Will All Go Horribly Wrong?

To own gold is not climbing a wall of worry. For anyone who understands the problems that the world is now facing, physical gold ownership gives peace of mind and the best insurance that money can buy. So why is less than 0.5% of world financial assets invested in gold and gold stocks? There are several reasons for this. Firstly, 100 years of massive credit expansion and money printing have mainly inflated the asset classes that investors understand, be it stocks, bonds or property. Also, financial repression, which in layman’s terms means manipulation, has totally distorted most financial markets. With the help of derivatives, governments, central banks, investment banks and hedge funds can create false markets in most investment areas. If a market is massive and global, like currencies, they are very hard to manipulate, except if several major sovereign states collude. But in a small market like gold and silver, it is extremely easy to manipulate prices. Even more so when a lot of it is done with the assistance and blessing of governments.

All manipulation ends in tears

The longer it takes before a market gets back to its unmanipulated equilibrium, the bigger will be the adjustment. In the meantime, investors believe that their portfolios will continue to grow to the sky. Nobody fears the fact that p/e’s are 80% above the average or that bond yields are around zero or negative. But in bubble markets not much is needed to change sentiment.

There is a lot of talk about the Trump effect. Is the new US president going to continue to fuel market sentiment or will he cause a collapse. It is of course not Trump that will change the direction of markets. More likely, he could be one of the catalysts that will cause the credit and stock market bubble to burst.

When markets are overbought, overvalued and overloved, there is not much needed to change the direction. And this is where we are now. A change in sentiment and fear will make markets turn on a sixpence.

In the short term the gold price is a reflection of fear. But in the longer term, all gold does is to reflect the debasement of paper currencies. Since 1971 when Nixon abandoned the gold backing of the dollar, the US currency has lost 97% of its purchasing power. But since currency debasement is not noticed on a daily basis, its effect is never understood by the public. Few people appreciate that the increase in house or food prices is due to credit expansion and money printing. We will never see a headline like: “The dollar is losing purchasing power due to economic mismanagement”, or that gold is going up because the dollar is being debased. Since 2011 when gold reached a temporary peak of $1,920 we have seldom seen gold making positive headlines. In 2016 we saw the first signs of gold making the news again. But that died quickly as gold declined $250 from the July 2016 peak.