"Everything you need to know about gold"
BEFORE ASSET PRICE DEFLATION
Before we talk about asset price deflation, let’s review what happened before 2022.
Most financial assets benefited enormously from the Fed’s hugely gratuitous efforts to support, sustain and reinflate prices after the 2020 collapse and the ensuing forced economic shutdown.
GOLD, STOCKS, BONDS, CRYPTO…
Is this the all-asset crash that some have expected? Looks like it could be. Before discussing that, though, let’s look at four charts (source) in sequence: GLD (gold), S&P 500, TLT (long-term US Treasuries), and Bitcoin…
From its high of 193 in early January to its recent low of 168, GLD has declined thirteen percent.
From its high in late December at 4818, to its recent low of 3858, the S&P 500 Index has declined twenty percent.
From its high point in early December at 155 to its recent low at 112, this ETF of long-term US Treasuries has declined twenty-seven percent.
From its high point of just under 70,000 (69,355) in November past, the price of the most-watched crypto currency has declined a whopping sixty-three percent to its recent low at 25,350.
ALL-ASSET CRASH?
Before trying to answer that, there is another question to ask first that will help clarify the situation: Has any asset class or investment been going up lately? None that I am aware of – except energy and food.
Also, being short something is not an investment in a particular asset or asset class as much as it is a speculation on dropping prices. So we can rule out inverse ETFs, put options, and selling short.
We can also rule out real estate which seems to be treading water at best, with the possibility of going under as rates keep rising.
What about silver? I thought you’d never ask. Here is a similar chart to those above; this one is for SLV…
From its 52-week high last June at 26.43 to its recent low at 19.01, SLV has declined twenty-eight percent.
Has anything gone up or at least not dropped recently? Well, yes; commodities in general. This includes primarily foodstuffs and energy which we have already mentioned, and some industrial commodities.
CRB INDEX
Since the beginning of the current calendar year the CRB Index has increased more than thirty percent. That is in direct contrast to nearly everything else we have mentioned thus far.
The index consists of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar and Wheat. (source)
DIFFERENCES AND DISTINCTIONS
When we talk about the financial markets, we are referring to stocks (equities) and bonds (debts). We are also talking about derivatives based on those underlying items, such as ETFs, options, swaps, and spreads.
The financial markets are separate and distinct from the commodities markets. The fundamentals for both markets are different, yet, there are factors which can affect both markets.
The currency markets are also separate and distinct from the commodity and financial markets, although, what goes on in the currency markets can have significant impact on the financial (stock and bond) markets and, to a lesser extent, the commodities markets.
As in the financial markets, there are also derivatives in the commodities markets (options and futures) and currency markets (usually involving currency exchange rates).
FINANCIAL ASSETS ARE OVERPRICED
In the case of prices for stocks, bonds and other financial assets, the recent high prices discounted years of profitability.
Even allowing for a highly generous application of price-to-earnings ratios, prices far exceeded the most favorable expectations for future growth.
The problem is much worse, though, than simple overvaluation of assets. The US and world economies are debt-dependent. The excessive valuations in financial asset prices are the result of an abundance of cheap credit.
Most economic activity is funded primarily by cheap credit; whether it be mortgages, business activity and corporate expansion, or retail consumption. Without access to unlimited amounts of credit the world economy would come to a standstill. The situation is precarious.
A FRAGILE ECONOMY AND A LOOMING DEPRESSION
Some are quick to assume that the Fed will take whatever steps are necessary to arrest the hellish descent. Of course, they will try. But they likely won’t be successful.
We have advanced too far down the path of money substitutes and cheap credit.
Also remember that the Fed is reacting to the effects of inflation and cheap credit which it (the Fed) created. (see Fed Action Accelerates Boom-Bust Cycle)
Whatever the Fed’s intentions are (or were), they caused the Great Depression of the 1930s and the Great Recession of 2008-2010.
The Next Great Depression will be worse and last longer. (Yes, I have said that before.)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
SOME FUN WITH NFTs
Both my son and grandson collect sports trading cards. I began a group text with them the other day. Here is how it went…
me: Do either of you have any of these in your collection? (I attached a link to NFTs of Rob Gronkowski on OpenSea)
son: Do you have a potato chip shaped like President Lincoln’s top hat?
