As the global financial world reacts daily to the impact of COVID-related “accelerants” and distortions on everything from asset pricing to social and political turning points, the risks, as well as opportunities, facing sophisticated investors have never been higher.
The Great Debate - Throughout 2020, the great “inflation vs deflation” debate raged, as concerns about tanking GDP growth sparked deflationary concerns in the backdrop of pandemic shut-down policies from NYC to Sydney. The facts which mark the opening quarters of 2021, however, have undeniably favoured our consistent view on rising inflation as measured not only by record-breaking highs in the M1 and M2 supply (inflation, after all, is defined by money supply), but also the equally undeniable rise in commodity pricing, which directly impacts consumer price measures of inflation. In short, rising money supply and circulation make the inflation topic fairly self-evident. Despite such clear inflationary tailwinds and double-digit price climbs in everything from corn to lumber, the U.S. Consumer Price Index (CPI) measure of inflation still reports CPI inflation at 2.6% as of this writing. The open secret, of course, is that the U.S. CPI scale is a fictional accounting of both reality and inflation, and even if one were to accept the CPI measure, what the policy makers are not saying is that the same CPI scale may be at 2.6% today, but has been growing at a rate of 4% (compounding average based upon monthly rates). In short, if you’re still debating about inflation, the simple fact is that it is already here.
MORE INFLATION + MORE RATE SUPPRESSION = DANGEROUS ASSET BUBBLES
With global debt surpassing $280T (and global GDP less than 1/3 that figure), policy makers have no choice but to “inflate away” their unprecedented debt by the creation of equally unprecedented levels of fiat currency to monetise an increasingly (and now undeniably) central-bank supported global bond market. Central banks will increase global money supply while simultaneously using those fiat dollars, euros, yen etc. to purchase their own sovereign debt and hence artificially repress bond yields/rates in order to keep the cost of their debt (and hence their capacity to service the same) affordable. Such artificial bond support creates immense over-valuation in the bond market, where inflation adjusted yields are negative across the entire yield curve—short duration to long -term. Such disgraceful bond risk is unprecedented and leaves investors with no place to hide from equally over-valued and over-risky stock valuations/prices. That is, stocks too are at historical highs and historical risk levels.
U.S. stocks have never, not ever, been this expensive. The current market cap of U.S. stocks to U.S. GDP has now reached levels that surpass even the dot.com hysteria (and disaster) of 2000. Near-term, artificially repressed interest rates will simply add more toxic air to the debt-based everything bubble in the key risk assets: stocks, bonds and real estate.
That is, publicly traded companies will continue to use cheap debt to purchase their own shares and otherwise balance-sheet broke bond-issuers will continue to roll-over their debt rather than deliver profits and free-cash-flow. Securities can continue to rise even higher than these nosebleed levels on access to cheap debt. Stated more simply, the duration and extent of the massive risks and over-valuations in everything from Tesla’s stock price and sovereign IOUs to beach-front real estate and junk bonds will hinge upon policy makers’ ability to keep rates artificially low.
CURRENCY DEBASEMENT—THE UNDENIABLE (YET IGNORED) ELEPHANT IN THE ROOM
The unspoken yet obvious danger lurking behind such artificial rate repression and “stimulus” is the simple fact that it can only be accomplished by using trillions of new printed currencies to purchase (“accommodate”) an otherwise unloved and unwanted bond market. Such inevitable currency creation also means equally inevitable and undeniable currency debasement, which explains the growing (hysterical) interest in alternative digital currencies and blockchain-based “solutions” like Bitcoin et al. Despite an admiration for blockchain technology and even BTC-based distrust in fiat currencies, we categorically deny such digital “gold” as a true wealth-preservation asset. One simply can’t deny crypto currencies’ appeal as a speculator’s dream. We respect this, but, again, do not equate digital gold to real gold as a credible wealth preservation asset for far too many reasons to recite here. The simple fact is that unlimited quantitative easing has led to equally extraordinary currency debasement, and when measured against a single milligram of gold, the major currencies of the world are losing inherent purchasing power by the day, minute and second. This is why informed investors continue to seek physical precious metals as insurance against now open and obvious currency risk. As for price action, gold will rise simply because currencies will fall.
