Youtube video for this blog post: https://www.youtube.com/watch?v=XTDzdbxZQPk&feature=youtu.be
As a student of the markets, history and economics, I approach everything through the lens of classical economics as opposed to mercantile economics, today called Keynesian economics.
Classical economics is about hard money and low taxes, while Mercantile/Keynesian is about soft money. Keynesian has been taught in school since 1971 (Nixon ‘suspended’ the Gold standard) and I believe for a reason. Keynesian is all about aggregate demand, essentially government playing a huge role in economics and having high taxes to pay for it. It is a win-win for governments and economists because governments get bigger with this theory, and economists get hired by banks who then propose, whenever there is a liquidity or solvency crisis, for government to bail the banks out using taxpayer money.
The government wins. The banks wins. Wall street wins. Main street loses.
Human history is cycles of hard money and soft money. No soft/fiat money has ever survived. We always revert back to hard money. We go to soft money when government becomes greedy and decadent just to name a few reasons.
Before I begin, I recommend you read my posts on the US Dollar going higher, and why the Fed is cutting. I argue we will enter a period where both the US Dollar and Gold move together. The academic approach to markets is to run into the US Dollar because it is the safe haven/reserve currency. Forget about Gold it is useless.
While the classical economists, and those who study history realize Gold goes up for one reason, and one reason only. A CONFIDENCE CRISIS. Many market participants have not realized the trouble coming, but they very soon will be.
Gold goes up whenever there is a confidence crisis in the government, the banks, and the money.
The division is clear. Just think about the US elections in 2020. The losing party will NOT accept the results. The division is just ready to boil. What excuses will be used next after the Russians? Think about the protests on the streets regardless of the Republicans or the Democrats winning.
This also leads to the idea of government debt. Government’s in the western world are all broke. Taxes will have to increase to pay for it all. There is even ideas now of government supplying universal basic income or the MMT model. More socialism More bigger and authoritarian government. I argue we will go to a digital currency so government can track money for taxation…this has to do with MMT which we will discuss when we look at the money crisis.
Perhaps the most important. Central Banks are stuck. What we are seeing is central banks attempting to MAINTAIN CONFIDENCE in the system. They cannot come out and say “we messed up”. We are seeing the beginning of central banks easing…and a lot of the academia crowd cannot understand why. The economy is supposed to be the strongest ever. So we are told.
Look at the Bank of Japan, the European Central Bank and the Bank of England (to name a few). They are at negative interest rates, or close to zero…how will they respond to the next recession? They are out of tools.
The ECB has come out saying they will provide more stimulus and cut rates further negative (again, the keynesians cannot admit they were wrong…we did not cut rates deeper to the negative nor did we print enough money…our policies are not wrong, we just did not do enough of it).
It is likely we are going back to Quantitative Easing. The Fed has come out saying they will stop Quantitative Tightening… meaning they may go back to QE .
Remember, QE was supposed to be a ONE time desperate policy to prevent another 1920-30’s like global depression. There was so much debt and bad debt in the system that they could not allow them to fall. These bad debts were bought, and the crisis was averted by central banks being active purchasers… really we didn’t solve the problem…we just papered it over with more debt. Once market participants realize that QE was not a 1 time desperate policy, and in fact will be the norm, people will realize these central banks are stuck. I argue their mandate is to keep assets propped up…but this will morph into the central banks being the BUYER of last resort. They will become the most powerful institutions in human history.
Now the question is, how much more stimulus can they provide? Again this goes back to confidence. THe ECB and BoJ have over 5 TRILLION on their balance sheet . The Fed went from 800 Billion to 4.2 TRILLION during their 4 rounds of QE … their balance sheet is probably around 3.8 TRILLION right now. Since the Fed is the central banks of central banks… how will the market respond if they go to 5 trillion? 6 trillion? Not to mention having to suppress yields meaning the Dollar may lose reserve status. This I believe, is when market participants will realize we are on QE and central banks running the show forever. No free markets.
Again, no fiat money has ever survived. We seem to be in a currency war where central banks are trying to out do each other to see who can devalue faster. The US Dollar went up because every other central bank is cutting. In fact, the ECB out did the Fed. This is why many were saying the Fed should have cut 50 basis points to out do the ECB. It is a race to the bottom now. To see who can devalue their currency more. This will lead to a inflation and disaster. The middle class/main street will pay for this.
Right now the market is confused on whether more rate cuts are coming. Powell delivered a some what hawkish rate cut. More cuts are coming. Look at the bond market. Again, in order to cut more, the Fed needs to do it in a way to save face and maintain confidence. “Oh our policies were working, now this happened so now we need to cut when we did not want/need too”. Enter President Trump and his China tariffs a day after. If you believe the Fed mandate is to keep stocks propped up, the Fed will now be cutting rates (the Powell Put). They will keep stocks propped.
In this environment, when REAL rates are yielding 0 or negative, why not just hold Gold? Central Banks will just continue to print and prop and even do the MMT thing meaning they will kill the fiat money. For MMT , you need a digital currency. The socialist economists realize that when people have a lot of money, but the number of goods and services do not increase, you will see inflation . The solution is the government “kills” excess money by removing it through taxation (excessive taxation).
On a final note, Ray Dalio has spoken about this in the past. He says we are in the 7th inning (out of 9-Baseball reference) of a debt crisis. He has come out recently saying he recommends increasing one’s allocation of Gold because there will be a ‘paradigm shift’.
Finally, I want you to all look at the charts. Gold had a very strong break above the 1360 resistance zone . Yes it can be retested, but I like Gold above this level. A very important break. 1600 is the next target, but I think we will surpass this as people realize the amount of trouble we are in.
Now look at Gold compared to other fiat currencies:
Gold vs the Euro not at all time highs yet.
Gold vs the British Pound made all time new highs just this week!
Gold vs the Japanese Yen is testing highs.
Gold vs the Kiwi Dollar not there yet.
You can also look at the other currencies. The Turkish Lira, Chinese Yuan etc against Gold . Making all time new highs!
This is telling us something! Fiat is dying and being devalued. This is now about wealth preservation going forward.