Win with gold in 2023!

Friday, 23 December 2022 — Albert Park

[8 min read]

Dear Reader,

Gold enthusiasts have every reason to feel hopeful as 2022 draws to a close.

After what transpired over the last two years, such as the stomach-churning false rallies that left many disappointed, it seems like we might see a much brighter 2023.

It’d certainly be a welcomed relief, given that the last six months were particularly brutal if you owned precious metal mining stocks.

Given what occurred during the year — armed conflict between countries, trade sanctions, rampant inflation, economic recession, and irresponsible government spending — you’d expect that gold would be soaring.

Well, it did for a few short weeks, as you can see in the figure below:

When armed conflict broke out between Russia and Ukraine in late February, gold spiked as other assets retreated. This brought back the notion that in times of real trouble, gold is like no other asset, as I wrote at the time.

I believe that gold is the safe-haven asset, something that the US dollar tries to imitate but fails when a real crisis hits.

‘Transitory’ inflation, rate rises, and the fizzling gold rally

Things turned downwards for gold as the US Federal Reserve began raising rates in April. The Federal Reserve finally followed through on its rhetoric from the second half of 2021. Previously they were vigorously ignoring inflation and downplaying its intensity, calling it ‘transitory’.

How transitory was it? Let’s check out the CPI in the US since 2017:

Talk about inflation sticking around like a bad smell in the elevator!

So ‘transitory’ is inflation that Treasury Secretary Janet Yellen has recently said that it’ll likely remain till the end of next year.

Keep in mind that this is the same Janet Yellen who ‘did not expect to see a financial crisis in our lifetime’ back in mid-2017 when she was the chair of the Fed. Also, this same person didn’t see a property bubble before the subprime crisis.

Let me say this about Janet Yellen: Never let her seemingly ‘warm and harmless grandmother’ countenance deceive you for what she really is…an incompetent crank, at best, or a seasoned liar.

Either way, the financial system is in a dreadful mess and the people we trusted to fix the problem for us turn out to fan the flames further.

The rate rises from the Fed came hard and fast since April. To date, the Federal Funds Rate has risen 4.25% and sits at around 4.4%. Such a rapid increase has caused the long-term real yield to rise to a positive level, making the US dollar increasingly attractive as its purchasing power improved.

You can see below how gold fared as the long-term US Treasury bond yield climbed:

Like Cinderella’s wicked stepmother and her ugly sisters, the Fed rate rises dressed up the US dollar in a nice gown, slapped on some lipstick, and sent them to the ball.

Sadly, market investors courted it, leaving gold at the door.

The Bank of Japan blinks — signs of an unravelling

The interesting thing about central banks all raising rates at the same time is that, eventually, they get in each other’s way.

What do I mean by that? After all, haven’t their rate rises caused a slowdown in economic activity, more burden on borrowers, and savers finally enjoying a meaningful return on their bank deposits?

Well, there’s a bit more to it.

The role of monetary policy is essentially to try and create harmony in domestic productivity, inflation control, and foreign trade. The drivers of the domestic economy are GDP (Gross Domestic Productivity) growth, inflation, and interest rates. The international markets are driven by differentials of these domestic economic drivers and reflected by the exchange rates between different currencies.

Central banks try to manage their own economies through controlling two of the following — interest rates, inflation, or foreign exchange. It’s impossible to do all three, with the US dollar being the exception — I’ll explain very soon.

This leads to fluctuations either in the country’s inflation or foreign exchange rates.

In the case of the US, the dollar being the reserve currency gives them a slight advantage. It can kind of do all three. Other countries may peg their currency to the US dollar, or the US can issue more currency and have countries use the US dollar and absorb the impact on inflation.

This system works if central banks coordinate their monetary policy to accommodate the US dollar and give assurance to the debt and derivatives market. However, one wrong move could undo this increasingly fragile system, especially given the volume of debt and derivatives exposure globally.

The US reserve currency status served its purpose well for much of this year, as you can see how the US Dollar Index rose to levels last seen 20 years ago:

However, we’re starting to see cracks appear in this system and it’s about to get worse.