HOW GOLD IS OWNED IS A CRITICAL ISSUE
Unlike gold held in ETF’s or “stored” in major banks beset with massive operational, counter-party and supply risks (the major, uber-levered banks and ETF’s do not own enough precious metals to provide actual delivery to their clients), sophisticated and informed investors store their precious metals outside of this fractured banking system, whose inherent flaws were recently evidenced by names like Archegos Capital. Instead, true precious metal ownership must be directly owned, immediately accessible and stored in the safest vaults and jurisdictions. Gold “owned” in ETF’s and banks is simply not real ownership. Full stop. At Matterhorn Asset Management, our informed clients enjoy the safest private vault in the world, located deep within the Swiss Alps and fully protected (as well as insured) against cyber, military, viral and natural disasters.
GOLD PRICING— UP AND TO THE RIGHT
In addition to the most sophisticated ownership and storage structures, informed precious metal investors are equally aware of the tailwinds favouring the price action, as well as wealth preservation role, of physical gold in particular. Whenever inflation rates exceed bond yields, gold prices rise significantly. As discussed above, we see an open road ahead of negative real-yields, and thus an ideal environment for precious metals in the coming years. As of this writing, reported inflation at 2.6% far outpaces the 1.6% yield on the 10Y US Treasury. Again, the only choice left to increasingly cornered and desperate global policy makers is deliberate inflation coupled with deliberate yield repression—hence negative real rates now and going forward, which is the ultimate and positive tailwind for gold. Equally plausible, of course, is the eventual inability as well as unsustainability of printing trillions of dollars per annum to artificially support otherwise defunct bond markets. Should central banks eventually lose control of the yield curve and rate markets, bond prices would tank, bond yields would spike and hence rates would skyrocket—putting an immediate end to the current, and entirely debt-driven asset bubbles in stocks, bonds and real estate.
We see such a scenario as inevitable, but impossible to time, as central banks are powerful forces with a staggering capacity to extend debt binges with equally staggering levels of fiat currency creation. Yet either way, the end result is the same: Currencies lose their value and gold’s role (as well as value) takes center stage. Furthermore, regardless of whether yields and rates remain artificially repressed or spike out of control, inflation will outpace yields, which, again, favours precious metals. Meanwhile, and despite ongoing efforts by a handful of mega banks to permanently short the paper contracts (and price) of gold and silver on the COMEX, gold continues to rise toward (and eventually well beyond) its August, 2020 highs. As gold prices rise, the production cost for large cap miners remains low (near $1,000), which creates extraordinary opportunities for investors in the mining space who have the foresight to invest in the right mining operations whose management, balance sheets, and dividend streams are prepared for the world ahead.
FIDUCIARIES NOT ‘‘BUGS’’
From our offices (and vaults) in Switzerland, we understand precious metals not as “gold bugs” caught within the echo-chambers of bias, but simply as surveyors of market history and candid speakers of debt cycles, currency woes and increasingly obvious central bank mis-management of the global markets. Investors, having enjoyed the obvious inflation in risk assets, must never forget the equally obvious dilution of the currencies in their portfolios, bank accounts and private ledgers. Nor should they ignore the simple fact that all asset bubbles eventually “pop.” After the longest and most artificial bull market in history, that “pop-moment” is not to be underestimated. We, of course, look forward to the price moves in gold and silver in the current and future environment, but as asset managers, fiduciaries and blunt-spoken advocates of wealth preservation, our message, consistent over the decades, has never changed and is now more important than ever: Physical gold privately owned outside of the banking system is an absolutely essential component of any sophisticated wealth plan. EG