Gold Is Good For Protecting Wealth And Gold Stocks Are A Good Place To Be Looking For Growth
The headline is that gold is getting a war premium, as is often the case, there is more to the story beyond the headline.
Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”
When the war between Palestine and Israel got underway, gold blasted off and the headline was that it is a war premium. But, what I really think it has brought into focus is that the US has a huge debt problem, funding that war and the one between Russia and Ukraine is going to be extremely expensive. The bottom line is the US can’t afford it.
The US is running two trillion dollar deficits per year for the foreseeable future. With the aggressive rate hikes, the interest on the debt is over one trillion and growing at an alarming rate.
This is without a doubt a death spiral of debt. That has been caused by the Fed relentlessly raising interest rates. Something has to give because with two wars to fund, and a debt problem at the national level, for consumers and businesses, it is unsustainable.
Janet Yellen said that the country can afford two wars, which means it can’t. She and others can put on a brave face, but sooner or later, math will prevail. This isn’t complex economics, it is simple math.
If you build an economy and housing market on new zero interest rates for over a decade, then rapidly increase interest rates, things are going to break.
Credit card debt is at extreme levels as consumers are using them, while paying loan shark rates, to make ends meet. The housing market is feeling the strain, and commercial real estate is a ticking time bomb. The Fed and other institutions are sitting huge piles of debt they built up during the near zero rates and as they have to roll them over they have a big bill to pay.
Earlier this year, we saw regional banks fall under tough times and that problem has not gone away. Many banks are pretty much insolvent. Marking their assets to market isn’t the biggest problem they face. Trading them to market is a much bigger problem that could blast off at any time if depositors decide they want to withdraw their funds en masse.
Central bankers see these problems which is why they have been buying gold aggressively since 2008 and ramped things up in 2022 and this year. They see the writing on the wall and are showing their hand to investors worldwide. Their actions speak louder than words and they are saying they see the need to hold less US dollars and debt, while increasing their reserves in gold.
Investors can choose to ignore what the central bankers are showing them but it could be very painful to their wallets.
I strongly believe that the best parking spot for investors to safely keep their wealth is in gold and the best place to look for gains is in the unloved gold stocks.
I clipped the chart above from finviz.com and I can see some important points to highlight. Around this time last year, gold bottomed and has performed very well since. It is now trading well above its 50 and 200 day moving averages. During its last pullback it had a shallow death cross that was averted. Now it looks to be headed over the yearly high and on its way to new all time highs.
The next chart is a 3-year chart of the TSX Venture Exchange, which is a pretty good proxy for what is happening in exploration stocks. It topped at close to 1100 and is currently trading 520. The trading volume has dried up so it looks like we could see a change in direction. Shareholders of exploration stocks have to be getting exhausted from selling their shares at such depressed prices. It wouldn’t take much confidence for them to get stronger as they are coming from such a low base. Gold getting stronger, which I believe it will, is the catalyst.
Memo to the Fed and politicians, you may want to pay attention to Einstein’s quote.
The Fed has caused an inflation problem and now a death spiral of debt. The interest rates are unsustainable and not only will they have to stop raising interest rates, it won’t be long before they have to drop them dramatically.
This will put pressure on the US dollar and send gold into overdrive.
All the best,
Allan
As is always the case, I’m not giving investment advice, nor making buying and selling recommendations. That is up to you and your investment advisors to decide based on your own risk profile. My reports are for information purposes only. I highly recommend you do your homework and speak with your financial advisors before making any investment decisions.