Rocks And Stocks News Makes A Case For Central Bankers To Return To Somewhat Of A Gold Standard And Build Strategic Reserves Of Metals
The global economy is at a crossroads.
When sentiment for a sector is brutal, like we are seeing in mining from the largest miners, through the developers and down to the explorers, the drivers of growth are the most ignored.
The speculators in any market tend to most ignore the fundamentals precisely when they should pay attention. For the miners, they are relying on old mines and squeezing every last penny they can out of them. They have been seeing head grades at their mines dropping for many years, they are not replacing their reserves remotely close to what they are mining each year, and due to bad buyouts in the 2001 to 2011 bull market for metals their reserves are in bad shape.
Gold is at nearly all time highs, yet the miners can’t increase their production which flies in the face of supply and demand taught in Economics 101. Gold is not the only metal following this path, the same can be said for silver, copper and other metals.
The metals mining sector needs to pay attention to replacing what they mine or production will keep declining. No matter how high the prices of metals go. They can’t just turn on production with some magic switch. First they have to be found, economically evaluated, permitted and then built which take a lot of time and money.
Next in the food chain are the developers. When looking at the pipeline of projects moving toward being built, for many metals there just aren’t enough to replace the old mines being mined out. This is another important argument for the price of metals to go much higher.
Copper is the most critical of the metals. To make electrical products and get the energy to those products requires copper. If you look at the big demand drivers, such as for alternative energy sources, electric vehicles, rewiring the aging electrical power grids in developed economies, or to build the infrastructure for developing economies, more copper is needed. Much more than the tired old mines can produce, or what is in the pipeline being developed.
Furthest down the mining food chain are the explorers. The long term supply chain story gets even worse when it comes to explorers. Not nearly enough has been spent on exploration going back for decades. Yes, there was an improvement in money spent on exploration in the metals bull market from 2001 to 2011. But, a lot of the low hanging fruit was well picked in the past, finding huge mines that came to the surface. Those days have been over for a long time.
Now the explorers have to throw a lot of science at projects and go deeper to find mines at a pace to get more projects in the development phase and ultimately replace what is being mined out every year. Exploration is hard, and crucial.
In a world that will throw huge amounts of money into tech startups that are often just new ways to send pictures and videos, or socialize, the copper explorers and developers are not properly supported. The cruel joke is to make the tech world work, the whole world for that matter, we absolutely need copper.
We are facing a very real supply crunch in copper within the next few years, maybe that can be stretched out a little longer but it is inevitable. I would argue that the most important parts of the supply chain are developers and explorers, yet they are being treated for the most part like the runt of the litter. They aren’t getting fed enough and getting enough attention to support them to get stronger.
Gold has a similar supply and demand story as copper. There are fundamental crises built into the global economy. Since the 1980s, the developed and developing economies of the world have been built on ever increasing amounts of debt.
It is not a coincidence that this trend started not long after they went off the Gold Standard, which forced central banks and politicians to have some restraint. Taking the world off the gold standard allowed them to pile on debt and crank up their currency printing presses like never before.
This ultimately led to the 2008 economic collapse. Take a wild guess how the braindead trusts in politics and central banks decided to battle this collapse. You guessed it by piling on more debt, and printing more currencies, like drunken sailors. The Fed and other central bankers world wide brought interest rates down to near zero and kept it that way until 2022. This prolonged free money era caused malinvestment and an explosion in debt.
After the prolonged period of free money, inflation started to show up, who could have guessed that would happen. Certainly not the army of economists at the Fed, who initially thought it was transitory. Like putting their collective heads in the sand would make it go away. Of course it didn't, it only got worse.
Like an alcoholic that doesn’t make the first step to recovery by acknowledging they have a problem, the Fed has never taken credit for causing the problem. Which begs the question if you don’t recognize you caused the problem, how the hell can you fix it.
But try to fix it they did, by going from free money to jacking up interest rates relentlessly, thinking they are the second coming of Paul Volcker. This time was very different. Back when Volcker was in charge the debt to GDP ratio was very mild compared to where it is now, well over 100% and on its way to over 200%. This is not sustainable and can’t be stopped.
The US is in a death spiral of debt. By jacking up interest rates so fast after the free money era, they have now caused the debt payments on the national debt to pass $1 trillion. Meanwhile the politicians on both sides of the aisle love to spend money and are going to run a two trillion dollar deficit this year. Maybe the death spiral could slow down a bit if the politicians could cut spending. The chances of that happening are zero. One of the only things politicians on both sides can agree on is spending, they consistently support raising the debt ceiling year after year.
