In today’s issue:
- Gold has been on a tear
- There may be a run on physical metal
- Investors should always own some gold
I suspect that most of you, while young, played musical chairs on occasion.
It’s a classic party game. It’s also a good metaphor for market dynamics.
How exactly? Let’s keep things simple. There is only so much liquidity to go around. Speculators use that liquidity to borrow against asset values, or derivatives thereof.
Prices rise. New speculators enter the market to get in on the action. Liquidity gets tighter and tighter.
Then something happens, a surprise of some sort, and one or more speculators decide to sell. Prices fall. The more leveraged speculators become forced sellers as the value of their collateral declines.
Prices now fall sharply. Banks, the providers of liquidity, become concerned about possible defaults. They raise collateral requirements.
Now even the less leveraged speculators become forced sellers unless they’re willing (or even able) to post more collateral.
Prices now fall even more sharply. Liquidity has evaporated. The music stops as it were.
Everyone still playing the game now rushes to find a seat, all at once, but there aren’t enough to go around.
Those failing to find a seat leave the game.
When the music – liquidity – is turned back on, another round of the game is played, but only with the remaining players.
Central bankers, the ultimate providers of liquidity, are available to step in to provide it for the next round of speculation, and the next, in a game that need never stop.
We’ve seen this play out many times before: the global stock market crash of October 1987, the Long-Term Capital Management failure in 1998, the dotcom bust of 2000-2003 and the global financial crisis of 2008-9.
Each and every time, when the market music had stopped and everyone had rushed to sell up, central banks have stepped in to add emergency liquidity and restart the game.
But what if the power goes out? The sound system fails? What if the music can’t restart, even if central banks would like it to?
Central banks can add liquidity all they like. They can create it out of thin air.
But can they generate electricity? Manufacture a sound system to play music? Construct chairs or other furniture?
Money isn’t real
Of course not. Energy, appliances and manufactures are real assets. They can’t just be conjured into existence on demand as liquidity can.
The same is true of gold.
You’ve probably noticed that gold has been on a tear.
You can’t print gold. It is real money, not ephemeral central bank liquidity.
And right now, everyone seems to want it.
Why?
There are many possible reasons. Some are fairly obvious. Government debts and deficits are historically high. Those need to be financed, and central banks issue money to purchase government debt.
Investors are rightly worried that this is inflationary. It is.
Then you have all the concerns around economic sanctions and even asset freezes and seizures. Central banks are purchasing gold as an alternative to reserve holdings that could be affected by such disputes in future.
Now, with President Trump in office, there is the threat of tariffs and a general global trade war. That would be highly disruptive to the global economy.
Some countries might try to counter the impact of tariffs on exports by devaluating their currencies. That’s inflationary too.
The world is also simply perceived to be a more dangerous place today than it was in the heyday of Pax Americana. Gold is the ultimate hedge against pure uncertainty, the “unknown unknowns” as it were.
The gold market itself is showing signs of stress. Physical exchange inventories are declining. Lease rates have spiked higher. This implies a growing preference to hold actual metal rather than derivatives thereof. (A similar set up took place in the early months of Covid lockdowns, which reduced refining capacity.)
Gold futures, options or other derivatives require counterparties to deliver the gold, if demanded. But what if the counterparty is unable? Or simply refuses?
Perhaps some investors don’t want to find out the hard way. Perhaps central banks don’t either. Maybe they’re concerned that, if they don’t get their hands on the physical metal soon, gold will acquire the soubriquet “unobtainium”.
Here at Fortune & Freedom, we always recommend that investors hold some gold as a source of diversification away from purely financial assets. It may go up and it may go down, but it will always retain its safe-haven properties.
Last week, I had a chat with my colleague Nick Hubble about recent happenings in the gold market and the outlook. You can find it here.
Also, late last year, we held a Gold Summit, including a series of interviews with gold market experts from around the world. In case you missed it, you can access these here.
