“If you bought a treasury bond five years ago, versus buying gold at $450, you got your money back at a nominal, miniscule yield because it’s ‘safe’ guaranteed investment. The problem is the million dollars you got back it buys one third the amount of gold it could have bought 5 years ago. That in a nutshell is the debasement of the currency at work. It is the lower standard of living at work.”
Ed Note: Michael Campbell calls Greg Weldon – “The One Analyst other Analysts can’t Wait to Read.”
Ed Note: Condensed version of this article HERE
“Gold still has significant upside” – and why…..
Michael Campbell: I’m glad you’re with us. I call Greg Weldon’s research the top research in North America. He is the guy who does all the work that other analysts and institutions want to have a look at.
In the last two weeks we’ve had the Irish bail out and the United States promised to help buoy up the International Monetary Fund, with another trillion dollars. Are we trying to solve a huge debt problem by taking on more debt? What are the implications of this?
Greg: Well, I think actually the last time I was on your show Michael we discussed that Greece at the time seemed to be an isolated event and how ludicrous that whole process was. This only intensifies when you think that 25 out of 27 EU nations are in violation of rules on either debts or deficit relative to their GDP. We’ve been saying for a long time that for Europe to to bail out Europe is ridiculous. To think that the US is going to commit a trillion dollars to any bail outs is even more ludicrous. Really the spark in the stock markets around the world was that comment from an unnamed US official.
The European Central Bank has been in a program to buy debt, but they sterilized that money that was in the system, they withdraw at the back end. So they are not even really playing ball to begin with to the degree that the Fed has in the US. To pin your hopes on all of this is highly suspect. But having said that, the European Central Bank is expanding their balance sheet again. The Bank of Japan balance sheet just hit a new interim high. The US bought a lot of bonds and unfortunately they’ve had mortgage roll ups so they haven’t yet in net expanded their balance sheet to new heights, but they’re in the process of doing that. So when you have the three major central banks in the world expanding their balance sheets, that does provide some underpinning in terms of liquidity. To think that that’s a solution to this long term problems is absolutely ludicrous.
Michael: In your view then Greg, it’s not a matter of if we have a day of reckoning, it’s just when?
Greg: There is no way out. This is the cycle that you’re caught in and you can never underestimate the ability of monetary officials around the world to get creative. This is a bubble that goes back to the US removing the dollar from the gold standard. What we’ve entered into is an absolute the day of reckoning. But it’s not here yet because we’re going to keep going through these vacillations where they pump it up and dump until they can’t do it anymore. The second you pull the rag out from under the market in terms of support either fiscally or monetarily, it’s a nightmare waiting to happen.
So they have boxed themselves into a corner where pump it up is the only way out, but inevitably is doomed to fail. And timing that failure is what is just so difficult and becomes increasingly difficult as these vacillations become more and more extreme. You might liken it to an EKG where you have a nice little pattern of up and down, up and down, up and down and in ’97, ’98 crisis that pattern became a little more wild, in 2000, 2001 more wild, lastly in 2007, you’re into the heart attack stage.
Michael: How does that manifest? Is it deflation or hyper-inflation?
Greg: It’s both Michael. This is a whole theme to talk about. On the one hand the bail out of Ireland calls for them to accelerate the €15 billion budget adjustments over the next five years. In fact they want it to be more extreme, in other words less spending, higher taxes and at $15 billion adjustment that the parties in power there just put forth. This has created a completely fractured political debate where the Green Party has pulled their support of the government and now they might have to call elections. It could become a referendum to the people who of course are not going to vote for even more extreme austerity.
So it becomes a situation where people are getting hurt, it becomes less easy to wiggle out of it by throwing more paper at it, and you can even liken this to the situation in the US now too where there is this push for austerity. The political will and the will of the people to endure pain to make that happen becomes the balancing act and the fine line. You’re looking at a situation in the US where the second they cut federal support, you have states the municipalities that are in deep, deep trouble; in fact declaring bankruptcy so I think that this issue applies in Europe.We said years ago when we first started talking you, that the housing market and the results in the US banking situation which just happened that it would expand and you wouldn’t see any kind of real potential end of days until you had a European state default and a US state default. This is kind of the trend of where things are going right now.
