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22 charts and 52 questions that will make you buy gold

22 charts and 52 questions that will make you buy gold

Since 2007 I am wondering how can the financial world continue in this insane artificial reality for such a long time. It is shocking how without any relevant systemic changes and resolution of issues from 2007 economic crisis the central banks were able to create the smokescreen of sustainability.

They were able to persuade the majority of the public that one does not need to be productive. We just need to print some more money and prop the markets here and there without consequences and so problems will magically go away. And why not to also double down on the most negative trends that got us into the 2007 economic crisis. How insane is that?

Unfortunately, I didn’t register the laws of nature changed so dramatically that suddenly we can live in a new paradigm of “Free lunch for everybody” for the foreseeable future.

Why the western world still believes we would not end up like Venezuela is beyond my comprehension. Yes, we have bigger guns, can impose sanctions and have major currencies ruling the other world for now. But what is really the difference between the trends in western economies and Venezuela?

Venezuela Inflation Rate 2017

I don't see much more wisdom in western politicians. There is no end in their insatiable need to support every seemingly good or bad idea, only for the purpose of gaining points for their preferred electorate and financiers of their campaigns. They seem to be living in the world with infinite resources and energy. They obviously do not serve people as a whole, but their own local or worldwide political agenda. One can’t spot a grain of humility in the political leaders of today. Media is full of diversion stories, made up stories for brainwashing and the truth is seen only by the accident.

The tragic part is that the majority of people I speak with in developed world have obviously suffered some amnesia or never really spotted that the financial markets are facing an avalanche of problems. Past economic depressions would seem like a nice vacation if history is any guidance for the next few years considering the current state of economic affairs. And I am starting to believe that even my outlook would seem as very optimistic in retrospect when we suddenly enter the cleansing period in financial markets. The are no parallels to the current levels of ignorance.

If you do not believe me, try to ponder next 52 questions and try to find your answers. In the end, it may save you a lot of hard-earned money, pension, secure your family future or at least help you stay sane when others would be discussing how could they all be so blinded by the false promises of central banks printing press.

Central Banks

What if the stock market is in full collapse at a time when central banks decide to unload their balance sheet holdings?

Central Banks Balance Sheet 2017

Central Banks Balance Sheet 2017

Why do central banks need to continue buying bonds and stocks when the economy is in recovery? The simple answer is there is no recovery and never was any recovery. There was only the pumping of newly printed money into the markets and making algorithmic trading systems, all other big banks and funds follow their money flows. How can anyone sane talk about any market economies when central banks put at least 10 trillion dollars into the markets in just 10 year period? Did someone explain to people what does it mean for the future value of their currency and savings?

If bonds are really such a trustworthy investment why is there not enough investors lining up for buying government bonds? What would the interest rates look like when people stop believing that governments can continue to finance their enormous programs with printing more money?

Today most of the people that really understood the insanity of these policies got crushed and burned with the market development since 2009. Most of them closed their funds, are closing them or are for the laugh of the others who just went with the central bank flows.

The funny part is that market is today eagerly awaiting central banks to at least start talking about stopping this harmful practice. We cheer them when they only suggest possible changes in stopping the balance sheet expansion. The speeches of central bankers are symphonies of euphemism as every single sign of change in direction can uncover the fragility of belief in their ability to manage this mess. How insane is that? Why are central banks so influential and everyone positions according to their words in a free market economy? Free market economy is one imaginary concept not seen in the western world for the past few decades.

BOJ Asset Holdings 2017, Source: Zerohedge

And let the above chart sink in for a while. The BOJ now owns 75% of Japanese ETFs. The Swiss National Bank is now a hedge fund owning $85 billion of US stocks. The ECB is funding M&A deals at zero yields.

How can anyone be talking about the market economy in any major developed country? It was a casino before, but today even the casino owners would be surprised by the skill of governments and central banks.

Or should we all now start to invest in The Swiss National Bank? Price of their shares is up 11 days in a row, soaring 150% in the last two months. Where is the discussion about the risks involved? Is there any clear exit strategy and timeline for putting these assets out of central bank balance sheets? Will the productive economy end up being owned by governments in full as the time goes by? Is sky the limit?

