Tag Archives: GOLD

SEMI-MONTHLY FISCAL/MONETARY REPORT – THE DISTORTIONS, AND PRESSURES ONLY INTENSIFY – YOU NEVER KNOW WHICH SNOWFLAKE WILL CAUSE THE AVALANCHE

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SEMI-MONTHLY FISCAL/MONETARY REPORT – THE DISTORTIONS, AND PRESSURES ONLY INTENSIFY – YOU NEVER KNOW WHICH SNOWFLAKE WILL CAUSE THE AVALANCHE

There is lots of additional news, all of which only serves to intensify the financial distortions that we have been describing for years. With the US election just days away, there seems to be nobody that expects government (fiscal) or federal reserve bank (monetary) support to be reduced after the election. It is virtually certain to be quite the contrary. Below we will hit a few “high” or perhaps “low” points, while quoting several more well known authorities than ourselves.

We have described many times how debt issuance brings forward demand, at the expense of future consumption. We have also pointed out, as Reinhart and Rogoff described over ten years ago in “This Time is Different” (chronicling 800 years of business history) that once government debt reaches approximately 100% of GDP it is a noticeable drag on productive growth.

Lacy Hunt and Van Hoisington of Hoisington Research said recently: “Countries in a debt trap (our italics) like the US, Japan, the UK and the Euro Area have experienced a fall in short term interest rates to the zero bound, in some cases into negative rates, thus eliminating monetary policy to play a role in supporting the economy.” In other words, once at zero, below zero can’t help much.

Hunt and Hoisington described the increasing burden of the debt buildup this way: “As proof of the connection (between debt and GDP slowdown), each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980s was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.”

Hunt and Hoisington also said “Debt financed fiscal policy can provide a short term lift to the economy that lasts one to two quarters. This was the case with….2009, 2018 and 2019. However, the benefit of these actions…even when the amount of funds borrowed and spent were substantial, proved to be very fleeting and the deleterious effects remain. The multi-trillion dollars borrowed for pandemic relief in Q2 encouraged the beginnings of a “V” shaped recovery, but this additional debt will serve as a persistent restraint on growth going forward. When government debt as a percent of GDP rises above 65% economic growth is severely impacted and becomes very acute (our italics) at 90%.”

Keeping the above in mind, we present the following chart, provided to us within our subscription to Grant Williams’ “Things that make you go hmmm”. Shown are examples of what was going on, describing profound societal adjustments that have accompanied the debt levels of today. Fifty one out of fifty two times in the past, when debt gets to 130% of GDP, the country eventually defaulted  on its financial obligations, one way or another, which is exactly where the USA is right now.

As the final footnote to this discussion, to demonstrate how dramatic the government intervention has recently been: the legendary investor, Howard Marks, pointed out recently that: “in the four months from mid-March to mid-July of this year, the Fed bought bonds and notes and other securities to the tune of more than $2.3 trillion. That was roughly 20 times what it bought in 18 months during the Global Financial Crisis (of ’08-’09).”  We have it it this way: the “drug addict needs an increasingly powerful ‘hit’ to maintain the ‘high’”.

Take all of this under consideration as you position yourself financially.

Roger Lipton

 

 

 

 

 

SEMI-MONTHLY FISCAL/MONETARY UPDATE – POLITICIANS BICKER, CONSUMERS AND INVESTORS, HOLD COLLECTIVE BREATH

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – POLITICIANS BICKER,  CONSUMERS AND INVESTORS HOLD COLLECTIVE BREATH

The general equity market was on the downside in September, up a little so far this month, probably based on the uncertainty relative to the election and the size (and nature) of the new stimulus program, still under negotiation between Steve Mnuchin and Nancy Pelosi. Gold bullion was down 4.3% in September, as the Fed Balance sheet “stabilized” around $7 trillion for a couple of months before taking off again. The gold miners were weaker in September, down a bit more than bullion. Both are still up substantially for the year.

Over the long term, the price of gold has closely tracked the increase in government debt. We’ve written almost continuously about the debt and the deficits and how increasing debt is a burden on the future economy. In simplistic terms, deficit spending (for an individual, a family, a business or a country) brings consumption forward at the expense of the future. It is just that simple and future consumption is currently being sacrificed at the altar of the can kicking (down the road) exercise.

A corollary to the current situation is that Federal Reserve money creation has been used to finance a very large portion of the US Federal deficit spending. As the table just below shows, the deficit in the current year has been $3 trillion for the eleven months ending 8/31/20. It seems like no accident that the Federal Reserve Balance Sheet has increased from approximately $4 trillion to $7 trillion currently, coincidentally exactly matching the eleven months of “stated” deficit.

But the story doesn’t quite end there. It’s true that the Fed, with the keystroke of a computer has created trillions of dollars to purchase US Treasuries, which has financed our massive spending deficits. The Fed has been a major buyer, for sure, but not the only buyer. In fact, the Total Public Debt of the US has gone up by almost exactly FOUR TRILLION DOLLARs in the last eleven months, a cool trillion dollars more than the stated deficit spending. Only with government accounting can the incremental debt not equal the deficit during the same period. Our website article on this subject, written in October, 2018, and provided to our investing partners  as well,  is provided just below.

https://www.liptonfinancialservices.com/2018/10/semi-monthly-fiscal-monetary-report-rising-deficits-even-faster-rising-debt-weve-only-just-begun/

In essence the reported monthly and annual deficits are just the numbers within the budget, and almost always the debt buildup is greater, most of it borrowed from the Social Security “lockbox”, now almost depleted. As our article two years ago pointed out, in the eleven years ending 9/30/18, the “extra” debt amounted to an enormous $3.24 trillion.

