Dollar Destruction and Inexpensive Commodities

Americans buy groceries with dollars. Most of the world buys crude oil with dollars.  World trade depends upon dollars. That is changing but for now, it’s a fact.

SO WHAT?

If dollars weaken against other fiat currencies and against commodities, it takes more dollars to buy the same stuff. That extra-hot, sugar free, half-caf, soy latte for five bucks could be priced at seven bucks next year.  Gasoline in the U.S. was $0.25 fifty years ago and now it’s ten times more expensive. Slow or fast, dollars devalue!

The problem is not the gasoline, the oil companies or coffee shops … it’s the dollar. “Print” too many dollars (euros, yen, pounds) and they buy less.

The Fed has “printed” an excess of dollars, and global debt has skyrocketed into uncharted territory. There will be consequences.

The dollars are invested, many in stocks and bonds. Continuously rising stock prices since 2009 and the 35 year bull market in bonds (lower yields) are a consequence of massive debt creation and dollar (euros, yen, pounds) devaluation.

Cycles and Consequences Exist:

Examine the Thomas Reuters Commodity Index (similar to the Goldman Sachs Commodity Index).  Note the lows in early 2016, and seven years before in 2009, and seven years before in 2002. The index in late January 2018 is 29% higher than the 2016 lows.

Examine the dollar index. The Index is measured against other “over-printed” fiat currencies so it measures relative strength and weakness against other paper currencies.  The index is counter-cyclical with commodities.  Note the highs in late 2016, 2009, 2001 and 1993.

The dollar has been falling against commodities and other currencies for two years. What can we expect for the dollar?

1. The value of the dollar will weaken for many reasons.
2. Congress and the Administration have no incentive to reduce expenditures on wars, social programs, bureaucracies or graft. Expect continuously increasing debt.  That means more dollars will be created and every existing dollar will be devalued.
3. The dollar is slowly losing its status as the global reserve currency.
4. While the U.S. is obsessed with military presence in 175 countries, China is building the One Belt One Road. If successful, their enhanced trading will strengthen the yuan and weaken the dollar.
5. Western countries are selling gold and shipping bullion to China, India, Russia and Turkey. They recycle devalued dollars into gold – a sensible policy.
6. US. foreign and domestic policies have not inspired confidence in the dollar or the U.S. government for many administrations. The value of the dollar declines along with decreasing confidence.

Examine this graph of debt/GDP showing the acceleration of debt creation.

GOLD TO MONETARY BASE:

This graph shows that currencies have been over-printed and gold prices have not risen enough to compensate for the expansion of unbacked paper currencies. Expect a rally in gold prices as financial sanity (slowly) returns and unbacked currencies are devalued toward their intrinsic value (zero).

GLOBAL GOLD HOLDINGS:

1. Official numbers are suspect – everywhere.
2. US. gold bars in Fort Knox and other U.S. locations (supposedly over 8,000 tons) have never been independently audited. The last “near-audit” was in the 1950s.
3. China has imported a massive quantity of gold during the past 30 years. Much of it came from western vaults, including the U.S. and London. Central bank rules allow “leased” gold, that is gone forever, to remain on their balance sheets. Suspect numbers!
4. Russia updates their gold holding information monthly and claims transparency.
5. China updates “official” numbers once or twice per decade. China has an incentive to underreport bullion holdings until western vaults have been emptied. Not transparent!
6. When China owns the majority of global gold – which will not return to the west – they will have an incentive to accurately report their holdings and revalue gold prices far higher.
7. BullionStar.com reports sensible numbers for Estimated Total Chinese Gold Reserves.

DOLLAR DOWN, COMMODITIES, CRUDE OIL AND GOLD UP:

Commodities are deeply undervalued compared to global debt (not shown) and the S&P 500 Index. This will reverse as inflation rises, capital flees declining stocks and moves into real commodities.

The crude oil to S&P 500 Index ratio shows multi-year cycles with a bottom in1999, top in 2008, and bottom in early 2016.  That ratio is due to rise as the S&P declines and crude oil rises. Not everyone agrees that crude oil prices will rise, but a declining dollar and a bullish commodity cycle suggest higher crude oil prices.

Silver to DOW Ratio:

When compared to the DOW, silver is as undervalued in early 2018 as it was in 2001.  Silver bottomed in 2001 at $4.01 and in December 2015 at $13.61.  Silver in late January sells for $17+. Expect a substantial rally in silver prices in coming years.

CONCLUSIONS:

• The dollar has declined substantially in the past year against other fiat currencies. Expect several more years of a declining dollar index.
• Commodity prices bottomed in early 2016. Expect many more years of rising commodity prices.
• Too many dollars have been created, and many more will be created. Debt increases more rapidly than the economy grows. Hence dollars devalue every year and consumer prices rise.  Plan on it!
• Asian gold imports have been huge for a decade. Asian governments, central banks and individuals understand the value of gold.
• US. stocks are over-priced based on fundamentals and technical indicators. Bubbles always pop. Watch out below – someday soon!
• Silver, crude oil, and the commodity index are deeply under-valued compared to the S&P 500 Index. Expect a reversal.
• Silver prices are far too low based on the quantity of global debt, future inflation, coming investor demand, and declining supply.

Call Miles Franklin at 1-800-822-8080 to buy silver. Yes, silver bottomed two years and $4 ago, but $50 silver is coming. I expect $100 silver in the next decade.

Gary Christenson