Tag Archives: fiscal/monetary



The general equity market was up in August, gold bullion was down about 3%. The mining stocks fared worse, with the two largest mining ETFs, GDX and GDXJ, down 12.9%.  Strange as it may seem, the apparent reason for the relatively poor performance of the miners may be a turning point. On July 31st, Vanguard announced it was “restructuring” its $2.3 billion Precious Metals and Mining Fund, and the newly named “Global Capital Cycles Fund” will start its new strategy in late September. Moves like this from a major institution are often a sign of “capitulation”, evidence of extreme negative sentiment, and marking a bottom as positions are liquidated. In particular, back in 2001, Vanguard removed the world “gold” from what was then its “Gold and Precious Metals Fund”, which coincided with a low in gold before a ten year rally. So, we’ll see.

If the facts had changed, we would have changed our strategy, but the underlying reasons are intact. The rampant creation of currency, and monstrous increase in debt, around the world, can do nothing but cause inflation in the long run, because it’s the only way out for the politicians who can’t admit to spending their constituents into financial oblivion. The amount of gold held by major central banks, relative to their circulating currencies, is approximately the same level as it was in 1970, before gold went from $35/oz. to $850/oz. There will be a “catch-up” again.

We believe, also, that the relationship between the price of gold and the US debt is valid, and the debt obligation as shown on the chart below is understated, not including monstrous unfunded entitlements. The price of gold moved in lockstep with the growing US debt, from 2000 until 2009, and for decades before that. In 2009, after a steady 9 year rise, because markets anticipate, gold ran sharply ahead when it became clear that the Obama administration was going to sharply increase the annual deficit. The price of gold diverged on the downside from late 2011 until the bottom of 2016, likely, because the annual reported deficits were lower, even though the debt steadily increased from “non-budgeted” spending. For example, this fiscal year ending September, the reported deficit will be about $800B but the increase In debt is already over $1 trillion. We think another inflection point is at hand, as the annual deficit and cumulative debt are accelerating again.

The gold mining stocks have fared even worse than bullion recently, down more than 50% since gold was at the current level four or five years ago.  That 100% catchup could be on top of the leveraged move that the mining companies, as operators, make when bullion changes price.  Financial markets can make shockingly rapid moves at certain times, as illustrated by the recent volatility in BItcoin, first up by over 20x and down by two thirds more recently. We believe this will again be the case with gold bullion, much more so with  the mining stocks, this time on the upside.

Roger Lipton



The price of gold bullion firmed a bit through the month of July, with gold bullion up about 2.3% for the month. The chartists could say that a base has been formed to support a major move upward. The gold mining stocks were up somewhat more, reflecting the operating leverage from the change in price of their end product. Our major position in the miners continues to be our  emphasis and, as we have pointed out before, has the potential to multiply our portfolio value by many times. The weakening of the US Dollar which began in June continued through July. A weak dollar is not a necessity for gold (and the mining stocks) to go up in price but, all other factors being equal, should prove to be a positive for us.

We talked last month about the steady increase in the monetary base that has been created by Central Banks worldwide, and that this financial experiment will undoubtedly end badly. An increasingly dangerous corollary of Central Bank currency creation is the purpose to which those funds are put to work. What is not well known is that Central Banks have been buying hundreds of billions of dollars of equities. Since major Central Banks cumulatively hold over $11 trillion of foreign currency reserves, it is natural that they should want to diversify those reserves away from the currencies which are being continuously diluted. Along with steady buying of Gold (which we suggest is the “real money”), the Central Banks are adding equities to the mix/

The Bank of Japan has been buying Japanese ETFs at the rate of $53 billion per year, and now holds over 71% of those ETFs. The bank is now one of the top 5 owner of 81 companies within Japan’s Nikkei 225 index. As reported by Grant’s Interest Rate Observer, the Japanese Financial Services Agency (Japan’s SEC) is now “paying close attention” to this phenomenon.

The European Central Bank has been buying 60 billion euros worth of bonds monthly, and Mario Draghi recently announced a continuation (A hesitancy to back off?) In the meantime, Deutsche Bank CEO, John Cryan, has said: “There has been absolutely no price discovery now in corporate bonds….which is a very dangerous situation”.

The Swiss National Bank has been steadily buying equity securities, including US based companies. Equity securities, as of Q3’16, comprised 20% ($128 billion) of their of their $643 billion in foreign exchange reserves, up from 7% in 2009, including investments of $1.7 billion in Apple, 1.08 billion in Exxon, and $1.2 billion in Microsoft.

Here in the US, our Fed has talked about beginning to unwind our $4.2 trillion balance sheet by no longer reinvesting the funds from securities that are maturing. The result of this form of money “tightening” can only be a guess, especially with an already soft economy.

These are serious amounts of capital being put to work in an increasingly dangerous way. To some extent, Central Banks are biased toward continued equity (and bond) buying, because their absence from the marketplace would cause a price decline and trillions of dollars of “paper losses” on their respective balance sheets. I learned a long time ago (the hard way) that when you become “responsible” for supporting a particular market, the best possible strategy is “get out of the way” and take the current loss before it inevitably becomes much larger. The key question, at this point for Central Banks, now becomes “Sell to Whom?”.

Lastly,  a Wall Street Journal  Headline this morning reads: Bitcoin RIval Arises From Sector Spat. I will write more about Bitcoin, and the other “Cryptocurrencies” in the near future. As a preview: I believe that years from now, books will be written about the current fiscal/monetary world we are living within, and the cryptocurrrencies will be appropriately viewed as symptomatic of the tail end of the financial folly. Stay tuned on this subject and, in the meantime, be careful out there.