So the beat goes on, except:

All the numbers are an order of magnitude larger than just a couple of years ago. We all are well versed in the stated deficit, now over $3 trillion for fiscal 2020, but hardly anyone talks about the extra trillion of debt that has been incurred. A trillion dollars is still a great deal of money and the number of trillions is building rapidly. Just a matter of months ago, fiscal hawks were warning that the cumulative debt could approach $30 trillion by 2030, now more like the end of 2021, nine years earlier.

Many observers lose track, or lack perspective, over the actual results of various asset classes, including gold bullion. We all know that gold went from $35 to $850 in the 1970s after Richard Nixon eliminated the conversion of dollars into gold. From 1980 to 2000, with good reason, the price of gold suffered as Reagonomics (with Fed Chairman, Paul Volcker)  and then Clintonomics  kicked in and a strong economy with relatively modest inflation reduced the need for gold as a monetary safe haven. When US deficits increased dramatically in the early 2000s, with the cost of two wars, Y2k inefficiencies, and the aftermath of 9/11, gold started to perform well, and that has generally continued in the last twenty years. The chart below shows how gold bullion has performed in various currencies.

The chart is as of May, 2020, when gold bullion was up 14.3% in US Dollars and it has done even better since then. As you can see, 2013 was the one very poor year (out of 20). It is worth noting that our Partnership was down over 50% that year, since the gold miners typically go up and down more than the price of bullion. We have often pointed out that the upside performance of the gold miners has substantially lagged the price of gold bullion, and it was specifically the terrible 2013 from which we are expecting to recover.  Aside from that observation, you can see that gold bullion in US Dollars has averaged a 10.7% increase annually, almost exactly the 10.3% average of all currencies. There is nothing shabby about the price performance of gold bullion as an asset class, and when the gold mining stocks catch up, the same observation will apply.

Keep all of this in mind as the politicians, economists and pundits predict a new growth phase for the US economy. The Presidential “debate” on Tuesday evening only reinforced our view that the partisan (adolescent) bickering, the legislative dysfunction, the spending and deficits will all continue indefinitely, and there is no “graceful” way out of this political, social and economic mess. Gold and gold related securities have historically protected purchasing power over similar stressful periods, and we firmly believe that this time will not be different.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – WARREN BUFFET’S BERKSHIRE HATHAWAY ADDS BARRICK GOLD (GOLD) TO PORTFOLIO

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – WARREN BUFFET’S BERKSHIRE HATHAWAY ADDS BARRICK GOLD (GOLD) TO PORTFOLIO

The big news, after the market close last Friday evening was that Berkshire Hathaway Inc., in the quarter ended 6/30, added $565M of Barrick Gold Corp. (GOLD) to Berkshire’s portfolio. This is a very positive development, not only as a reversal of Buffet’s long held disdain for the “barbaric metal”, but as an endorsement for the ownership of gold mining equities. Buffet has been quoted many times as saying that gold “just sits there”, no dividend, no interest, no growth. With interest rates virtually at zero, gold’s lack of dividend or interest is no longer a drawback. The lack of growth can now be overcome by ownership of a well run mining company that is increasing production and will benefit, in a leveraged way, from an increasing price of their end product. This rationale leads to ownership of Barrick Gold (GOLD) and lots of other possibilities, all of which we continue to own.

EXPECT A DEBATE (got to fill the 24 hour news cycle)

On one hand: $565 Million is a rounding error for Berkshire’s $150B portfolio, far from a major purchase. Barrick is just a gold miner (not gold itself) and the purchase decision was possibly made by one of today’s day to day active portfolio managers at Berkshire, not Buffet himself.

On the other hand: $565M was likely not the end of the buying. It is six or seven weeks since the end of June, the portfolio managers know that Berkshire’s purchase will trigger a great deal of interest not only in GOLD but in the entire gold mining asset class. It is therefore highly likely that more Barrick, and perhaps other mining companies have been bought by now. It is possible also, that Berkshire’s further (perhaps even more substantial) buying contributed to the strong performance since June 30th of the gold mining stocks.  Furthermore, while Buffet himself might not have initiated the move toward gold mining, he was no doubt well aware of the decision and is prepared to defend it.

Parenthetically, it is worth noting that: While Berkshire has purchased a gold mining stock for the first time, sold were billions of dollars worth of JP Morgan Chase, Wells Fargo and Goldman Sachs. Seems like a parallel path to the “money management” activities of worldwide Central Banks, who have continued to buy gold bullion while they reduce (as a percentage of reserves) their holdings of US Treasuries.

THE PSYCHOLOGY OF OWNING GOLD RELATED STOCKS

We believe Berkshire’s purchase could provide a psychological inflection point. Though gold and the gold miners have performed well for the last eighteen months, and over the long term,  a money manager puts his professional life at risk (and possibly his marriage as well) by owning a controversial gold related security. An institutional money manager can buy any amount of Microsoft or Apple or even Tesla, and his stakeholders won’t be critical if it doesn’t work, especially since so many competing money managers will be suffering the same fate. On the other hand, everybody has an opinion about gold, well informed or not, so a mistake in this area could be fatal.

In essence, Buffet now provides “cover”.