Michael: There’s huge pension problems that exist in the world today and they are already under funded in the extreme. When does the media really recognize how severe the problem is?t
Greg: Ireland and the US and New Jersey are the most fiscally problematic places. I’m of Irish heritage, grew up in New Jersey, so it is painful to watch from a personal perspective but it impacts everybody. There are things going on in Asia and in other places in the world which are growth orientated but also problematic from the perspective of sustainability. Even when you mention Canada, by some metrics Vancouver is among the most overpriced real estate in the world. The reality and the math is that Canadians are totally tied into this. So Europe is really bailing out Europe; it’s not about bailing out Ireland, it’s more about making sure that the entire European banking system doesn’t come unglued.
Michael: There needs to be some sorts of restraint on government’s spending but in my experience the only way you can get the popluous to agree is if its someone else who has to cut back. Therefore is politics completely unable to handle it unless you get a a crisis situation?
Greg: Someone’s got to feel the pain and no one wants to feel the pain. It’s much easier to print more money to cover up that pain and ultimately that’s what happens.That’s he human condition, and the business the Fed and other central banks are in now is to do whatever they have to do to circumvent the pain of debt deflation. They feel they can fight an inflation, a hyper-reflation so they want to push for that. And they’ll probably keep pushing until they get it, or if they can’t get it, that’s your nightmare scenario.
Michael: You wrote the Gold Trading Boot Camp in 2006 in which you chronicled the kind of situation financially that we’re finding ourselves in right now and about taking advantage of gold as a protection against these kind of events. Where do you think gold is right now?
Greg: Gold still has significant upside. We actually became a little bit more cautious on precious metals about six weeks ago, when it looked like global interest rates had started to rise. But as we mentioned before the Bank of Japan’s balance sheet is expanding again, the ECB expanding its balance sheet and the Fed doing the same. As soon as these mortgage roll offs get out of the way the feds balance sheet should explode. So this certainly is positive for Gold.
More importantly in the bigger picture, when you take a look at gold prices in every currency in the world, it’s not a dollar move. Gold is gaining against every single currency in the world. The flip side of that is that every currency in the world depreciating relative to gold because central banks are debasing money everywhere. That’s the bottom line when talking about gold. That’s what people tend to miss, tend to overlook, that is what is really at the core of this. It’s kind of veiled, it’s kind of hidden, and no matter which way it goes, whether it is a successful hyper-reflation or whether it is a downturn to debt deflation, either scenario incorporates a lower standard of living.
This is what you’re saying when you’re talking about what’s happening in cities in the US and in Ireland where state employees are undergoing wage freezes. The bottom line is more unemployment, more chronically unemployed who can’t find jobs. This is the embedded reality of economics and it means a lower standard of living. For example the debasement of the currency means if you bought a treasury bond five years ago, versus buying gold at $450, you got your money back because it’s ‘safe’ investment and getting your money is guaranteed though at a nominal miniscule yield.
The problem is the million dollars you got back it buys one third the amount of gold it could have bought 5 years ago. That in a nutshell is the debasement of the currency at work. It is the lower standard of living at work. We’ve lived on this credit bubble for so long that he downturn is going to be very difficult to fight because we’ve become reliant on expanding credit.It’s not the right thing to do it’s just because we’ve become so reliant on it now.
Gold is so attractive in the long term because this is a trend that is intensifying. It’s a trend that’s broadening, and the tentacles are reaching throughout the world in places that it has not reached before. You’re not protected in currencies, so for me on the longer term picture gold still looks attractive even at these prices.
Michael: What do you think of the Crude Oil Market?
