Tag Archives: gold miners



There have been numerous ongoing fundamental developments that support our long held view that a day of reckoning is an inevitable consequence of the unimaginable mountain of debt that has been created by Central Banks, worldwide, over the last forty years. As our readers know , we view gold and the gold mining stocks as one of the best hedges against the prospective financial/political/social upheaval that lies (somewhere) ahead. It’s been said that a bet on gold is a bet against Central Bankers’ colored paper. Central Bank credibility continues to be at stake, and we suggest, in summary, that you can’t get out of a hole by continuing to dig.

Several current developments, which we have not recently discussed, support  our long term strategy.

First, Central Bankers collectively continue to purchase large quantities of gold bullion. purchasing 333.2 tons, an increase of 39% over the 5-year average in the first half, and about 199.9 tons during Q2. The largest purchases were recorded in Germany, Thailand, Hungary and Brazil. We should note that Russia and China, the most obvious political, economic, and military adversaries of the USA, have consistently added to their gold reserves over the last ten years. China updates their gold holdings only sporadically, supposedly owning only about 2,000 tons, but they are the world’s largest miner, about 400 tons annually, and none of it gets out of China.  When pressed as to what event might finally ignite the price of gold, we suggest that China, who has indicated their plans for a digital currency in 2022, will, in one form or another back their currency or their debt with gold bullion. They have encouraged the Chinese public to use gold backed savings accounts and demand for gold jewelry doubled in China in the first half of 2021. Central Banks are voting with their wallets as to whether they prefer fiat paper currencies or gold bullion as the real money over the long haul.

Secondly: The debate continues as to whether all the new money being printed will finally ignite inflation, which (up until the pandemic driven shortages) it hasn’t. Something like $20 trillion has been created by worldwide Central Banks since 2009. However, what happened in the US, for example, is that while the Fed printed money, at the same time they raised the capital and reserve requirements in banks, reducing the “velocity” of the new funds. The Fed bought Treasuries, created money, which wound up in the banks and then was redeposited at the Fed. The money, therefore, never really entered the money supply so wasn’t inflationary. However, in the last twelve months the M-2 money supply was up about 25 per cent last year and could well be the precursor of inflation such as we had in the 1970s (when gold went from $35 to $850/oz.).

You don’t need a PHD in economic. It’s common sense.  What if the Central Banks were to create $100 trillion of new currency, with no increase in available goods and services? Prices would be sure to go up, right? Well, $20 trillion didn’t do it over the last ten years but $100 trillion would. Somewhere between $20T and $100T is “ignition” and we suspect it is closer to the former.

We wrote the above commentary a couple of days ago. This evening we read the September 1st  commentary of James Grant, publisher of Grant’s Interest Rate Observer, and among the world’s most respected monetary historians. While he would be the first to admit that is timing is often in question, his views over the last forty years have been consistently borne out.  We hope he won’t mind if we quote a few sections of the current issue. The underlining is of our choosing.

Grant describes how the suppression of interest rates distorts economic activity, and ends badly:

“Chair Powell last Friday ignored the dollar mountain that figuratively rivals the Grand Tetons. He acknowledged no such thing as the inflation of credit, which leads to the inflation of asset values and thereby promotes overleverage, misdirected investment and financial fragility. He neglected to mention that a zero-percent interest rate in a resurgent economy is one for the monetary record books. And he omitted reference to the thinkers who correctly posit that when the central bank’s policy interest rate is pitched artificially low—e.g., below the expected rate of return on capital—boom and bust surely follow. Everyone living today knows about booms: Credit proliferates, eager financiers swarm venture capitalists, construction cranes ascend and YouTube influencers get their pictures in The Wall Street Journal. But as the boom roars on, the structure of enterprise becomes distorted. Negligible borrowing costs (and the expectation that they will long so remain) bring forth SPACs, NFTs, towering equity valuations, grandiose M&A activity and uninhabited luxury residential towers. The bust starts when credit stops.”

