Gold Is In The Earliest Days Of A Bull Market As World Moves Back To The Gold Standard Due To The Death Spiral Of Debt
As time goes by and we look back, the Fed’s meeting at Jackson Hole in the summer of 2024 will prove to be a seminal moment. Until then, the Fed was hawkish and professing that they were being diligent concerning inflation.
All of a sudden they declared victory over inflation and signalled that they would be cutting rates at the September meeting.
Their narrative was that the jobs market and economy was strong. That inflation was above their arbitrary 2% level and that they would stay higher for longer. While monitoring the dot plots to decide when they would change course on interest rates.
Then they got spooked when the BLS dramatically revised the jobs number just before the Jackson Hole conference by slashing over 800k jobs from their previous reports. Well before the revision I had reported in several reports that the trends in declining full-time jobs and increasing part-time jobs was alarming.
After the 800k revision, the BLS had to revise more months down from previous reports prior to the Fed meeting in September. I still believe the BLS has not come completely clean on their previous reports over the past year and a half.
I’m not the only one, even Chairman Powell said that they believe the BLS numbers are artificial, which is a nice way of saying they have been heavily manipulated. Surprisingly, he also said that they are adjusting the jobs numbers being reported in their thinking because they don’t believe them.
The level of manipulation took away their dot plots to stay higher for longer. Which caused them to declare victory over inflation and cut rates at the September meeting by a half-point.
Although they admitted that for several months they were relying on inflated jobs numbers, Powell couldn’t help himself from changing the smoke and mirrors story. After cutting by a half-point, that until very close to the meeting the consensus was that they would cut by a quarter-point, he switched the narrative to the Goldilocks pitch.
Saying that despite cutting by a half-point the jobs market and economy are just right.
It didn’t take more than a number of hours before gold figured out that something is not adding up. If the jobs market and economy are a Goldilocks story, why did they need to cut by a half-point? The answer is that the Goldilocks story has holes in it.
The Fed as usual is behind the curve and although they didn’t say it, they are worried that they may have dithered into losing the chance to orchestrate a soft landing and increased the odds of a hard landing.
Now, I expect that the market participants are going to transition from looking at the economic reports for signals about when the Fed will start cutting to how many meetings will they cut a half-point. Then how long will the rate cutting cycle continue and ultimately are they going back to the Free Money Era.
My sense is that the trends are deteriorating in the jobs market and economy much faster than the Fed is letting on. Actions speak much louder than words and the fact that they went with a half-point cut suggests that they believe that a hard landing is on the table. Making matters worse for them is if the economy does enter a recession while inflation stays around their goal of 2% means that the economy will be in stagflation.
A few months ago, concerns about stagflation started to increase and Powell said he doesn’t see “stag or flation.” This reminded me of their comments that inflation was transitory. It is shocking how the BLS can get their numbers so wrong and that the Fed can also mischaracterize things like inflation being transitory.
But, here they are once again getting things wrong by trying to sell the Goldilocks story. While the jobs market is in trouble, which undoubtedly means the economy is as well, a hard landing is possible and stagflation is on the table.
The Fed likes to point to their dual mandate of price stability and maximizing employment, but the numbers are showing them that they were behind the curve on both inflation and the jobs market.
I expect to see more statistics coming out that will suggest they are going to have to stick with at least a few half-point cuts and then a series of quarter-point cuts. Market participants will be watching closely for signals of what the Fed will do at their next two meetings.
I’m not ready to make the argument that a soft landing is not possible, but it is becoming less likely. Based on the trends in the jobs market, and by extension the economy, economic growth could fall below the inflation rate. And that the Fed is going to have to fight against a hard landing.
I know it will never happen, but it is time for the Fed to get real with people. They helped cause the inflation which they felt was transitory. They were behind the curve then and they are again now when it comes to the jobs market and the economy. Their actions are increasing the odds of a hard landing just when the next president will take office.
Making the Fed’s job even more challenging is that the next president will be a massive spender. The national debt is over $35 trillion and compounding the problem are the demographics that put the unfunded liabilities on an unsustainable path.
