A Deathbed Conversion to Gold

Dear Reader,

Today I’m going to take up the question of whether a kind of collective madness has taken over New Zealand. And if so, what Australia must do to eradicate early signs of the disease in Melbourne before it can fully spread to the rest of the country. Your personal freedom of movement and your right to live your own life as you choose could be at stake.

But let’s start with money and markets. And let’s remind ourselves of a key idea I brought up a few weeks ago: all paper money issued by governments is in long-term decline against gold, silver, and alternative assets like cryptocurrencies (as well as art, wine, and other collectibles).

Gold is the easiest way to store your wealth

Getting a portion of your portfolio into these objects of permanent value is a good idea — especially before your country is hit by a crisis.

Gold is the easiest way to store your wealth in a trusted asset without any counterparty risk. Warren Buffett finally gets it. The big news among gold bugs on the weekend is that Buffett’s Berkshire Hathaway took a half a billion-dollar stake in Toronto-based Barrick Gold.

Barrick is one of the world’s largest gold miners. Buffett’s holding company (likely at the direction of one his associates) bought nearly 30 million shares in Barrick, according to US regulatory filings.

Is this the equivalent of a deathbed conversion? I’m not suggesting Buffett’s at death’s door. But the US dollar, as the world’s reserve currency and a store of value, may be. And maybe Buffett knows that or is at least hedging his bets that the next 100 years won’t be good for Team US as the last 100 years.

The US government spent a record $5.6 trillion in the first 10 months of this fiscal year AND ran a record $2.8 trillion deficit. Democrat Joe Biden’s selection of former California prosecutor Kamala Harris as his vice presidential running mate does nothing to change the expectation that the US government has entered a period associated with runaway money printing and, eventually, rampant inflation.

The other point of note in Berkshire’s filing is that it reduced its stake in Wells Fargo bank by 26% and JP Morgan by 62%.

This is consistent with the idea that financial assets are in decline relative to real assets and that this could be a tradeable trend for years. My colleague Tom Dyson at The Bonner-Denning Letter sums this up in his Dow/Gold trade.

The short version of the thesis is that there is a primary trend in the market and a primary trade to try and make money from that trend. The trend is that the Dow/Gold ratio — dividing the total value of the Dow Jones Industrial Index by the US dollar price of an ounce of gold — peaked in 2000, and would have mean-reverted to under five IF the US Federal Reserve hadn’t intervened to lower interest rates and spur a bull market in ‘risk assets’ (stocks, especially the tech ones).

The Dow/Gold ratio is around 14.3 after Friday’s price action. On a day when the S&P 500 flirted with making a new all-time closing high, the US market got spooked by the lack of another stimulus deal in Washington DC. The Senate adjourned and went on holiday. Stocks fell.

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The Dow/Gold ratio peaked at 18 in 200. But you’re not too late to the trend or the trade. Mean reversion can take years. That’s even in today’s markets, where things that you think will take months and years seem to happen in days and weeks.

Incidentally, Buffett’s macro indicator of whether stocks are expensive or cheap is the market capitalisation-to-GDP ratio (the total market value of publicly traded stocks versus GDP).

On that basis, US stocks (driven by the huge gains in tech stocks from passive investing) are 175% of GDP. That’s massive overvaluation, according to Buffett’s own metric. It mean reverts too.

Buffett’s indicator isn’t a timing mechanism, though. That is, traders shouldn’t use it to try and time WHEN to buy or sell stocks.

But it does tell you where you’re at in the cycle. And where we are now is pretty obvious: interest rates are low, stock prices are high, and relative to real assets and the real economy, financial assets are massively overvalued. Allocate accordingly.

Maybe Berkshire’s honchos suspect it could be hard for commercial banks and investment banks to make money in a low interest rate world of ‘financial repression.’

By financial repression I mean central banks purposely keeping interest rates lower so governments can refinance maturing debt at low rates and borrow new money at low rates. Low rates make it hard for banks to earn money (the net interest margin declines).

What investors should remember is that the border between financial repression and actual repression is nebulous and ill-defined.

