Gold’s Price May Be High, But It’s Still a Buy

“The desire of gold is not for gold. It is for the means of freedom and benefit.”

– Ralph Waldo Emerson

October 29, 2024— We’ve only just scratched the surface.

In theory, gold is a difficult investment to analyze because it doesn’t produce earnings or cash flow.

In theory, it should move higher as interest rates move lower. That’s because declining interest rates narrow the gap between gold’s built-in 0% cash rate, making it more attractive.

Yet gold has continued to rally even as interest rates hit pre-financial crisis highs. Over the past few weeks, gold has rallied as interest rates have trended higher (despite the Federal Reserve cutting rates).

One way to measure gold is to compare how many ounces it takes to buy the Dow Jones Industrial Average. During the dotcom peak, it took more than 40 ounces of gold to buy the Dow. In 2011, it took just 6 ounces of gold to buy the Dow, reflecting gold’s then-run to nearly $2,000 per ounce before it declined. Today, the ratio stands at about 16.1, and it’s declining. When the ratio drops under 10, gold becomes overvalued relative to stocks. We’re not there yet.

Both of those moves indicate that the market may be bracing for an uptick in inflation. That’s where gold tends to hold its own.

The fact that 30-year mortgage rates ticked back up to 7% yesterday is a sign that the Fed will likely slow-walk interest rates lower.

For now, gold glitters. Shiny objects always attract attention.

With the election approaching, astute investors know that politicians will rail against problems while campaigning. But they’re not interested in solving the problem because then they’d have to find a new reason to stay in office.

This is a phenomenon across other industries too. In a now-infamous analyst report by Goldman Sachs in 2018, biotech companies were criticized for working to “cure” diseases rather than “manage” them:

“The potential to deliver ‘one shot cures’ is one of the most attractive aspects of gene therapy, genetically engineered cell therapy and gene editing. However, such treatments offer a very different outlook with regard to recurring revenue versus chronic therapies… While this proposition carries tremendous value for patients and society, it could represent a challenge for genome medicine developers looking for sustained cash flow.”

It’s the same with monetary policy. Fiat currency, like dollars and euros, creates the disease of inflation. So, it needs to be “managed” by central banks, which operate largely outside of the political realm in marble palaces.

Meanwhile, gold is the cure to inflation or at least an inoculation against its worst effects. It’s less susceptible to speculation. And if you listen to the old timers, its price is manipulated in the futures market.

Perhaps that’s why central banks are buying the metal rather than their fellow central banker’s fresh-off-the-printing-press currencies.

And it’s not just creating money itself. The process of creating new money involves debt. Debt leads to problems. Particularly if you can’t pay it back. One way out? Print more dollars. In that scenario, every dollar printed is worth less than the one before it.

Lau Vegys writing for Doug Casey’s Crisis Investing, explains the political phenomenon we’re all living through, astutely, below. Enjoy –Addison

The Coming Dollar Devaluation

Lau Vegys, Doug Casey’s Crisis Investing

I’ve often said that the only way out of the U.S. government’s $35.8 trillion (and counting) debt crisis is by devaluing the dollar. I also touched on this earlier in the week in my essay about the latest numbers on the government’s interest rate spending.

But I have to admit, I’ve never really explained my reasoning in detail, aside from saying it’d be political suicide for those at the top to do anything else. So today, I want to break that down and show you why dollar devaluation is the only path left for America’s power brokers.

This won’t be a quick read, but by the end, you’ll understand exactly why devaluation isn’t just likely – it’s inevitable.

Mission Impossible

Let’s start with the basics…

The root of the government’s nearly $36 trillion debt is simple: politicians have a spending problem. The federal government consistently spends more than it brings in. In fact, over the past 74 years, it has run deficits in 65 of them.

Even more telling: for the last 22 years straight, they’ve overspent every single year, piling on more and more debt. It doesn’t matter who sits in the White House – Bush, Obama, Trump, or Biden – each administration breaks the previous debt record.

Truth be told, the last “balanced budget” under Bill Clinton (see blue bars above) was largely the result of accounting smoke and mirrors, and the debt still increased during that time.

The point is, it doesn’t matter which party is in power—the budget isn’t getting balanced, and debt keeps rising.

Just how bad is it? Consider this…

To balance the budget today, spending cuts of roughly $2 trillion per year would be required. For context, the entire Social Security program costs about $1.5 trillion annually, and the defense budget is roughly $900 billion. Even eliminating either completely wouldn’t be enough.

Put yourself in a politician’s shoes. Imagine stepping up to the microphone: “My fellow Americans, we need to slash government spending by $2 trillion a year. We’ll start by cutting Social Security payments…” You wouldn’t finish that sentence before being booed off stage – assuming you made it past your campaign donors.

