Saturday, November 1, 2014

Better Buy At $1166: Gold In November 2009 or Gold In November 2014?

In November 2009, after a steady 7 year relentless climb in prices, gold crossed $1100. Each tick higher was a new all time high, and those that began investing in the metal years before were brought on national television and applauded.

I was someone fortunate to begin investing in gold back when it was in the $500's. My last gold purchase was in the high $600 range, although I have purchased gold mining stocks at various times over the past 8 years (I currently have a paper loss for almost every gold company I own).

Back in 2005 - 2007 when I accumulated the majority of my physical precious metals holdings I would discuss it with some of my friends and business associates. I was devouring books at the time on the global economy and the fundamental reasons for purchasing precious metals seemed almost too good to be true.

For the next few years precious metals remained mostly unnoticed, and it was not until gold hit $1000 that I felt, for the first time, other people around the world were beginning to take notice. In the fall of 2009, as gold crossed into the $1100's, friends and former business associates began contacting me to ask if it was too late to make purchases. I told them that although I felt the prices would go much higher in the years ahead I was not personally making additional purchases because I thought the price had risen too far, too fast. While I recommended that gold should be at least a small part of every portfolio due to the fundamentals behind owning it (massive global debt imbalances and future money printing from central banks), I always ended with an overly cautious tone on the near term direction.

That caution looked extremely foolish over the next few years as gold would rise from $1100 up to $1900. By that point, in August of 2011, I was so nervous about the future direction for gold that I put up the full caution flag here on the site (see $1900 Gold).

Just over 3 years later gold has pulled back from $1900 to $1166. It is right around the price point it reached in November 2009, five full years ago.

At exactly the same price, the view toward gold today (after a 40% price decline) is the exact opposite as it was in late 2009 (after a 425% increase in the price). An asset that is rising in price and sitting at all time highs becomes a drug that people want in their portfolio. When that same asset goes on sale, it becomes a toxic poison that no one wants to be near.

Has anything changed fundamentally surrounding the reasons to own gold? Yes, the fundamentals have improved drastically. In late 2009 gold buyers could only speculate that global debt would increase by tens of trillions of dollars, central banks would print over 10 trillion dollars while holding interest rates at 0%, and the global economy would remain stagnant even with the unprecedented stimulus.

Today those conditions, the most fundamentally bullish set up you could ask for surrounding the gold market, are the reality we live in. No structural changes followed the 2008 crash nor have they even been seriously discussed. Europe has been the closest economy to even make an attempt at structural reform and they are widely regarded by policy makers as an example of economic failure under the new global Keynesian regime. The European Union has now essentially thrown in the towel, joining the rest of the world in massive fiscal deficits combined with large scale QE programs.

Back in November 2009, when gold was crossing the $1100 mark for the first time in history, Peter Schiff was brought on mainstream news networks and applauded by the commentators for recommending to clients they hold a portion of their money in metals. He is described entering this segment by the hosts as their "favorite gold bug," and they begin by discussing how he has been wisely recommending gold to clients since it was in the $300 range.



On another November 2009 CNBC segment with Schiff (which you can watch here) the commentators seem to have a full understanding of the fundamentals behind gold's rise.

Fast forward five years later. This past week, after gold's 40% pull back, Schiff was asked to come back on to CNBC where they had a large scale firing range waiting for him.



How low can gold go from here? Much lower. I certainly cannot tell you where it will bottom, however, I can tell you with certainty the fundamental reasons for owning gold are far better in November 2014 at $1166 than they were in September of 2011 at $1900.

I planning on buying physical gold this week for the first time since 2007 (I have been buying physical silver relentlessly over the past year and I have lost money, so far, on every one of those purchases). I like to purchase assets with strong long term fundamentals, in secular bull markets, after major price declines when sentiment is low. Very rarely do the stars align for me in each category. Now is one of those times in the precious metals markets.

For more see:

Total Global Debt Crosses $100 Trillion: QE Programs Will Not Stop The Collapse

Wednesday, October 29, 2014

Total Global Debt Crosses $100 Trillion: QE Programs Will Not Stop The Collapse

The following chart shows where we have come from the start of the quantitative easing experiment in the United States in 2008. The Fed's balance sheet has risen from $800 billion to over $4.4 trillion, as they announced today they would temporarily end QE for the third time.


The Fed holds bonds on its balance sheet and when those bonds reach their maturity they will continue to reinvest or roll that money back into new bonds. The same goes for the income (interest payments) the Fed receives on these bonds. In essence, the Fed will continue to conduct "stealth" QE moving forward (about $16 billion per month to keep its balance sheet at the current size). This portion of the QE discussion goes unnoticed by most of the media and financial analysts.

Beyond the stealth QE program that will continue (until they announce a larger real QE4 program in the future) the Fed will hold interest rates at crisis levels for an "extended period." In their words today:

"The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the long run."

What has the all powerful Federal Reserve so afraid?

The simple truth is that the Federal Reserve is powerless against market forces should they turn against them. Think of someone running alongside a tornado holding a small fan thinking they have the ability to control the direction that tornado will move next.


Public (government) and private (individual and corporate) debt globally reached the "impossible to ever pay back" level of $35 trillion in mid 2001. By mid 2007 total global debt doubled to an astounding $70 trillion. This week we received the updated numbers showing that six years later in mid 2013 global debt had crossed $100 trillion (it is certainly much higher today over a year later).

