SEMI-MONTHLY FISCAL/MONETARY UPDATE

The general capital markets were up modestly in July, gold bullion was down 2.3%. The gold mining stocks were down about 3.5%.  Most importantly, our conviction hasn’t changed regarding the long term outlook for our portfolio that is heavily invested in gold mining stocks.

While last month we outlined a group of tangible factors that support our thesis, it could be useful to go back to the biggest single reason that gold will be the surviving “currency”, protecting purchasing power best. The worldwide credit pyramid that has fueled the economic growth over the last forty years must be liquidated. Debts must be paid off, and the numbers are too large for the worldwide economy to grow out of the problem. “Default” will be the result, but refusal to pay is too obvious and makes the politicians look bad. Inflation is the only other solution since the voting public doesn’t understand who caused it. Gold has gone from $250/oz. to $1200/oz. since 2000, starting with the President GW Bush debts to finance the aftermath of 9/11 and then the two wars. Gold doubled from $900 in ’09 and the gold mining stocks quadrupled and more) as the deficit spending ramped up even further under President Obama.

Here we go again: The projected US deficit in the fiscal year ending 9/30/18 is projected to be about $800B, up from $600B last year. However, the cumulative debt in the 10 months ending today ($21.2 trillion) is already one trillion dollars higher than last September and is projected to be higher by $1.2 trillion by 9/30.

Only in governmental accounting can the annual deficits not total the cumulative increase in debt. This is not new. You have no doubt heard from politicians and economists who are concerned about the future deficit spending. Republicans are concerned when Democrats are in power, and now the situation is reversed. However, they don’t talk about the excess debt, on top of the budgeted spending, called other borrowing. Over the last ten years, the cumulative debt increase has exceeded the total of annual deficits by a cool three trillion dollars. People, this is a lot of money. While the annual deficits going forward are projected to be over a trillion dollars annually over the next decade, you can only imagine what the cumulative debt will look like after the other borrowing. We have described the situation in terms of US debts, but enormous potential credit problems also overhang the economies of China, Japan, and the Eurozone, the largest after the USA. What the endgame looks like is unknown, but it won’t be pretty.

Stay healthy. Stay financially flexible.

Roger Lipton