A responsible president would dramatically cut spending, neither candidate even recognizes the debt crisis, undoubtedly the next president will ramp up spending. Especially when they have to contend with the costs of servicing the debt that is now consuming a huge portion of the income from taxes.
I firmly believe that the next president will increase the deficits to over $3 trillion per year throughout their four-year term. Which will drive the debt to $50 trillion by the end of the next president’s four year term, many years before the Congressional Budget Office suggests it will hit that level.
The Fed and politicians don’t even recognize that debt has gone past the tipping point into the Death Spiral of Debt.
The scale is now leaning to only two realistic solutions, one is to default on the debt and restructure the entire economic system, the second is to return to the Gold Standard. Either solution means gold wins and I hope that more people see through the smoke and mirrors and put themselves on their own personal Gold Standard.
I’m encouraged that central bankers in the BRICS nations and citizens in those nations are seeing the writing on the wall and buying and hoarding gold. Equally encouraging is that folks in the West are also joining the gold bull market to use gold to store their wealth and protect against inflation.
As always, the direction in the US dollar has an influence on the movement in gold and currently the US dollar is trading like it is looking for a reason to drop. Since the Fed cut rates, it looks to be on a cliff ready to resume the bearish action that started a few months ago in anticipation of the Fed going into a rate cutting cycle.
Bitcoin looks particularly susceptible to a steep correction. It had its bounce due to the ETFs and when it starts dropping it will be on the elevator down. The trading in Bitcoin reminds me a lot of the Dot-com stocks just before that bubble burst.
Bitcoin has taken some speculative money out of the gold market due to it being promoted as digital gold. When it really is a digital Ponzi scheme. When the cryptocurrency bubble bursts it will be beneficial to gold in much the same way as the Dot-bomb period was.
Wall Street stocks have stretched valuations to historically high levels, owning the high multiple stocks looks very risky. I don’t think that there will be a big stock market correction because the Fed will not forget their unspoken third mandate which is to protect Wall Street from too much pain.
I do think that high multiple stocks could see bearish action and investors would be better served to be owning stocks with more reasonable multiples. I definitely see rolling corrections ahead.
If investors are looking for stocks with cheap valuations that are making a ton of money, the well run gold miners are ideal candidates. Some are growing their free cash flow in ways that are hard to find in any sector.
As gold goes much higher, some of the gold miners, like Agnico Eagle and Alamos Gold will be big winners. They are already producing record free cash flow and higher gold goes the profits will go directly to their bottom lines as they produce gold for well under the average cost of production amongst their peers.
Generalist investors that look at the performance of the best gold miners in their bullish stock action and with their free cash flow, are going to be impressed and their buying will build up momentum for gold stocks as gold goes higher.
The fund flows into the gold related ETFs are picking up momentum as a shift has been happening in the West lately. There has been an impressive transition from funds flowing out of the gold ETFs that has reversed and is flowing in of late in a strong way. Western investors are starting to get gold’s remarkable bullish story.
In Closing
As is often the case, smart money sees the changes in trends first. Wealthy investors in the West have been positioning themselves in gold and major gold miners for a significant amount of time.
They saw the writing on the wall that the central bankers in the BRICS nations are selling their US debt and US dollars to buy gold. There is a currency war going on that few financial media talking heads have recognized. Retail investors in China and India see these bullish trends for gold.
I’m very happy to see generalist investors in the West waking up to the bullish scenario for gold and gold stocks. It will help them to put themselves on sounder financial footing. They won’t do that by owning high valuation Wall Street stocks or insanely priced Bitcoin. Gold and high-quality gold stocks are the best path to prosperity.
The long-term fundamental reason to be bullish on gold is the world economy is transitioning, from being built on debt and fiat currencies that constantly destroy purchasing power to a golden era.
With the US in a Death Spiral of Debt, and many other countries in the midst of debt issues of their own, the inevitable conclusion is revival of the Gold Standard that is just getting started.
There has never been a more perfect storm for a magical era for gold and gold stocks. The last great gold bull market was from 2001 to 2011. The current one will last much longer and be more powerful and make the last gold bull market look like a warm up act.
Please see my report from yesterday to find my current list of top gold stock picks.
All the best,
Allan Barry Laboucan
Disclosure
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