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A lock-step relationship has existed between gold and U.S. debt for most
of U.S. history. If the U.S. debt continues to increase at the same rate as the last ten years, then it will reach $26 trillion by 2020. This is a good indicator for a gold price of at least $2,500 per ounce in the near future.
To see the article in speech form as presented at the 22nd Annual Empire Club of Canada Investment Outlook Luncheon, Toronto, Canada please go HERE.
Stock Market
The monetary policy of low interest rates…on the part of the world’s central banks have caused bubbles in stocks, bonds, real estate, art, and exotic cars. These are not likely to continue higher in 2016, and the risk of a major correction looms…
While it is clear that the global economy is contracting and there are numerous vulnerabilities, several valuation methodologies summarize current market fundamentals and provide an excellent indicator of future trends. They are the Buffet Indicator, the Shiller PE Ratio, and the Tobin Q Ratio.
The Buffett Indicator
The Buffett Indicator uses the total market capitalization of U.S. equities divided by GDP. The only other times the Buffett ratio exceeded 100% (it’s currently 123.4%) was just prior to the tech crash in 2000, and the credit bubble in 2008.
The Shiller P/E Ratio
The 134-year average Shiller P/E ratio is 16.7, whereas the current ratio is 25.9, or 55% overvalued. The ratio has only been this high on three other occasions: 1929, 1999, and 2007. Each time it happened, stocks dropped by over 50 percent, and didn’t recover for years.
Tobin’s Q Ratio
The Tobin Q ratio, which measures market value versus replacement cost, is considered one of the better long-term indicators of a pending market decline. The current Tobin Q ratio exceeds the 70-year average of 0.7 by 58%. The ratio rose above the average in 2000 and 2008.
Margin Debt
This time, however, the correction could be much worse than in either 2000 or 2008. Not only do we have a significant overvaluation, but historically high margin debt which will accelerate the decline due to margin calls. These conditions provide investors with the opportunity to sell high and take a profit.
China & Gold
The future outlook for gold pricing is not complete without understanding the implications that China will have. China has been increasing its gold reserves, and has made a number of strategic moves that threaten the U.S. dollar’s reserve currency status.
- China has signed 26 currency swap agreements wherein the U.S. dollar is no longer used to settle trade imbalances.
- The Asian Infrastructure Investment Bank has been formed as an IMF alternative to provide loans to BRIC countries.
- A yuan currency exchange hub has been created in Canada with ICBC bank.
- China has developed an alternative to the SWIFT system of international currency transfers, and Russia is developing its own version.
- China’s currency has been accepted into the IMF’s SDR program, with full implementation in the fall of 2016, at a 10.92 allocation.
- The Shanghai Gold Fix, to be introduced in the spring of 2016, has a good chance of eliminating short selling on the COMEX because the Shanghai Gold Fix is going to be only physical, without any paper market dilution. If traders try to drive gold’s COMEX, price down through shorting, arbitrage traders in Shanghai will quickly counter the move.
In 2015, the result of these changes was already showing, as 71% of U.S. Treasuries were purchased by the Federal Reserve with newly issued currency as demand for U.S. dollars decreased.
Gold in the 1970s
Finally, to reinforce the “Buy Low” opportunity, a comparison to the cyclical gold correction from 1974 to 1976 and the subsequent price rise serves as a good example. At that time, after a 445% rise from 1971 gold declined 45%, gold sentiment was at record lows, and the media was full of negative gold commentary, as it is today.
- On March 26, 1976, the New York Times stated: “For the moment at least, the gold party seems to be over.”
- It also quoted a Citibank letter that declared, “Gold was an inflation hedge in the early 1970s, but money is now a gold-price hedge.”
- It suggested that the rout was due to the “victorious dollar,” the “victorious dollar” that has lost 80% of its purchasing power against gold since that day in 1976.
After two years of declines, many investors sold their gold holdings and vowed never to invest in gold again. However, in the fall of 1976, gold began an ascent that saw it rise 750%, peaking at $850 a troy ounce three years and four months later. After a 3-year correction, the same opportunity to buy low exists today, just as it did in 1976. Of course, conditions were different then: the stock market was not in a bubble, and total U.S. debt was $800 billion – less than last year’s annual deficit.
(Incidentally,] I am often asked how high will the price of gold go, and do I still think it will hit $10,000 per troy ounce, as described in my book. The conditions detailed in my book are still very much in place, and many of the vulnerabilities have actually increased. To order your copy of “$10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven” please visit: Amazon.com, Amazon.ca, Chapters.Indigo.ca or info@10000goldthebook.com)
Gold & U.S. Debt
A lock-step relationship has existed between gold and U.S. debt for most of U.S. history. If the U.S. debt continues to increase at the same rate as the last ten years, then it will reach $26 trillion by 2020. This is a good indicator for a gold price of at least $2,500 per ounce in the near future.
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