But with such elevated levels of inflation (just counting what the government will admit to) shouldn’t gold and silver be much higher?
“Should” is a loaded word, but I do think sustained high inflation will have this effect. My base case expectation remains stagflation. This “should” be the ideal setting for gold and silver… when the last vestiges of “transitory” thinking fade away and the ugly reality becomes inescapable.
If I’m right about this, next week’s US Consumer Price Index (CPI) print may be more important than this week’s rate hike.
Even if they don’t use the word, The Powers That Be (TPTB) are still peddling the transitory story. Mainstream media pundits seem only too happy to help propagate this view.
At the end of the day, however, reality matters.
Hence Powell being forced to “retire” the word “transitory” (even though his actions show he still believes it), rather than risk whatever shreds of credibility the Fed has left.
So, bogus as the CPI numbers are, if they come in hotter than expected, it’s likely to be a major shock to most investors.
From what I hear, most economists expect headline CPI to drop from 8.5% in March back to about 8% for April.
If this happens, it won’t be evidence of inflation having peaked. Plenty of pundits will say so, but it won’t be true—not unless one accepts a phony definition of “peak” to mean a slowing of the increase.
As I say, however, if one scrambles up a cliff and continues up a mountain at a gentler incline, it’s easier going, but one hasn’t yet reached the peak.
Never accept phony definitions that deny reality.
Never let opponents define the terms of debate.
Next week, we may indeed see a slowing of the increase in CPI. The increase in April of 2021 was huge. That “base effect” makes it much harder for prices to increase by as much this year. If we get the 8% or so expected, I’m sure we’ll hear no end of declarations of peak inflation. Even if CPI takes a baby step back—say, to 8.4%—I think we’d hear much the same, if with a bit less enthusiasm. And if it drops back to something with a “7 handle,” brace yourself for premature celebration.
In any of these cases, it wouldn’t be true that inflation has peaked.
It would be true that we still have a monstrous level of inflation that destroys real wages and savings.
Still, such a turn of events would likely be a headwind for gold and silver for some weeks, until reality overcomes the spin-doctoring. I know long-suffering gold and silver bugs don’t want yet another “buying opportunity.” Mr. Market doesn’t care what we want, so we have to play the cards we’re dealt.
The main mistake to avoid would be believing the peak inflation nonsense in mainstream media—that could prove a serious threat to your wealth.
Of course, it could also go the other way… suppose CPI posts a “surprise” increase, maybe to 9% or even higher.
How could that happen against the massive base effect from April 2021? Well, I’m not saying it will, but we still have the chip shortages and other supply disruptions. China’s lockdowns this April were worse than ever. And now there’s a war on top of that, sending gas and other prices soaring (as Powell himself keeps reminding us).
If this happens—if it does—I think it’d shock Wall Street (while Main Street shakes its weary head). All that relief that the FOMC is “not actively considering” a 75-bp hike would turn to dread, potentially setting off a panic.
Meanwhile, across the pond, the Bank of England also raised rates—while warning of double-digit inflation and possible recession.
The ECB remains deliberately behind the curve in the face of massive inflation across the continent. That’s perhaps a bit more understandable, with war in Eastern Europe and critical energy supplies at stake. But understandable or not, it looks like stagflation ahead there as well.
We’ve got rising inflation in China, Japan, and India as well… not to mention 70% inflation in Turkey after that country’s genius move to fight inflation by cutting interest rates.
None of this is any surprise to me; governments around the world tried to paper over the damage from the COVID-19 lockdowns with easy—or free—money. Cause and delayed effect.
Also, for all the talk about things like “energy independence” and even my own warnings about the New Iron Curtain, the global economy is still deeply interconnected. That means that countries are all vulnerable to economic weakness in their trading partners.
That includes the US, despite its exorbitant privilege as issuer of the world’s leading reserve currency. In this context, it’s notable that while the official US unemployment rate published yesterday—which even the Fed discounts—held near record lows, the labor force participation rate dropped. I don’t think an economy propped up by stimmie checks and artificially low interest rates counts as strong.