Grant talks about the unprecedented recent growth in the money  supply, with the likelihood that inflation will follow:

“In the two years to May 2021 M-3 broad money rose by 35%, by far the highest number for such a short period since the Second World War. On the basis of the money supply developments, we have argued that the annual rate of U.S. consumer inflation will lie between 5% and 10% until at least the end of 2022. Views are shifting, but our forecast remains far above the prevailing consensus.” Milton Friedman was sometimes wrong, but perhaps now, when his monetary-policy legacy is either forgotten or derided, and when the money-supply data certainly look alarming, he could be a little right.”

Grant describes the unbelievable leverage involved in the Fed’s “business model”, how dangerous it is, and how uncontrolled market forces (i.e. when “bond vigilantes” will say “basta” and require a much higher return to invest in US debt) will eventually end the party:

“Systemwide, the Fed shows assets of $8.33 trillion versus capital of $39.8 billion, for a leverage ratio of 209:1. If the average conscientious Federal Reserve bank examiner encountered such a balance sheet as this one, he or she might dial 911. However, the New York Fed, with assets of $4.156 trillion and capital of $13.3 billion, exhibits a leverage ratio of 311.6:1. For perspective, on June 30, JPMorgan Chase showed a ratio of assets to stockholders’ equity of 12.9:1. What makes the New York Fed so confident that it can manage a balance sheet almost nine times more distended than the one that almost took down Morgan Stanley in 2008? Footnote 15 on page 7 of form H.4.1—the weekly Federal Reserve balance sheet emission— dated Jan. 6, 2011, has the answer. It discloses that future losses at the central bank will be treated as a negative journal entry to the Treasury rather than a reduction in the Fed’s capital and surplus account. In the ordinary course of business, the Fed remits its operating income to the Treasury—the New York Fed, just this past week, journaled $728 million over to Janet Yellen. In case of a substantial loss, for example, an inflation-induced markdown to bond prices, the central bank would effectively draw a government loan. Fearless in the face of its extreme leverage, the Fed is a kind of financial free agent. It formally answers to Congress and may one day soon have to answer to Mr. Market.”

Back to a conclusion, our way:

Just as Grant described, huge distortions in financial markets are taking place. Around the world, $15.9 trillion’s worth of bonds are priced to yield less than zero, though not in the US (yet). An illustrative example of this absurdity is that the Greek government zeros of 2026, for example, are priced to yield negative 0.08% versus the positive 0.77%  from five-year Treasuries and that is why US Treasuries, surely safer than Greek debt, are a relative bargain. This is the definition of “the best house in a terrible neighborhood”. Another description goes “a race to the bottom”.

Step back for a moment. The US Treasury needs more capital to finance the $3-4 trillion annual deficit, so sells bonds to the Fed, which prints it out of thin air and lends it to the US government at a minimal interest rate. There is no limit to how much currency can be created so there is no limit to how much money the US politicians can piss away. The interest (even at the low rate) earned by the Fed is periodically rebated (after the Fed’s billions of administrative overhead) back to the US government, reducing the deficit just a little from what it would have been. The interest on the debt has therefore been recycled (after paying the salaries of hundreds of economic PHDs and thousands in staff) and the principal borrowed (forgetting about the wasteful spending) doesn’t ever need to be repaid, except by newly created Fed currency. This is how the Fed’s balance sheet has gone from $1T ten years ago to over $8T today and the annual US deficit, which was $100B in 1980 is $3-4T today.

Does this “scheme” seem sustainable to you? Well, sort of, except that a 1913 dollar is worth $.02, and a $1971 dollar is worth about $0.15. In the history of the planet, there has never been an unbacked “fiat” currency that has survived. It is just a question of how long it will take the politicians of the day to destroy it and nobody would suggest that today’s politicians are any different. An important caveat, however, is that a deflationary bust could interrupt the inflationary party, ala’ the deflationary 1930s, before a new monetary system (with at least some temporary restrictions) takes shape. This brings us back to gold related assets, that have proven over the centuries to protect purchasing power in both inflationary and deflationary times.

