We’re on a journey together through a distorted Twilight Zone of a market. So naturally, readers are constantly commenting and asking about the importance of precious metals.
Now, we’ve always stressed the importance of these shiny, critical assets; we’ve been straightforward addressing our “pro-gold” views and have referenced precious metals in numerous other articles.
There are countless distortions in the market today, breathtaking in size and scope: $17 trillion in negative bond yields, $16 trillion in fresh money printing since 2008, expensive Federal Reserve quantitative easing and repo operations – with much more on the way.
There are global and domestic political tensions; a flock of sinister black swans paddling around the Persian Gulf. There are ongoing trade wars, cold and hot.
In short, there’s a lot to like about gold allocations right now, particularly if any- and everything I’ve just mentioned brings on (yet another) period of systemic stress and breakdown.
Here’s what investors need to know…
Hearing from Naysayers in the Great “Inflation v. Deflation” Debate
Despite our bullish leaning over the long-term, it’s equally important to hear out views contrary to our own as we defend our stance. The better for you to see both sides of the gold debate and hence make your own conclusions—with all the key arguments and data before you.
Without naming names, there has been a resurgence of late by certain market watchers warning of a gold collapse that would send the precious metal to as low as $700, despite its recent climb past $1,500 and its technical support levels at $1,360.
Still others see $5,000 gold on the horizon.
So, what gives? Who’s right or wrong?
The key “gold bear” argument holds that the yellow metal thrives during inflationary periods, like the 1970s, when it surged from $40 to $850 per ounce, but tends to tank in deflationary times.
The gold bears remind investors that after years of gloom and doom talk of rampant inflation as a result of equally rampant money printing, the simple fact is that no such inflation has surfaced—except, of course in grossly inflated stock markets reaching record, melt-up highs.
But as for the Consumer Price Index (CPI), inflation keeps getting lower not higher.
Despite the fact that actual inflation is much higher than reported inflation for reasons we’ve discussed at length elsewhere, the gold bears have a valid point: inflation has not reared its ugly head…
Blatant lies from the Bureau of Labor Statistics notwithstanding, inflation has been muted because the vast majority of the money printed since 2008 has stayed walled-in, behind a dam of big bank reserves on deposit at the Fed (and paying interest for the banks, I should note).
As long as those trillions stay behind those dam walls, the velocity of money remains contained; the inflationary forces behind that velocity-effect remain blunted.
Additionally, because the U.S. dollar is the global reserve currency, the U.S. can “export” its inflation overseas. That is, for every dollar we print, the rest of the world that is forced to trade and transact in U.S. dollars has to make similar moves in their own pegged currency and essentially swallow and absorb our inflationary pain for us.
That’s a pretty neat trick. And it even works… to a point… until it doesn’t anymore.
It always makes me smile when experts say there won’t be inflation, because there is no inflation now. That’s like saying it won’t rain tomorrow, because it’s sunny today. Kinda crazy logic, no?
Furthermore, the gold pessimists argue that gold will tank as the dollar strengthens. We’ve shown how this is not in fact the case at greater length here, so I will not re-argue that point again now.
The Bears’ Main Argument for Declining Gold
For now, the gold bears see deflation ahead, so look out below for gold.
Let’s stick to that key argument.
Ironically, the bears are just as bearish – if not more so – on the global economy than the pro-gold bulls.
However, the bears see massive market declines ahead in a different light.
They argue that when the admittedly over-indebted corporations which compose our current stock and bond bubbles eventually “tank,” massive defaults will follow, thus leading to an equally massive “vanishing” of dollars, and hence less (rather than more) money “velocity” – and hence more deflation.
And a corporate debt bonanza it has been, as investors desperate for yield snap up a record $2.4 trillion in corporate debt sales globally.
Additionally, when markets tank, prices tank. Price declines (so say the gold bears) portend even further price deflation rather than inflation. Again: bad for gold.