When the Fed jacked up interest rates, it put the USD into overdrive as large international investors wanting to take advantage of the higher interest rates first needed to buy USD to then buy US debt. The key sentiment driver for gold and other metals is what they are doing in USD terms. Those prices are the most watched by investors in metals and metals stocks and with them under pressure the sentiment grew poor that led to the current level of brutal.
Something that shouldn’t happen when the USD is strong, did, after the summer of 2022, gold bottomed at a little over $1600. Since then it moved up aggressively reaching over $2000 in a few short months. During much of this year it has been going sideways in a fairly tight trading range as it attempted on several occasions to bust through $2000.
But the sentiment for the gold stocks has only got worse. The gold stocks are suggesting that gold is going to go into a steep correction, even though demand is strong and supply is weak for the reasons mentioned earlier when discussing the supply chain of copper.
Where is all the demand coming from? What fueled the gold bull market from 2001 to 2011 was gold buying from India and China. They have never stopped buying as they value gold highly as an important place to hold their wealth. After the 2008 economic collapse, many central banks joined the gold party. They have been on a buying spree ever since, with 2022 being a record year for this trend and 2023 on a path to beat 2022.
Wealthy investors have also bought gold as have retail investors. The retail investors are putting so much pressure on gold coins that sometimes the big mints can’t make enough to feed the demand. Even Walmart has gotten into selling gold and when they put it on sale, it is often sold out within a couple of hours.
The central bankers in many countries are buying gold hand over fist because they see the writing on the wall from the actions of the politicians in the world’s largest economy and the Fed. You don’t have to be an esteemed economist to recognize it is unsustainable to keep piling on debt and printing USD like it is going out of style.
Many of the central bankers buying gold are the countries in the BRICS network. They want to have less US debt and USD in their reserves and more gold. They also want an alternative to the USD as the world reserve currency and the currency that dominates world trade.
Just before Nixon took the US off the Gold Standard, then Treasury Secretary John Connally said, “The dollar is our currency, but it's your problem.” It took a long time for central bankers of the world to take this to heart and want to do something about it, but the BRICS nations seem to think now is the time.
A lot has been made of what their actions will be, with the leading speculation being that they want to create a new world reserve currency. I believe that is a longer term goal and at some time in the future it will likely be the Chinese currency or a BRICS currency. The short term goal that is much less talked about is that they want alternatives to the USD dominating global trade.
The actions to make that happen are already underway. The Saudis which in the past did their oil trades in USD, are now starting to trade their oil in other currencies. Other oil producing countries will likely do the same.
Many BRICS nations are forming trade alliances to trade using their domestic currencies. They seem tired of being pushed around by the dominance of the USD in world trade. The US politicians and the Fed are doing a lot of things to make the USD their currency and their problem, not other countries' problem.
Many countries have similar problems as the US, politicians that spend way too much and central bankers that follow the Fed on interest rates. So their currencies are not a great alternative to be used for global trade. Gold could be an excellent alternative for global trade. It is at all time highs against almost every currency world wide, and is within 10% of all time highs in USD terms.
World reserve currencies have come and gone many times over history, but gold has been a store of value for thousands of years. I’ve said many times in past reports that economics has a way of fixing stupid.
It was stupid for the US to go off the Gold Standard, as it forced politicians and the Fed to have some discipline in how they spent money and printed cash. Not long after the US went off the Gold Standard, they consistently devalued the purchasing power of the USD and not long after went from the biggest lender to the biggest borrower.
Economics will change this stupid move. It is already happening in real time. Many central bankers are reducing their reserves of USD and US debt and replacing it at a rapidly growing pace with gold. Economics are forcing them to return to somewhat of a Gold Standard. The Dutch Central Bank openly said they are going in that direction.
I wouldn’t stop at gold, I think silver could play an increasing role. I also think it is time for central bankers to consider building up reserves of other metals. At a minimum to have enough to meet their domestic needs.
The global economy is at a crossroads. The Fed and the American politicians have made terrible mistakes of spending too much before the free money era, during it and after it.
The US economy, as well as the economies of many countries, has been built for much too long on debt with no shackles on the politicians or the Fed. The debt caused the US led global collapse in 2008. The remedy to go to a free money era only made the debt problem worse.
Now the US has a debt to GDP ratio around 120% and the politicians spending and interest rates have made a death spiral of debt that will cause it to go much higher. This will also drive the debt payments on the national debt way past its current $1 trillion.
