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The Gold Bugs Will Soon Be Vindicated

Mar. 05, 2018 7:59 AM ETGDX, GDXJ, GLD36 Comments


  • Gold bugs have been a laughing stock for 7 years, but not for much longer.
  • Inflation is rising, and when it breaks through 4%, that'll be the end game for the dollar.
  • Interest rates would have to be 6% or higher to quell 4% inflation, which would bankrupt the federal government.
  • Instead, the Fed will choose runaway inflation, and gold will go ballistic, reminiscent of the 1978-1980 bull market.

It's been hard being a gold bug these last 7 years. We've been mocked and discounted as preppers who live in a fantasy world where disaster awaits the global financial system at every turn. We've been called stopped clocks and permabears, with some justification. By the numbers we've been wrong, at least since 2011. In the end, numbers are all that matter in this business.

Equities have skyrocketed since 2011 while gold has fallen hard, now about 30% since topping. Gold stocks and ETFs (GLD) (GDX) (GDXJ) are still in the doldrums, doing even worse. But that's not even the hardest part of being a gold bug. The hardest part as that fundamentally, nothing has changed in the case for gold. Government spending keeps rising relentlessly along with debt, but no matter how many times we say it's unsustainable, which everyone in principle agrees with, few seem to seriously consider the real possibility of a complete monetary disaster.

True, we do not know when it will happen. We just know that it will. Then people quote that vapid amoral Keynesian line at us, "In the long run we are all dead." In quoting that line, mainstream equity investors aren't really challenging the gold bug premise. They're just saying that by the time our predictions come true, it won't matter because we won't be here.

While we don't know the exact timing, I would argue that we, or at least I, believe I know what the trigger will be. By trigger I don't mean a specific event or series of events, which could be anything, but a hard number. That number? When inflation hits 4%, that'll be the end game. There is no way to stop 4% inflation without raising interest rates significantly higher than 4%, and there is no way the Federal government can pay higher rates than 4% without going bankrupt. If inflation

This article was written by

Austrolib profile picture

I invest in the light of Austrian Business Cycle Theory and cover monetary trends for the purpose of timing the credit cycle. My marketplace service The End Game Investor helps subscribers manage the risks of, and profit from the ongoing fiscal and monetary crisis precipitated by the COVID-19 pandemic. I use gold, silver, and associated stocks and investment vehicles in a low-risk high-return setup.

Analyst’s Disclosure: I am/we are long GLD, GDX, GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (36)

Markjc63 profile picture
Now that Xi Jinping has been given the green light to rule for years to come makes a more powerful Yuan Vs USD a bigger reality. This Guy had Trump bent over backwards asking for more , and what's gonna happen?. China is going to shaft America. Why? Because it can.
I could not agree more. Great post!
Tytler profile picture
Great article. Thanks
All this news will affect gold but even more interested in what happens starting March 26th when China's first gold backed Yuan oil contract is implemented! This upcoming big transaction could trump all else. The first crack in the PetroDollar dam has appeared. The Shanghai Gold Exchange is ready and willing to start dealing in PHYSICAL gold prices and not GLD fiat paper gold products. BRICS all working together on gold exchanges to bypass US dollar. Trump's recent tariff's just fired the first shot in this new currency and trade war. Good time to own Gold/silver/PM's/miners while they are heavily discounted partially due to the suckers buying into cryptos thinking it is a safe haven of what is to come. Early Feb's stock pull back proved that when equities nose dive, bitcoin is right behind it. Hoping many have learned from this first test of how cryptos handle a down turn and buy into a 6000 year old proven safe haven. Smart buyers will avoid paper gold products such as GLD and stay n physical or miners as if Shanghai wrestles away the gold pricing from the CRIMEX/NY/London, things are going to change very quickly with gold finally finding it's true price discovery which is multitudes higher than current manipulated low prices.

What gold backed yuan? China isn’t backing anything with gold.
Very insightful, thanks for this. I'm not a fan of paper gold derivatives (GLD) for the reasons you've mentioned.
silverfortune profile picture
Same here. If you can't hold it, you don't own it!!
pcourt profile picture
Good article. I agree inflation should be the variable moving gold going forward ,,, even though I have still have doubts to see strong inflation. On paper gold should be much higher but we need a catalyst / trigger to unlock this value
IBWO profile picture
"Gold bugs have been a laughing stock for 7 years, but not for much longer"

You trying to wake us up after 7 years ?
silverfortune profile picture
Great article... But you left out how much silver is a GIFT because of its dirt cheap prices compared to gold. :)
Civilization Type 1 profile picture
There will be another recession before inflation ever hits 4%.
I hope the metals get hammered so I can buy more silver..
This “article” reminded me of Dr. S holed up in the Spirograph Factory.
edaskew profile picture
Great article. One thing I believe is worth mentioning is how low interest rates effected energy prices by encouraging development in shale even though oil prices were so low that investments in exploration were uneconomic. Exploration companies were able to survive only because of their low costs of capital. Low energy prices held down inflation. Now as energy prices rise, and interest rates rise this has a double impact on inflation. The Fed is trapped. It will be interesting to see how they attempt to wiggle out of this conundrum. I can't imagine why anyone would want to weather the coming storm without a significant allocation to gold and silver.
They report a month over month change as well as a 12 month annualized return. The current core PCE of 1.5% is a trailing annualized return. Ironically, the Fed and so many others talk about inflation but when you dig into the core PCE we barely have any. I am still counting on 2-3 Fed Rate hikes this year and not 4.
What will happen to dollar and gold March 28th when China Russia bypass the petrodollar settling oil contracts in gold backed yuan instead of the USD?

Then what happens when Powells dumbass only raises twice instead of the 4 times he promised the market...Or in 2019,2020 when rate hikes freeze and we already start talking QE4 and ZIRP again.
This can't be accurate: "The Federal Reserve's preferred inflation rate index is the Personal Consumption Expenditures, or PCE. The average monthly rate for the index since it began in 1978 is 3.05%".
A MONTHLY RATE of 3.05% would result in an annual rate of 36.6%. I think we would have noticed!
Austrolib profile picture

Frequency: Monthly. The chart means month over month, not rate times 12. Sorry for being imprecise, you're right and I'll change the wording.
RJJ1 profile picture
Gold bugs have been a laughing stock for 7 years, but not for much longer. ???? More like crying. I think silver is the play under your assumptions.
You make some good points on the PCE. The problem is the core PCE is stuck at 1.5 % trying to get to 2.0% for years. I have doubts if we”ll hit 2.0, 2.5 or 3% this current business cycle before the next recession. The problem is the last 10 years were living in a new lower rate environment and a 2.5% core PCE might be considered robust or overheating inflation.
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