Investors, speculators, gamblers, and instigators – four types of ‘investors’. Which one are you?
Nowadays, it seems that anyone who owns anything fancies themselves to be an investor.
However, does buying a fractional unit of bitcoin in an online trading account qualify someone as an investor?
Are fanciful dreams of striking it rich by running with the social media herd the foundation of fundamental investing? Maybe there is more to it than that. Let’s take a look.
BUBBLICIOUS ASSET PRICES
The words bubbly and delicious might be more descriptively accurate when talking about champagne. However, it is not too difficult to imagine giddy salivation among the owners of Bitcoin, or Tesla stock.
And, while some might be more stringent in their terms of definition and applicability, investors in stocks, bonds, real estate, etc. – pretty much anything with a $ sign in front of it – might want to rethink the current state of affairs as it pertains to valuation of their financial assets.
STIMULUS DOESN’T ALWAYS STIMULATE
The word stimulus has become an oft-repeated term, sometimes overused. We are referring to the non-biological meaning below.
A 21ST CENTURY DEPRESSION
Some are calling it the “Greater Depression” but that still makes last century’s Depression of the 1930’s the point of reference. The Great Depression of the 1930s was bad, but what we are facing now is worse.
The Depression Of The 21st Century will likely end up being the new singular event of discussion and comparison for all financial and economic catastrophes. Questions of how much worse and how long it will last are difficult to answer. Predictions about the type and strength of potential recovery could be premature.
An All-Asset Price Crash (AAPC) might be the next “Wow! Can you believe it?”
In the meantime, whether it be stocks, bonds, gold, or oil, investors are licking their chops and counting their profits before they are booked. And, they have reason to gloat. Let’s see what all the noise is about.
EVERYTHING IS GOING LOWER
Nothing epitomizes cheap money more than the lofty level of bond prices and their corresponding low yields. The old adage of “never chase yield” seems to have been pushed aside in favor of “buy more when the interest rate approaches zero”.
Yield-hungry investors think they are being conservative, though. Some of that reasoning is due to the obvious volatility of the stock market; especially during the first twenty years of this century.
BONDS BIGGER RISK THAN STOCKS
Even before the latest stock market dump, bonds could be considered a bigger risk than stocks. The risk is greater now than it was in 2007-08; and probably more so than at any other time in history.
DO YOU NEED A SECOND OPINION?
Let’s face it. No one plans financially for disaster. We assume that if we are conscientious, persistent, and long-term oriented, that our plans – generally speaking – will find fruition.
We carry insurance to protect ourselves against financial loss from events such as death, major illness, disability, property damage, long-term care, etc.
But what about systemic risk?
How will you survive a complete credit collapse and loss of 50-90 percent of the value of all assets denominated in U.S. dollars? What about a full-scale depression?
When most advisors talk about investing in such a way as to minimize risk and avoid market blowouts, there is an implicit assumption that whatever the situation, it will be temporary; that the financial markets will continue to function.
Maybe that isn’t the case. Wide-scale bankruptcies, bank failures, and interruptions in communication channels could effectively stop markets from functioning at all.
Suppose you have an investment that generates huge profits for you during a stock market collapse; say a short position on some individual stocks or an ETF with a similar strategy.
Because of the leverage involved, if a market decline is steep enough and swift enough, there may not be any traders or other investors with money to whom you can sell your profitable ETFs or from whom you can buy back your existing short positions.
What if the U.S. dollar renews its long-term decline in accelerated fashion? Is runaway inflation a possibility and how would you be affected?
Do you understand the concept of fractional-reserve banking and the danger it presents?
Maybe you don’t own stocks. You might own bonds which provide you with interest income. Or real estate; or gold. Extreme negative market conditions will affect all of these things in ways you probably cannot imagine.
If you are worried or concerned about any of these things, or just feel the need to be better informed, you could benefit from a personal consultation.
Or, perhaps you are a corporate officer who has employees that would gain from a better understanding of these issues.
Whatever your particular situation, take action today. Send me an email with your concerns and questions. I will get back to you quickly.
Let’s talk… kwilliams@kelseywilliamsgold.com
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!