I
urge everyone to consider my arguments for investing in gold and silver, and
the miners that extract it.
I am holding on to my post 2008 forecast for gold reaching $3,000-$5,000
per ounce by 2017 (and silver reaching $100) because the world’s
largest governments continue their plunge into default, and cannot
afford to let interest rates normalize if they don’t want to be
forced into a rationalization.
It may be arguable at what point it became unfeasible in the US to allow
the market to drive interest rates. Admittedly, it would be unusual for
the market to determine interest rates without interference from the
all-knowing bureaucrat at any time, trained as they are in the art of
spinning infinite financial verbiage. Yet, since Volcker’s day, it has
also become increasingly less feasible even if they wanted.
It seems so obvious to me that the bureaucracy is not only taking the path
of least resistance – cheap money – but that it is also trapped in
this policy, i.e. trapped in a lie to the public about the state
of the government, and of the malinvested economy. This can
only lead the world into another stagflation.
In my original (2000-01) call for the bull market to end in 2013, it is
true that I expected stagflation to have already occurred. I hope you
forgive me for not being prescient enough. To my credit though, it is
hardly arguable that we got the “stag.” If that were not
true the Fed would have long exited from its zero interest rate policy and
likely would not have coordinated a global alliance to do the same thing.
As for the ‘flation’, or lack thereof, I failed to anticipate
such a large demand shock in 2008, or the persistence of deflation fears, and
other factors that encouraged cash hoarding by both individuals and
businesses. On the other hand, though, many economists underestimated
how much money the Fed created in the post 2008 period. This was because
on the one hand they monitored the Fed’s own haphazard categories of money
(hurray for transparency) and on the other they really just have no idea what
they are talking about. Think what you want but I know it is true when
they pull out tired old phrases like “velocity of circulation”, or if they
claim that while the central bank has created high-powered money it hasn’t
made it out into the economy. It is sitting there piling up in bank
vaults, or so goes the lore – and meanwhile the stock market averages
are making new highs every other week.
Finally it is easy to forget that before the last tightening (2004-07)
precipitated the 2008 financial and economic crisis prices were accelerating,
especially for food and energy. You can be sure that if there was no tightening
and no demand shock the ‘flation’ part would have become a bigger problem.
But Its Postponement Is No Reason To Get Complacent About It
After all, among some of the other things that I did not anticipate was
the Fed’s post-2008 policy.
I would have never believed back then that after being widely persecuted
for causing the tech, real estate and commodity bubbles of the 1999-2008
period, the public would have let it get away with even more monetary
chicanery –including the blatant bail out of its crony friends in broad day
light.
The justification – to save the economy – is about as bankrupt as it can
get but the nearly $5 trillion manufactured by the banking
system since 2008 is motivational, thanks in part to your
deflation fears.
They just laughed in our face and stepped on the gas pedal, driving stocks
to highs that I did not imagine because I could not imagine them throwing
caution to the wind like that, at least not back in the y2k years when “The
Greenspan Put” itself was still relatively new. The Fed wasn’t that
bold yet.
But all lies start small. Just a little bubble! C’mon, mummy,
just a little one??
Now they have to do it to cover up the biggest lie of all: that
the world’s largest governments are insolvent today. They
are covering this up by having pushed interest rates on the least sound of
sovereigns to near zero through various unsustainable
inflationary schemes involving a global alliance of central banks and
governments. If economic law exists, the attempt to coercively suppress
interest rates for so many years, and down to 50 year lows, is going to bring
about unwanted consequences.
One thing that low interest rates will not bring about is more saving,
which ultimately fuels investment.
Another thing they won’t bring about is less debt and more financial
discipline.
Those are just a couple examples of the harm of the policy –all you have
to do is keep thinking.
Significant Bottom at Hand?
I believe that gold and silver prices have bottomed; or if not, are close
to it. Granted, I have believed this for two years now and have been
both right and wrong. Wrong in that my number was $1350, but right in
that it is not down a lot from there so far. With silver I was more
wrong, expecting it to bottom at $20-ish. I am also a lot wrong about
the gold shares, which I thought bottomed at the end of 2012.
The bottom in gold – modeled on a 1975 retracement scenario – would be
$1050.
I cannot rule it out; I am just more bullish than that.
The more bearish projections out there are calling for between $800 and
$1000 per ounce.
I think that assumes a secular bear – like the one that began in the
eighties – which lasted 20 years.
That scenario has powerful implications but it is also based on rising
real interest rates - which was only able to occur in the 1980’s because the
Volcker Fed abandoned the cheap money policy.