OUR ARGUMENT: SPEND THREE MINUTES WITH ME, ON YOUTUBE, YOUNGER,  AND A LITTLE EARLY, IN 2012

https://www.youtube.com/watch?v=ah7Y2rHuhCs

THE UPSIDE

The “cover” that Berkshire’s purchase provides has the potential of unleashing the upside in the gold related asset class, so let’s look at the upside.

The chart just below shows gold bullion as a percent of US Financial Assets. The chart goes only to 2014, and while it is true that gold has come back to over $1900/oz., up about 60%, the other asset classes are up about the same amount, so the relationship shown still exists. With gold bullion about 4% of assets versus a previous high around 16% there is obviously a great deal of catching up to do.

Compound the above chart with that just below which shows how the gold mining stocks have very substantially lagged the price of gold.  As you can see, the miners strongly correlated with bullion until late 2012. It would now take a triple to catch up.

SUMMARY

All the reasons that gold bullion has maintained its purchasing power for 3,000 years, for 200 years, for 50 years, for 20 years, all but between 2012 and now, are very much in place. John Maynard Keynes is quoted as saying: “When the facts change, I change my views. What do you do, sir?” The facts are not only the same as eight years ago, but substantially magnified. Warren Buffet, and his portfolio managers, do not make a lot of long term mistakes, and we join them in the view that we are much closer to the beginning of a new bull market in gold related assets than the end.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE MOVE IN GOLD, AND THE GOLD MINERS, HAS JUST BEGUN!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE MOVE IN GOLD, AND THE GOLD MINERS, HAS JUST BEGUN!

The capital markets continued to be supported by the Federal Reserve Bank’s continued accommodation, in its effort to counter the pandemic related slowdown. The Fed’s policy, to do “whatever it takes”, not even “thinking about thinking about” higher interest rates or tighter money, supported most asset classes, including gold bullion (up 10.8% in July, and up 29.8% YTD) and the gold mining stocks (which did even better). Our Investment Partnership’s portfolio, virtually 100% invested in gold mining stocks, has performed in a similar fashion. While we are pleased with the progress, we expect gold miners to continue to outperform bullion on the upside and feel it is only the top of the second inning for the major move to come. While gold bullion is now at an all-time high, the gold miners are still down more than 50% from their highs. We expect bullion to at least triple from here over the next 3-5 years and the gold miners to increase by a multiple of that. All the financial factors that the pandemic has brought into focus and magnified are still in play.

Prominent investment strategists at Goldman Sachs and other investment firms, as well as legendary investors such as Ray Dalio are now recommending gold and gold mining stocks as productive portions of a diversified portfolio. Virtually every point they make we have been discussing every month for seven or eight years. Goldman says gold is the “currency of last resort and there is more downside to come with interest rates”. Dalio points out that “China is an adversary, the dollar’s reserve status is at risk, there is no true ‘price discovery’ as the Fed is buying everything in sight, the deficits and cumulative debt are a huge burden on future economic growth, central bank balance sheets are exploding as they purchase stocks and bonds and gold bullion as well, all of which support an important allocation to gold”. Does any of this sound familiar?

In addition to the debt burden, another factor that slows the growth path is the aging population. The increasing portion of the US population represented by older people, similar to trends in Japan, China, and Europe, is shown in the following charts.

Lastly, an important feature of government spending in the US is the increasing burden of entitlements, social security in particular. Entitlements and defense make up about 75% of government spending, and that’s a major reason why the total budget is mostly (‘baked in the cake”. With everything else going on in the world, it is often forgotten that the social security system was put in place in the 1930s when the average life span of an American male was about 65, which today is about 80. There were also A LOT MORE workers contributing than recipients. The chart just below shows the steady contraction of that ratio, from 3.7 down to the low 2s.

The above chart is impressive….but the following chart shows numbers closer to the 1930s when FDR put the program in place, with 159 workers/recipient in 1940, decreasing to “only” 42 workers by 1945.

Combine the above charts dealing with Social Security with the reality of an aging population. Add to that what might be considered “anecdotal” in terms of our impression of the work ethic of the younger working age population. If “America’s Greatest Generation” of workers is being replaced by today’s youth, perhaps less convinced of the morality of capitalism, it is difficult to picture government spending coming down or GDP and productivity accelerating.

All of this is to say that central banks, around the world, will have no alternative to aggressive monetary accommodation. Governments, similarly, will do likewise with fiscal  measures. We can watch this play out currently on almost a daily basis, and this is at a scale unprecedented in modern business history. Gold bullion, based on many parameters which we have described previously, is as cheap now as it was in 1971, before it went from $35 to $850. At $850 it was likely “ahead of itself” but $300-400 would have been a rational range at that point. Accordingly, 8-10 times the current level, which discounted by 50% would be $8-10,000 per oz., can be justified today. The gold mining companies, leveraged to the price of gold, could (and should) go up by somewhere between two and four times that gain. This is the basis by which we suggest  that the gold mining stocks could increase by 10-20x their current levels.

With gold hitting all-time highs, and the gold miners at seven or eight year highs, you will no doubt hear a number of financial commentators suggest that “the easy money has been made”. Some will suggest taking profits, with an objective of getting back in at a lower level. We suggest that if you owned a stock that had gone from $11 to $20, but you think it will be $80 or $90 or $100 in a few years, would you sell it at $20 to try to buy it back at $19 or $18? Probably not :).

