Is This A Gold Shakeout Before A Breakout?
Whenever I see spikes up or down, I review the fundamentals to assess if they have changed. The big spike up in the US dollar (USD) and spike down for gold are happening due to the landslide election win for Trump.
The USD is trading on Trump’s comments about strengthening the USD, while gold is being sold on the belief that Trump is the saviour for the USD which won’t be good for gold. The USD spike actually started before the election as the momentum was building for a Trump win. The shakeout in gold has been since election day.
One thing that I have noticed during decades of watching the markets is spikes never last long. They are emotional moves that aren’t based on fundamentals, in a spike down it is panic induced and during a spike up it is euphoric in nature. Panic and euphoria trades change direction quickly.
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Spotlight On A Top Pick
Dryden Gold put out news this morning that they hit 32.96 g/t gold over 2.73 metres. This is the deepest hole Dryden Gold has drilled and is showing that their orogenic gold system is coming together as they test deeper into the gold system.
Dryden Gold holds a 70k hectare land package just outside the town of Dryden, Ontario. Dryden, Ontario has all the same geological characteristics as nearby Red Lake, Ontario. Red Lake is one of the most famous gold mining camps in Canada known for its extremely high-grade gold deposits. They were found and mined with low-costs and high-grade gold which made for exceptional free cash flow.
What makes orogenic gold systems so impressive is that they have very deep roots that go down for several thousands of metres and get higher grade as they get closer to the heat engine source of the gold systems.
I’m very encouraged to see Dryden Gold going after the depth potential at their project and rewarded with high-grade gold intersections. Their orogenic gold system is coming together beautifully as they drill deeper into the system.
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The Trump victory parade has been very good for the USD and Wall Street stocks while Bitcoin is on fire.
Wall Street stock prices are trading at euphoric levels while earnings are challenged. Valuations based on price to earnings ratios are at the highest levels based on historical trends. They are priced for perfection to the point that Warren Buffett is selling stocks and building his cash to the highest level he has ever reached. He is not a fan of cash because he is well aware of its constant destruction of purchasing power. He isn’t even able to buy his own stock Berkshire Hathaway because it is also trading at a premium valuation.
The Wall Street stocks are trading on extreme momentum that has them at very risky valuations. Either the stock prices need to drop or earnings need to get much stronger to bring valuations down to reasonable levels. Voters just gave Trump a resounding victory because they aren’t happy with the economy which certainly doesn’t suggest that earnings are primed to fly higher.
Bitcoin is trading like a Dotcom stock just before the Dotbomb happened. Famous mining tycoon Frank Giustra has described Bitcoin as an asset looking for a purpose. Its only purpose is as a trading vehicle that depends on new buyers driving up the price. If that sounds like a Ponzi scheme to you, it sure does to me as well. It recently hit a new record high that is wonderful for those that bought low and are taking profits but not so great for those buying high.
Trump is believed to be very bullish for the USD, but his plans aren’t about strengthening the USD and all about punishing other countries that don’t fall in line to keep the USD as the world reserve currency.
Dictating that the USD must keep its position as the world reserve currency is not a great building block of strength. It may appease the masses, but when the strongest argument that USD bulls have is that it is the least dirty shirt in a pile of dirty shirts does not make for a compelling bullish argument. Nobody is forced to buy dirty shirts.
Since America abandoned the Gold Standard, the USD has consistently destroyed purchasing power. Even in the past couple of years inflation has lopped another 20% plus off its purchasing power. Which is another reason that voters lined up to fire Biden-Harris and also give the GOP control of the House and Senate. They feel the pain of inflation every time they buy stuff and aren’t fooled by the government statistics on inflation that exclude key products they buy every day.
After the election, Trump’s appointments have been more about feeding the MAGA wing of his party. Not really about making the economy stronger to help voters feel stronger about their jobs prospects and the economy. Really there is nothing in his early appointments and plans about dealing with the debt gorilla in the room.
To fix the Death Spiral of Debt, will require slashing spending and increasing taxes. But, those aren’t going to make voters any happier than they were about the economy when they arrived on election day to give Trump and the GOP a resounding victory.