The recent occurrence of rising real rates I don’t believe is very
sustainable.
So I have ruled out this scenario because it does not fit the precedent
historically or theoretically.
Likewise, I have long ruled out the debt deflation scenario conjured up by
professor Fisher, one of the chief proponents of the Fed in its early
days. That scenario is not likely at the moment because
there is nothing to restrict a central bank from printing money (i.e., that’s
why they killed the gold standard) other than public opinion and
political will, and incentives favor it neither politically
nor commercially.
Either preceding scenarios (<1050) are possible if the Fed were to stop
printing and let interest rates normalize. But we are arguing that it
can no longer do this, and that it knows it can’t… not for long.
The only other way I believe you will see gold below $1000 again or silver
close to $10 is if the Fed announced QE4 –but at the right time! What
would be the right time? Hindsight knows best, but it is not
here. The ideal time might be after a little rally
in gold and a 20% correction in the S&P 500.
If your investment time horizon is longer than a year the case for gold
and silver is a no brainer, whether or not they fall a bit more in value
first. Technically, we are at another crossroads where it can go either
way for the next $100 or so. I would not try to outsmart the market at
this juncture.
It is easy to be out right now. And it was easy to be long in
2011. Don’t do what’s easy.
I don’t want you telling me you wished you listened to me; I want you
thanking me that you did!
Value Is Tough to Find These Days, Except in PM and Resource
Shares
Today I want to focus your attention on gold equities, to which I
presently suggest a larger allocation than bullion (i.e., 35 vs. 30%).
I would include other resource and energy sectors, including uranium
producers, to a well-rounded portfolio these days, and increase that
allocation to as much as 40%.
However, I recommend overweighting the gold miners on account of their
likely counter-cyclicality.
The last time I was bullish on the gold miners when the rest of the stock
market was topping was 2000. Many investors worried then too that they
would fall when the tech bubble popped.
It has been a miserably long bear market in gold stocks – the second
longest I have ever seen in my 25 year career, 49 year young life, and as far
back as the Barron’s gold stock data goes (1939).
As miserable as you feel about buying gold stocks today, I feel much the
same writing about them.
But this is nevertheless the time to own them. I do not believe in
gold stocks as an asset class unto themselves and do not hold them up as a
means of wealth preservation like I do the precious metals – and actual asset
classes like stocks and real estate in the right circumstances (not the
current ones).
The precious metals equities can be considered
derivative of the precious metals story, but I think this too is a mistake
that leads to the kind of blood bath we’ve seen. Repeat after
me: gold stocks do not suit a buy and hold strategy like a bona fide asset
class. I prefer to view them as any other sector or business,
and just as susceptible to the vagaries of the business cycle and over
investment as any.
I believe that the precious metals are
the best guard against the aforementioned wealth
confiscations for investors that seek a relatively long term buy
and hold strategy of wealth preservation in a system where
inflationism and interventionism are the norm. The equity
and real estate classes require more vigilance. The stock
averages are constantly rebalanced, for ex., and require compositional
changes, if only to cull the businesses destroyed in the unnecessary
downturns produced by the central bank’s unsound policies, let alone those
that die away from technological or other forms creative destruction.
If memory serves, no other current Dow component besides GE existed in the
1920’s, and its composition has been changed often. If you wanted to
beat the average I would suggest that it would require even more vigilant
monitoring of the composition of your equity portfolio than Dow.
Instead, a gold or silver ounce is still a gold or silver ounce –through
millennia.
True: if our monetary system were sound, there would be no need to own
gold or silver (as assets).
And since there’d be no malinvestment or business cycle you wouldn’t have
to change your stock portfolio as often. Value investors would reign
instead of momentum traders. Indeed, even in this climate, I prefer
equity because I believe it offers a chance to beat
my precious metals holdings, and for other reasons of
convenience, diversity, and my personal risk tolerance level.
I think real estate is also a good long-term hedge and protection against
inflation and other abusive policies of the central bank. But both
equity and real estate require some knowledge –i.e., what kind of real estate
or what kind of businesses to invest in – which requires work and
vigilance. I’m not saying that gold and silver aren’t volatile.
Nothing is safe from that. Nor am I saying the government won’t try to
outlaw them in the future. Although I don’t think they would succeed if
they tried. What I am saying is that gold and silver bullion offer
the best passive way to save in this environment over the long term without
having to work for additional returns –which can be very hard to obtain over
gold/silver returns in this climate.