Roger Lipton




The following is an excerpt from an excellent article published recently by Myrmikan Research. We warn you advance that it is more technical than most investors like to deal with, but nobody ever said it is easy to maintain wealth. The following provides a logical and compelling case why a much higher price for gold, and gold mining stocks, is inevitable. Enjoy !!

The following is republished with the permission of Myrmikan Research LLC

Gold Past $10,000

Gold in 2019 finally burst through the $1,350 ceiling that had been established during the crash of 2013. Gold’s current price of $1,550 may be materially higher than where it has traded over the past six years, and it has returned most gold miners to profitability, but it is nothing compared to where the price of gold is headed. For the benefit of new readers and to jog the memories of long-time followers, let us work through the admittedly circuitous but conceptually simple reasoning behind the reason why the dollar price of gold is heading well above $10,000 per ounce

In 1915, the Federal Reserve’s assets were 77% gold, 7% commercial bills, and 2% government bonds (the remainder a smattering of various “amounts due” from other institutions). By 1923, those figures had shifted to 61% gold, 22% commercial bills, and 3% government bonds. There was no possibility that the Federal Reserve’s liabilities (i.e., the dollar) could decline in value when they were so backed: the Federal Reserve’s assets had almost no credit risk nor interest rate risk. Those who held dollars could at any time demand that the Federal Reserve redeem their dollars into gold, but few would want to given that the dollar was more liquid than gold and so solidly backed.

During the credit collapse of the 1930s, asset prices crashed against real money (gold) as malinvestments liquidated. Roosevelt made holding gold a felony, but there was little need: the dollar, backed by gold and commercial bills, remained relatively constant. Gold, in fact, flooded into the central bank from Europe: by 1940, Federal Reserve assets were comprised of 85% gold, 0% commercial bills, and 9% government bonds.

Contemporaneous economists understood that the dollar had not become “too strong” in the 1930s; it was asset prices that had been too high in the 1920s. But then the age of Keynes arrived, and the Federal Reserve embarked its new mission of funding the government instead of liquefying trade. By 1971, the Federal Reserve had increased its assets and liabilities by five times and lost over half of its gold to European governments (which retained the right to redeem dollars into gold): its balance sheet shifted to 12% gold, 0% commercial bills, and 71% government bonds. The Federal Reserve was no longer a liquidity provider in the mold of the Bank of Amsterdam, but a credit creator for the state.

In 1971, Nixon closed the gold window, and U.S. physical gold reserves have remained nearly constant since. But the Federal Reserve bought enormous amounts of government bonds in the 1970s to keep interest rates low to prop up government spending and financial market excesses. By the end of 1980, the Federal Reserve had increased its liabilities (i.e., the number of raw dollars) by 76% by buying government bonds. The dollar’s value collapsed.’

Under the quantity theory, a 76% increase in the number of dollars should have produce a 44% declined in its value. Or, if we look at M2, which increased by 125%, the dollar should have fallen by 55%. Instead it fell against gold by 96%.

The chart below shows what happened: as the government printed more money, interest rates rose, and the bonds the Federal Reserve holds to back the currency fell in value. It wasn’t that there were too many dollars chasing too few goods—as the monetarists claim—it was that each dollar was stripped of that which gave it value. It would as if the Bank of Amsterdam had suddenly announced that half of its gold reserve had been stolen: the value of its paper currency would immediately fall in half.

The surging price of gold—really the devaluation of the dollar—exactly tracked the increase in nominal interest rates. Note that the first surge in rates occurred when the price of gold was still fixed—instead of the price of gold rising, the U.S. lost 15% of its gold reserves to European governments.

The next chart shows the Federal Reserve’s balance sheet in terms of its gold backing. It shows clearly what happened when the Keynesians took over economic power in the 1940s and stuffed the Federal Reserve full of Treasury bonds. Then, in 1971, the reaction set in: interest rates soared and as did the the price of gold until the Federal Reserve’s existing stock backed Federal Reserve liabilities by over 100%.

