Daily Missive
The “Commodity Lag” Explains Why Gold Remains a Bargain
October 31, 2024 • 11 minute, 7 second read
“While critics thought we’d need a recession to lower inflation, instead we’ve grown around 3% a year on average, while inflation has fallen to the level right before the pandemic.”
– Joe Biden
October 31, 2024— Joe Biden’s sustained and confused victory lap on the economy only proves what we already know is true. Most politicians don’t know much about the economy… or money.
While GDP hit 2.8% annual growth in the third quarter, price inflation is still running at 2.4%, even according to tortured government statistics.
So in real terms, even by their own data crunching, the economy is growing at a leisurely 0.4%.
At that rate of growth, the real economy would take 174 years to double. So much for the intractable idea that we can “grow our way out” of a debt debacle.
With solid nominal growth in 2022, when inflation rates soared to nearly double-digits, the economy shrank in real terms.
We say this not to nitpick the BLS bean counters. They’re likely good people doing a thankless task. We do intend to remind ourselves how much publicly accepted economic data is distorted. One small goal at the Grey Swan Investment Fraternity is to cut through the economic distortion and noise.
Investors see inflation as down, but not out. The bond market has reacted with rising yields, even as the Federal Reserve has cut interest rates. And gold, which closed in on a record $2,800 Biden bucks per ounce yesterday, continues to look like a bargain.
Yesterday, we introduced Jim Rickards, who is borrowing the term “the once and future money” for the metal. Today, we’ll introduce Nathan Lewis, with whom we published a book of the same title in 2013 through our relationship with John Wiley & Sons.
Nathan is another personal friend. And one of the few independent statisticians who trades his own money on what the data he crunches actually reveals.
Today, Nathan, in an excerpt from his Polaris Letter (named after the true north star), draws from history to show the importance of gold as a real, tangible, and difficult-for-governments-to-
Gold and the Election
Nathan Lewis, The Polaris Letter
I think everyone feels the tension around this election season. There is talk of Martial Law being imposed in the US, before the end of this year, either because a) the election is again a fraud as in 2020; b) the election is not a fraud, Trump wins, and Black Lives Matter or other Leftist groups make an appearance again in the streets; c) Trump is actually assassinated. (I do not think that Kamala Harris has a meaningful chance of winning a real election.)
Along with this is the prospect of an expansion of the war in Ukraine. Certainly a lot of effort is being made to goad Russia into some kind of action that would justify direct war between NATO and Russia. Russia has been studiously avoiding this, but the prompting could get quite intense (for example, the use of a tactical nuclear weapon inside Russia’s borders).
This is also linked to the election, as the warmongers (mostly US Neocons and their similar Globalist ilk in Europe) would like to get a war going before Trump can prevent it; presumably before inauguration in January, or perhaps even before the election itself.
War between Russia and NATO quickly becomes war between Russia, China and Iran, and the US/NATO/Western Alliance.
Even if most countries manage to remain neutral, there might be a significant economic separation between the US/NATO/Western allies (including Japan), and the BRICS allies, including India and much of Eurasia and the Middle East outside of Japan (probably including Turkey). Among the implications of this is that investing might become a lot less global soon; and the same may also be true of business.
Naturally capital looks for a way to at least survive such a situation, and the response seems clear: US assets, and gold. I’ve heard that there is a little bit of a flight-to-safety trade to countries that seem like they will be reasonably healthy and remote from difficulties, such as Malaysia. Among US assets, people clearly favor equities, probably because they perceive that equities have some inflation resistance (higher inflation means higher nominal revenue), and also because government bonds are getting rather iffy.
I do not think this will end well for equity holders, since both inflation and war have been historically bad for equities. Nevertheless, that is the trend of these times, and it will continue until it stops.
Despite being pulverized vs. gold, the USD has not done badly vs. other major currencies.
Gold looks like it is ready to hit $3000/oz. before the end of the year.
At these times, there is always the question of whether the USD’s value is falling, compared to relatively unchanging gold; or the real value of gold is rising, as seems reasonable given the situation today.
The short answer is that it is hard to say; but, I tend to always caution against the “Money Illusion Fallacy,” which is treating the USD as a stable measure of value when it is certainly not that. I also tend to default to the assumption that gold remains reasonably stable in value, and a rise in Gold/USD is mostly a measure of declining real dollar value.
Usually, this assumption is verified in time. After all, it makes sense that the USD would be declining in real value, since the country is clearly in a state of political upheaval; possible war; and with unresolved debt and deficit issues, which will only get worse from the first two factors. Historically, governments have “printed money” during times of war and political upheaval, and certainly when they have big deficits that they have to finance to begin with.
US history itself mirrors these global trends: these were the Revolutionary War, the War of 1812, the Civil War, World War I, the Great Depression, and World War II. (I do not think that Vietnam was a significant contributor to the floating and devaluation of the dollar in 1971.)
So, if the dollar is falling, but other major currencies are falling more and faster, that would make a lot of sense if you ask me.
However, I have to caution that there is not really any “money printing” going on at the Federal Reserve at this time. Rather, the Fed has been very cautious, no doubt because the USD is getting thrashed vs. gold. The USD base money supply has actually been shrinking!
