’s oil. A growing business of thieves has been to drill holes into the many oil pipelines. That is sold into the black market. The state oil company found 12,500 drilled holes in its pipelines last year. Some thieves even built a 2-mile long pipe to transport the stolen oil. Mexico’s new president has ordered the pipelines to be shutdown. Obviously, if they don’t contain oil, there is no reason to drill the holes. Now the government transports its oil by truck. But that costs about 14 times more and takes much more time to arrive at refineries. Idea: wouldn’t it be cheaper to have the army protect- ing the pipelines and have very high penalties for thievery?
Another country to go down the road to hyperinflation and serfdom will be Argentina. Just think, at one point in history this country competed with the US as the second most powerful country in the world after the UK. Then the socialists took over. People were promised a lot of “free” things to get their votes. In 1946, Peron and his wife came into power. Remember the song, “Don’t cry for me Argentina?” It was about Evita Peron. Argentina last year had to get a huge bailout from the IMF of $57 billion, the largest loan ever granted by the IMF to any country. It will never be able to repay that, and most probably will require many more in loans in the future.
Our conclusion: when the number of countries going into hyperinflation increases, the demand for inflation protection increases. The time for gold investments may have come once again. Bullish sentiment is very low and reminiscent of other important times before strong up-moves. [End of Bert Dohmen article. For more information on Bert’s excellent newsletter, contact: Bert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049; phone: (310) 476-6933
CONCLUSION
The fundamentals and technicals are lined up for a huge global up-move in gold and silver. Russian, Chinese, and Indian demand for gold is continuing to explode; global gold mine production is declining sharply; Central Bank gold buying is now the highest in history; Central Banks (which created $15 trillion out of thin air after the last global financial crisis) are beginning to panic and are gearing up to print massive new quantities of currency to prop up the about-to-implode global debt pyramid; high, super, or hyperinflation is breaking out in a number of countries around the globe – with much more to come; gold is at or near highs in 72 countries around the world; and the great majority of American investors still love and are fully invested in the highly overpriced US stock market. They are totally ignoring the highly undervalued gold and silver markets. Contrarians, please take note!
Déjà vu – in this writer’s 47 years in the gold business, we have seen all of this before – history does repeat itself! As we said in the introduction to this article, the majority is almost always wrong – doing the wrong thing at the wrong time – as we saw in the 1970s, right before a 25-fold up move in gold ($35 to $875), and early this century – before a 7.6- fold up move ($253 to $1930). The great majority missed the huge gold/silver price explosions then, and most will miss them again – including (sadly) many of our readers.
But for those people who can still think and who do understand the very difficult times that are rapidly approaching, we suggest being completely out of the stock market except for some very contrarian positions in gold stocks or short positions. We believe you should have no more than 50% of your assets in the now very vulnerable US real estate market. We suggest at least 25% of your net worth be in physical gold and silver (in 5 years you may wish it had been 110%) with at least 25% of that position stored overseas (i.e., Toronto, Switzerland, or Singapore).
Past and future issues of MIA have discussed or will discuss other strategies for maverick investors to get out of harm’s way. For more information on the gold/silver markets, how to acquire physical precious metals, or store same abroad, contact International Collectors Associates (ICA) at 1-800- 525-9556. ICA has been helping precious metals investors since 1972 – 47 years. And remember the “Second Golden Rule”: “He who has the gold makes the rules!”