Over the very long term, gold should be considered a “store of value” rather than an “investment”. There is, after all, no dividend or organic growth.  At the present time, however, the investment characteristics of this asset class, substantially lagging the increased nominal prices of almost all others, are too compelling to ignore. That is why our investment partnership is 100% invested by way of the above approach.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THERE IS NO GRACEFUL WAY OUT OF THIS MESS!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – THERE IS NO GRACEFUL WAY OUT OF THIS MESS!

The capital markets were quiet in June compared  to April and May, but still productive for owners of gold related securities.  The general market was up slightly in June, but all indexes except Nasdaq are still down for the year. Gold bullion was up 2.7% (now up 17% for the year. The gold mining stocks, with their cash flow and earnings leveraged to the price of gold, are still cheap statistically and are moving at a dramatic rate. Most impressively, in the last three month, from the low point, gold bullion is up 13% and the gold mining stock indexes are up well over 50%.   As our discussion below shows, the trends are more than adequately clear, all supportive of much higher prices for gold bullion and especially for the gold mining stocks .Moreover, there is no graceful way out of this fiscal/monetary mess.

Pictures can efficiently provide a summary of what has been going on from a fiscal/monetary standpoint over many years, leading us to a considered opinion of what the financial world will look like in the future.

The chart just below shows the current 30 year yields in various countries around the world. It is an axiom that the bond market supposedly prices in some sort of a “real” yield on top of allowing for inflation.  With the US 30 year yielding close to an all time record low of 1.44%, hardly anybody expects inflation to be zero over the next 30 years, which would provide a 1.44% “real yield”. It is a better assumption that the pricing represents expectations of a weak economy as well as the US Fed’s intention to increasingly support the long end of the yield curve.  The 30 year is “bid” to represent a safe haven as well as a short term trade, rather than a 30 year investment.

We can also assume that interest rates will stay very low, if the US Fed has anything to say about it (and so far they have), because it is only the ultra low rates that allow the US to carry the sharply increasing debt load.  The charts below show the ongoing annual budget deficits as well as the increase in the Federal Reserve’s balance sheet, whereby the Fed has been financing an increasing amount of the US operating deficit. Lest you think that this will all change once the economy gets going, and the operating surplus will reduce the cumulative debtt: Since 1981 there have been a grand total of four surplus years, the last three under Bill Clinton and the first under GW Bush, before the two wars started. The total surplus in those four years was about $760B, so you can judge for yourself how much of a dent  a stronger economy will make in the current $26 trillion growing debt federal debt burden.

We can also assume that interest rates will stay very low, if the US Fed has anything to say about it (and so far they have), because it is only the ultra low rates that allow the US to carry the sharply increasing debt load.  The charts below show the ongoing annual budget deficits as well as the increase in the Federal Reserve’s balance sheet, whereby the Fed has been financing an increasing amount of the US operating deficit. Lest you think that this will all change once the economy gets going, and the operating surplus will reduce the cumulative debtt: Since 1981 there have been a grand total of four surplus years, the last three under Bill Clinton and the first under GW Bush, before the two wars started. The total surplus in those four years was about $760B, so you can judge for yourself how much of a dent  a stronger economy will make in the current $26 trillion growing debt federal debt burden.

You have now seen how the bond market is predicting slower growth, at least in part due to the growing debt burden (around the world), which has been financed largely by worldwide Central Banks.

The last chart shows the steady decline in GDP growth in almost every post-recession expansion since 1981. The most recent ten years is fresh in our mind. A business friendly outsider passed one of the largest tax reductions in history, allowed for repatriation of almost one trillion dollars that had been frozen overseas, reduced the legislative burden on businessmen and encouraged the Federal Reserve Bank to print trillions of new dollars and keep interest rates near zero. The result was a grand total of 2.3% real annual GDP Growth over the last ten years, perhaps 0.1% to 0.2% more in the last three years under President Trump than under President Obama. This can be best described as a minimal “marginal return on investment”.

The coronavirus pandemic will be in the rear view mirror at some point in the next six to twelve months. The trends as described above will not. Rates will still be low, as signaled by Jerome Powell just recently, through 2022. This is because (1) the economy needs the support and (2) the US budget cannot afford higher rates on $26 trillion of growing debt. The annual deficits and cumulative debt will continue to step up by record amounts because that is essentially baked in the cake at this point. Just yesterday Fed Chairman, Jay Powell, reiterated the intention to invest a trillion dollars in all kinds of corporate bonds and ETFs. Also under active discussion is a trillion dollar infrastructure program.

As a result of the domestic debt burden, amplified by similar trends in every major worldwide trading nation, our expectation is that, after the sequential improvement from depression level economic activity, average real GDP growth will be no better, most likely materially worse, than the meager 2.3% average real GDP growth of the last ten years.

We fully expect that gold bullion will outperform equities in the next ten years, just as it has in the last decade. The bond market has outperformed both, as the entire yield curve was repriced downward, but that is less likely, from current levels, in the future.  Gold mining stocks have substantially underperformed the price of gold bullion over the last ten years and we continue to believe that they will be the best performers of all.

Roger Lipton*

*Roger Lipton is the managing General Partner of RHL Associates, LP, a Limited Partnership  that is 100% invested in gold mining stocks.

SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD AND THE GOLD MINERS CONTINUE THEIR MOVE, NEW PRICE OBJECTIVES !

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SEMI-MONTHLY FISCAL/MONETARY REPORT – THE STIMULUS IS MIND BOGGLING – GOLD AND THE GOLD MINERS HAVE JUST BEGUN THEIR MOVE !

