I’ll get to the markets shortly, but first I want to bring up a dilemma that I have. There are many readers who want my Daily to be short and to the point. But there are many who want a longer and more comprehensive newsletter. I have been wrestling with this issue and trying to come up with a way to please all of my readers.
Here is a solution that should satisfy everyone. If you only have a few minutes to spend reading my Daily, then read my opening comments and the next section, below the Kitco Daily Gold Chart, which will discuss gold (and usually silver) from the previous day. If you have more time, read on – there will always be a few really important articles and comments from the likes of Richard Russell, Jim Sinclair, Bob Chapman, Jim Willie, Ed Steer and others. You be the judge as to how much reading you want to do. Stop reading whenever you wish.
I spend hours every day researching the best of the best and cull it down to 10 or 15 minutes of reading for you. I carefully select the information that I believe to be the most important for you to read and focus on gold, the dollar and the economy. Today, for example, I have gathered together over 179 pages of notes but will be able to use less than 10 percent of it in this letter. It’s a shame, because all of it is critical, as far as I am concerned. Oh well, I do the best that I can.
Every day, I receive many kind emails from readers who thank me for helping them understand the troubled world that we live in. It is sad that Wall Street, financial advisors, insurance salesmen, money managers and the news media do such a poor job of presenting the dangers that are lurking in the shadows, about to devour those who are unprepared. I guess it’s up to me to cast some little light on the shadows and present you with the world as it is – not as you would like it to be.
My wife was at a family birthday party last weekend, while I was in California. She ran into an acquaintance that she hadn’t seen for a number of years. He said “I hear that David is doing very well. To his credit, he never wavered.” That’s right. I never wavered. It has been crystal clear to me for more than a decade that the “favored asset class” would become precious metals and the alternatives would fall into disfavor.
Why is gold becoming a “go to” investment? Simple! The alternatives are ALL less desirable. Let me give you an example. Yesterday I was at my granddaughter’s high school graduation party. 250 people stopped by and I would be willing to wager that other than Jim Cook, owner of Investment Rarities, Andy’s father-in-law, me and my son Andy, not one other person at the party owns any gold or has ever held a gold coin in their hands. I had a conversation with my son-in-laws best friend and it came up that his father had recently passed away and he was managing his mother’s inheritance. He said he was in cash because he was afraid to be in the stock market now. (After “opening his eyes” to what is happening, he decided to buy 25 ounces of gold. Slowly, people are starting to figure it out!) Yes, the stock market is now priced as if the economy was strong and robust. Such is hardly the case. Therefore, the stock market is grossly over-priced and a risk. Doug Casey wrote, Digging through the entrails of the fundamentals associated with the global economy and markets, it increasingly strikes me that there is really only one investment I’d now consider a “sure thing” – and that is buying gold on dips.
In support of that contention, a quick review of the other primary asset classes is in order.
The broader stock market. Now, I can’t speak for all the world’s stock markets, but will say that with the S&P 500 currently selling at a P/E of 18.29 and with a dividend yield of a miserly 2%, it’s hard to say that these stocks are selling on the cheap. Especially when you consider that during the depths of the deep recession lasting from 1980 to 1982, the P/Es hit below 7 (averaged 8.4) while dividend yields reached above 6% (averaged 5.4%)… levels we’ve been nowhere near hitting at any point in this even more dark and dangerous crisis. Yet.
Worse, the underlying problems that delivered us to this place remain largely unresolved, having been “kicked down the road” by a numbing amount of government spending, topped off with a big dollop of meddling.
If anything, the problems are even worse now than they were in the early days of this crisis, because the bad debt is still out there – lurking in the portfolios of banks and other financial institutions, and in trillion-dollar portfolios held by the Fed, Fannie Mae, and other parastatal institutions.
While the stock market and the economy are not the same thing, they are connected at the hip. As such, unless and until the economy goes through the painful process of reducing debt levels to the point where they can be comfortably serviced, the stock market remains at risk.