To make this point stick, the bears rightly remind that in times of crisis, such as in the oil and commodities collapse and savings and loan debacle of the early 1980s, gold tanked by almost 60% to $300 per ounce—hitting the $250 floor by 1999.
They further point out that in the early months of the Great Financial Crisis of 2008, gold fell more than 30% from March to November. Ouch!
Admittedly, gold then skyrocketed from $700 to $2,000 once the Fed turned the money printers into full-on “Crazy” mode, but even that epic rise, the bears maintain, never achieved the $3,500 to $5,000 per ounce gold prices promised by the omni-present gold bugs popping up on your screens and inboxes on a daily basis.
Why no super-surge in gold?
Again, because the hyper-inflation “hype” never surfaced.
The gold bears argue today that even such a temporary rise was based purely on fear, not inflation. They say, “forget about the hyperinflation, get ready for more deflation and with time, more tanking gold prices,” citing the recent drop in price as an example.
Our Take: Gold Is Portfolio “Flood Insurance”… And the Water Is Rising
Perhaps the gold bears are right. After all, we’re analysts – not psychics. That said, our analysis takes a different tack—and it’s our role to give you not only facts, but perspective.
First, as to the eternal “inflation versus deflation debate,” we’ve discussed this at length, and recognize that deflation is in fact a typical precursor to subsequent inflation.
The question, therefore, is not deflation vs. inflation, but deflation and inflation – that is, the transition between the two.
You see, the fact that we may see deflation first doesn’t mean we won’t see inflation later—and we are fairly sure that in a world now awash in printed currencies that inflation has not been outlawed, despite all the magic tricks at the Fed.
Even the bears’ case of gold’s under-performance in 2008 is ironically self-defeating, for the subsequent rise in gold in late 2008 shows that gold can lift in a crisis, despite preliminary (deflationary) dips.
Additionally, the bears attribute gold’s latest rise to fear, rather than inflation. Even if they’re right, do they actually believe fear, too, has been outlawed?
In fact, and for reasons introduced above, we see much fear ahead—and inflation too—just a bit later down the road…
This Is the New Abnormal
Furthermore, in the entirely “New Abnormal” of these post-2008, rigged-to-fail markets, there can be little doubt that one of the only tools left to the world’s central banks is further money printing; after all, interest rates are already at, near, or below zero.
We predicted over the summer that the money printers would return, and as of this fall, we’ve been proven right. In the span of 60 days, the Fed has “created” over $300 billion dollars and then told us this wasn’t “QE” … huh?
For now, markets are in the complacency phase of “all is good.” But when this phase ends, we can be certain that money printing will not only return, as it has, but ramp up. This will be a tailwind for gold.
What’s more, the mad scientists behind Modern Monetary Theory are the new harbingers of extreme money printing ahead—the very kind of money printing that sent gold to the moon in the post-2008 environment.
Gold will likely do more of the same once the money printers go into overdrive in the next recession.
And as for fear? Well, there is and (will be) no shortage of that in the years ahead, as both Main Street and Wall Street suffer the twin flames of top-down neglect and intoxicated excess, respectively.
If fear is good for gold, then gold will certainly shine when the Phase 4 “Uh-Oh” Moment comes.
Remember Supply & Demand?
More importantly than all of this, there’s one basic thing the gold bears seem to be side-stepping: Basic supply and demand, specifically, the rising demand for gold in countries like India and China—not to mention the global central banks themselves.
In a world now awash in fiat currencies, sovereign fear is indeed rising, as is populist common sense and tension. From Hong Kong to Venezuela, the natives are getting restless and governments are cracking down, or, in the case of Brexit, cracking relationships.
Bottom Line: Gold – the refined, above-ground, investment-grade flavor, has a limited supply but nearly unlimited demand, which also bodes well for prices in the long term.
Unlike massively inflated stock, bond, property, cash and derivatives markets, gold has a very tight supply; even a small increase in global demand can send its prices much higher, mighty quickly.