The Coronavirus will pass, but the economic ramifications will be far longer lasting.  You don’t get out of a fiscal/monetary hole by continuing to dig. The current health crisis has brought forward, accelerated, and magnified the economic trends that were already in place. The monstrous buildup in debt is important because economic history has clearly shown that the higher the debt burden the bigger the drag on productive growth. This is why “the longest (and falsely promoted as “the strongest”) economic expansion in US history only provided 2.3-2.4% annual real GDP growth from ’10 through ’19. You heard it here first: there is no chance in hell that future growth (after the “dead cat bounce” from current levels) will be higher than 2% or so, likely to be materially  lower, with the new debt burden that the world will be carrying. 

We all know that the Fed balance sheet is exploding, as it finances the monstrous government spending. It is instructive to look at the pattern of growth over the last dozen years, as the supposedly apolitical Fed ignores the conservative side of the Keynes economic equation. John Maynard Keynes suggested, the in the late 1920s and early 1930s that the Fed should provide stimulus in hard times and pull it back in better times, presumably muting potential booms and busts. Unfortunately, economic conditions never seem to get good enough to remove the previous accommodation. Recapping the last dozen years: The Fed Balance sheet was under $1T in early ’08. It grew to about $2.2T by late’08, stayed around that level until mid ’09 when it started moving to about $3T by late ’11. From late ’12 to late ’14 it moved to $4.5T where it stayed until early ’18. The economy apparently never got quite good enough to pull back between ’10 and late ’17. In early ’18 the Fed announced a program of “automatic” reduction, with the implied objective to get back to perhaps $2.5-3.0T. It got back (only) to $3.7T by the end of ’19, but with the economy softening and distortions in the short term “repo” bond market, the Fed backed off and built its asset base to $4.2T, clearly on the way to a new high by mid’20. Which brings us to the current “new world”. Since March 4, 2020, the Fed has taken its balance sheet from $4.2T to $7.0T, and Chairman, Jay Powell, has indicated that he will do “whatever it takes”. We expect it to be $10T or more in a matter of months. People, this does not provide organic, productive, sustainable economic growth. This only provides an addictive high (not so high, in this case), supportive by always increasing doses of fiscal/monetary drugs.

The debt and deficits that require the Fed’s intervention are likewise exploding. The US debt, excluding unfunded entitlements like Social Security, is now over $25T, up from $22.7 at 9/30/19. The operating deficit which was supposed to be about $1.2T for the full year ending 9/30/20 is now expected to be at least $4.0T. The deficit in April alone was $738B. At this junction, after trillions of dollars have already been provided, it is clear that there is much more fiscal/monetary stimulus to come and nobody knows the ultimate magnitude or duration. Most importantly: virtually everyone, fiscal hawks and doves alike, bipartisan in nature, agree that the support must be provided, and we can all worry about the ramifications later.

THE PRICE OBJECTIVE FOR GOLD BULLION

The price of gold has shown a strong long term correlation with the federal US debt. The buildup of the Federal Reserve balance sheet over the last fifteen years has also strongly correlated with the gold price. The above discussion therefore supports a materially  higher price of gold related securities.

We believe that gold has proven itself for thousands of years as a store of value and the ultimate currency. It competes with paper currencies as the supply and demand of one currency (gold) must relate to the supply and demand of (these days) unbacked colored paper. The following chart shows the value of the gold held by the United States, since 1918 (shortly after the Fed was established in 1913), relative to the adjusted monetary base. A chart looks similar on a worldwide basis. You can see that from 1913 until just before the end of WWII, the value of the gold was about 35% of the monetary base. After the Bretton Woods agreement in 1944 whereby the US Dollar was established as the reserve currency, the percentage drifted down. The monetary base was growing steadily, and the US gold backing was declining, but the world was relatively unconcerned during a postwar recovery period. In the late 1960s, however, as US spending for the Vietnam War and President Lyndon Johnson’s Great Society accelerated, US trade and operating deficits became widely anticipated. Over 50% of the US gold was exchanged for dollars within eighteen months prior to August, 1971, when Richard Nixon “closed the gold window”. At that point, our gold amounted to only 6-7 % of the US monetary base. This level is important because we are back to that same level today.

We are not suggesting that the US, or anyone else, will make their paper currency convertible into gold any time soon. It wouldn’t work for long, in any event, because deficits in all major trading countries are larger than ever, and paper currencies would once again be tendered for gold. No country could back their currency with gold, unless they were “balancing their books” or, at the least, that prospect was in sight. We do, however, feel that the value of the gold “in circulation” should have a relationship to the value of alternative currencies. You might be surprised to learn that the country most able to make their currency convertible into gold would be Russia, perhaps our most prominent political adversary and a consistently large buyer of gold.

he chart above indicates that 7% could be 35%, or five times the current price. This  ballpark calculations indicate what we consider to be a rational value of 5-6x the current $1740/oz, or $8700 to $10,440/oz. This ballpark price range objective is at the current time. The monetary base is now rising at about 20% per year with all the money printing to support the economy in the current crisis. Though gold is now moving steadily higher, the monetary base is also rising so the price objective within just the next few years could be well over $10,000/oz.