Stock and real estate investments have matured. They are no longer
cheap. And they are making bubble like moves, broadly speaking – from
the US to Japan – wherever central banks have been busy transferring wealth
and the command over the economy’s scarce resources to Wall Street.
I don’t know when it is going to end but the extent of the interest rate
suppression, globally, assures us that it will end, and
likely with a thud. The Dow/Gold ratio is headed back to 1x, though
that will not be evident until the current trend reverses, and/or we see the
price inflation that will be inevitable once the public realizes why a market
driven normalization of interest rates in the ‘advanced’ economies is no
longer possible without bankrupting the states that protect the banking and
financial monopolies.
Unless some public pushback forces the authorities to deal with the
fundamental problems of adopting big government ideas that no one can pay
for, let alone getting them to liquidate the public debt and privatize public
assets, the precious metals investment strategy offers the best long term
value, imo.
This is particularly true from here; in what must be a late inning stretch
for the latest boom any way we slice and dice it. You will never see
gold or silver bullion become as worthless as Citigroup
stock did.
Even if they fall another 25%, I strongly suggest buying, just based on my
view that bullion is currently the cheapest of the asset classes that can
protect investors against inflation and other forms of theft.
With regard to gold stocks, I make an additional plea to value investors
and speculators with a higher tolerance for risk (and especially equity oriented
investors), and who are currently on the sidelines.
The capitulation has already occurred. All that is left is a
graveyard.
I suggest a disciplined approach of wading into the sector slowly and
picking off the babies that were thrown out with all the other prior bath
water, weighed down by the sector’s current depression.
I
don’t know if they will get cheaper first but I don’t believe there’s another
capitulative climax in the cards, and I don’t think these types of valuations
will last for very long regardless. The drought in the juniors may last
a while longer (than the recession in the miners) because of the usual
funding risk that accompanies a general equity downturn, though that may
already be overdone. Historically, however, the majors are not very
timely in their own investment program, tending to buy high and sell low just
as much as anyone else, according to my own analysis of M&A trends going
back the past two decades. That trend may reflect the fact that mergers
and acquisitions are typically funded with equity, which may be cheaper than
cash at the top of a cycle. Having said that, there is always the one
or two that are making timely acquisitions at the bottom, like Newmont and
Goldcorp did in the early days, or like B2gold, Agnico, and (hopefully!)
IAMGOLD are today.
They will all reap the benefits tomorrow.
And maybe the gold or silver price come back will be so sharp that it
eliminates funding worries.
[By the way there may be an indicator in the above chart: note that
when the HUI makes a new high unconfirmed by a higher high in takeover
related transaction values it has been a reliable sell signal.]
I’ve written to you about ‘why’ the gold story is still unfolding and why
you should own gold or silver, and why the stock and bond markets are
overvalued. Here I want to urge you to act. I know our picks have
been decimated in this decline and that I’ve been calling a bottom for two
years now. But I do have a tendency to be early and long term in my
investment horizon. Anyone that has followed me for longer than the
past few years knows that my general track record in making calls is still
quite sound at both the macro and micro level. However, the former, in
my opinion, is much more important as it sets the tide. You will do
much better picking the sector favorites going into a sector upturn than
trying to pick stocks in a sector where the tide is going against you –as I
learned by ignoring the tide while putting out my monthly buy
recommendations. That’s because I didn’t expect such a large ebbing.
I
doubt this plea will sell any new subscriptions because I am cynical. I
fear the only time people will do what I tell them is when it’s too late,
which is usually after a string of successes.
But why not try something different this time?
Prove me wrong.
Why not follow my advice when it is least popular?
And don’t just think about it; don’t just put it on your radar.
Go out and buy some of our picks here.
Just remember to overweight your allocation towards the top (core)
positions. They consist in producers I think will survive this
trough. The allocations are suggested. I
would suggest allocating up to a 35% of your financial non real estate wealth
in a portfolio like this at this time; the allocations mentioned in the table
refer to the segments comprising the portfolio here.
Don’t plunge. Just pick away over the course of the year.
I have developed a portfolio of about 15 companies I’m comfortable with
and will continue to grow this list to about 20 names. We will be
starting to introduce new names again soon, as well as other related
services. But start with this short list if you live on this
continent. I predict that this portfolio will be up from 300 to 500
percent over the next three years –plus or minus. The last time I
constructed a portfolio of gold stocks in a trough was 2008.
They returned nearly 300% from then to their peak values in 2011.
Gold stocks returned even more in the 7-yr period following Y2K.
This time is not different. We are at a cyclical low for this
sector. Don’t waste time chasing the crowd.
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