Tuesday, 19 March 2024

By Brian Chu Editor, Gold Stock Pro and The Australian Gold Report

[8 min read]

Dear Reader,

I just spent my weekend in Albury attending The Triple Conference.

What’s that?

It’s a conference that brought together Australians from all walks of life. The theme of this conference was ‘Big Ideas for a Better Australia’.

Those who attended are largely concerned about the overreach of government, a loss of our cultural heritage and those wanting to preserve their liberty and autonomy from what some may feel is a ‘nanny state in the making’.

Those presenting hailed from a diverse background from politics, medical and healthcare, social welfare, church leaders, media personalities and business professionals. They covered specific issues including:

The need to curb government power.

Improve due process for government bureaucracies, especially since the global virus outbreak in 2020–22.

Dealing with wealth inequality.

Fostering representation of different people in the country’s governance system, and…

Combating the decline of societal mores.

Now I’m not going to explore all these issues in any great detail today.
What I do want to explore further is something interesting that links to the price of gold.

So, let me explain.  

Improving rural representation — The Riverina
State concept

One of the most interesting topics from the conference related to something called ‘The Riverina State’.

Those looking for the full details can find out in this site, particularly this document.

Most of you are aware that our country’s electorate system divides regions so each electorate has around the same population.

For several decades, urbanisation gained traction thanks to businesses and commercial enterprises flourishing. This led to more people moving to the bigger cities. As a result, the city folks gained more electorates and parliamentary representatives.

Therefore, residents across rural New South Wales and Victoria have lost their representation and a voice in the parliament.

Here’s some figures to give it context. The state has 93 electorates, with the vast majority coming from the Greater Sydney region that encompasses the Central Coast, the Illawarra, Blue Mountains and the Southern Highlands. There are only 22 rural electorates in the New South Wales State Parliament, comprising around 550,000 voters.

Similarly, Victoria has 21 rural electorates out of 88 in the State Parliament. Rural voters number around 420,000 voters.

The sheer imbalance of representation is made worse given almost as many city voters in both states support policies that may work to harm the interest of the rural voters.

Without going too deep into this, the fate of rural NSW and Victoria appears to be in dire straits. Many who live in these areas feel this way.

No doubt, that’s having an impact on social inequalities and things like suicide rates which are higher across rural areas versus cities, especially among teenagers and adult males.

The Riverina State concept has a movement that proposes starting a new state to exclusively represent these people. Their aim is to have its own state government elected by their people without the city dwellers cancelling out their voice.

Now this is just a concept. It may take some time before it could happen, should there be sufficient momentum to move this forward. But I thought I’d bring it up as it’s relevant to what I’m going to talk about next.

The parallel with the gold and commodities markets

In a sense, there is a parallel between the plight that rural NSW and Victorian residents face and that of gold investors in the market.

Some of you are aware that the price of gold is set by the market in a counterintuitive manner.

By that I mean the amount of gold bars or coins that is physically exchanged in the market doesn’t drive the price of gold.

For those who aren’t familiar, I’ll quickly explain how it works.

Based on Gold.org, the daily trading volume for gold in 2021 was around US$120 billion (note that it’s since increased to around US$160 billion as of late last year). The figure below shows the breakdown of where they’re traded:

As you can see, over 80% of the gold trading volume occurs in London and the New York and Chicago Commodities Exchanges. And the vast majority of the exchanges’ transactions were digital contracts rather than physical contracts.

In other words, these trades are merely notional. That is, these trades don’t involve an exchange of gold bars. They comprise contracts used for risk management and speculation.

So, institutions seeking profits at the margin have an undue influence in moving the price of gold. The supply and demand of the metals hardly move the dial. (is that correct because supply and demand are two things rather than being one?)

You may conclude therefore that relentless destruction of fiat currency is pushing gold higher.  

But it isn’t THAT simple.

Let me show you the price of gold in US dollars, adjusted by the intrinsic value of the US dollar as represented by the US Dollar Index [DXY]:

The figure shows that the rise and rise of the price of gold in the long-term points to the decline of the petrodollar system.

But you can see that the price of gold can fluctuate in the short-term. These are from day-to-day trading of the gold contracts and physical metals, with the former comprising the vast majority of trades.

The short-term price movements don’t reflect the state of the financial system or the actual physical supply. They’re the result of institutional trading for profits.

Put simply, the activity in the western gold exchanges has muddied the waters.

The Achilles heel of the Western market manipulators

And that goes back to my point of the Riverina State concept.

Like the rural NSW and Victorian voters, gold enthusiasts and the sceptics of the petrodollar system are looking to gold as their champion in shifting away from a crooked system.

But those wishing to see an end to the petrodollar are fighting an uphill battle.

There’s some good news in this. Those who run the system are slowly destroying themselves by their own machinations.

Keep in mind that they manipulate the price of gold (and other commodities and even the broader market, for that matter) using a system driven by debt.

Their fiat currency thrives on the growth of debt. Their aim is to make it ‘just right’ to perpetuate this game.

However, they’re painting themselves into a corner. After all, keeping this game going requires unlimited capital.

And that capital comes from…you guessed it, debt. They’re drowning in that already, with more to come.

And we know they want high interest rates to retain the value of the US dollar (because the dollar pays interest to its bearer). At the same time, debt and high rates squeeze the system starving it of productive capital.

This is a self-destructive system and is doomed to fail.

The only question remains… When will this happen?

I don’t want to play the mug’s game of guessing when the system crumbles in a heap.

However, make no mistake that is inevitable.

Now gold has enjoyed a good jump since the start of the year. It could pull back to around US$2,100 an ounce to form a base before it continues the rally.