Earlier this week, the Bank of Japan shifted its monetary position and announced it’d adopt ‘yield curve control’. In other words, it’s adjusting its short and long-dated bond positions in the money markets to cushion the impact of greater volatility in the global markets on the Japanese economy. This is a pivotal signal to show that even the Bank of Japan may finally join in on raising interest rates, which have been in negative territory since 2016.

This move is significant because it could further weaken the US dollar, in turn threatening the US-denominated debt and derivative markets.

And that could roil the global markets.

Gold stirs and rises for a stellar 2023

The markets noticed the Bank of Japan’s move by selling down the US dollar, buying gold and the Japanese yen.

The broader asset markets are in a bit of a dilemma, as we’ve seen with the initial retreat followed by a strong recovery on Wednesday night trading.

On the one hand, prices rose due to the easing US dollar. But on the other, fears are rising due to expectations of greater uncertainty ahead as a weakening US dollar could threaten the already fragile debt and derivatives markets.

Most people don’t expect a crash to come. They’ve heard it so many times on the news about it, much like Peter crying ‘Wolf’.

But I believe that it’s more like Banquo’s ghost. It’s an ominous portent to wake people up and snap them of their complacency.

Gold is a good signal in this respect. It’s one of the few assets trading higher than at the start of the year.

Silver is also making a run for it too, gaining more than 30% since its bottom in early September.

Having bullion on hand could give you peace of mind should the financial system hit the rocks in the future.

Those who have the guts to speculate on the boon for precious metals should consider buying mining stocks. They’ve had a tough year this year, with the ASX Gold Index [ASX:XGD] falling 10% and many producers falling 30% or more.

Speculative gold explorers had it much worse, many shaving more than 50% during the year.

When things have been that bad, you’d be right to expect it can’t get that much worse. Should it recover, and history shows it does, you’re talking seriously good returns!

If that’s something you’re up for, consider my Gold Stock Pro service.

And with that, may you and your family have a Merry Christmas! See you in 2023!

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

PS: Due to the festive season, The Daily Reckoning Australia will have a modified publishing schedule next week. Expect to see special editions of Daily Reckoning Australia on Monday, Wednesday, and Friday next week — where you will get a glimpse at what our editors have been telling their paying subscribers recently on how to best navigate these sensitive market conditions. We will return to our usual daily publishing schedule on Tuesday, 3 January.

Dear Reader,

Like a dead fish or a live Congressman, the US economy continues to deteriorate. Rotting now is the housing market. From Forbes: ‘Home Sales Plunge to Great Recession Levels As “Frozen” Housing Market Adjusts to Elevated Mortgage Rates’:

‘Existing home sales fell in November for a record 10th-consecutive month, according to data released Wednesday by the National Association of Realtors, as the housing market continues to be one of the worst-hit sectors of the uneasy U.S. economy.

‘That’s a whopping 35.4% decrease from November 2021, when 6.33 million homes were sold.

‘Existing home sales are down on an annual basis at their greatest pace since May 2020, when the real estate market briefly went cold early in the pandemic before exploding, and otherwise the worst mark since November 2010, amid the Great Recession.’

Interest rates have more than doubled in barely 12 months. No wonder houses are getting hard to sell.

But we’re not going to worry about it, not today. We’re getting in the spirit of Christmas here at the Irish headquarters…

A time for giving

We would like to express our gratitude to our leaders…the movers and shakers…the deciders…the elite…the Establishment…and the Deep State…

…and their lackeys in the mainstream press…for making 2022 so entertaining. Their lies, hypocrisy, incompetence, and stupidity haven’t caused a nuclear war — yet. But they have given us an almost daily ration of laughs.

The year already had more than its share of jackassery…and then — what ho! — along comes Sam Bankman-Fried (SBF) and FTX. And the more we learn about it, the more we need to pour a drink and dig further.

To begin, we found out recently that Mr Bankman-Fried had a lot of help from Mr Bankman and Ms Fried, his parents. Mr Bankman teaches international tax law at Stanford. He ‘wrote the book’ on tax shelters, say colleagues. And it was apparently he who set up the business in…what else…a tax haven, the Bahamas. He was also instrumental in setting up Alameda Research and acting, effectively, as its legal counsel.