Until next time,
John Butler
Investment Director, Fortune & Freedom
Have Gun… Will Travel
Bill Bonner, writing from Baltimore, Maryland
It was only a matter of hours after the ‘trade war’ had become a phony war, and the press irrupted again. Here was yet another way to make the world hate Americans. ABC News reports:
As President Donald Trump’s second administration continued its swift recasting of the federal government and American foreign policy, the president and his top diplomat issued a stunning proposal, saying the U.S. would “take over” the Gaza Strip, “level the site” and rebuild it.
America’s last attempt to help Gaza was its ‘floating pier’ in May of last year. Built by the army, it cost $320 million and broke apart 12 days after being put in service. But taking over Gaza may be a floating pier too far. Even for Republicans. Reuters:
‘I thought we voted for America first’ – Trump Gaza plan divides his party
Skeptical lawmakers said they still favored the two-state solution for Israel and the Palestinians that has long been a foundation of U.S. diplomacy. Some also rejected the idea of spending U.S. taxpayer dollars or sending in U.S. troops to a region that has been devastated by more than a year of war.
“I thought we voted for America first,” Republican Senator Rand Paul said on X.com. “We have no business contemplating yet another occupation to doom our treasure and spill our soldiers’ blood.“
Poor Senator Paul. America First? That was on yesterday’s menu. Today’s a new day with a new way to alienate the US from the rest of the world.
If Mr. Trump were in need of a development project… a chance to relive his glory days in Atlantic City… he need not go all the way over to the Middle East. A bombed-out city? A death trap? Where the leading cause of death for young people is homicide? Just get in the Presidential limousine and take the 45-minute drive up to West Baltimore.
Of course, there is no real comparison between Baltimore and Gaza. Here, the poorest parts of the city were collateral damage in the feds’ wars against poverty, racism and drugs.
Gaza took destruction to a whole new level, where US bombs were used intentionally to flatten the city and kill thousands of children as well as adults. And now that the city is almost unliveable, an opportunity presents itself. The leveraged real estate speculator can’t help himself. He wants to create the Middle East Riviera.
Prissy foreigners don’t like the plan. The Financial Times:
US allies across Europe and the Middle East have condemned Donald Trump’s plans for Washington to “take over” Gaza and any attempt to expel Palestinians from the devastated territory. Countries throughout the region and beyond denounced the proposals within hours of the US president’s shock Tuesday evening announcement that Washington should assume control of Gaza and that its 2.2mn-strong Palestinian population should be resettled.
But what do you expect from Europeans? They lack the entrepreneurial vision of Americans… the toughness of real war fighters… and the professional skills of US federal employees.
Let’s see… put the new project in the hands of the US Army? The Post Office? Or how about Amtrak? Despite having a monopoly on the busiest train corridor in the US… a straight shot from Washington to Boston… Amtrak has lost money every year since its founding 54 years ago.
And there’s USAID… now said to be looking for work. Have gun. Will travel.
Wait a minute… who better than Trump himself? He learned the ropes in Atlantic City… surely, he could parley that experience into another big win. Benzinga:
By the early 1990s, the financial situation of Trump’s casino empire had become critical. Multiple bankruptcy filings ensued: the Trump Taj Mahal in 1991, followed by Trump Plaza and Trump Castle in 1992 and later Trump Hotels & Casino Resorts Inc. in 2004. These filings were a clear indication of the dire state of his casino ventures.
In 2009, Trump resigned as chairman of Trump Entertainment Resorts, just before the company filed for bankruptcy protection again. This move was in line with his past strategies, distancing himself from the financial failures while maintaining his brand and wealth.
According to the UN, it will cost $80 billion to rebuild Gaza. It will be grim work, too, uncovering the bodies of children under the rubble. In addition to the stain already on its soul from enabling the widespread destruction and murder, the US would have to lead the ethnic cleansing necessary to rid the area of the surviving Palestinians.
And yes, it is a strange thing for a nation with $36 trillion in debt and broken down cities of its own to take on. “A disaster for the US,” says Ambassador Chas Freeman, not realizing that that is the point.
What other way is there to make sense of it? The US needs to be taken down a peg; Trump is the man for the job.
But the condo sales are bound to be good. After all, who wouldn’t want to live in Gaza?
Regards,
Bill Bonner
Contributing Editor, Fortune & Freedom
For more from Bill Bonner, visit www.bonnerprivateresearch.com