This brings me back to my base-case outlook: stagflation.
I expect this to be:
- Extremely bullish for gold and silver.
- Positive for commodity prices in general—with more restrained upside if the stagflation is recessionary.
- Positive for oil. WTI crude closed over $110 yesterday. I think triple-digit prices are likely to be the new normal… until most of the world goes electric.
- Positive for all real assets. Higher interest rates may reduce turnover in homes, but I doubt it will make them or real estate in general any cheaper. This is subject to huge demographic forces.
- Neutral for uranium. That’s not to say it’s bad for uranium. I just think that—absent a major nuclear accident—use of nuclear energy will increase dramatically regardless of inflation, stagflation, or any other “-flation.” The economic outlook is almost not a variable when it comes to uranium.
That’s my take on our markets this week. Speculate accordingly.
(As always, if you’d like to know which stocks I’m betting on based on these trends, that’s what The Independent Speculator is for. No arm-twisting—nor phony offers that expire at midnight…somewhere—but you’re welcome to join us.)
This Week’s Q&A
Q: What is a reasonable asset allocation within precious metals? I started, thinking: 10–20% precious metals as a portfolio hedge. This is how my asset allocation looks today:
- Real estate: 33.54%
- Cash: 12.23%
- Bitcoin: 9.47%
- General shares: 11.63%
- Mining shares: 9.86%
- Physical silver (available any time): 0.62%
- Physical silver (in vaults) 2.47%
- Silver trust (Sprott): 8.8%
- Physical gold (available any time): 2.53%
- Physical gold (in vaults): 2.28%
- Gold trust (Sprott): 5.73%
- Gold certificate: 0.84%
How should the percentage of “physical available any time” be considered? For emergency moments (like banks and shops being closed) or for an upcoming period in which precious-metal coins go back into circulation?
A: This is a huge topic, and I can’t give you individual advice, so let me share some general thoughts…
First, obviously, you’re in way deeper than 10–20%. Your gold and silver holdings (including paper) add up to 23.27%. Assuming your mining stocks include gold and silver companies, your exposure is even higher. As I’m bullish on gold and silver, I don’t think this is a bad thing, but I think anyone who finds themselves more involved than they initially wanted to be should review and update their thinking to make sure things are as they now want them to be.
Second, I like your diversification—anchored by a large chunk in real property. Given the elevated chances of a market crash as central bankers around the world try to fight inflation, I like the reduced exposure to mainstream equities. I like that you clearly understand the difference between paper silver and gold vs. bullion you can lay your hands on at any time.
As for how to allocate physical, one size doesn’t fit all. In my own case, I see bullion as long-term savings and emergency insurance. This inclines me to hold more gold than silver, as it’s much more convenient. I don’t own any paper gold at all—just bullion. I don’t think of this as part of my portfolio at all, but wealth preserved for future need. There is no correct percentage nor any upper limit to how much bullion I’d like to save.
If I were investing or speculating on price changes, I might go with more silver than gold (and use more paper substitutes than physical), since silver typically outperforms gold in a monetary metals bull market.
And as for physical at hand in case of an actual emergency, I don’t think of that as a portfolio percentage either. A rule of thumb that makes sense to me is to have enough bullion on hand to be able to cover about a year’s living expenses. (Vaulted bullion is not “at hand.”) Gold and silver “prices” will change over time, but over the long term, they should be able to buy about as much, regardless of what’s happening to all the colorful pieces of paper floating around the world.
Q: I enjoyed your most recent Speculator’s Digest. I'm having trouble associating the very rosy picture for uranium with the potentially gloomy outlook on the stock market. I see the previous stock market crash and uranium price crash both began their downward movement around the same time back in the year 2007. The uranium price did not begin to recover for another three years. Given this history, I’m wondering how you are seeing near term positives in uranium with the potential “crash of 2022” in the stock market.
