Gold Silver Desk

Jim Rickards – 9-3-2021

Dear Reader,    The greatest paradox in foreign exchange markets today is the U.S. dollar (USD).   U.S. fiscal responsibility is in ruins. In the past two years, the U.S. has authorized $11.5 trillion of new deficit spending and increased its base money supply by over $4 trillion. The U.S. debt-to-GDP ratio now stands at 130%, comparable to Lebanon, Italy and Greece, among the most profligate countries in the world. Meanwhile, U.S. growth is slowing rapidly. The Atlanta Fed GDP Now forecasting tool showed projected annualized growth slowing from 13% in April to 11% in May to 7.5% in June. The actual GDP growth figure for the second quarter of 2021 was 6.5%. Third-quarter growth is now projected at 5.1%. Actual growth will come in even lower because those projections do not take into account the full extent of new lockdowns, mask mandates and vaccine mandates, which are damaging travel, entertainment, resorts, restaurants and retail sales. Consumer confidence just recorded the steepest one-month drop in the history of that data. So the U.S. is experiencing soaring debt, reckless money printing, slowing growth and a new wave of COVID. That sounds like a recipe for full-scale flight from the U.S. dollar. But that’s not happening. The dollar has been getting progressively stronger. The U.S. dollar index (DXY) has rallied from 89.64 on May 25, 2021, to 93.57 as recently as Aug. 19. Other dollar indexes show comparable gains. How does the dollar soar in the face of fiscal and monetary failure and slowing growth? The Dollar Isn’t Just a National Currency The answer is that the U.S. dollar is more than just a national currency. It is the global reserve currency. It is used worldwide for trade, investment and payments, and it is created outside the U.S. in the form of eurodollars by U.S. and foreign banks operating in London, Frankfurt and Tokyo, among other money centers.    The eurodollar market relies on dollar-denominated securities such as U.S. Treasury bills and notes for collateral in leveraged transactions. In short, the dollar has a life of its own independent of the Federal Reserve, the White House and the U.S. Congress. It’s the lifeblood of the international monetary system regardless of whether U.S. policymakers are reckless in fiscal and monetary policy or not. Banks need dollars to buy Treasury bills to pledge as collateral and keep the system afloat whether U.S. domestic policies are sound or not. How will the paradox of profligate fiscal and monetary policy by the U.S. and increased demand for U.S. dollars by international banks be resolved? In the short run, the paradox will not be resolved. I expect continued record deficits from the U.S. Congress and continued demand for dollars by highly leveraged international banks. Still, that condition is non-sustainable. Possible remedies include a new dose of fiscal responsibility in Congress (unlikely before 2023 if ever), direct Treasury intervention in foreign exchange markets to weaken the dollar (unlikely until it’s too late) or a global financial crisis that leads to major reforms in the international monetary system, possibly including a new Bretton Woods-style agreement. That kind of collapse followed by reform is the most likely outcome. It’ll happen because policymakers will have no other choice.

Long Overdue for a New Monetary System

My research has led me to one conclusion — we’re going to see the collapse of the international monetary system. When I say that, I specifically mean a collapse in confidence in paper currencies around the world. It’s not just the death of the dollar or the demise of the euro. It’s a collapse in confidence of all paper currencies.   

Over the past century, monetary systems have changed about every 30–40 years on average. The existing monetary system is 50 years old, so the world is long overdue for a new monetary system.

When confidence is lost, central banks may have to revert to gold either as a benchmark or an actual gold standard to restore confidence. That wouldn’t be by choice. No central banker would ever willingly choose to go back on a gold standard.

But in a scenario where there’s a total loss of confidence, they’ll likely have to go back to some form of a gold standard.

Few remember that Nixon explicitly said that the suspension of gold convertibility by trading partners was being done “temporarily.”

I spoke to two members of the Nixon administration, Paul Volcker and Kenneth Dam, who were with the president at Camp David the weekend the suspension was announced. They both confirmed to me that the intention was for the suspension to be temporary.

The plan was to convene a new international monetary conference, devalue the dollar against gold and other currencies, primarily the Deutsche mark, Swiss franc and the Japanese yen and then return to the gold standard at the new exchange rates.

The first part did happen. There was an international monetary conference in Washington, D.C., in December 1971. The dollar was devalued against gold (from $35.00 per ounce to $42.22 per ounce in stages) and other major currencies by about 10–17%, depending on the currency.

Yet the second part never happened. There was never a return to a gold standard. While countries were negotiating the new official exchange rates, they also moved to floating exchange rates on international currency markets.

The cat was out of the bag.    

Why Do Central Banks Cling to a “Barbarous Relic”?