As I mentioned, this debt total includes government bonds, corporate bonds, mortgages, credit card debts, consumer debt, etc. from around the world. It does not include bank debt, which would put it closer to the $280 trillion level. Remember that bank debt can be considered part of government debt because when bank debts go bad the governments (taxpayers) "must" immediately step in to cover any losses; a key lesson we learned from the Lehman Brothers bankruptcy.

The $280 trillion total does not include unfunded liabilities (which in the U.S. alone are over $100 trillion) or derivatives; "off balance sheet" bets banks place with each other. The derivative total is estimated to be fast approaching a quadrillion dollars.

Can you see why the Fed's $3.6 trillion in new money created over the past 6 years is just a drop in the ocean compared to the debt outstanding? What the Fed and the supporting central banks around the world have done is provide a small token of good faith to show they stand ready to protect the financial markets should the $280 trillion in debt begin to wobble.

In essence, they bluffed, and the bond vigilantes folded. Investors have purchased and agreed to roll forward the $280 trillion in debt outstanding on blind faith that the paper contracts they hold will be paid in full the day they decide to cash them in. Global interest rates on the $100 trillion in public and private debt have fallen from 4.8 percent in 2008 to just 2 percent today. 

This is why the Fed, the European Central Bank, the Bank of England, the Bank of Japan, the People's Bank of China and every other central bank around the world must stand together in unison, without blinking, to tell the debt markets they stand ready to do "whatever it takes." The balance sheets from the major central banks around the world have grown by almost $10 trillion since 2008 (central banks print money to purchase assets) as they have held rates close to zero.


The central bank leaders today are considered godlike by their ability to move and control markets. In reality, they control nothing. Someday we will wake up and someone holding an IOU in the $280 trillion debt market will decide not to roll it forward and they will ask for their money back. The person standing next to them may see them do this and decide they should ask for their money back too. Interest rates, which have been falling around the world for 32 years, will rise off their ridiculous 2 percent levels and move higher. The tornado will have turned and the $10 trillion in QE will be seen as a small handheld fan in comparison to the power of a 280 trillion dollar debt market.

Then you will see the real crisis unfold and the world will turn to their saviors; the central banks. The fear will not come when paper assets begin to experience declines, it will come when investors collectively realize central banks have no power to stop a worldwide debt avalanche. 

When this moment arrives there will be chaos and there will be opportunity. For those that seek to go further down the rabbit hole and peer into the future, I highly suggest you read The Death Of Money, which walks through how the new monetary system will be created after the current one collapses.

For more see:

Global Debt Grows Exponentially While The Income To Support It Does Not


Tuesday, October 28, 2014

Four Straight Months Of U.S. Home Price Declines

The Case-Shiller home price index data was released this morning showing a month over month seasonally adjusted decline in home prices for the fourth month in a row.


Robert Shiller discusses the data with CNBC below noting that while the American dream is still to own a car and a home, there is a lot of common sense in support of renting and taking public transportation. 

It must be difficult for readers of this site outside the United States to try and figure out why a government would provide unlimited subprime auto loans, unlimited subprime student loans and unlimited subprime housing loans (Fannie Mae and Freddie Mac are already working on a new 3% down program for "less qualified" borrowers).

The answer is simple. The more debt the government has issued (so far) the lower interest rates have gone and the more demand there has been for U.S. government debt. Supply/demand and quality no longer matter, just like it did not matter for U.S. subprime mortgages from 1997 to 2007.

Then one day psychology changes and the world collectively realizes they are holding a mountain of toxic waste on their balance sheet that will never be repaid. Until that moment arrives, keep the party going. Get ready for zero down subprime auto, student and housing loans in the years to come.

Monday, October 27, 2014

Global Debt Grows Exponentially While The Income To Support It Does Not

Excellent visual below posted this past weekend at Mauldin Economics showing the growth in global debt to GDP over the last 12 years. While we often focus on the worst offenders here on this site (Japan, U.S., Europe, UK, China) which are the most likely to have a debt crisis/implosion first, it is important to remember that the debt binge that has taken place since the start of this century has been a truly global phenomenon.

Global debt to GDP has grown from less than 165% to over 210% in just 12 years:


If you borrow money today you must sacrifice in the future when the debt must be repaid. Borrowing money turbocharges present growth at the expense of future growth. We are 75 years into the current debt super cycle so many believe it is impossible for a developed economy to face a real debt crisis (2008 was concentrated in just a small sector of the global debt market; U.S. subprime housing).

My guess is there will be a severe crisis from one of these major economies in the next five years:

1. Japan (government debt)
2. China (corporate/real estate debt)
3. Europe (government/financial debt)
4. U.S. (government debt)
5. U.K. (financial debt)

I think the likelihood of them occurring are listed in the order above, but on paper every single one of those debt categories should implode tomorrow morning. The only thing that has stopped that from occurring has been the ability to continuously roll the debt into new loans at lower interest rates. This has been supported by the central banks around the world and investor willingness to continue to buy today and hope there will be a greater fool tomorrow waiting to offload the debt.

For more see:

What If The Stock Market Fell & It Did Not Recover?