- 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 hits 4%, interest rates would have to be close to 6% to even begin to quell inflation, and that would mean annual interest payments of about $1.3 trillion on the national debt, give or take a hundred billion. At that point Congress would need to institute massive, drastic, and immediate spending cuts, I mean like cutting the entire budget in half across the board.
If spending cuts like this actually happen, gold would suffer. But the idea that cuts like this would actually be instituted is absolutely laughable. I'd say there's a higher chance of aliens holding the moon for ransom. Congress can't cut a single dollar on net let alone cut the budget in half. So the only choices left are national bankruptcy or runaway inflation. But national bankruptcy means cutting the budget in half de facto, because the government would not be able to borrow any more and the resulting recession would plummet tax revenues. So the only choice left is runaway inflation. Gold skyrockets.
Will inflation go to 4%? Absolutely. 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%. The average from 1978 to 1990 was 5.05%. To say that it will never go above 4% again, to me, is crazy. It will. It's just a matter of time.
The argument between even the hardest of hard core gold bugs and conventional investors then is one of timing, not of substance. On the basic premise, that governments spend too much money and that this eventually will lead to rising gold prices, both sides actually agree. It's just that gold bugs think the day of reckoning will come soon, with specific timelines varying, and conventional investors think it will only come in a very long time, namely when we are all dead, or rich enough not to care because of our wise equity investments, or what have you.
What happens to gold once inflation hits 4%? I believe the metal will rise faster than the bull market of 1978-1980. Unlike what happened in 1980 though, the metals will not collapse back down afterward this time.
I said earlier I don't know what specific event will happen before the end game, but here's one possibility: A failed Treasury auction. The possibility of this is already being hinted at by mainstream news sources. Back on February 20th, Bloomberg published a piece entitled "U.S. Pays Up to Auction $179 Billion of Debt in a Span of Hours". What was unique about the piece was, as one of the anchors mentioned in the discussion, "I can't remember a time we've parsed into an auction as much as we have this time around."
Treasury auctions usually happen behind the scenes, out of the headline noise and off of everyone's radar. Most assume that these auctions will be perfectly fine, so the very fact that these primary bond markets are even being covered is anomalous. If an auction ever fails, the dollar will tank, interest rates skyrocket, inflation will spike, and gold will go ballistic.
No, Rising Rates Do Not Mean a Stronger Economy
One final counterargument I'll mention against the gold bugs is that rising rates mean a stronger economy, and rising rates themselves will quell inflation before it gets to 4%. It never ceases to amaze me how much mainstream financial media insists that rising rates mean a stronger economy or that rising rates quell inflation. That was not true from 1971 to 1981. Rates on the 10-Year blasted from 5.5% to 15.5% over 10 years and the economy stagnated or receded.
Over the same time frame, from 1971 to 1980 until high rates caught up with inflation in 1981, the inflation rate in the US blasted off from 5% to 15.5% as well. It was a prolonged, 9-year period of higher rates and inflation that everyone seems to forget about. It happened though, and for nearly an entire decade, Keynesian economics was proven wrong. Rising rates do not necessarily mean higher growth and less inflation. Not in the 1970's anyway.
Rising rates now are just be a reflection of high debt levels rather than a healthy economy. High inflation is coming, and this time the Fed cannot fight it without bankrupting the US government.
So if you've been in equities since 2011, congratulations! You've won these last 7 years, and boy you've shown us! Best not to lose your gains. Join the gold bugs now, before it's too late.
This article was written by
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.
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