“Gold is money everything else is credit.” J P Morgan
In 1912 ole J.P. told Congress that and the next year that same Congress founded the Federal Reserve. The income taxes, social security, and other helpful programs would follow, but the key to it all was gold. It is difficult for the government to steal your money when it is in your possession. Credit means someone owes you and can thus welch. Gold is money. There endeth the lesson.
Today the US dollar masquerades as money and does it well. After World War II the United States had the moral authority and history to create a substitute claim. People trusted the Americans as they have created the wonder country. Innovation, manufacturing, resources, ability to defend its allies with troops and armament, these all justified the United States position as the leader in the world. Its currency was also backed by gold. It meant that the country founded on limited government had a limiter on its ability to act like government and supersede its bounds. We have gone 53 years on what Nixon called a temporary move away from the gold standard and we have a $35 trillion deficit to show for it. That’s why our founding fathers put gold and silver into the Constitution, but that has never stopped a good politician from usurping the law before. This little time out had an inauspicious ending and no one but a very few knew it. When the United States froze the foreign reserves of Russia after egging them into invading Ukraine, the financial ground shifted. It was so slight that no one noticed. Taylor Swift still toured, cats still made Youtube videos, and Joe Biden went out for ice cream. The world noticed. They started speaking in hushed tones and back alley whispers, “ Can you believe that? What if that was us? How dare they sacre bleu…..”
The French were the first to elucidate our dollar printing advantage in the 1960s but today the world is now holding something other than US dollars as their foreign currency reserves. Stephanie Pomboy told Adam Taggart on his podcast Thoughtful Money that foreigners are holding the least amount of dollars they have held in 29 years. People say the dollar can’t lose its hegemony, but it can. It simply won’t be fast. Large institutional changes take a long time, but the shift is happening.
Another shift is that they are buying gold. That old bygone relic is showing up on central bank balance sheets in record numbers. That’s right, not commercial banks, not regional banks, not blood banks, but central banks. Why are they holding the oldest form of money? Why do you think. They want to diversify away from the double tongues that is the US. I’m attaching an article from ZeroHedge regarding a report from Goldman Sachs. It is jaw dropping, not only what they are seeing, but how much. Global central banks have tripled their gold purchases since the Russian invasion of Ukraine. They also reported that most central bank buying is unreported, so this reported gold buying understates just how much demand there has been. The article also clearly points out what we have discussed, this isn’t a good environment for gold. Interest rates going up mean that gold which doesn’t pay interest should be falling, but it isn’t. The dollar which has gone up should be pushing gold down since how we price gold is in ounces per dollar. Nope, gold is rising against everything. It is setting records against the Euro, the Yen, the Swiss Franc. Why, those are all fiat currencies. Gold can’t be printed like the fiat have been.
This article is so good because it also discusses the geopolitical concerns that have driven gold higher in particular the seizing of the assets of Russia. There is a chart showing the three largest price spikes in gold in the last 50 years and the one in 1980 aligns with the US freezing the assets of the Iranian central bank, in 2011 it was the freezing of the assets of the Libyan central bank, and this time the Russian central bank. Goldman is calling for gold to go to $3,100 and they are recommending it as a hedge against equity portfolio risks.
This is quite an endorsement and curious considering we have gone to all times highs by 20% or so already. Gold is certainly the bedrock, but that doesn’t mean that it can’t be volatile. In fact, I expect gold to decline from here. I don’t know how long it will or how far, but there are always pull backs and I think gold will likely have one when the market sells off which it will do soon. Once the Fed figures out that we are in recession, and that knowledge is coming soon, they will probably start cutting rates. People will cheer as they have been hoping for that for over a year now. Then they will hear a loud pop, and that will be their heads remerging from their asses and they say wait, why is the Fed cutting? Are things bad? Why did I lose my job? I thought things were terrific, oh no! Yes, I have attached a chart from MacroTrends and it shows recessions and rate cuts and let me tell you recessions dance with the one that brought em. Of course they move in tandem with rate cuts, the Fed is reactive. They are data dependent. Right now bad news is good news because everyone is hoping for rate cuts, but soon bad news will just be bad news. The unemployment rate will be going up and inflation might still be sticky, classic stagflation.
