Executive Global
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Productivity | Strategy | Profitability
As we approach year-end on a year marked by record highs in gold in a setting of headline-making elections, ever-expanding sovereign debt levels and a BRICS+ coalition moving ever-so-carefully away from the USD, there is a great deal on our minds.
Facts, as we know, are stubborn things- and our opinions can only change as the facts change.
Debt: The Same Ol’ Same Ol’
As for global and US debt, sadly, the facts, and hence our opinions, are only becoming more entrenched. With interest expense on Uncle Sam’s IOUs breaking 28-year highs ($882B owed on $37.5T in public debt), it’s becoming mathematically clear that Uncle Sam can’t afford a “higher for longer” Powell at the Fed.
Thus, the recent rate cuts by the FOMC are and were no surprise, as we’ve promised throughout 2024. In essence, the Fed’s oh-so-predictable move from rate hikes, to a rate “pause” and then rate cuts was effectively right on schedule. These patterned moves in the Fed Funds Rate also confirm that Powell has and will lose the “war on inflation”—as these cuts occurred well before hitting his “data dependent” and “targeted” 2% inflation goal.
A Simple/Sad Choice
Powell, of course, can’t and won’t say the scary part out loud, but like all debt-cornered policy makers throughout history, when forced to chose between debasing the currency (inflation) and saving the bond market, the currency will always be the lamb sacrificed to the alter of sinful debt.
This is not fable but fact, and follows a scenario forewarned from David Hume to von Mises. In sum: No surprise at all. Such an inflationary (i.e., currency debasing) end-game, however, does not mean dis-inflationary forces (from a market mean-reversion to an officially recognised recession) can not occur in the interim. Either way, however, the central bank will respond by expanding the money supply alongside a litany of direct or indirect QE measures, which, alas- are inherently inflationary.
A Global Fiat Sandwich
The foregoing direction for the USD is, and will be, equally true of all fiat currencies, as Western central banks, almost without exception, follow the Fed’s lead in cutting rates to support their shared debt addiction and forced marriage to the World Reserve Currency. Again, the pattern, choice and end-game are now obvious: Sacrifice the currency to support the debt addiction.
East vs. West
The facts confirm, however, that central banks in the East in general--and among the BRICS+ coalition in particular—have seen the writing on this fiat wall for long enough. The net result is that they are (and have been) slowly but clearly moving away from the UST as a strategic reserve asset, choosing instead (like our clients in over 90 countries) to save in physical gold rather than US paper/promises.
This is an historically staggering trend largely (and understandably) ignored by the Western media since 2014. However, with even the BIS granting gold a Tier-1 status in 2023, it is becoming obvious that far-sighted nations (including oil exporters like Saudi Arabia and the UAE) are stacking gold as both a savings and net-settlement trade asset. Such central bank gold stacking is not only an open vote of no confidence in the once-mighty (and still liquidity-relevant) USD, but far more importantly, helps explain the 30%+ rise in the 2024 gold price.
What About Silver? The Miners?
Silver, though climbing higher in 2024, has yet to see rocket-like moves north nor a gold-silver ratio compression akin to 1980 or 2011, and this is largely due to the simple fact that central banks are not buying silver but gold. That said, the fundamentals of basic supply and demand still favour, and point toward, a silver rise, as obvious supply constraints are moving toward rising demand forces.
Open pit mining restrictions in Mexico and political volatility in Africa, help explain four-year supply deficits in the metal at the same time that demand forces (from solar to India) are climbing. Despite these bullish forces and all-time-highs in the golden cousin, the miners in the precious metal space continue to be the lowest-priced sectors in the S&P despite enjoying the highest cash-flow metrics in the Index.
Why the Mis-Match?
Some will argue that price-manipulation via futures contracts on the New York and London Exchanges continues to place levered paper pressure on the physical reality/price of the metals. This is a fair point, but generalists on the street will also cite distrust of the operational and management profiles of the unloved mining sector as a primary concern.
That is, despite 40%+ FCF waves in the mining space, the long-standing reputation for self-dealing, shareholder indifference and seemingly constant under-capitalisation by mine operators has kept the sector perennially unloved. Regardless of such bullish and bearish forces/arguments, it is hard to imagine a future in which silver does not reach and surpass $200 for those who have the patience (and stomach for volatility) to make silver an investment.
The BTC Wave—Sink or Swim?
Of course, as tanking faith in fiat money and fiscal drunk-driving at the sovereign levels explain the obvious reaction in the anti-fiat gold price for 2024, BTC, as always, has tagged along on this anti-fiat narrative to enjoy record highs as well for 2024.This too is no surprise, as the “digital gold” narrative for BTC is a brilliant and seductive way of hiding what is essentially a triple-levered tech stock behind the mask of an alternative, anti-fiat money “asset.” We clearly have our bias when it comes to gold vs. BTC, but this does not mean we mock the speculators in the BTC space who are rightfully enjoying the rewards of their conviction.
The Speculation Ride of a Generation
But let us be clear: BTC is not a reserve asset, anti-fiat solution nor alternative form of money; it is the speculation ride of a generation—which means it has the profile of both the sublime and ridiculous.
Money, debated passionately as to its meaning and role, comes down to being: 1) a store of value; 2) a unit of account and 3) a medium of exchange. BTC has none of these characteristics, but in all fairness to the BTC camp, the same, they say, can be said of gold. But in fact, that’s not quite correct.
Nature’s Anti-Fiat
Gold has been a store of value for over 6000 years, and central banks stacking that metal today (yesterday and tomorrow) at record levels are not stacking, well, BTC at all…
Furthermore, gold has also been money many times throughout history, including within the post-1944 Bretton Woods US, which Nixon welched upon in 1971. More importantly, gold is clearly serving as a medium of exchange at eye-opening and critical levels as a net-settlement asset among the current and projected BRICS+ practices. One simply cannot and should not underestimate, for example, that China is buying oil from Russia in Yuan, which Russia then converts to gold on the Shanghai exchange. The implications and ramifications of what such practices (in the gold-energy space) mean for the USD and gold over the coming years are simply immense.
In short, gold literally has and does operate in a manner which confirms the qualities and characteristics of real money in quantifiable ways in which BTC clearly does not, despite its admittedly clever “digital gold” façade.
That said, there’s no denying BTC’s eye-watering annualised return of 60+% since inception (aided by a 5400% move in 2013). No asset, including gold, can compare to such a price move or return statistic. Not one.
But then again, one must be equally aware that BTC’s maximum draw-down includes four 80% “corrections” and a standard deviation (i.e., volatility score) of greater than 150%, which are the classic profiles of a mad speculation asset and not even close to a “store of value.” Again, we applaud those who can speculate and profit in the BTC space without getting burned, but we remain unwilling (by facts rather than bias) to confirm its profile as “digital gold” yesterday, today or tomorrow.
Gold Going Forward
As for gold, many are rightfully wondering if, after such a momentous price climb in 2024, it has peaked? Naturally, we cannot and will not say that the gold price will only go in one direction.
Of course, there will be spikes and pull-backs in the gold price as headlines, yields and new policies and politicians rise and fall. But as gold investors (i.e., owners) rather than gold speculators (renters), we hold gold to preserve wealth rather than trade price direction. We measure that wealth in grams and ounces rather than dollars, euros, yuan or pesos.
Toward that end, we are more than confident in the longer-term direction of the gold price, only because we are soberly realistic of the historical direction of debt-soaked fiat money. In essence, we are seeing (and yes enjoying) what is in fact a fiat bear market rather than a gold bull market, and for all the reasons touched upon above, are confident of our choice. EG