Blog | CB Investment Management

Gold. Ignored, but making a new all-time high.

 

‘Once-in-a-generation buy”

Newmont Gold CEO

“In the short run, the market is a narrative machine, but in the long run, it’s a narrative debunking machine.” 

Benjamin Graham

With our Stagflation trajectory firmly in play, has there ever been a better time to own  precious metals? Check out the set up. The six cases for gold.

It is likely that the CPI will not fall much below 3% in 2024 on the latest data and outlook. @AtlantaFed‘s Sticky CPI rose 4.4% year-over-year in February but the 3-month annualized rate came in at 5%

The Treasury has adjusted to this revised outlook

In the years from 2009 to the beginning of the pandemic, the 10-year Treasury yield averaged about 2.4%, according to Bloomberg.

The White House budget proposal projected that the 10-year yield would average 4.4% in 2024, up from its year-ago projection for 2024 of 3.6%, and up from the average in the decade before the pandemic of 2.4%.

And it projected the 10-year yield to average 4% in 2025 and to 3.7% in 2029!

Nevertheless excessive stimulus will have to continue as the private sector remains fragile and the banking sector remains broadly insolvent, highly leveraged, with record and rising delinquencies and so is unable to extend much credit.

Policy makers are currently ignoring the problem that stimulus is NOT generating lasting growth, just a higher GDP in the quarter it spends excessively. Worse, the excessive unproductive spending is making the inflation problem bigger. Policy and the financial system are on tilt.

The outlook for commodities has not been this good for some time. If a commodity rally takes hold, then the US will have an even greater inflation problem, increasing the analogue with the 1970s. The chart below shows how well we are tracking 1970s inflation.

A weak and inflationary economy with continued excess unproductive stimulus creates a great environment for commodities as an increasingly attractive allocation. A sovereign debt crisis can’t solve itself by doing exponentially more of what created the problem. Stagflation favors commodities over equities and bonds. The opposite of the last decade.

Over the last week several key commodities have been breaking out into new uptrends. The new all-time high in gold and new uptrends in copper, silver. and oil are significant.

The US already has record refinancing needs for the next several years, and also record delinquencies. The refunding requirement and higher inflation will put significant stress on the bond market. If yields stay high this will dampen the economy. The interest cost may not come down and could even rise further.

The economy is already struggling with record delinquencies.

The multiple expansion and presumed earnings growth in equities does not come from flatlined and negative business sales growth. It is being manufactured as a “solution”. It used to be that a healthy economy would drive the equity market. Now, apparently, forcing the equity market higher will somehow save the economy. Yet business revenues do not seem to be impressed so far.

Over the last 3 months the US economy has shed 1.87 million full time jobs. That’s the largest decline since the GFC, outside the covid lockdowns.

Yes, and the cost of manufacturing mining machinery and equipment has been skyrocketing, which will likely curtail supply even further, and increase the economic value of metals.

So for gold and precious metals:

  1. Investors have not participated in gold even as it has made new all time highs.
  2. The central banks are likely ongoing buyers.
  3. Production is historically low.
  4. The marginal cost of buying has gone up significantly.
  5. The best economic environment for gold, which is stagflation, and a troubled banking system, is in place.
  6. The biggest gold mining Company’s CEO is acting bullishly in his own transactions in Newmont.

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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