For much too long, the global economy has been built on debt. One need not look beyond America for the ramifications of going off the Gold Standard in the 1970s. Under the Gold Standard, America was the largest global lender, now it’s the largest debtor.
The Gold Standard forced discipline on politicians and central bankers. Taking those shackles off, has caused an era of explosive debt, money printing and ravaged the purchasing power of the US dollar. Debt in America is around $34 trillion, the debt payment is over $1 trillion, higher than spending on the military. Annual deficits went past $1 trillion easily and now are $2 trillion and rising. The US and many other countries are in a death spiral of debt.
If you go on a debt fueled rampage for decades you get what happened in the 2008 global economic collapse. So what were the solutions brought to a theatre near you?
The FED brought in the Free Money Era, and the politicians loved it as they could add debt like never before. It doesn’t take a brilliant economist to understand this would cause runaway inflation. To fight the inflation they caused, they switched rapidly from the Free Money Era to make it very expensive. Most central bankers followed suit and we have a big global problem.
I rarely give central bankers credit for making smart moves, their basic problem is too many cooks in the kitchen who are beholden to politicians and the wealthy. In a remarkable move to accept reality, plenty of central bankers started buying gold after the 2008 economic collapse.
They haven’t stopped, in fact, 2022 was a record year in this trend and 2023 will be a new record.
They are having a coming to reality moment, realizing they need to go back to some version of a Gold Standard.
In addition to central bankers wanting more strategic reserves of gold, the Chinese and Indians just keep buying. Now we have gold trading at all time highs against practically every currency in the world.
The only holdout has been gold priced in US dollars and that milestone is on the verge of happening as well. We are seeing technical price levels being passed rapidly. At the end of November, last Thursday, gold had its first monthly close above $2000 in US dollar terms. The next day it had its highest ever daily close. On Sunday, when futures trading opened gold made new record highs.
Meanwhile, with gold doing so well against every currency, the gold stocks are trading at levels not seen since the years 1999 and 2000. Which was followed by the 2001 to 2011 gold bull market. A natural question to ask is why is gold trading so well, but the gold stocks are so depressed?
The answer can be found in understanding who has been buying gold. The leading buyers are China, India and central bankers. They don’t buy gold stocks.
For the most part, gold stocks are bought by Americans, Canadians and investors in other developed economies. They focus on what gold is doing in US dollar terms. The technical price levels being passed are a strong sign that gold in US dollar terms is entering a magical period, a Golden Era if you will.
Speculators that want to play momentum stocks found alternatives. Tech stocks, weed stocks, crypto stocks and lately AI stocks have given them the vehicles to chase momentum.
Over the past 25 years, there have been developments that are giving speculators new tools. One of those was the internet, another has been discount brokers. The average investor has changed dramatically. They no longer have to go to a full service broker paying high trading commissions.
They can do it themselves, trading stocks at very low transaction costs. They no longer need to go to their full service brokers to get a stock quote or to find news releases. Now they can find all of that easily at the push of a button on the internet in seconds. They have tools now to make a watch list and have the information sent directly to them in their email, on their phone or on the websites they visit.
Then they can go on their social media sites to discuss the news and stocks. These networks have bulls and bears, making for flurries of trading activities and momentum that is remarkable when these crowds get a hold of a narrative they want to talk about. No longer is it just Wall Street that controls momentum, now Main Street investors do the same when they come together on social media.
We have seen this in what are called Meme stocks. When the internet crowd gets behind something they can cause tremendous moves. We’ve seen them roll into different themes, including tech stocks, weed stocks, crypto and recently AI stocks.
With gold trading like it is, I don’t think it will be long before the Wall Street and Main Street investors get into gold and the gold stocks. When you consider that all the gold stocks combined have a collective valuation that is less than an insanely valued big cap tech stock. It boggles the mind to think what could happen if even a tiny percentage of the momentum crowd finds its way into gold stocks.
Let’s take a look at the food chain of gold and gold stocks to make a checklist. The first mover is gold. Check. It is trading at all time highs against almost every currency and on the verge of surpassing it in US dollar terms.