THE TIMING – FOR GOLD BULLION PRICES

The following two charts provide insight into the possibility of an imminent major upward move. The first chart shows the high correlation of the gold price to the amount of worldwide sovereign negative yielding debt, which peaked at $16-17T in mid ’19 and is now in the low teens. Even in Germany, the strongest European country, the entire yield curve has been negative or close to it. We believe that the amount of negative yielding debt will continue its upward march and could even include some of the US debt, especially based on President Trumps implied blessing just in the last couple of days. The continued upward trend of this indicator could be influential in breaking the gold price out above the previous all-time high of $1911. That, in turn, could ignite the price toward the price objectives noted above.

The second chart shows a nineteen-year price chart of gold. It shows the end of an 11-12-year bull market, ending in 2012, then a 6-7 year “consolidation”. The price has now clearly broken above $1400, the previous high. Chart technicians would say that the longer the base, the bigger the move. It is conceivable that a new bull market has begun that could last for quite a few years. This would tie in to our logic that the price of gold could be 5-6 times higher over a number of years.

There are other charts we could provide that show a long term correlation of the price of gold to the level of US debt. Over the last fifteen years the same sort of correlation has taken place between gold and the buildup of the Federal Reserve balance sheet.

THE GOLD MINING STOCKS

The chart just below shows the gold mining index, XAU, relative to the price of gold bullion. Since 2008, the relative valuation of gold equities to gold bullion has fallen 75% from the prior 25-year average. The ratio of the XAU Index to spot gold averaged 0.25x for a quarter century through 2008. As of 3/31/2020, the ratio was 0.05x.

We believe that the substantial divergence in performance is due to mostly outdated opinions, the justification for which have been corrected over the last 10-12 years. Managements have been improved, balance sheets have been strengthened, operations have been streamlined. Additionally, energy costs, which are 15% or more of mine operating expenses are 60-70% lower today than they were a decade ago. Combined with sharply higher gold prices, results from established miners have been impressive recently and should become even more so.

SUMMARY

The healthcare crisis has accelerated, magnified, and brought forward in time many of the long term fiscal/monetary trends, as well as fundamental developments in our society. We believe that the worldwide economy will stagnate, at best, after the short term sequential bounce from the current situation. Some companies will survive and prosper, many will not. All will change to varying degrees. Profit margins will change, mostly for the worse. From an investment standpoint, we continue to feel that gold mining companies are the single best asset class in terms of reward versus risk. We’ve been joined lately in our conviction relative to gold by legendary investors and portfolio strategists such as David Rosenberg, Jeff Gundlach, Ray Dalio, Jim Roberts, Stanley Drukenmiller, David Einhorn, Stephanie Pomboy, Luke Gromen and others. Long term proponents of gold and gold miners such as John Hathaway Fred Hickey, Bill Fleckenstein and Peter Schiff are more convinced than ever. Though it’s nice to have some “smart money” in our camp, the investment world in general is just beginning to take small positions in this sector. Gold bullion is up about 15% this year at this moment (a safe haven, after all). The miners, which were down for the year a month ago, are now in positive territory and catching up with bullion. In the last six weeks, gold mining stocks have moved about 4x the price change of bullion.  We believe we are still in the first inning of the resumption of the long term bull market for gold related securities.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – NO PLACE TO HIDE – THIS TOO SHALL PASS, BUT WHAT WILL THE FINANCIAL WORLD LOOK LIKE??

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – NO PLACE TO HIDE – THIS TOO SHALL PASS, BUT WHAT WILL THE FINANCIAL WORLD LOOK LIKE ??

You don’t need me to tell you that we are all living through unprecedented times. First and foremost, I hope everything is well with you and your loved ones. For what my opinion is worth, and from what I read, the virus hates “heat”, temperatures above 77F degrees and sun, and I think the weather will warm up in the USA before the most dire of the predictions take hold. That of course varies from country to country but aggressive precautions are now in place all over the world, and I hope (and actually expect) that will be sufficient to stabilize this situation.

In terms of all equity portfolios, this has obviously been an unbelievably volatile month in the financial markets. The last week and a half have been brutal, there has been no place to hide, everything gets hit with margin calls and so forth. Investors, and especially traders, sell “whatever they can”, not “whatever they want to”.

As you know, I’ve been writing, and investing, with the long term debt and credit bubble in mind, expecting a new round of money printing and stimulus when the next recession hits, which will drive gold and especially the gold miners much much higher. I have expected, in the next few years, for gold to be $5000 or higher and the gold miners to go up 10-20x in value. The big question, of course, is timing, but with the trillions of stimulus now being discussed, it seems like the time is just about here. Just as in 2008-2009, once the dust settles, gold and the gold miners should lead the recovery by a lot. Nobody could foresee that it would be a worldwide virus that would start the deflation of the latest and largest debt and credit bubble, but I view the forty years of monetary and fiscal promiscuity by central banks and governments as the cause of the current situation in the capital markets. The coronavirus, expected by nobody, is just the catalyst.

My general conclusion, therefore, is that this too shall pass, in terms of the coronavirus, but the effect on the worldwide economy (and probably the equity markets) will be much more long lasting. Recovery will take place in stock prices, but it could be a long time coming. There has been an enormous amount of psychological damage to investors. The lack of liquidity in everything, and the risk, especially in equities, has now been demonstrated. There are a lot of “kids”, who have only managed money during the last ten years, who never saw a real downtick until ten days ago. Also, stocks may look “cheap”, but in 1974 there were 150 stocks on the NYSE selling for about one times EBITDA, so equities can get a lot cheaper before they recover. Central Banks and Governments, around the world, will “do what it takes” to support the capital markets but it will require many trillions of new dollars. That will provide a much larger debt burden, which will be a larger deterrent on an economic recovery, and therefore limit the recovery in stock values. Japan has been leveraging up their government balance sheet for 30 years and have avoided recession but growth has been slow, and their stock market is still way below the speculative high of 1990. I’ve provided a chart below.