Greg: I think oil has been a major laggard and we haven’t liked oil until the last month or so. It’s increasingly gotten more powerful this move up in Crude Oil and its clearly breaking out this week. There’s very strong momentum including the energy stocks and the energy ETFs relative to the market as a whole.
And it’s interesting to note too that this is obviously increasingly bullish for commodities just when it look like maybe commodities have had their run and peaked. A lot of commodities have gotten to historically outrageous levels if you will with Cotton at $1.50, Copper back to $4 and Palladium pushing $800. The list of commodities that are trending in a positively has intensified this week alone. Which gets back to this whole thought process surrounding stock markets and central banks and bail outs and printing more money and balance sheets, so on and so forth.
So to me, the entire commodities complex has looked good, continues to look good, and now you can add the energies to the mix as they begin to play catch up and in fact are taking a leadership role on a short term basis. This creates all kinds of discussions we might have on what this means for inflation down the road because if you recall it was October, November, December of last year that commodities were exceptionally weak. Food like wheat and soy beans and are breaking out again this week too. Food prices could become problematic at some point going forward thanks to the monetary support for economies world wide.
Michael: One of our favorites since May of ’03 has been silver. Is silver outperforming gold?
Greg: Silver is absolutely outperforming gold. It has been a big performer and an upside leader for quite some time in the near term. I have a love for Silver as when I first started the business it was in the Silver pit in New York Cities World Trade Centerback in the hey day of $50 Silver.Talking about the bigger picture, Silver has a great appeal in that it’s a lower denomination metal, you can hold smaller quantities, exchange it for less value in terms of what you mightexchange Gold in potentially a real worst case scenario down the road. From that perspective I still like Silver. It does continue to outperform gold and I expect that to be sustained.
Michael: One of the trends you spotted was the huge surplus of gasoline inventories and when you recognized when that had reversed itself, you got bullish on gasoline. It worked out very well and I thought that was a terrific example of why analysts and institutions read what you’re doing .We’ve seen a rise in gasoline so what do you think is going on in gasoline now?
Greg: With the down turn in the economy there was less demand for gasoline ,we’re producing less and we started importing less. The next thing you know we’re drawing down inventories to meet demand. So if there is any push in the economy as a result of this monetary stimulus that will be bullish. But really it’s more a function the fact that the supply demand fundamentals have shifted. When you look at the calendar spreads, the nearby’s are commanding a price premium. I won’t say that’s abnormal but its very bullish. It indicates that there is not enough supply available for immediate delivery so the market is willing to pay a higher price for the near term contracts to try and draw that supply because it’s needed. We see a pretty dramatic shift in the gasoline markets.
I think it’s also interesting that we haven’t seen gasoline rise. When we start talking about US inflation it is certainly weighted towards energy more than food so gasoline rising will becomes problematic. If labor is not picking up, housing is not picking up, it’s only the asset markets that are inflating because of the monetary push. If gas were to rally significantly that could create a real wild card kind of problem for the Fed in terms of discreetionary spending as it will certainly put pressure on the consumer if it continues.
Michael: Always fascinating Greg, I hope you and Aileen have a wonderful Christmas season.
Dennis Gartman on Oil: “We have been stressing the changing term structure of both WTI and Brent for the past several weeks, to the point of being taken to task by many of our clients who wonder why it is that our attention is drawn so materially to this shift. Now it is clear why we have spent so much time writing about the shifting term structure. It is because the term structure changes before the flat price does and when the term structure changes those who do not change with it shall be run over by the eventual change in price. “
“Finally looking at the chart of January WTI Crude on the page previous it is obvious that it is materially over-bought in the short term and is running up against resistance as we approach $89.50. A retracement back to $84.50- $85.00/barrel would seem reasonable”
Greg is the guy who does all the work that other analysts and institutions want to have a look at. He gets behind the numbers and obviously has a terrific understanding of what’s going on. You can also subscribe to Greg Weldon’s Newsletter at: www.weldononline.com
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