Then they did it again from 1981 to today (only this time they called themselves monetarists). The Federal Reserve bought government bonds to fund the growth of the state and keep interest rates low to stimulate industry artificially. Leading up to the 2008 panic, gold increased to a price that caused it to backed Federal Reserve liabilities by nearly 30%. But then the Federal Reserve issued dollars to buy Treasuries and mortgage-backed securities, massively expanding its balance sheet and saving the malinvestments.

By the time QEs were complete, the gold backing of the dollar had fallen to just 6% (as opposed to 12% in 1969). In other words: in 2016, with gold trading at $1,050 per ounce, the price of gold was half what it had been in 1969 in terms of the Federal Reserve’s balance sheet. And, as the chart below shows, the composition of that balance sheet in 2016 was much worse than it had been in 1969 (the dip in bond holdings in 2008 was due to temporary swap lines with other central banks and other short-term extraordinary bailout programs).

In the 1970s, the duration of the Treasury bonds on the Federal Reserve’s balance was only a few years—now it is over a decade. Plus, the duration of mortgage-backed securities is inverse to the movement in rates: few borrowers refinance in a rising interest rates environment. Unlike at the Federal Reserve’s founding, when its assets were virtually immune from interest rate risk, its assets now are highly sensitive.

At the moment, when the Federal Reserve prints money to buy bonds, the result is rising prices and falling interest rates, which keeps the government funded and financial markets aloft. The end of the dollar will begin when this dynamic flips, as it did in the 1970s. At some point, the market will demand a premium to protect against the weakening position of the Federal Reserve’s balance sheet. The more the monetary authorities print, the higher rates will go, the more money the government will need to print to cover its interest payments and deficit, the lower the dollar will sink, and the higher gold’s nominal price will be.

The question is when will the dynamic flip? The great economist Ludwig von Mises argued that psychological factors are determinative:

“Finally, the public becomes aware of what is happening. People realize that there will be no end to the issue of more and more money substitutes—that prices will consequently rise at an accelerated pace. They comprehend that under such a state of affairs it is detrimental to keep cash. In order to prevent being victimized by the progressing drop in money’s purchasing power, they rush to buy commodities, no matter what their prices may be and whether or not they need them. They prefer everything else to money. They arrange what in 1923 in Germany when the Reich set the classical example for the policy of endless credit expansion, was called die Flucht in die Sachwerte, the flight into real values.”

Mises’s description of what happens after the panic begins is undoubtedly accurate, but there is no need to rely on psychology to determine when panic sets in: the cause is the collapse of cash flows from business projects due to overcapacity, which is what ended the canal boom of the 1830s, the railroad boom of the 1850s and 1870s, the stock market and real estate booms of the 1920s, 1960s, and 2000s.

After the last panic, the Federal Reserve managed to lower structural interest rates by around 4%. Existing projects looked more valuable, and the lower rates stimulated industry to build all the marginal projects that suddenly appeared to be profitable. Instead of a thorough liquidation of the financial and economic systems, the Federal Reserve engineered a new boom.

The next panic will similarly require not just a bailout of the banks but also a structural lowering of rates in order to avoid complete liquidation. This is why Bernanke announced earlier this month from his perch at the Brookings Institute that “new policy tools can provide the equivalent of 3 percentage points of additional policy space.” These new tools include: “the future use of negative short-term rates, both because situations could arise in which negative short-term rates would provide useful policy space.”

Negative interest rates that (adding the commercial banks’ spread) result in near-zero rates for large industry might well serve to keep the economy and government from complete collapse for a time. The consequences, however, would include providing gold with a positive carry as against government bonds and further deterioration of the composition of the Federal Reserve’s balance sheet.

At some point, whether it is during the next panic or the following one, the market will discover that much of society’s wealth has become entrapped in non-cashflowing malinvestments. Tax revenues will plummet, and the assets that our central bank holds will be shown to be near worthless. That is when gold will shoot into the multi-thousands of dollars per ounce.

History allows us to make some projections: The average gold backing for Bank of England liabilities from 1720 to 1900 was 33%. Private banks in the U.K. maintained a similar percentage of gold backing during this time. This percentage was set more by the market than by policy-makers: until World War I, anyone could deposit gold and demand paper or vice-versa. The composition and size of the Federal Reserve’s balance sheet requires gold to trade above $5,000 to reach one-third backing.