More realistically, balancing the budget would require across-the-board cuts of 40% to all non-debt-service spending. That means 40% less for Social Security’s 72 million beneficiaries, Medicare, veterans’ benefits, military spending, education, and infrastructure. No politician who wants to remain in office would propose this. Even if they did, Congress would never pass it.

Following the Money

But, for the sake of argument, let’s imagine the government does the unthinkable: cuts spending massively while the Federal Reserve stops printing money.

This would trigger deflation and economic depression, causing the price of everything to plummet – stocks, real estate, private equity investments, all assets.

And who owns the majority of these assets? The ultra-wealthy.

I’m not talking about your average millionaires or even multi-millionaires here.

I’m talking about the Jeff Bezoses and Jamie Dimons of the world, the Wall Street financial elites, the politically connected class that has benefited from decades of easy money policies.

Their fortunes are tied up in assets that have skyrocketed in value due to the Fed’s money printing and the resulting inflation. That’s why the top 1% are now holding more than four times the wealth of the entire bottom half.

The last thing these people want is to see the value of their assets deflate like a birthday balloon the morning after. And that’s exactly what would happen during an economic depression.

Sure, some wealthy individuals might relish the chance to scoop up assets on the cheap, but the politically-connected elites would never back policies that would shrink their net worth to a fraction of what it is now. That’s their worst nightmare.

The “Easy” Way Out

History shows that when governments face tough choices, they almost always take the path of least resistance. Cutting spending is politically toxic. Default is off the table. But gradual devaluation? That’s always the preferred stealth option.

It allows politicians to:

• Avoid explicit spending cuts.
• Continue funding popular programs.
• Maintain the appearance of “doing something” while avoiding blame for direct cuts.
• Preserve their power and wealth.

Devaluation is also essentially a get-out-of-debt card for the government because it reduces the real value of what it owes.

Let me give you a simple illustration that hits close to home…

Say your family has a fixed $500,000 mortgage – about the average house value in the U.S. right now. If high inflation hits and prices across the economy rise dramatically – say your and your partner’s salary doubles or triples along with most prices – that $500,000 debt suddenly feels much lighter. While your mortgage payments stay the same, they become a smaller portion of your growing income.

The government’s massive debt works the same way: inflation shrinks the real value of their near $36 trillion debt burden while tax revenues rise with inflation.

The elites benefit too. During inflation, asset prices soar – stocks, real estate, private equity investments all rise in nominal terms.

The pandemic years proved this dramatically: The number of U.S. billionaires grew from 614 to 737 between March 2020 and March 2024, while their combined wealth surged by 88% to about $5.53 trillion. Not coincidentally, this happened when the Fed ramped up money printing to unprecedented levels.

The bottom line: the path of least resistance is a win-win for those in power and the elites. For the majority of Americans? Not so much.

Writing on the Wall

We’ve seen this before. When countries become financially unstable, they choose currency devaluation over explicit default or austerity. From Weimar Germany to modern Venezuela, the playbook remains the same.

What makes anyone think the U.S. will be different? Because we’re a developed nation? Tell that to 1970s Britain.

Note: In 1976, the U.K. – then one of the world’s leading economies – was forced to go hat in hand to the International Monetary Fund (IMF) for the largest loan the IMF had ever granted. The British pound had collapsed, inflation was running at 27%, and the government couldn’t sell its debt. Being a developed nation didn’t protect them from the consequences of fiscal mismanagement.

Now, I’m not here to scaremonger—I want to be realistic. I don’t think dollar devaluation will happen overnight or even by the end of this decade. The most respected models suggest it could take until the mid-2030s or even the 2040s.

That doesn’t mean you can ignore it, though. We won’t suddenly slip into hyperinflation, no. But you can count on inflation progressively worsening, eroding living standards and crushing what’s left of the middle class.

Remember, the dollar didn’t lose its value overnight when Nixon took it off the gold standard. But in just ten years, it lost over half its purchasing power. Today, that same dollar buys about 90% less than it did in the early 1970s. I think history will repeat itself – just faster. We won’t have the luxury of decades this time around. Plan accordingly. ~ Lau Vegys, Doug Casey’s Crisis Investing

So it goes,

Addison Wiggin,
Grey Swan

P.S. “Silver wasn’t mentioned in today’s email,” Fred responds to yesterday’s missive regarding gold hitting $2,700. “An allocation to one ounce coins for the possibility of using as a currency for small transactions should have appeal. Plus, relatively to sell if (when) the gold/silver ratio reverts to more historical levels.”

Indeed, you are correct, sir.

Silver is more like an antihistamine than an inoculant. It has more industrial uses than gold, and there’s a lot more of it above ground.

As money, silver is better used for small transactions. For trading, we expect silver to rise significantly alongside a gold breakout.

But, of course, beware. Silver is more volatile.

When it spikes, silver is likely to far outperform gold on a percentage basis. It could even be a top investment for 2025.

Don’t hesitate to send your thoughts, whether on the dollar, gold or bitcoin to: addison@greyswanfraternity.com