We’ve been living with floating exchange rates ever since. The creation of the euro in 1999 was a way to end currency wars among the European nations, but the EUR/USD currency wars continue.

The temporary closing of the gold window by Nixon has become permanent, though it was only intended to be temporary…

Still, gold is always lurking in the background. I consider gold a form of money rather than a commodity.

 Central banks and finance ministries around the world still hold 35,000 metric tonnes of gold in their vaults, about 17.5% of all the aboveground gold in the world.

Why would they hold onto all that gold if gold was just a barbarous relic?

Looking at the price of gold in any major currency tells you as much about the strength or weakness of that currency as any cross-rate. Gold still has a powerful role to play in the international monetary system with or without a gold standard.

The timing of any financial crisis is always uncertain, but the probability of an eventual crisis is high. New signs of liquidity stress are emerging every day.

No investor should be surprised if the crisis happens sooner rather than later.

Regards,  
Jim Rickards  

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Anna Golubova – Wednesday August 25, 2021

Billionaire “Bond King” Jeffrey Gundlach sees the U.S. dollar on the decline and gold going a lot higher after the precious metal leaves its hibernation mode.

“My number one conviction looking forward a number of years — I’m not talking about the next few months at all, I’m talking about several years — is that the dollar is going to go down,” DoubleLine CEO Jeffrey Gundlach told Yahoo Finance. “The dollar going down is another reason why we touched on gold. I think ultimately gold is going to go a lot higher, but it’s really in hibernation right now.”

The dollar’s decline is inevitable because of the economic policies implemented by the U.S., Gundlach said, adding that it is all about the debt levels.

“We have debt-to-GDP that is fueling the majority of our so-called economic growth. So, is it really economic growth when you borrow money or print money, send checks to people who turn around and buy goods on Amazon in addition to maybe paying down debt and speculating and these goods come in from China?” Gundlach said. “A lot of that consumption is going to China … That’s one of the reasons why China has such a strong economy. So, what we’re seeing in the United States is starting to fall behind in economic growth. That’s not a new thing. That’s been going on for a generation, the U.S. falling behind.”

This is also why the dollar’s global reserve currency status is under threat.

“We’re running our economy in a way that is almost like we’re not interested in maintaining global reserve currency status or the largest military or global call it superiority or control. As long as we continue to run these policies, and we’re running them more and more aggressively, we’re not pulling back on them in any way, we are looking at a road map that is clearly headed towards the U.S. losing its sole reserve currency status.”

How low with the U.S. dollar drop? Gundlach said that the greenback could take out the lows of the past bearish cycle.

“The dollar has been in a series of declining highs for decades — it goes back to the ’80s. For that reason, I think when we get to the next break to the lower level, the dollar will go past the most recent low of around 80 and even take out the low of 70. So, I think there’s easily 25% downside in the U.S. dollar,” he stated.

Gundlach sees good future opportunities in European equities and emerging markets but noted that it is still too early to “aggressively rotate into emerging markets.”

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Neils Christensen – Tuesday August 24, 2021

The Gold market has pushed back above $1,800 an ounce, and while the precious metal has room to move higher, one major bank is lowering its year-end price target.

In a report published Friday, commodity analysts at Commerzbank said that they see Gold prices ending the year around $1,900 an ounce, down from their previous price target of $2,000 an ounce. However, the downgrade in this year’s price target is just a tactical retreat. The German bank remained a long-term bull and pushed its $2,000 price target to 2022.

“As soon as the U.S. Federal Reserve announces that it will start to reduce its bond purchases, an important obstacle for the Gold price should disappear. Moreover, our economists expect U.S. inflation to start falling significantly as early as the fourth quarter. This should take some wind out of the sails of the interest rate hike expectations that have just emerged,” the analysts said. “Next year, U.S. inflation is even likely to fall below the Fed’s inflation target again, which should further weigh on interest rate expectations. We, therefore, expect the Gold  price to rise significantly over the next 12 months.”

Not only does Commerzbank see the potential for Gold as they expect the U.S. central bank to keep interest rates at historically low levels, but the analysts noted that the precious metal is cheap compared to other historical standards.

“In our opinion, Gold is currently trading at an unjustifiably low level and is too cheap compared to other asset classes: one troy ounce of Gold is equivalent to just under 5% of the Dow Jones Industrial Average. Over the past ten years, it has averaged 7.6%, at its peak even more than 17%,” the analysts said.

One key factor that will drive Gold prices higher is the return of investor demand. Gold prices have dropped more than 13% from last year’s highs as investors pulled 270 tonnes of Gold out of gold-backed exchange-traded funds since August 2020.

“This is almost equivalent to one month’s global gold mine production,” the analysts said.

However, the German bank added that weak ETF demand obscures other pillars of strength in the marketplace, notably physical demand for bars and coins.