One of his key economic platforms was that he would reduce taxes (as usual, in a way that will be most beneficial to the rich, not the average voter) and crank up tariffs. It is astonishing how many people believe that tariffs are paid for by foreign companies that import the goods that consumers want. Sure they are initially, but those costs are passed on to the consumer which inflates the prices of what consumers buy.
Inflation is already a massive problem that will only get worse with tariffs. What caused the runaway inflation in the first place was the spending addiction of Obama, Trump and Biden. Made possible by the accommodative Fed that kept interest rates too low for much too long.
Now the Fed is between a rock and a hard place. The Death Spiral of Debt has caused debt to be so unsustainable that the cost of servicing the debt is the straw that will break the debt camel’s back. Compounding interest is wonderful when you receive it, not so much when you are on the paying end.
The Fed is trying to pitch the Goldilocks economy narrative, but voters just said that the economy isn’t just fine. When asked at the Fed press conference last week about the message that the voters sent about the economy, Powell had no comment. Which effectively was a message that he doesn’t care and is going to do it his way or the highway.
Voters need relief on interest rates, instead of throwing them a bone with another half-point cut and suggesting more of them were coming, they went with a meaningless quarter-point cut. Pretty much thumbing the Fed’s nose at voters.
Signs that he was called by the Trump team with instructions to aggressively cut rates and keep cutting in that fashion until further notice, were readily apparent during the press conference. When Powell was asked if he planned to step down, or if he would resign if asked, or could Trump oust him, he gave terse minimal answers. He was not a happy camper because he and his cohorts at the Fed likely got an earful from the Trump team after the election.
Trump certainly doesn’t want to have to deal with a stagnant economic growth or a hard landing early in his term in office.
So what’s a poor Fed chairman to do? The debt level is unsustainable and Trump has already shown that he loves big deficits and he can not lie. He won’t slash spending, sorry Elon, and instead will increase spending. With growing debt and interest rates where they are, the cost of servicing the debt is on its way to $2 trillion in 2025 and only getting worse after 2025.
Meanwhile, the voters just showed up on election day to say they don’t believe his Goldilocks economy story because they live in the real economy, not the one portrayed by the highly manipulated government statistics.
The Fed has already started a rate cutting cycle and the bond vigilantes aren’t helping the cause as they have gone on a buyer’s strike. Which means that if the Fed wants to stay on their rate cutting cycle they will have to increase their balance sheet to get the bond yields in line with their plans. QE and Goldilocks aren’t on the same page.
Voters are saying that the Goldilocks economy narrative is bull excrement, and the bond vigilantes are saying that inflation is scary. A stagnating economy, with inflation too damn high, equals stagflation. Whether or not Powell sees stag or flation.
The last time America went through stagflation was extremely bullish for gold. But what makes things different now from the 1970s is the Death Spiral of Debt and cost of servicing the debt, which is also bullish for gold as it is causing a return to the Gold Standard.
The Death Spiral of Debt is only going to get worse and the only way to combat it is a return to the Gold Standard or default on the debt.
Central bankers in the BRICS nations are already returning to the Gold Standard. Sorry, Bitcoin bulls, they aren’t interested in a Bitcoin Standard. They are loading up on gold to the point that gold is now the second highest reserve currency, with the USD in its crosshairs. Gold is the soundest money and should be the highest reserve currency to combat long-term debt growth and destruction of purchasing power of every fiat currency.
The healthiest economic situation for the American and global economy is a return to the Gold Standard as it would force fiscal discipline on politicians and take power away from the Fed and other central bankers to enable politicians.
I’ve even heard marquee gold bulls say they own gold as an insurance policy against economic calamity. They say that they don’t want their insurance policy to pay off in a big way with gold higher by multiples of its current price. I wholeheartedly disagree with this outlook.
For much too long the world, led by America, has been built on debt and devaluation of fiat currencies. The central bankers of the world would be much better off backing up the debt with gold in a significant way. It is still much too low relative to the debt. Plus, gold is the soundest money and a much better currency for international trade than fiat currencies that aren’t really worth the paper they are printed on.
Long live the Gold Standard coming to theatres near you throughout the world.
All the best,
Allan Barry Laboucan