Swiss National Bank Stock Price, Source: Zerohedge

People should be in streets asking questions: How could this be done without any public vote? Washing away the purchasing power of all major currencies and distorting the valuations of all financial assets. Do any of you believe this can be done without dire consequences? Why do we then go to work every day? Why don’t we just print more money every single day and give them for free?

Stock, Bonds, Central Bank Balance Sheet Correlation 2017, Source: Zerohedge

Interest rates and debt load

Why is it for the first time in 5000 years that interest rates would need to go to almost zero in a functioning economy? How can one think that this trend will not create enormous asset bubbles, destroy motivation to save and destroy productive capital? 

With the information revolution, one would expect the wisdom and understanding would grow in general population. It looks we are more financially illiterate and naïve than all previous generations combined.

Interest Rates Historical Chart 3000 BC - 2017

How is it possible that there is no one in power in any major developed country shouting to stop the buildup of unimaginable levels of debt? I believe there is zero probability of the debt being paid in the future and every central banker and sane politician must know this. They will never tell you the truth as the show will end immediately.

The Institute of International Finance published at the end of June that total nominal global debt had risen to a new all-time high of $217 trillion, or 327% of global GDP… Do you really think that this can go on further? For how long?

Total Global Debt 2002-2017

Who will pay for this when the middle class was destroyed and the gap between the poor and rich goes wider every year? Where will the growth needed for debt repayment come from?

And emerging markets won’t help us with the growth as they are buried in debt too. Who should then be the savior of growth that will help repay this pile of debt? No relevant big player is debt free and can grow fast enough to offset this problem even partially.

It now appears that contrary to the previous speculation of potential deleveraging among EM nations, not only was this conclusion incorrect, but that developed nations had been stealthily piling on just as much debt, only largely hidden from the public eye, in the form of swaps and forwards.

The publicly known debt numbers are still looking very good considering the recent revelation from BIS who found some 13–14 trillion of missing debt...

The BIS calculates that according to its estimates of “on-balance sheet” dollar debt equivalents of non-banks outside the United States, such cash market obligations, both bank loans and bonds, totalled $10.7 trillion at end-March 2017. The BIS then calculates the corresponding additional debt borrowed through the FX derivatives markets, i.e. “off balance sheet”: it finds the answer to be in a similar magnitude: “the missing debt amounts to some $13–14 trillion.”

 

This is a major problem for the regulator of global central banks which admits that this attempt to mask exposure, “greatly complicates any assessment of the missing debt’s total amount and distribution, and hence of its implications for financial stability.” While the BIS concedes that much more analysis will be necessary before making definitive policy recommendations, the implicit message is that the next time a USD funding crisis strikes, in addition to the trillions in dollar exposure already known, the world will be faced with a USD shortfall potentially as great as $14 trillion. All that would be needed is a sharp repricing in the US dollar, which in turn would likely be catalyzed by another financial crisis. The result would be another central bank fire-drill, in which the Fed will have to double down on its emergency global bailout last observed in the days after the Lehman failure.

So if history provides any guidance, periods with a higher number of crises/shocks coincide with higher levels of debt. And as the debts were never higher, we should expect the shock of the corresponding magnitude.

Government Debt Shocks Historical Chart

By continually using stimulus to deal with crises and not letting creative destruction take over, you make a subsequent crisis more likely by passing the problem along to some other part of the global financial system, and usually in bigger size. In a fiat currency world, intervention and money creation is the path of least resistance. In a Gold standard world, mining new gold was the only stable way of increasing the money supply.

 

We think this leaves the current global economy particularly prone to a cycle of booms, busts, heavy intervention, recovery and the cycle starting again. There is no natural point where a purge of the excesses is forced by a restriction on credit creation.

 

So we’re quite confident that there will likely be another financial crisis/shock pretty soon with their frequency continuing to be high until we create a more stable global financial framework.

Source: Deutsche Bank’s Jim Reid, the credit strategist unveiled an extensive analysis of the “Next Financial Crisis”.

