Gold Breaks Through: Where’s it Heading Next?

Dear Reader,

Your editor spent the weekend listening and presenting at the Sprott Natural Resource Symposium. What a time for a conference on gold, even if it had to be virtual this year because of COVID-19. The big topics were the big three: gold, COVID and the US elections. I added a fourth: a conflict between Australia and China. More on that in a moment.

For gold, the excitement is obvious. It finally made a new high in US dollar terms (yes it depends on what gold price you’re using…futures…spot…Comex, but price action above $1,900/oz is the main point). Gold is now at the crossroads. Not only is it in a bull market against stocks, it appears to be in a bull market against all paper currencies and fiat money (government issued legal tender).

If I’m right that this is a historical case of monetary regime change, then US Federal Reserve notes (the dollar) will either be reformed, replaced, or people will eventually begin substituting other mediums of exchange for dollars.

It’s not an overnight process. But with over $26 trillion in debt and the Federal Reserve now the largest holder and biggest buyer of US debt, the US (with hits huge debt-to-GDP ratio) has now entered a clearly defined historical cycle for how paper money regimes end in overextended empires.

Yes, it’s a big idea. But keep your eye on the investment ball. The regime change should be great news for gold producers. Gold is nature’s currency. And in that regard, because Australia has (and produces) so much gold, Australia is one of nature’s great printing presses. You just have to find the right geology, the right people and the right company.

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Where’s gold heading next?

One way to know that gold is headed higher from here is to keep your eye on silver. The gold/silver ratio (in US dollar terms) hit a high in March at 125. Silver made a ‘pandemic low’ under $12/ounce. Since then, silver (again in USD terms) is up almost 100% and the gold/silver ratio is close to a 52-week low at 83.51. What gives?

For the punters, and lately the young day traders on Robin Hood, silver is cheaper and easier to speculate on than gold. In a precious metals bull market, silver stocks could become like tech stocks. That is, they could behave completely irrationally, soaring (and plunging) by dozens or hundreds of percent as the public’s imagination is captured by the move in underlying gold and silver prices.

In The Bonner-Denning Letter, we have a simple maxim: save in gold, speculate in silver. Gold is for trying to preserve the purchasing power of your life savings by extracting it from the legacy financial system and putting it in a stable, sound store of value. Silver on the other hand, can be a lot of fun to speculate with, provided it’s money you can afford to lose. Buckle up. Sliver has a lot of catching up to do with gold in a bull market. But it’s going to be a wild ride.

COVID-19, meanwhile, continues to cast a long shadow over governments, public policy and an expensive ‘fiscal response’ to the shutdown of the economy. Over here in the US, the extra $600 a week being sent to those on unemployment expires at the end of July. Republicans in Congress can’t agree on how long to extend that benefit, or by how much. Politically, President Trump wants a deal. Treasury Secretary Steven Mnuchin believes a deal is in sight, and it includes another $1,200 stimulus payment to eligible Americans.

Any kind of deal would be welcome by the stock market. But it’s a short-term boost. Why? Tens of millions of Americans and Australians are out of work because of the pandemic and the lockdown response. Many may never get back to work (the numbers show that recoveries in employment lag recoveries in GDP, and many businesses simply learn to do more with fewer people).

What hasn’t happened yet — and that’s what worries everyone about a second wave — is how many small- and medium-sized businesses will disappear forever if there IS a second wave or a longer lockdown. The knock-on effect to employment, commercial real estate prices and to the burden on government to supplement or replace those lost incomes indefinitely…well…let’s just hope the printing presses are well oiled.

They’ll need to be, at least up until Tuesday, 3 November. That’s when the US elections take place. You can’t have an orderly election and a peaceful transfer of power if the streets are filled with angry, out of work Americans, fighting with one another over masks, racial justice and the correct gender pronouns. A little ‘walking around money’ should be enough to keep the peace until all hell can break loose after the elections.

The more fake money, the better for gold

The current scuttlebutt among the chattering classes (which was wrong about Brexit, wrong about Trump, and wrong about Scott Morrison losing to Bill Shorten) is that Democrats could take the White House (Biden beats Trump), gain a majority in the Senate (thereby insuring perhaps two new Supreme Court nominations in the next four years), and build their majority in the US House of Representatives (where all new spending bills must originate, according to the US Constitution). If all that happens, then what?

As I wrote in The Bonner-Denning Letter a few months ago, it will formally usher in an era of unlimited government and unlimited ‘money’. Trillions more will be borrowed or spent to try and ‘fix’ problems and keep the population satisfied. The more fake money printed, the better it should be for gold and silver.

Australia’s biggest worry in all this, aside from the very real hole in the budget being blown out by the COVID response, is what China’s going to do about it. No country has prospered more in the fiat money regime of the US dollar than China. No country has more to lose (or gain) depending on how the ‘regime change’ is managed.

China generated huge trade surpluses by manufacturing all the goods on the shelves of Walmart. It reinvested those surpluses in a fixed asset boom that built the country from the ground up into a modern, gleaming, industrial powerhouse. But now the mutually beneficial relationship between the US and China has become mutually adversarial.

That puts Australia in a tough spot. For example, Australian diplomats recently told the United Nations that China’s territorial claims in the South China Sea ‘have no legal basis’. The Chinese, who have been busy building artificial reefs and parking military hardware on them to enforce those claims, are not happy.

China’s Communist Party trotted out a token academic to support the party line in an Op-Ed in the state-controlled Global Times.

The relationship between China and Australia has now deteriorated to a very bad point and the chance for a turnaround is slim in the near future’, wrote Zhou Fangyin of the Guangdong Research Institute.

One of the main reasons is that Australia’s policy lacks independence and its current choice is to closely follow the US lead. If Australia further provokes China, not only on political relations, but also economic relations, the damage to Australia should be expected.’

What damage? Chinese investment in Australia real estate? Chinese demand for Australia bulk commodities and agricultural exports? Or Chinese tourism and students enrolled in Australian universities? Some combination of all of them?

Or is China’s hand much weaker than it looks? That’s what I’ll be discussing with my colleague Greg Canavan later this week. Greg and I are overdue for a chat on these issues and more, so we’ve decided to record that chat and make it available for our subscribers when it’s done. Stay tuned.


Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

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