Looking at American history, Federal Reserve notes were freely exchangeable for gold until 1933, and the average gold backing of the Federal Reserve through that time was 54%. To reach that level of backing would currently require a gold price above $8,500.

Recall, however, that the above figures occurred when the non-gold assets on central bank balance sheets were nearly all commercial bills. Given the current composition of the Federal Reserve’s balance sheet, the market will demand more backing than one third or even a half.

The panic in 1980, for example, sent gold to a price that caused Federal Reserve liabilities to be gold backed by an absurd 135%—to achieve the similar figure today would require gold to trade over $20,000 per ounce. That was the peak of a dollar panic, not an equilibrium price, but it shows how crazy the gold market can get.

The nominal figures above assume that the Federal Reserve will keep the size of its balance sheet constant. But, of course, as Bernanke has telegraphed, the central bank will start printing as soon as recession looms. The Federal Reserve has, in fact, already starting printing to support the repo market, the primary funding mechanism for both the state and real estate loans.

Bernanke claimed on 60 Minutes: “We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.” This is exactly what Federal Reserve governors thought would happen in 1979 when they boosted rates to 21%. Instead, the dollar went into it final swoon as the Federal Reserve’s bond portfolio collapsed in value.

The money to push gold over $10,000 per ounce has already been printed. And now they are going to print more. The bubble economy is already teetering. No doubt strong fiscal and monetary intervention may extend its life for a time, but then the ultimate price objective for gold will then be markedly higher. The gold miners will do even better.

The above article excerpt is republished with the permission of Myrmikan Capital LLC

Roger Lipton




David Rosenberg, one of the most highly regarded investment strategists, and not a perennial “gold bug” by any means, just this morning wrote “WHY GOLD HAS ALLURE”.

(1) The Fed is set to cut rates, which will send the fed funds rate into negative territory in real terms.

(2) Geopolitical risks, including Iran’s behavior, are increasingly bothersome.

(3) Trade talks with China do not seem to be making progress, and Beijing has “tools” to hit back, including the ability to weaken their currency and/or continue reducing their US Treasury holdings.

(4) The economic war between the US and France is heating up, as Emmanuel Macron imposes a tax on American large cap tech companies. At the same time, trade tensions increase between the US and Japan, as well as South Korea.

(5) The Chinese economy, as well as the entire Asian economy, as clearly in retreat, adding to the prospect of worldwide monetary ease.


In terms of supply of demand for physical gold:

(1) Russian and Chinese Central Banks continue their steady accumulation.

(2) India,  between their central bank and their population,  perennially the second largest accumulator of physical gold,  imported 78 tons in May alone, running 49% ahead of a year earlier.

(3) The price charts, for gold as well as gold mining shares, indicate much higher prices. Gold bullion has broken out to a five year high, though still 25% below the 2011 high. The gold mining shares are at three year highs, still 60% below the 2012 high.


There are never any certainties, especially in the short run, but it seems like both fundamental and technical considerations are in gear, and indicating much higher prices.

Roger Lipton



The general equity markets were down materially in May, the worst month in about eight years. The bond market firmed up, as it becomes clearer that the economy is slowing and Quantitative Tightening (QT) is ending. Gold bullion was higher by 1.5%. The average of the gold mining ETFs (GDX and GDXJ) were up 2.0%. The three precious metal mutual funds that we monitor (TGLDX, OPGSX, and INIVX) did a little better on average, up 3.7%. Considering how strong the US Dollar has been, and the strength in the stock market until just recently, gold bullion and the gold mining stocks have held up pretty well for the month and the year. Once again, the prospect for a major move in gold bullion and an even larger move in the gold mining stocks has only improved with time. The longer the fundamental fiscal/monetary trends that we have discussed continue, the larger the upswing  will be. Gold bullion broke above $1300 per oz. just last Friday and is up over 1% today. The gold miners are also trading higher. The “consolidation” in the price of gold, and the gold miners, has been longer than we anticipated, but the last few days could be the resumption of the long term bull market in precious metal related assets. It’s been said that “in any crisis, you have a choice or either looking like a fool before, or after, the event.  Based our long stated conviction that gold related securities represent the most underpriced  asset class, we are in the former group at the moment. We believe that there will be a great number of observers who, upon reflection, say: “How could I have not seen this coming?”