So, there you have it: The case against gold and the case for gold. Who’s right? Who’s wrong? Will gold soon rise to $5,000 per ounce or retreat to levels of $700?
We make no direct predictions. Frankly, we don’t think those are even the right questions, for we are agnostic as to the short-term price action—or even potentially extreme volatility—in the gold space.
Because for most investors, we see gold less as a speculative trade for quick entry and exit, but rather as a longer-term insurance policy against a Twilight Zone market. Pure and simple.
Currently, the markets seem to agree. In spite of recent weakness, investors are still all-in on the bullion:
The Stars Are Aligning for the Yellow Metal
Although we don’t see gold hitting either $700 or $5,000 anytime soon, we do see favorable conditions unfolding. All the ingredients for eventual fear, money printing and monetary excess are lining up, which means the case for gold is favoring the gold bulls, not the bears.
As we have said, even if deflation does precede inflation and gold prices fall – perhaps even dramatically – they do so before they surge.
Ultimately, while it’s our job to give you blunt facts and unvarnished analysis, what works best for each investor is to develop their own outlook and opinion on gold, as a speculative investment or as an insurance policy.
Depending on how you answer that one question, the way you invest and hold gold will be very different.
Even for the most high-conviction gold bulls, it’s critical that you see both sides of the gold debate and consider opposing views before otherwise going “hog wild” and over-allocating to gold.
Gold is an asset we favor, but within reasonable limits.
As we’ve said before, the standard allocation for most gold proponents ranges from 5% to as high as 20%, depending on just how worried, wealthy and informed/convinced one is on the gold debate.
These are highly individualized choices and decisions.
We hope this pro/con dialogue on gold will help you to crystalize what’s right for you and we’ll certainly be back with more thoughts on precious metals in Signals Matter Reports to come.
14 responses to “Here’s A “Gold Bear” Argument for Much Higher Prices”
- J Csays:
December 2, 2019
Why are we talking about gold today instead of the usual critical signals that are talked about on Monday? You threw me a curve and I struck out. What happened to cash and other allocations. Why the sudden change? Kind of disappointing on a Monday after a long holiday.
December 2, 2019
an economic slowdown perhaps severe is inevitable, money velocity slows down, deflationary crisis appears, the fed goes into QE to infinity and finally gold skyrockets, its appears the most logical scenario. I do not understand how gold could could rise in a deflationary situation, but you seem to state that is a possibility as well, of course predicting any of these hypothetical situations with great accuracy is impossible , but I enjoy your opinions on this
December 2, 2019
Thanks again Matt for a blunt perspective on this issue— and I appreciate the candor on how gold prices will and can be unstable with potentially “dramatic” pullbacks before a final surge. As you say, the real issue the rest of us have to consider is how we see gold— as a trade or as an insurance policy. I agree that for most of us it’s the latter, and thus need to ignore them price movements and just stick to the big, longer term picture. The central banks have no choice but to keep printing money, just as you forecasted over the summer. The entire global economy is on borrowed time, but the central banks still have some gas in the tank. As you’ve said— the only thing any of us can do is see how much mileage they have left, which no one can time. I’ll be watching that yield on the 10 Y UST, as u recommended, to better track what the markets rather than idiots on tv are saying. Really appreciate your updates and humility. Rare indeed these days— a smart guy who speaks his mind and makes this clear for the rest of us.
- Brian Hamiltonsays:
December 3, 2019
It is good to see an analyst give the pros and cons…..Most analysts just barrack for one team or the other
- James W Collinssays:
December 3, 2019
Thanks, I needed that!
- Kenneth L Swansonsays:
December 3, 2019
For these very reasons I am invested in Wheaton Precious Metals!!