A: I understand, but don’t quite agree with your version of history. Uranium got way ahead of itself in 2007 and corrected very sharply on that basis. It was down almost 50% before the crash of 2008 hit. Uranium then spiked again in 2010 while general equities were still struggling to pick themselves up off the floor. I think uranium would almost certainly have kept rising if not for the Fukushima tsunami.
This clearly shows that uranium and related stocks can move quite separately from the broader markets.
That does not mean, of course, that there’s no relation. We see on a daily basis that uranium stocks—being stocks—often rise with the general equities, even if uranium itself is falling. We see the reverse as well. And in a market crash, everything gets whacked. Absolutely everything.
But these things don’t stop uranium stocks from rising (or falling) with uranium over time. The short-term noise gets filtered out.
Also, while I certainly do see elevated odds of a market crash this year, I do not see a crash this year as a certainty. The Fed may say fighting inflation is its top priority no matter what, but they are well aware of the “wealth effect.”
If I thought I knew for sure that the markets would crash this year, I’d sell just about all my stocks, not just uranium. Being a mere mortal with limited insight into the future, I prefer to simply invest in companies I’d be happy to buy more of if they went suddenly on sale.
Q: My current cash position is lower than the 10% minimum you reasonably suggest, and so I am clearing out my portfolio to raise it. However, in a recent interview, Rick Rule suggested that he saw gold as cash, albeit perhaps volatile cash. He also suggested that one might have both a strategic and a tactical allocation to gold. The idea of gold as cash seems to me to make sense. If you are going to hold cash, you have to choose some currency to hold it in, and gold is arguably a currency. I think you see gold bullion as savings: money goes in, but it doesn’t come out except in an emergency. That might correspond to Rick’s strategic allocation. One could perhaps hold some further gold as a less-committed tactical allocation to be sold when required. Do you have any thoughts on these ideas, please?
A: You understand us both perfectly. Yes, gold is money. And yes, I see my bullion as 100% strategic/savings, 0% tactical/short-term cash.
I don’t tell anyone they should never have a tactical allocation, as Don Ricardo suggests. But…
Obviously, the gold–dollar exchange ratio (and ratio vs. the euro, yuan, and other currencies) fluctuates, making short-term allocations risky. If I need to liquidate at a time when the ratio has gone against gold, I take an extra loss. That would have been more than the loss to currency cash due to inflation many, many times between 2011 and 2016. Or between August 2020 and August 2021. As long as the world sees gold as a commodity priced in dollars rather than as money itself, shorter-term tactical allocations to gold add the complexity of market timing to our trades.
There are also costs associated with exchanging gold for other things. That’s less so with paper gold, but can still be an issue.
And finally, as a gold bug, I have the same problem Bitcoin HODLers have with their BTC: I think gold’s going higher, so I don’t want to spend any of it.
If you have brief questions for me, please send them to L@LouisJamesLLC.com.
This Week’s Free Articles…
- Why I’m a Speculator—And What I’m Speculating on Today. This interview with Commodity Culture covers my outlook on key commodities today, but also takes some time to dig into how and why I do what I do. I think this may help others who wish to do the same… or at least point them in the right direction.
- Guidance for Hawkish Times. This is not an article, but an update of all the companies in the My Take database, for anyone wondering if a stock they’re interested in is covered.
- Uranium: Bullish Optimism vs. Promotional Hype. This is a deeper dive into the uranium market today. I am bullish, but I make every effort to look at the pros and cons here, not just act like a cheerleader for the home team.
In Closing
I’ve got a clients-only meeting starting soon for My Take subscribers, so I’ll just leave you with this thought:
Gold bug that I am, I do wish inflation would peak soon.
If it doesn’t, things could spin out of control, increasing the damage done to literally billions of people around the world.
So, I wish inflation would peak—but I don’t expect it.
And in a crazy world inching toward global stagflation and greater tensions between nuclear powers… well, I think this is no time to skimp on history’s best and longest-serving forms of wealth preservation: gold and silver.
Sincerely,