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September was basically flat in the equity markets, the Dow and S&P up slightly, the Russell and NASDAQ Composite indexes down a bit. Gold bullion and the gold miners were very, very quiet. Gold bullion was down 0.6%. The large and small gold mining ETFs, GDX and GDXJ, were down 0.2% and 1.1% respectively. The three gold mining mutual funds that we track, TGLDX, OPGSX and INIVX were up an average of .015%. The adjustment of the Vanguard Precious Metals Fund, which we discussed last month, has apparently run its course by the end of September, with them selling something like $1.5 billion of mining stocks. The last time they did this, in 2000, it was just prior to a twelve-year bull market, during which gold bullion went up six times in value and the mining stocks by a multiple of that.

We discussed last month how the price of gold has generally followed the increase in US debt, which itself is a precursor of an increase in inflation, the only politically acceptable way of dealing with that debt. In August, 1971, Richard Nixon closed the “gold window” because the prospect of rising deficits were creating “a run” on the US gold reserve. The price of gold went from $35 to a high of $850 per oz. in the 1970s. The gold price went from $250 to just under $1000 per oz. between 2000 and 2009 with the rising deficits created by the aftermath of 9/11 and the cost of two wars. The move from the 900s to a high of 1850 between 2009 and 2011 took place as the deficits rose sharply in the early years of the Obama administration. The decline since 2011 has coincided with less concern, misguided as shown below, over rising deficits. We want to “close the loop” with specific facts about deficits and debt over the last eleven years. In summation, the annual “deficit” has come down materially less than advertised, is now going up materially more than presented, and the result of annual deficits, namely the cumulative debt burden is a larger problem than ever before.

The following table shows, over the last eleven years, the stated annual deficit, as well as the year end debt. The increase in debt has far exceeded the reported deficit. Over eleven years, the difference is a monstrous $3.24 Trillion. It is interesting that in fiscal 2014 and 2016, two of the four years (from ’13 to ’16) when the annual deficit was so widely advertised as being “reduced”, the debt somehow went up by an “extra” $1.39 trillion, from what we call “non-budgeted” spending.

As the following table shows, the stated deficit for the fiscal year ending 9/30/18 will be something like $830 billion. The increase in the debt, however has been $1.29 trillion, with an extra $460 billon “needed”. It is interesting that the 9/30/19 Congressional Budget Office estimates when presented in Feb’17 called for a deficit of $526 billion. By Feb’18, the 9/30/19 estimate had been increased to $984 billion. Just yesterday, the official CBO estimate is now $1.085 trillion for the next twelve months, ending 9/30/19. Based on (1) the historical pattern (2) the obvious spending needs for defense, higher interest rates, health care and other entitlements, storm remediation, etc. (3) the current administration’s conviction that you have to “spend money to make money” and lack of fear of debt: we will “bet on the over” in terms of the cumulative debt growing materially more than $1.085 trillion deficit forecast. The CBO estimates, by the way, call for increasingly large numbers beyond fiscal ’19.

There is, lately, a bit more concern by the politicians, economists, and pundits about the reported and projected deficits and cumulative debt. However, because the inflation, as presented by government statistics, has been modest, the general assumption is that it can be “controlled”, and as, Dick Cheney suggested, the “deficits don’t matter”. Others (such as Stanley Drukenmiller, Ray Dalio and Howard Marx)  have said something like  “ignore history at your own peril”, and we are in that camp. In terms of the deficits: as the song goes “We’ve only just begun”.  We believe there will soon be a major price to be paid for the financial promiscuity of politicians and central bankers in recent decades, especially during the last ten years.  Governments can’t print their way out the problem. One doesn’t get out of a hole by continuing to dig.

We continue to believe that, as the distortions within the worldwide financial system become more apparent,  the gold price will catch up with the inflation of most other asset classes, and the gold mining stocks will move by a multiple of the gold price.

Roger Lipton

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