It is entirely possible for a currency to decline substantially even while base money growth is very low or even negative. Although the Fed has been quite conservative with its base money supply, there is not much talk of supporting the dollar’s value here (since the dollar has actually been soaring on forex markets).
The Commodities Lag
The inflation playbook says that other commodities typically follow gold higher with about a 12 month delay. Basically, a declining dollar value means that it takes more dollars to buy gold; and soon, in a few months, it takes more dollars to buy other commodities too.
The recent upleg in Gold/USD outside of its previous $1800-ish channel began in February 2024, so we are in the lag period. Also, I think there is significant pressure on commodity prices before the election, when the candidates of either party would rather not talk about inflation much if they can avoid it. For one thing, stronger “inflation” readings would tend to push the Federal Reserve toward a “tighter” stance (particularly on interest rate policy), which stocks and bonds probably wouldn’t like much.
The conclusion of all this is that it is a nice time to pick up exposure in commodities including energy, metals and foods. I’ve done this successfully a number of times in the past, and I have to say that it always seems a little too hypothetical when it is time to buy.
Among safe haven plays, I tend to favor gold, especially since other options (stocks, bonds, property) are so richly priced.
It looks like gold mining stocks, particularly junior miners like those in the VanEck Junior Miners ETF (GDXJ) are ready to advance relative to gold, or outperform on the upside. But, in the event of significant turmoil (war in Europe), mining will look like a lot riskier option compared to a bar in a vault.
Equities
By the measure that John Hussman finds best correlates to actual real-world results, US equities hit an all-time high in October 2024.
Trend-follow if you like, but I would keep general equity exposure low.
All this outperformance vs. the Rest of the World has resulted in a huge valuation premium for US equities — a premium that has some justification, given the present state of world affairs.
Chinese equities have jumped higher, as the government looks to apply various spending and other programs. Although there is a lot of rahrah for US equities, which have been outperforming nearly all other equities and bonds worldwide, US equities have had a toppy look vs. gold.
You would expect stocks to underperform gold in a currency decline event (“gold bull market”), which hasn’t quite happened but it is not far off without even more stock valuation expansion than we’ve already seen.
Yes, equities are still falling short of gold on a Total Return basis since 2000, and more recently since 2018. People don’t talk about that much.
Do you remember the burst of enthusiasm for US small vs. large from a few months ago? That sure didn’t last. But, this is the kind of dip that might be buyable.
Conclusions
We’re certainly hitting all the “Fourth Turning Greatest Hits” including political instability, war, sovereign default, and currency decline (“inflation”). At least. markets seem to be squaring up that way.
OK, I have to admit that “the highest valuations in the history of US stock markets, even as bond yields soar” was not really on my Fourth Turning bingo card, but, now that it has happened, it sort of makes sense to me as a combination of flight-to-safety from the rest of the world, and perhaps the nature of today’s passive/other-peoples-money/
For a long time, people have wondered what the negative consequences might be of over-emphasis on passive approaches in the face of big valuation and fundamentals issues.
Everyone who said “enough is enough” and sold, has then faced “underperformance” issues.
I think there is good potential for catchup in other commodity prices, following the rise higher in Gold/USD (decline in USD vs. gold), with the usual lag. This would start to ring more “inflation” alarm bells at central banks, probably sending interest rate expectations higher. I continue with big positions in Energy in my active accounts.
Gold has been doing great but I am not so excited beyond $3000/oz. or 20% above the 200dma, which seems like they might coincide.
The Federal Reserve hasn’t been “printing money” at all and instead seems to be quite restrained here. Yes, this might be the moment when things break down and gold soars like it did in 1973/74 (which also didn’t have much Fed money-printing). Nevertheless, I would be a little cautious although I am still keeping big core allocations.
I’ve been adding a little here and there in Emerging Markets including China, and US mid/small. This would look bad if: a) we have a war with China and US owners of Chinese stocks get locked out like US owners of Russian stocks (me) did in 2022; or b) general turmoil is bad for all US businesses except the Magnificent Seven, which basically make more money if you hide in your basement and spend all day online. I still say gold wins either way. ~~ Nathan Lewis, The Polaris Letter.
So it goes,
Addison Wiggin,
Grey Swan
P.S. In a Zoom call on Tuesday, Joe Biden called Trump supporters “garbage.” Trump responded by riding around in a garbage truck in Green Bay, Wisconsin on Wednesday.
Meanwhile, the White House removed the reference from its transcript, which may have violated the Presidential Records Act. As a lifelong cretin on the underbelly of the Washington political beast, who first got elected to the Senate on the back of the Watergate scandal, Biden knows better.
Whatever.
Biden’s comment is also emblematic of A) what the Democratic Party establishment really thinks of voters, B) their idea that only they can be arbiters of what’s “true” and in the historical narrative, and C) their lack of respect for the institutions that govern the United States, including democracy itself.
These events are common in a fatuous Presidential campaigns. For the full skinny on what to really expect following Tuesday’s election chaos, check out the full array of contributors insights and advice in The 2024 Grey Swan Election Roundtable and Wealth Building Forecast for 2025, instead. If you’re a member of the fraternity paid in full, you’ve got access to all our videos.
If not, simply click on this link to get started.
How did we get here? Find out in these riveting reads: Demise of the Dollar; Financial Reckoning Day; and Empire of Debt — all three books are now available in their third post-pandemic editions. You might enjoy one or all three.