My personal ongoing strategy is to stick with the gold mining stocks, which I feel represent the best long term value among all asset classes. Their performance has been terrible the last ten years, even as gold bullion has gone from $900 to $1600, so they have never been cheaper and the opportunity is that much greater. The gold mining companies now have strong balance sheets, improved management, mining costs are coming down with lower energy prices, and they are already reporting sharply higher earnings.  I expect gold to be north of $5000 per ounce in the next few years, and the gold miners could (and should) go up by 10-20x in value. Everybody knows that gold is a great inflation hedge (it went from $35 to $850 in the inflationary 1970s), but it is also a safe haven in a deflationary world. In the deflationary depression of the 1930s, the publicly held mining stocks went up by something like 10x in value. I could go on, obviously, but I know you’ve been reading about my opinion on this subject for years.

I can’t help but suggest that a modest participation (perhaps 5-10%) in gold mining stocks, as a hedge, and the chance of a very big move on the upside in the next several years. There are lots of ways to do that, and one way is through my investment partnership. My timing has admittedly been less than ideal :), since I transitioned the fund six or seven years ago into this approach, but it looks like a monstrous amount of spending and stimulus (many trillions of dollars) is in our future, so I could finally be vindicated. Funds can come into my Partnership on the first of any month. We are about 90% invested in gold mining companies, with 8-10% in a few non-gold “special situations”. The fee of 1% annually, plus 10% of gains is a lot less than the standard “2 and 20”. I’m the largest investor, always have been, and that’s the end of my “pitch”.

More important are my thoughts, above. I may be the only money manager you will meet that says “money isn’t everything”. Nobody knows what the “end game”, as a result of forty years, especially twenty years, and most especially the last ten years, of financial promiscuity, will look like. The best we can do is to stay flexible and healthy: financially, physically, emotionally, be in a position to respond to events as they unfold.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY REPORT – HISTORICAL VOLATILITY – CAN THE FED SAVE US ?

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SEMI-MONTHLY FISCAL/MONETARY REPORT – HISTORICAL VOLATILITY – CAN THE FED SAVE US ?

February was a very volatile month, most noticeably the last week of the month, apparently driven by the worldwide concern about the coronavirus. We say “apparently” because we view the coronavirus to be the catalyst for an overdue decline, rather than the real cause. The cause will prove to be the distortions (over the last forty years, even more the last twenty years, and especially the last ten years) of normal monetary supply and demand created by promiscuous central banks around the world.  In any event, the selling was emotional and indiscriminate, especially last week. Gold bullion and the gold miners were both doing nicely, up over 3% and 7% respectively until the panic selling of everything last week. Gold bullion closed the month down a fraction of one percent and the miners closed down more than 10%. This kind of price action in gold and the gold miners is disconcerting for sure but not surprising in a market panic almost unprecedented.

We wrote our normal month end letter to investors in our investment partnership the first day of the new month, and, at 2 pm yesterday, after talking about how bad February had been,  I wrote  “For better or worse, we report as of the month end, which in this case could be the low point. For what it’s worth, as I finish this letter, gold bullion is up 1.3% today and our portfolio is up almost 4%.”   If I were to write the letter right now I would say that gold bullion is up 6% we are up 12% for the first day  and a half of the month.

So much for short term trading commentary. More importantly:

All the fundamental developments in the worldwide economy point to much higher gold prices and much, much higher prices of the gold mining stocks. We look back, below, at the price action of the precious metals sector in the last crisis, that of ’08-’09.

The two charts below, that of “GLD”, the ETF that tracks gold bullion, and “GDX”, the ETF that tracks the gold mining sector. The chart shows the price performance from the middle of 2008, through the bottom of early ’09, and then the recovery through the end of ’11. You can see that GLD and GDX both declined, with the stock market, until the fall of ’08, started recovering before the general market bottomed in March ’09. From the bottom, over the next two years, GLD went from about 70 to 180, up 157%, and GDX went from 18 to 62, up 244%.

It is important to note that the monetary stimulus that supported the worldwide economy ten years ago, and drove the price of gold and the gold miners so much higher, will of necessity be dwarfed by today’s needs.

In the fall of ’08, the five year US treasury note was at about 3% and the two year was around 2%. The Fed drove them down to about 0.7% and close to ZERO, respectively, while printing about $3.5 trillion. The starting point today is about 0.7% for both the five year and two year treasury, interest rates can’t be lowered by much. It therefore falls to the printing press to provide the stimulus and it will likely be a lot more than the last $3.5 trillion. By the way, the Federal Reserve Assets in ’08 were only $1T, ending at $4.5 trillion which were supposed to be reduced in a stronger economy. The economy got just a bit stronger (averaging 2.3% GDP growth) but the Fed balance sheet only was reduced to about $3.7T. It then was expanded again, through bond purchases last fall (which coincided with a strong stock market), then stopped growing in January, which may have foreshadowed the stock market collapse in February.