- duncan innessays:
December 3, 2019
Its depressing to see charts with fake bases (eg 70 million ounces above)
Even worse to think Gold is a better hedge than Gold Mining shares (as the latter both rise proportionarely more and pay dividends – if good companies)
December 3, 2019
Would appreciate a discussion on how the printed money sits without being in, circulation. Have bank reserves increased by the bulk of the eased amounts. I think you are saying that velocity of money has actually slowed, hence minimizing price increases. We are trying to sell our home now to redeploy assets and since Oct 15 it would appear that the potential price has dropped by 15% in a matter of days. Of course its cheaper to hold some gold than pay forever increasing property taxes on real estate, all else being equal. The argument for 700 gold escapes me at the moment but had validity when i read it and your notion the surge later adds depth to the story Keep writing
- ez scottsays:
December 3, 2019
I went in too much on silver stock and I’m down, but not down and out, yet. Just back down to earth and I feel confirmed with your article(s).
Thanks for being here, and the breakdown. Scott.
- Craig Robinson says:
December 3, 2019
I agree with your analysis that the “inflation figures” are skewed; the manner in which they compute inflation is inherently rigged to produce a number that supports their so-called “target rate”. Having said that, when the next meltdown occurs (it’s only a matter of when, not if) I can see inflation rising to levels at (or above) anything I’ve seen in my lifetime. I’m approaching my 64th birthday.
- Juergen Krause, Ing.says:
December 3, 2019
Quite apart from its dependency upon imports of energy, China will always be unable to feed its citizens without food imports. Its South China Sea adventure may bring some energy relief, if ever, but the Western food supplies cannot be commandeered in this way. It will take hard currency, in terms of gold, not threats, to ensure the survival of the dictatorship. Hence the Chinese gold hoarding. Many other economies are doing the same. Those are the hard facts. Inflation and deflation are only results. Now look at India and translate the facts. “Hunger will drive the price of gold!” One fact is supply and demand: The export of food from the West to populations unable to feed themselves is elastic but the supply of gold to pay for it is highly inelastic. Go figure and focus! Beyond that has to be recognition that food producing land in the West will require gold to be acquired legally, as well as illegally through political means.
- Signals Matter Infosays:
December 4, 2019
JC–sometimes, especially during the Holiday’s, the Monday Reports on “What’s Happening Now” get pushed aside. We’ll strive to keep them more regular for Mondays going forward. The melt-up announced in early October recommended going long equities and later, the tech sector in particular. That was a fairly “fat pitch” with very little curve to it. That said, not every pitch is a homerun, but that was a double or triple. In 2020, after a year of providing big-picture reports, CSR will offer a far more structured newsletter to update more specifically on cash allocations, hot and cold sectors etc. Our Heat Map and Storm Tracker articles explain in depth the signals we employ to make sense of these otherwise abnormal market swings in a 2019 that witnessed a record level of total U-Turns in both monetary policy and market sentiment, and direction–opening with a bear, crawling sideways in the summer and ending with a bull . For now, the primary aim is to inform readers of the systemic macro forces influencing these flows, trends and hidden as well as overt risks (and opportunities) which demand risk managed approaches to both portfolio-centered investing and active trade-minded profiles, two very different approaches (and reader profiles) in these Fed-Driven Markets. We read every reader’s comments and strive to address their common concerns with each article and appreciate your concerns.
December 5, 2019
This was a good article and made me realize why I have gold in my portfolio ! Insurance is the only way to view it … speculation has never worked for me !
- DALE HANKINSsays:
December 15, 2019
My take on the reason massive fiat money printing has not produced inflation follows: The Fed’s money is routed to U.S. banks. Banks can sit on it and be paid a little from the Fed. Since the amount held by banks is large this income covers much of their overhead. They are willing to loan their money; however, clients are in a controlling position – they know how little the Fed pays and they can borrow from Japan or the E.U. near the Fed’s rate. So, clients play hardball and refuse to pay significantly more than the Fed does. As a result banks sit on their money and money velocity remains low and there is negligible inflation. The money which is loaned goes only to the worthiest clients (the wealthiest) who buy stocks