"Gold Punished On Friday But Fear Not As The World Is Still Going Through The Death Spiral Of Debt That Will Force A Return To The Gold Standard
Gold got smacked down on Friday fairly significantly. There were a couple reasons for that action including stronger than expected employment numbers. In addition, there were reports that the Chinese central bank didn’t buy any gold in May.
The employment numbers are a smoke and mirrors kind of thing. The headline is that the employment numbers were strong and would cause the Fed to hold off lowering interest rates. Beyond the headlines are that full-time jobs are declining, with part-time jobs being the reason for the stronger numbers.
Workers are losing their better paying full-time jobs to take on one or two part-time jobs to make ends meet. The government reported jobs numbers do not discern between full-time and part-time jobs, they are considered the same. This does not indicate a strong employment market or economy.
Of course, it does give Wall Street traders something to trade on. Gold and stocks were sold off when the report came out and the US dollar was up. They call this the risk-off trade day. To me it was an overreaction trade on the headline. These things have a way of changing direction quickly, likely on Monday.
Putting additional pressure on gold was that the Chinese central bank didn’t buy gold in May. Does this mean they are done, I highly doubt it. They know what they are doing and know this would put pressure on gold which will likely result in them buying more. The reasons for their buying have not changed.
The world is still in a Death Spiral of Debt caused by the Free Money Era after the 2008 GFC. The reasons for the need of the world to return back to the Gold Standard didn’t change on Friday. In fact, earlier in the week it was reported that the central bankers of the world have more reserves held in gold than the Euro.
The chart above gives us a good image of the trends in central bank reserve holdings since 1900. As you can see, the gold reserves of the central bankers were dominated by gold in the early part of the chart.
Peaking at a little over 90% in the 1930s. From the 1950s to 1970, it averaged around 65%. Then when the US went off the Gold Standard in 1971, and for much of the 1970s, it dipped significantly. Then in 1979 it jumped up again significantly and stayed above 50% until around the mid-1980s.
Then it dropped precipitously down to around 10% over the following 30 years. It bumped up after the 2008 GFC, then softened again for a few years. Since then, it has been increasing significantly up to its current level around 17%. The trend certainly looks very bullish and coincides with the Death Spiral of Debt gaining momentum.
Not only do I think the Death Spiral of Debt is a long term debt crisis, it will only get worse as politicians keep spending at insane levels, and the debt servicing costs rise in a frightening way like in the US which is on a path to $2 trillion. Much of the debt was built up during the Free Money Era, that debt has to be rolled over into much higher interest rate debt.
Ultimately, gold is on its way to exceed the US dollar as the dominant reserve currency to over 50%. With the politicians insane spending, and the Fed enabling them, printing money like it is going out of style, it makes me wonder why anybody would want to hold heavily diluted currency to support the spending with IOUs backed by nothing.
Since the 2008 GFC, the Chinese have been asking themselves why they need to hold so much US debt and currency, so they are selling. Others are doing the same, who can blame them. The Death Spiral of Debt and money printing on steroids is adding remarkable risk.
Buyers of the US debt are likely to drop and become more problematic. To the point that the Fed will have to return to being the buyer of last resort. If the international investors go on strike, they won’t need to convert their currencies to US dollars in order to buy US debt putting pressure on both.
The other big issue in the global economy is that the BRICS nations, who are reducing their reserves of US dollars and US debt, want an alternative to the US dollar being the dominant reserve asset and for international trade.
My thesis for speculating that gold will reach $20k in the next 10 years is based on seeing the world returning to the Gold Standard. And that gold plays a more significant role backing up world currencies and debt, while also playing a dominant role in international trade.
Another important thesis in my reports of late is a crucial catalyst I see developing in real time to bring the gold stocks into the gold bull market.
Gold is shaping up to average around $300 more per ounce in the second quarter compared to the first quarter. The second quarter will deliver windfall profits for several gold miners. This will come into play when gold miners report, even before, their second quarter reports.
Many gold miners will receive windfall profits in the second quarter that will without a doubt catch the attention of generalist investors. The gold stocks need new blood chasing them. I certainly believe that chasing is exactly what will happen because as a sector many gold stocks are coming off very low bases and trading at historically low valuations relative to what they have in the ground.
While gold has reached record highs recently, silver is still a long way from its record highs, while copper has also recently reached its record highs. Gold is definitely in a bull market, but to get a sense of how early we are in the trend is to assess confirmation indicators.
In a gold bull market, silver always joins the party early in the bull market, the fact that silver is still a long way from its record high indicates that it hasn’t confirmed the gold bull market yet.
Another key confirmation is the gold stocks. Prior to the PDAC in early March, the gold stocks had been going through a severe bear market for a couple years. Several of the larger gold stocks made multiple year lows prior to the PDAC and then came off their lows.
Basically, after being left for dead a few months ago, they have started to improve but really haven’t joined the gold bull market, at most one can say that some have risen off the canvas. They have a long way to go to be trading in a similar fashion as the bullish action in gold.
To have a real gold bull market, silver and the gold stocks also have to join the gold party. The fact that silver and gold stocks are only showing some green shoots of optimism, tells me we are still in the very earliest days of the gold bull market.
The PDAC this year avoided the PDAC Curse, I believe that the 2024 PDAC will be a seminal moment for gold and the gold stocks. After the PDAC, gold made a major breakout, and some of the gold stocks joined the golden party.
Just like gold and gold miners dodged the seasonal trend of the PDAC Curse, I also believe they will avoid the sell in May and go away until Labour Day trend. On the contrary, this summer is shaping up to be a very strong trend for gold miners.
The real catalyst to bring the gold miners into the gold bull market is when they report their second quarter and see windfall profits for several of them.
We only have a few weeks left to end the second quarter. It won’t surprise me at all if there is positioning of big money flowing into the gold miners, especially the best in class, well before they report their second quarters.
The windfall profits I see coming for some gold miners in the second quarter will make the gold miners hard to ignore by generalist investors. I believe it will prove to be the inflection point that brings a much larger group of generalist investors into the gold miners.
When it comes to generalist investors, the household names in gold stocks are Barrick and Newmont. With Newmont being the largest gold miner and Barrick being number 3. My favourite pick amongst the major gold miners has been, and continues to be, the number 2 gold miner Agnico Eagle.
While gold is at record highs, both Newmont and Barrick are well below their record highs, while Agnico Eagle has been on a tear that has them within striking distance of their record high. It would not surprise me to see Agnico Eagle hit its record high before they report their second quarter and then go on to make a series of new record highs as gold goes higher. "
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