My point is, don’t let price deter you from accumulating gold or gold stocks, the latter requiring you to shoulder significant risk. The rising price of gold reflects declining purchasing power of the dollar, rather than gold becoming more expensive intrinsically.

To find out more on how you can prepare for this, please check out my gold investment newsletter, The Australian Gold Fund.

You can learn more about what I have to offer in this newsletter with this video where I explain the market conditions positioning for a favourable setup for gold and gold stock investors.

God bless,

Brian Chu,
Editor, Gold Stock Pro and The Australian Gold Report

Brian Chu is one of Australia’s foremost independent authorities on gold and gold stocks, with a unique strategy for valuing big producers and highly speculative explorers. He established a private family fund that only invests in ASX-listed gold mining companies, possibly the only such fund in Australia, putting his strategy and research skills to the test under public scrutiny. He currently writes two gold-focused investment advisories.

In his Australian Gold Report, Brian shows you a strategy for building long-term wealth in physical gold, along with a select portfolio of hand-picked stocks, mainly producers with proven revenue streams, chosen for their balance of risk and reward.

In his more specialised Gold Stock Pro service, Brian helps readers trade some of the most exciting, speculative gold mining plays on the ASX. He uses his proprietary system — based on the famous Lassonde Curve model, which tracks the life cycle of mining stocks. His aim is to help you get ready to trade the next phase of gold and silver’s anticipated longer-term bull market for opportunities to benefit.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Dear Reader,

‘We have two parties here, and only two. One is the evil party, and the other is the stupid party…I’m very proud to be a member of the stupid party…Occasionally, the two parties get together to do something that’s both evil and stupid. That’s called bipartisanship.’

M.S. Evans

No new dots today.

So, let’s make sure we see how the old ones connect.

Friday, we looked at how stocks have become very expensive. We live in an Age of Bubbles.  1999, 2008, 2021…and now, just three years later…a new bubble — this time, concentrated in the Magnificent 7, big tech stocks.

But some things always happen. Bubbles always pop. And it probably won’t be long before the AI bubble pops. Then, people who were hoping to get rich quick, thanks to the spiffy new technology, will get poorer, in a hurry, thanks to the very old boom-bust cycle.

And here’s something else that always happens: when the cost of credit goes up, bankruptcies go up too. This year, with interest rates substantially higher than they were a few years ago, bankruptcy lawyers are back in high clover. Here’s the Financial Times:

Debt defaults at highest rate since global financial crisis, S&P reveals.

‘This year’s tally of corporate defaults stands at 29 – the highest year-to-date count since the 36 recorded during the same period in 2009, according to the rating agency.’

Bubble, Bubble

In the financial crisis of ’09, the Bernanke Fed stepped in, pushed interest rates down, saved many big debtors — including some of the biggest banks on Wall Street — and trimmed billings for the bankruptcy bar. That didn’t have to happen. It was a mistake; Bernanke panicked and set the stage for an even bigger crisis later. 

The lowest interest rates in history encouraged almost everyone to go deeper into debt. And no one went farther down that rathole than the US government — adding $25 trillion in new debt since 2009.

And now, the Federal government itself is in over its head…and the Fed is in no position to rescue borrowers or stock market investors with more debt. This is new. And important. In 2000, and again in 2008, the Fed boosted stocks by lowering its key lending rate by 500 basis points…and ‘printing’ up the money to cover deficits.

But that was before the inflation bogeyman was on the loose. Today, the Fed can’t get away with that kind of stunt. Bond buyers will see more inflation coming; they’ll sell bonds…forcing up interest rates, making it even more expensive for the feds to borrow.

When you are already $35 trillion in debt…and counting on adding another $16 trillion over the next 10 years…higher interest rates are not what you want to read about in the morning news. Even at 5%, the interest cost could be $2.5 trillion per year. That, in turn, would force the feds to borrow (and print) even more to cover the interest expense.

That is when we’d see another thing that always happens. When you have to borrow more and more money, just to keep up with the interest payments on previous debt…you are doomed.  

The Fed will be very reluctant to get into that situation. It will not want to ‘print’ more money just to keep stock prices or a few high-profile businesses from going bust.  

A Predictable Crisis

So far, it hasn’t had to take action. Inflation rates seem to be moderating and interest rates are coming down. The vigilantes (who are supposed to punish federal borrowing by demanding higher interest rates) have been on a long break too. They ‘snooze, as Treasury bonds shrug off vast borrowing’, says the Financial Times.

But the feds are set to borrow an amount equal to more than 5% of GDP every year for the next 10 years. That is not something that has to happen; but it is something that will happen. And even those numbers depend on clear sailing, with no troublesome storms. In the event of a recession (almost guaranteed), the feds will borrow and spend more.

Yes, dear reader, the US faces ‘the most predictable crisis ever,’ as debt increases faster than GDP. You can see it coming from a mile away. The obvious thing to do is to avoid the disaster by bringing the rate of debt growth down. And the obvious way to do that is to balance the federal budget. But this is one thing that the evil party and the stupid party agree on: nothing can be allowed to interfere with America’s rendezvous with bankruptcy.  

You might wonder: how come the richest country in the world…near the peak of its power and wealth…can’t pay its own bills? Why does it have to pass the cost along to future generations…who have no say in the matter?

We’ll save that question for tomorrow. For now, we connect two important dots.  The quantity of US Treasury debt is soaring. The demand for it depends on the interest rate.

And somewhere along the line, the bond vigilantes are likely to hear an alarm go off. Torsten Slok at Apollo Global Management:

‘…a really weak auction could wake [them] up.’

Who knows what will happen; but real interest rates will probably go up.

Regards,

Bill Bonner,
For Fat Tail Daily