Take Turkey and the sinking lira. Turkey’s autocratic leader Tayip Erdogan is slowly gathering all government and central bank authority to himself. As a result, when they can, Turks are rushing to get their money out of lira and into something else less prone to inflation.

The main ‘something else’ is gold

Business has been brisk at Istanbul’s Grand Bazzar, where Turks have traded in as much as $7 billion worth of lira (and US dollars) for gold, according to Reuters.

There may be as many as 5,000 tonnes of gold in private hands, according to Mehmet Ali Yildirimturk, the deputy head of the Istanbul gold shops association. That makes sense. Why?

Gold is for saving in. It’s a way of preserving the value of your wages, your labour, and your time in an asset that you can liquidate later for a different medium of exchange (legal tender coins or paper money printed by a central bank).

Turks, from long experience, understand that. And some are even selling their houses and cars to convert the proceeds to gold.

The last bit, if true, seems ill-advised to me. Certain owned assets that you can possess and are unencumbered by debt are what I call ‘functional wealth.’ You can live in a house. You can drive a car. Both are useful. You can’t drive a gold coin or live in a house made of gold bricks (I suppose you could if you were really rich…but if you were that rich, you probably wouldn’t want to live in a house made of gold).

I hope you take my point. Increasing centralisation of money and power inevitably leads to profligacy, debt, and deficits.

The immediate victim is your purchasing power. The ultimate victim is the value of your lifetime savings.

If we are in an era where all paper money is in decline against precious metals, Buffett and the Turks are making the right move (see my PS below for what I think is an even better move).

Meanwhile, what kind of madness has taken hold in New Zealand? All new confirmed COVID-19 cases will be placed in a mandatory, government-run, quarantine camp, according to an announcement last week by Dr Ashley Bloomfield, New Zealand’s Director General of Health.

The mandatory quarantine may include immediate family members who are not yet infected.

It is not clear if it will be a 14-day quarantine, as with returning international travellers, or some other length of time determined by the government.

Even so, what absolute madness and a total overreaction by power-drunk government officials. New Zealanders, and any Australians who fear the same thing could happen Victoria or NSW, should be alarmed and outraged.

Remember when the lockdowns were supposed to ‘flatten the curve’ so the health care system wouldn’t be overwhelmed by sick people?

When did that turn into ‘total eradication’ even if it means smashing the economy and essentially incarcerating individuals who test positive for a virus, rather than letting them self-isolate at home? What’s really going on here?

The government is so disturbed by the idea that the virus may spread from community transmission that it’s decided to lock people up against their will if they get sick. This is insane.

New Zealand always knew that a highly infectious virus was going to work its way through the country. The goal should have been to protect those most at risk — the elderly, especially those in aged care facilities.

But the authoritarian mind (Dan Andrews, Jacinda Ardern, Joe Biden) is now infected with another kind of mind parasite; a virus that destroys rational thinking and relies on pure police/military power to coerce people into doing what they’re told.

Civil liberties, free enterprise, and now even the right to control your own body — which will be taken into custody by the State to protect you AND the community — they’re all under full assault.

In small, cohesive, homogeneous communities there may be support for this. But the bigger the polity — the group of people living under the same political system — the more that support is going to turn into resistance.

The New Zealand and Victorian governments have badly overreacted, massively overreached, and seem to believe themselves completely unaccountable to the people.

How will it end? In victory? Violence? Somewhere in between? More on that next week.


Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

PS: What is the best way to buy physical gold if you want to shift some portion of your net worth into it? And if you’re a speculator, what are some of the best gold stocks to buy if you think the gold price is going higher? Hint: it’s not buying the major producers like Barrick.

Buffett and Berkshire likely did so because the universe of publicly traded gold stocks is so small. Also, Barrick is one of the few gold producers with a large enough market cap to accommodate the size of the investment Berkshire wanted to make. That doesn’t mean it’s the BEST investment though.

This is a rare case where the individual investor or punter has the advantage. If the Dow/Gold ratio really mean reverts to under five, you want to buy gold companies with gold in the ground. The gold gets more valuable as the price goes up. And it’s not being produced and sold at today’s prices. But which companies are those? Don’t ask me…ask Shae.

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.

The Rum Rebellion