I’ve talked in several reports about the many reasons to be bullish on gold. The key ones are the Free Money Era, followed by expensive money over the past couple years. The US deficits and explosive debt from the Free Money Era have painted the FED into a corner they can’t get out from. This will cause them to reduce interest rates in 2024, which will put downward pressure on the US dollar and drive gold higher.
The only ways to slow the death spiral of debt is for the FED to lower rates and let the economy and inflation run hotter than they would like. It also needs the politicians to increase taxes and dramatically lower spending. The chance the politicians will take those steps is zero. So the only way to keep the Ponzi scheme alive is for the FED to lower rates, they will be the first to blink.
I grew up on a racehorse farm, and like to keep things as simple as possible. Just like if you walk behind a racehorse and slap it on the butt, it will kick you, the death spiral of debt will inevitably cause a return to somewhat of a Gold Standard.
The Chinese, Indians and the central bankers have figured this out and I can see that more investors worldwide are as well. Including some of the most high profile wealthiest investors are joining the crowd like never before.
Next on the golden food chain are the ETFs for gold and gold stocks. They have recently hit yearly lows and are now coming off those lows. Check. The biggest gold mining stocks are seeing the same trend. Another check for the gold bull.
Next on the golden food chain are the smaller miners and new mine developers. They are starting to look like they will join the party. No check for them yet, but it looks like that will happen soon.
Finally, you have the explorers, they are showing a bit of a pulse, but the patient still looks pretty ill. No check mark for them, but as gold gets stronger and the larger companies start to improve the rising tide will help float the explorers boats as well.
A chain is only as strong as its weakest link. In the golden food chain, the explorers are the weakest link. But, if you look at the past few decades in gold mining, I strongly believe they are the most important link in the chain.
The large gold miners are going deeper into their mines for lower grades which is why the head grades at their mines have been in decline for many years.They are pretty bad at exploration which is why for the past couple of decades they had to buy new mines, they haven’t been finding them.
When they went on a buying spree during the 2001 to 2011 gold bull market, they bought a lot of iffy projects. This is why they haven’t been able to convert their known resources into new mines.
The new mines in development are not nearly enough to replace what the miners are mining every year. The pickings are slim for the major gold miners to go shopping for development projects to replace their old mines.
Exploration companies have suffered from a few decades of under investment to go out and find new mines. Evidence of this can be found in the limited number of new mines in development.
They have to go deeper in the ground, in tougher regions to explore. This takes time, money and patient backers that allow the exploration companies to find new mines. Time, money and patient backers are, and have been for a long time, in short supply for explorers.
Collectively, the miners, developers and explorers are at depressed levels, which makes the gold they have in the ground very inexpensive. In fact, the valuations for gold in the ground has not been this low since the years 1999 and 2000.
Back then, like now, the sentiment was horrible. Which was why the 2001 to 2011 gold bull market lasted for a decade. They were coming from a very low base and when the crowd arrived, many significantly outperformed the rise in gold.
It really was a magical time, as you can tell from the laundry list I presented, I firmly believe we are at another magical time.
The central bankers are forced to return to somewhat of a Gold Standard. I think this trend will continue as many are well aware that the death spiral of debt, and prolific money printing need a Gold Standard to force discipline on politicians and central bankers.
The Chinese and Indians are always on a Gold Standard as it is part of their culture to put some of their wealth in gold.
A key catalyst that could cause more investors worldwide, including the Meme stock players to get into gold is when the price of gold goes into new record prices against the US dollar. We are on the cusp of that happening as I write this report.
As more people see gold in a bull market in US dollar terms, we will see a stronger trend for ETFs and the largest gold miners which have started coming off their yearly lows. Then it will flow down the golden food chain into the quality names of new mine developers and explorers.
Please be mindful that these opinions are based on my 30 years working in the mining sector and nearly 20 years as a market commentator. You have to do your own homework and consult with your financial advisors to consider what makes sense for your risk profile.
All the best,
Allan Barry Laboucan
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