The fundamental developments over the last month that come to mind are the following:

  • The economy is weakening and tighter money is behind us. A renewed era of easier money and lower interest rates should be a tailwind for precious metal prices.
  • Gold bullion continues to be aggressively accumulated by Central Banks, China (way understated) and Russia most notably. Russia has bought over 200 tons annually for four years in a row, at the same time almost eliminating their holdings of US Treasuries.
  • The US deficit for the year ending 9/30/19 will be comfortably over $1 trillion. Be aware that the cumulative deficit is frozen” at just over $22 trillion because the US has reached its debt “ceiling”. The cumulative number will stair step to close to $23 trillion when Congress acts in the next few months. Furthermore, it is virtually guaranteed that the US is within a year of $24 trillion, and not far from $25 trillion by January 2021 when a new (or old) administration could consider adjustments. Of course, neither Donald Trump nor any of the Democratic candidates seem likely to reduce entitlements, which is the only remedy. Compounding the problem, the fiscal/monetary trends so evident in the US are also in place in Europe, China and Japan, the next three most important economies.

There are only two ways out of the worldwide debt burden. One option is outright default. The alternative is “unstated” default by paying off the debt with paper currencies depreciated by major inflation, and that is the new stated mandate of central banks worldwide. The gold price and the gold mining stocks will be major beneficiaries.

Roger Lipton




June  4, 2018

The equity market firmed in May and the fixed income market strengthened late in the month, after sinking mid-month, ending modestly higher (yields lower) than at May 1. Precious metals related holdings were quiet overall. The gold miners did slightly better than gold bullion which was down 1.2%.  We can’t help but repeat last month’s statement, that we continue to feel that the gold mining stocks, which represent almost all of our portfolio, represent the best value (and most unloved) asset class of all. The “money” is being safely stored, in the ground.  It is just a question of when it will be brought north and exchanged for the “colored paper” of its time, and the quantity of green paper (in the US) will be a multiple of the current $1300 per oz. The dramatic increase in profits for the gold miners will put their stocks an order of magnitude higher than they are currently.

The thoughts that currently come to mind are as follows:

  • The economy, while firming, is not at the 3-4% GDP growth that the administration advertises. After several quarters last year that averaged about 3.0% of real GDP growth, Q1’18 finally came in at a modest 2.2%. It will obviously take GDP growth of well over 3% (far from certain) for the rest of the year to reach the 3% annual objective. The higher interest rates will hinder consumer spending as well as limit the government’s ability to stimulate. Also, an inhibition, the tariff/ trade negotiations continue to keep the business community and capital markets on edge.
  • The Fed is barely keeping up with the plan to shrink their $4.2 trillion balance sheet. While they are stretching to reduce by the current rate of 2.8% (big deal!) annually, interest rates are steadily moving higher which drags on the economy and insures that the current selling program won’t make much of a dent before the program gets abandoned, and it won’t be long.
  • Inflation (which is a good reason for owning gold) is not as dormant as commentators indicate. “Core Inflation”, the most commonly quoted indicator, excludes food and energy. You know what grocery and restaurant prices (heavily influenced by higher labor costs) are doing, and the recent gasoline price rise is absorbing a lot of the recent tax cut.
  • The US deficit in the year ending 9/30/18 is officially estimated at $825B, but I’ll take “the over”. Certainly at least $1 Trillion is in the cards for 9/30/19 with higher defense spending, higher interest costs, and lower taxes on an economy that remains sluggish.

We believe that, due to any number of possible catalysts, the Fed will back off. The inevitable new round of stimulus should finally spark gold related securities much higher. It’s just a question of time.

Roger Lipton