There is a sequence when the market sells off that all correlations go to one. We saw this during Covid and the Great Financial Crisis. Sell whatever, I need cash. That includes gold, real estate, which will trigger that crisis, and then gold and every other stock follows. Everything goes down just about. Normally people rush to the safety of US treasuries, but this time some people not all but some are saying I don’t want that, so they will start to turn to gold and it will outperform. Gold’s trigger will be the Fed pivot, but the lighter fluid will be any fiscal stimulus programs to ease the recession. If we don’t take the pain this time, and we probably won’t, then all bets are off for gold. I don’t know what height it could reach because I don’t know how much the US dollar will be distrusted. This is a live and moving market this distrust of the US, this open rebellion of the Houthis on the waterways, Russians in Europe refusing to be bullied because they too have nuclear weapons, and after the sanctions released on solar and EV products Monday, probably the Chinese in earnest.
If the Fed cuts rates to try and save the market and relieve pressure on leveraged banks and borrowers, it will be because the market is sick. The economy has been sick, but despite all the warnings the stock market just grinds higher on illusions of AI and EV miracles. When it starts down, and it may already have, it will seem orderly but then there will be a little bad news and then a little more and then panic will set in. This is when gold, which has been rising with the stock market lately, will also fall, gold often turns the corner at the bottom first. Panic can shake out those that are not prepared for volatility. Simply not going down as fast as fiat holdings will cause flows to enter the tiny gold market. This will cause incredible price rises just as we have seen in the past.
People will scoff and say that gold can’t go higher if interest rates rise, but gold’s inflation adjusted all time high was during the great inflation of the 1970s and early 1980s when interest rates went to 20%. Gold can and does perform well whenever there is what? We have discussed this, when there is turmoil. Gold is the old stand by, the girl that you call at 2am and ask if she is still up? Gold is sexy.
That is only during times of tumult though. Mostly, gold is the boring old stand by. On Monday the meme stocks made a dashing appearance again and Game Stop’s stock had to be halted as it was up over 80%. We still have pockets of rampant speculation left to crush. AI hopes and dreams will have to be next as the hype and hope trade is turning out poorly, as the technology isn’t delivering enough results. It might take decades before it does, but the stocks are priced as if we are there now. These are your sexy investments at 9pm, but after they have all flamed out gold starts looking good about closing time. Gold is about preserving wealth and not really creating it which is why it fits so well in our avoid the outhouse and risk never getting to the penthouse philosophy. Gold does well not because it goes to the moon, but because it does so well against other things. In the great hyperinflation of Weimar Germany a couple gold coins would buy a block of mansions. The purchasing power of everyone else went down and gold preserved its own. That is the strength of gold.
Relative value is such an interesting concept when it comes to comparing different asset classes. There will come a time when it is gold that is expensive. Too many people will love its shininess or its store of value. In the late 1970s, it was stocks which were cheap compared to gold and think of bonds. Bonds were able to be had that paid 15% for 10 years. Stocks had been flat for a dozen years. Today is the opposite, people think bonds are expensive and a great deal at 4.5% when this is the lowest rate in 40 years, just outside the last few. Stocks have done nothing but gone up for 16 years if you can overlook our government’s insane reaction to a very bad case of the flu. That’s right, the conditions are the exact opposite today.
What is happening today? People are rushing out to pawnshops to sell their gold jewelry. That’s right, people are selling at all-time highs, not realizing that these are only nominal prices. Inflation has made everything more expensive, and people need cash to pay their bills. Savings rates are low, credit card balances are high, and defaults on auto loans, and credit cards are the highest since the great financial crisis. It is one of the reasons that gold is so highly desired, it is very liquid. It is accepted damn near anywhere.
Even Warren Buffet can be coerced into buying what he calls a rock. In the second quarter of 2020, when the market was in freefall it was revealed after the fact that Berkshire Hathaway had bought Barrick Gold, one of the biggest miners of said rock. He likes buying businesses and that business wasn’t a great business to hold for a long time like we said, but during rough times it is comforting.
As Mickey Gilley once sang, “Don’t the girls all get prettier at closing time?” it is approaching the end of fiat currency and since it is about 2am it might be worth giving that shiny sexy little blonde a call.
Sincerely Yours,
C Thomas Printer
On this date in history… 84 years ago to be exact and speaking of sexy little items today, nylon stockings first went on sale to the general public and sold out within days.
Also born on this date … two of the greatest to ever put on pads and play in the National Football league, Emmitt Smith and Ray Lewis.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.