Quoting data from the World Gold Council, Commerzbank said that 62 tonnes of gold bullion were bought in the U.S. in the first half of the year. In Germany, the demand for gold coins and bars was around 90 tonnes.

“Demand for these investment forms in North America more than doubled in the first half of 2021 compared to the previous year,” the analysts said.

By Neils Christensen

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August 24, 2021

Today a man who is connected in China at the highest levels said gold is going to be the new global currency.

The Great Default

August 24 (KWN) – John Ing:  Fifty years ago, under the crushing weight of debt to foreigners, President Nixon severed the dollar’s link with the gold standard, replacing the dollar’s backing not with gold but the “full faith” of the United States’ economy. What followed was an era of fiat money debt-fueled spending and the great inflation of the seventies and early eighties.

After years of massive deficits from LBJ’s Great Society and financing the Vietnam War, the United States did not have enough gold to back its debts. The Fed also tried to keep rates low until Paul Volcker forced rates to the roof to stop hyperinflation. Since 1971, the greenback’s purchasing power has lost 98 percent in real terms…

Today America not only has record debts but the Fed keeps creating dollars as the tsunami of money cheapens the world’s leading currency. Money is free. America’s debt is larger than its economy and it is unlikely that debt will every be repaid, debasing the dollar. In less than 10 years, America’s debt has doubled to $29 trillion, another record. The dollar is structurally weak. The present system depends on the dollar, however without confidence in the dollar, the world has no valid reserve currency. America’s exorbitant privilege is not infinite as are the laws of economics.

Gold Is Going To Be The New Global Currency

The crux is that America is reliant on foreign capital to fund its deficits and profligate spending – that is America’s Achilles heel. The greenback is overvalued, deficits are unsustainable and inflation is their next problem. In Washington they do not seem to care. Both the economic vulnerability and geopolitical risk are more acute than it appears. If interest rates rise, paying down and servicing the debt will become unmanageable. Interest on their debt alone tops $500 billion and that is at new zero rates. America is operating a reckless financial system whose main characteristics are rising deficits and a rising stock market. A consequence of America’s profligacy, is that the dollar must depreciate further which will exacerbate rising inflation. And again, America remains divided against this threat. What damages trust in the US, damages trust in the whole world.

Investor confidence is fleeting. History shows that there is a cycle of debt, and borrowing trillions of dollars only makes it harder to be repaid. The overvaluation and bubble-like market conditions have masked many problems but the swamp is draining; exposing some very ugly frogs. Credit Suisse alone suffered a $5.5 billion loss from the collapse of Archegos Capital which cost the big banks a total of $10 billion in losses. Greensill in the UK filed for bankruptcy in March, sparking a corporate and political scandal, shortly after the Wirecard implosion in Germany.

Today, the crackdown from Beijing has hurt many of the big private equity players as Chinese tech stocks dropped the most since 2008. While global capital has so far digested these shocks, risk keeps piling up. Awash in a sea of debt, growing public and investor disenchantment over government mismanagement of the economy, pandemic and ESG has created inequalities and an unjust society. Without confidence, there will be pressure for familiar old remedies. Our problems are being treated as everybody’s problem and therefore nobody’s. All in all, gold is a good thing to have…

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August 6, 2021

Panic Day

August 6 (KWN) – Eric King:  “Michael, obviously we are having a panic day here in the gold and silver markets with the price of gold down at one point tumbling $50 and silver trading down $1, but you always step back and look at the big picture.”

The Clock Is Ticking For The Bears

Michael Oliver, Founder of MSA Research:  

“We are focused on our technical conclusion, that is the March low at $1,673, which took them 10 months to get gold to shed 20% (after doubling), and then we shot back over $1,900, lately we’ve been hovering around $1,800, and today we get a sharp break. We are not near the March low of $1,673. Instead we are in the $1760s.

On a short-term basis, this decline that we’ve finally had this week — because if you look at the past 4 or 5 weeks they’ve hovered like a quiet little clump of ink mostly above $1,800 gold, so they’ve been selling it for 4 or 5 weeks now and they couldn’t get any downside — finally they got some downside. It looks like they’ve spent too much time (trying to break the gold market). In other words, when we measure weekly momentum, we measure weekly bars, and frankly this is week 4 down on momentum, not price. So the clock is ticking for the bears. I would say they’ve got next week and that’s it. So if they don’t get any real damage by then, they’ve already shot their wad.

Golden Stick Of Dynamite

We believe the March $1,673 low was the corrective low. And we think everything that’s occurred since then is in-between noise. Meaning, in between the low and setting up to challenge the high again. But momentum has a stick of dynamite above this level that could really get things going on the upside. And the level we want to see…

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