Thanks, Dad!

As for Ms Fried, she wrote of her two sons, that they ‘have become take-no-prisoners utilitarians, joining their father in that hardy band’. She did not include herself in that hardy band, but she might have. She, too, is a world-improver, deeply involved with Stanford’s Center on Poverty and Inequality.

Uh oh. And there we have the problem. Whatever education and social distinction his parents gave to their children, they also gave them a foolish, on-its-face preposterous philosophy. This is what led, like a bad odour to an open drain, to the creed of ‘effective altruism’, the shroud behind which the scoundrels hid.

A very simplistic idea

Utilitarianism is a very simple idea, developed in its modern form by Jeremy Bentham, whose body is now pickled at the University College London. The idea is that you should always try to do whatever will give most people most happiness. It is such a silly idea that it is amazing that anyone takes it seriously. It is a branch of ‘consequentialism’. But the obvious problem is that we never know what the consequences will be.

We don’t know what will give most people most happiness. The First World War? The War on Poverty? McDonalds tells us that ‘happiness is in the bag’. Is that all there is to it…a Big Mac and cheese for everyone? Nor have we any way of knowing whether ‘happiness’ is a worthy goal for anyone. Nor do we have any way of measuring it…or its opposite, unhappiness. If Donald Trump or Joe Biden were assassinated, for example, it might bring happiness to a great many…and unhappiness to a great many more. Should the unhappiness of the weeping masses be considered? After all, they’ll get over it, while the happiness of those celebrating will presumably last. Death is a permanent condition; mourning is temporary.

In short, the ‘utilitarians’ have no way of measuring the utility of what they are doing…or of knowing whether it is of any use at all. So they take a shortcut — they try to make the world into something that they, personally, would find more charming.

Pope Urban II approved of removing the Muslims from the Holy Land. Adolf Hitler thought removing Jews from Europe would have pleasant consequences. The war in Vietnam found favour in Lyndon Johnson’s eyes. In the 20th century alone, the death toll from ‘consequential’ programs was more than 100 million. And almost all world leaders today are convinced that future generations will thank them for eliminating fossil fuels.

Will they? Who knows? That is why consequentialism is a fraud. It’s also why the common sense of the common people is so often at odds with elite programs. The deciders think they know what is best for everybody. And they’re ready to impose it on them.

Long-term capital

The common folk simply follow the rules. One of the 10 Commandments, for example, is ‘thou shalt not kill’. We can think of a lot of people without whom the world might be a better place. But we’re not about to kill anyone to find out. Rules don’t guide you to any specific place…but they keep you from blowing yourself up along the way.

The utilitarians, however, eschew rules. It’s results they’re after. And the ‘effective altruists’ of the SBF persuasion take the nonsense a few steps further.

First, they think they should earn as much money as possible, so they can give away as much as possible. Have any of them seriously thought about this? Earning money means you are adding to the wealth of the world. If you are earning a lot, it means the difference between the goods and services you provide…and the cost of providing them…is high. That is, you are ‘adding value’.

Logically, the way to add more value is to invest wisely and earn more.

Instead, SBF and the EA (effective altruism) crowd think they should give their money to people who don’t add anything to the world’s wealth. This reduces the world’s wealth, but it makes the givers feel better about themselves.

It also covers up a lot of sin. If you think you are earning money for a good cause — give it away! — you may feel a little, well, like Robin Hood. Why not rob the crypto fantasists of the US in order to give to unwed mothers of Pakistan? Wouldn’t that be for the greatest good of the greatest number?

No matter.

The other nuance of the EA enthusiasts was to take the very long view. Will MacAskill, a Scottish philosopher and one of the ‘guiding lights’ of the effective altruism ‘movement’, became a kind of guru to the young dreamers in the Bahamas. He argued that EA needed to focus on ‘longtermism’:

‘Humanity might last for a very long time…Barring catastrophe, the vast majority of people who will ever live have not been born yet…[W]hat we do today can affect the lives of future people in the long run.’

What, then, shall we do that will help our great-great-grandchildren? Whatever the answer to that question might be, it is not ‘scam them with cryptos’.

Regards,

Bill Bonner,
For The Daily Reckoning Australia