 

Business Cycles

On top of this do you believe that the business cycles stopped existing? And what happens if you combine business cycle turnaround with an enormous pile of debt? How many business cycles of the past 2 decades were neutralized by central banks and government interventions?

I highly recommend this video explaining business cycles from Raol Pal. It is a needed excursion for anyone who believes this time is different.

What can be the future if not the total destruction of currencies with today’s policies? What is different in current economic context from currency collapse pretext in the past?

Do you believe central banks have the power to get away with today’s experiment? The following chart confirms that after the establishment of Federal Reserve, the frequency of financial markets boom and bust cycles have gone exponential. If it was a seismograph, we would all freak out. So I doubt that we can expect the situation to be resolved without the corresponding pain.

Financial Crisis Frequency Historical Chart

Yes, there will be some technological breakthroughs. As they were in the past. But I doubt that in the near future the technological improvement can offset this load of debt and monetary experiment. So the question arises.

Where will all this money or any future fiat substitute go searching for value, protection, and profit?

I believe that it will end up in hard assets and especially the precious metals market.

You are maybe asking why precious metals. Well, there won’t be many alternatives you can trust at that point in time.

Does stock market chart seem attractive to you? Look at Nasdaq. All other indexes look almost the same.

Portrait of a bubble from Jesse's Cafe Americain

And what about Price/Sales ratio and P/E ratio for S&P500?

S&P500 Price to Sales Ratio 2002-2017

S&P500 P/E Ratio 2012-2017

What about investing in the housing market?

Case Shiller National Home Price Index 1987 - 2017

Or bond market?

10-year treasury yields 1790 - 2017

10-year treasury yields 1790 - 2017

Or commodities excluding precious metals? Don’t you think that the credit downturn and business cycle turnaround would have no impact on purely industrial demand? If so, wouldn’t precious metals as a form of money outperform other commodities in times of economic depression even though they may profit from currency devaluation?

Maybe you are thinking that Bitcoin will be the alternative. It may go to $1 million, but how many common people would enter into this exponential rise? Do you expect masses to adopt Bitcoin in the chaos of market crash? Most of the people have trouble opening browser window and we expect them to understand Bitcoin? The concept of cryptos is hard to grasp even for the people with higher IQ and the adoption rate is still is still in its infancy.

Bitcoin 2012-2017

Where else can the money flow? Gold and gold stocks.

Precious Metals

Gold was true money for millennia and gold is money today. The power structure of the global financial system is still based on gold. Why would they otherwise hold gold as reserves? If it was of no future value, they would sell it immediately.

Why would China and Russia rush to pile as much gold as possible in recent years? You make not like these two countries but they for sure are not stupid.

Chinese Estimated Gold Reserves 1994-2017

Russian Gold Reserves 2006-2017

Furthermore, the fastest growing economies like China and India are extremely gold-oriented societies. They understand the role of gold and will be ready to invest more when the fiat currencies fail them. The understanding of gold investment is easy even for the common guy.

So how does the gold market look like in charts?

Gold Breaks 6 Year Downtrend 2001-2017

Volume is picking up.

Gold Comex Volume 2009-2017

Where are we in the commodities market cycle?

GSCI/S&P500 Ratio

How big is the market capitalization of gold stocks? Unbelievably small.

Gold Mining Market Capitalisation

Right now, it’s estimated that 1.4% of the world’s financial assets are allocated to gold and gold stocks. This laughably small percentage shows the world doesn’t care much about gold right now. But just a modest increase in this allocation percentage would hugely influence gold stock prices (some money would go into physical gold and gold ETFs, but a lot would flow into gold stocks as well).

Source: Marin Katusa

Do you still have doubts that gold is the right answer for the next 3–5 years?

PS: feel free to repost this blog with proper attribution and linking back to source.
Goldbugs should be in love with Bitcoin

Goldbugs should be in love with Bitcoin

TA, Debt, De-Dollarization And Bitcoin — Gold Market News And Charts Week 37

TA, Debt, De-Dollarization And Bitcoin — Gold Market News And Charts Week 37