Today’s starting point for the Fed balance sheet is just over $4T and the ending point could be $10T. It always takes more (financial) heroin to maintain the (monetary) high. The last installment of this unprecedented monetary adventure took gold and the gold miners up well over 100% (the miners more than the bullion). The next trip should be even more dramatic, especially for the gold miners. As we’ve said before, while gold is down about 18% from it’s high of 1900 in 2011, the gold miners are down well over 50%. At the same time, the gold mining companies are far better managed, strategically positioned, and with stronger balance sheets than ten years ago.

The US Fed Reserve’s aggressively lowered the Fed Funds Rate by 50 bp a couple of hours ago. It is an interesting commentary that the stock markets rallied, but have now given up their gains and are down for the day. Our conviction is that the Fed, and the other Central Banks around the world have become impotent. Each round of stimulus the last twenty years has been increasingly less effective in stimulating growth. It is called a “diminishing marginal return on investment”. Monetary stimulus has run its course. It then falls back to the need for more fiscal stimulus, in the form of tax cuts, etc. That will have a limited effect, also, but will explode the deficit.

All of the above is supportive of much higher gold prices, and much much higher prices for the gold mining stocks.

Stay tuned.

Roger Lipton

              

SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT OVER $1600/OZ & THE US DOLLAR APPROACHES 6 YR HIGH – SCRATCH ONE MORE MYTH !!

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SEMI-MONTHLY FISCAL/MONETARY UPDATE – GOLD BREAKS OUT OVER $1600/OZ & THE US DOLLAR APPROACHES 6 YR HIGH – SCRATCH ONE MORE MYTH !!

It’s an accepted fact that gold and the US Dollar move in opposite directions. Any number of economists, market strategists, and stock pickers have presented this as gospel. One true giant of the gold mining industry, no less than Pierre Lassonde, has stated that 90% of the price action in gold is dictated by the price performance of the US Dollar.

Not exactly !

If that were true, it would be impossible for gold bullion to be breaking out above $1600/oz., a multi-year high, at the same that DXY, the ETF representing the performance of the US Dollar relative to a basket of other currencies is hitting a multi-year high. WHICH IS WHAT WE HAVE TODAY !

There are a large number of other myths relative to the attractiveness of gold as a store of value and/or a speculative investment. We have dealt with many of the following over the years, will again in the future, and there are other myths as well:

Gold is mostly attractive as a “safe haven”, in times of economic, social, or political chaos.

Gold is useful primarily as an inflation hedge.

Gold can only go up when interest rates, especially adjusted for inflation, are very low.

Gold can’t do well when the stock market is doing well.

Gold is not as liquid as other currencies.

Gold’s absence of dividends is a killer in terms of a store of value.

Gold, going forward, is far less attractive than bitcoin or other crypto-currencies.

I could go on, but for the moment: THE STOCK MARKET AND THE US DOLLAR ARE HITTING NEW MULTI-YEAR HIGHS AND and (somehow) SO IS GOLD !!

Roger Lipton

P.S. But the gold miners are still down 50-70% from their highs & that’s another story for another day !!

SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION UP 4.5% IN JANUARY – WITH GOOD REASON

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SEMI-MONTHLY FISCAL/MONETARY REPORT – GOLD BULLION UP 4.5% IN JANUARY – WITH GOOD REASON, AND  THE GOLD MINING COMPANIES WILL REPORT SHARPLY IMPROVED RESULTS !

Gold bullion was firm in January, up 4.5%. The gold mining stocks were down modestly. This short term divergence only makes the gold mining stocks even more of a bargain. There are many gold mining companies with strong balance sheets, long term reserves, and improving production. There have been hardly any large discoveries in the last ten years and it takes something like ten years to get a new mine permitted. Sharply higher gold prices will not create a lot of new supply, so much higher prices can be sustained for a long time. The mining companies have reported excellent results from last year’s third quarter, the fourth quarter results will be no different, the bullion and the miners’ price charts still look good. Though gold bullion is approaching the $1600/oz. level, most analysts have built their earnings and cash flow models on lower prices and will be revising projections sharply higher as the new bullion price range becomes more established. As described below, gold related investments are starting to become mainstream, with the emphasis on starting.

A very small percentage, something like 1% of worldwide investable assets are allocated to gold related investments. All the gold related liquid assets (mining stocks, bullion ETFs, etc.) combined amount to something like $400 billion, compared to the trillion dollar valuations of one company like Apple or Microsoft. That 1% compares to over 20% in 1934 and 1982, when investor stress was extreme and gold was considered a safe haven.

In recent years, if a mutual fund manager invested in controversial  gold related securities, his/her job could be at risk, as opposed to buying Apple or Microsoft.

However, it is starting to become acceptable to own gold related securities, as quite a few investment legends endorse the holdings. (I’ll leave it to Google to provide you with their credentials).

Ray Dalio has said: “If you don’t have 10% of your assets in gold….you don’t know history”.

Jeffrey Gundlach has said: “I’m certainly long gold….it’s getting almost exciting. Something big is happening”.

Paul Singer has said: “It makes a great deal of sense to own gold. ….the world’s central bankers are completely focused on debasing their currencies”.

Kenneth Rogoff has said: “….a shift in emerging markets towards accumulating gold would help the international financial system..”

Paul Tudor Jones has said: “My favorite trade in the next 12 to 24 months is gold….it’s possible we go into a recession….rates in the US could go down to the zero bound; gold in that situation is going to scream.”

While his fiscal/monetary credentials are not quite as well known as the above investment professionals, Roger Lipton says: “My favorite investment in the next five years is gold mining stocks. To whatever extent gold “screams”, the miners should move by a multiple of that.”

Roger Lipton