How about bonds then? Interest rates are at near zero and can’t go lower, which means they can only go HIGHER. Rising interest rates decimates the value of bonds. If interest rates double, say from 3.25 percent to 6.5 percent, the value of the bond will be cut in half. Yes, that is coming. How about real estate? If you wait, you will buy it cheaper. Doug Casey wrote, With interest rates near 50-year lows and governments around the world spewing out hundreds of billions of dollars in new financings, suggestions of buying bonds are more appropriate as punch lines delivered from the stages of comedy clubs. That said, there may be some additional upside to be squeezed out of U.S. bonds as investors continue to flee the euro and, maybe soon, the yen… but comparing the risks against the slim potential for further rewards makes chasing the returns in bonds anything but a sure thing.
How about foreign currencies? Gold is at or very near an all-time high in all of the major foreign currencies. If they are all falling, relative to gold, why not just own gold? Doug Casey wrote, Foreign currencies are a big area with lots of choices. With just a couple of exceptions discussed in this month’s Casey Report, most of the fiat currencies are like dry tinder lying too close to the roaring fire of out-of-control sovereign debasement. In addition, you also have the always-there possibility that a government will do something really, really stupid that blindsides its own currency. The most recent example was provided by Australia’s decision to slap its domestic mining industry with a special 40% tax on mining company profits, effectively wounding one of its critical export industries just as China looks to stumble. Hope that works out for them. In any event, with all the uncertainties just now, no fiat currency rises anywhere near the level of a “sure thing.”
How about real estate? To buy it now (investment real estate) is like trying to catch a falling knife. Doug Casey says, it’s still way too early to invest in residential or commercial real estate. The list of problems are too long to recount here. We see things beginning to unravel in residential as early as July, and worsening as the year progresses. For now, keep your powder dry.
If it is imprudent to own stocks (precious metals stocks being the exception), bonds, foreign currencies and real estate then that leaves gold as the only viable alternative. That is one of the factors in the robust increase in purchases of physical gold and GLD, the gold ETF. Doug Casey wrote, Which brings me to the only sure thing… Gold. As I have previously commented on in these pages, to the point of stuttering repetition, the overarching problem the world now faces is debt, debt, and more debt. Including, most importantly for this discussion, historic levels of government debt – coupled with an ongoing attitude of “If you spend it, they will come” – “they” being the easily misled voters.
All you really need to know is that in sum, the world’s top ten sovereign debtors currently owe upwards of US $135 trillion.
Experts in Iran’s central bank have suggested the country buy gold because they forecast the precious metal’s price will increase, the newspaper said.
What’s striking a chord with me on reading that is as follows…
a) A year ago, could anyone have imagined that we’d see a wholesale dumping by central banks of the only real competitor to the dollar’s reserve status?
b) It’s interesting that Iran is considering shifting back toward the currency of its sworn enemy, especially after numerous earlier statements it would increasingly eschew the use of the dollar in its commerce. One has to wonder how long Iran will remain willing to feather its nest with dollars?
c) Finally, the comment at the end about gold catches the eye. Especially in that it is increasingly being looked upon for the role it can, and likely will, once again play as a foundation of central bank reserves.
Of course, the sovereign nations could decide to resolve their massive debt problems through default – and some most certainly will. But at this point, that these nations will reduce their current, let alone future, obligations to manageable levels without crushing their respective economies – never a politically palatable choice – is literally impossible.
Thus, while there will be much grandstanding about making tough choices and hard budget cuts, when push comes to shove, you can bet that the choices made will be those most likely to return the politicos to office, and the cuts nothing more than window dressing, quickly offset by spending increases.
In a world awash in funny money, gold is the only sure thing.
Check out the two graphs, courtesy of Nick Laird at sharelynx.com. It’s a total of all the gold in all the depositories, ETFs, funds… and e-funds. The graph on the left is in ounces (77.65 million) and on the right, the dollar value ($93.05 billion). 77.65 million ounces is nearly one full year’s total global gold production.
Ambrose Evans-Pritchard posted an article at The Telegraph in London with the following headline: “US money supply plunges at 1930s pace as Obama eyes fresh stimulus. “He wrote, “The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.” You have to be brain-dead not to understand that the Fed and the Administration will inflate like mad to turn this around. It looks like “hyperinflation” is coming. This is another reason to lighten up on dollars, and all currencies now, and shift into gold.