Politicians are unwilling to slow down spending with this year’s deficit to exceed $2 trillion and growth in the deficit will keep getting worse like it always does. As politicians regularly make a mockery of the debt ceiling year after year.
Consumers always pay the price for the stupidity of politicians and central bankers. They haven’t seen a wage increase in several decades. The farce of the labor statistics are evident when you look at the average hourly work week. The labor market is far from as strong as the government statistics suggest, workers are having to take on second and sometimes third low paying jobs.
The two biggest ticket items are their homes and cars. The housing market is on shaky ground as can be seen in the dramatic drop in housing sales. Those that didn’t lock in mortgages during the free money era have big problems when they have to get new mortgages. Delinquencies on car loans are at an alarming level. To make matters worse, many need to use their credit cards to make ends meet while paying over 20% interest on them.
The commercial real estate market is even worse because during the Covid epidemic, many workers realized they didn’t need to spend so much time in their cars commuting to work in an office. So vacancies are at extreme levels. The commercial real estate owners are highly leveraged with debt that will be rolling over. They will have to go to their lenders to replace their free money era debt with current levels of debt and high vacancy rates.
The regional banks that lend them money can’t lend them money because they are such a credit risk. Plus, many banks are in reality insolvent. They also loaded up their balance sheets with free money era debt, to an extreme level. Earlier this year, we saw a group of banks have bank runs when their depositors realized that the banks they had their money in had iffy balance sheets. When they withdrew their money en masse the banks had to sell their free money era debt and found they didn’t have enough to cover the withdrawals and went out of business.
Many banks have been able to keep their house of cards from falling into insolvency by not being forced into marking to market their assets, and passing less than realistically stressful stress tests. When the banks that went out of business had to trade their assets they showed they weren’t able to handle that stress. They aren’t the only insolvent banks holding too much free money era debt on their balance sheets that can’t cover the deposits if there is a bank run.
There are plenty of other institutions holding a lot of free money era debt. The Fed being the largest holder. For many years after the economic crisis the Fed was not only the buyer of last resort but sometimes the only buyer.
To show that they are serious about inflation, no that isn’t a joke, they are trying to sell some of their debt. China is doing the same, and other countries are in that boat. Which brings up the question: if all these big holders of debt are selling, who can buy it all and who is going to buy the new debt being issued? The answer is that it won’t be long before the buyer of last resort will be the only buyer again.
To put even more strain on the US is they have to help fund two wars, the one between Russia and Ukraine. The other is the one between Israel and Palestine that could start to bring in more Arab countries. Gold has gone up recently since the war between Israel and Palestine started and many are calling it a war premium. I think it is bringing into focus for more investors the debt problem that the US has, that will only get worse when they have to help fund two wars.
The Fed has to stop raising rates, which looks to be the case in their last meeting. They call the peak rate their terminal rate. The patient is very sick. Next they will have to lower rates back toward the free money levels to keep the house of cards from crumbling down.
When the currency traders start seeing that the Fed is done with raising rates and a lot closer to lowering rates than many think it will put a lot of pressure on the USD. This will drive gold, silver, copper and other metals much higher in USD terms. Which will result in the sentiment for gold stocks and other metals stocks to improve from the current brutal level.
This current depression in the sentiment toward mining stocks reminds me of the magical period prior to the 2001 to 2011 metals bull market. Few believed back then that we are on the cusp of a decade long bull market. The sentiment was equally as brutal as it is now.
It was a painful time, I remember it well having gone through it. Now is no different. A few years later when we looked through the rear view mirror with the clarity of hindsight we saw it was a magical time to snap up assets at depressed prices. We are now at the depressing price level that has been hammered down to an extremely low base.
The TSX Venture board (a good proxy for the exploration stocks) in addition to being at a low base, has seen the volumes dry up over several months. When looking at trends, bullish or bearish, I always pay close attention to the volume. When it dries up at the top it means the bulls are finished buying at the highs. The opposite is true on the lows, it means those that have wanted to sell at the lows are done. Which signals a turn is coming.
The gold price is suggesting that it will go through the all time highs and that breakout could lead to a lot of blue sky action. Gold stocks are suggesting gold is going much lower. The reason I think gold is correct are the many reasons I mentioned earlier. The key reason I think gold stocks are wrong is because as a group they seem to be trading with horrible sentiment that is detached from the gold price.
Gold offers investors that want to protect their wealth a safe parking spot that won’t be ravaged by the lowering of purchasing power of currencies, including the USD. For investors that want to grow their investments, gold stocks offer the potential when focused on quality to have returns that come from a low base and enter a more bullish trend.
All the best,
Allan Barry Laboucan
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