$5,000/oz Gold, $300/bbl Oil? Is it really possible? Yes.
In my opinion, a multitude of forces are converging that could create an epic run in the price of oil and gold, as the dollar's role as a world reserve currency begins to fade.
As humans, we have evolved into a species that possesses a keen instinct to sense trouble ahead. In the Paleolithic days, this instinct warned us to take cover when a thunderstorm was moving toward us, or that a predator was nearby when the birds in the forest suddenly became quiet. The humans that did not possess this instinct likely died out fairly quickly and did not survive to produce offspring. That means if you are alive today you possess this innate instinct deep inside of you to know when trouble is brewing.
Even if you are not an advent observer of the markets, you can “feel” a general sense of unrest and unhappiness amongst people. This anecdotal view each person is feeling however, is often countered by the constant news headlines of new stock market records, supposedly lowering inflation, and low unemployment. How can this be? How can the economic numbers be so great, yet everyone has a collective sense of dread?
The news media has the same question. Just in the last few months the following articles have been printed.
CBS - “Why are Americans so unhappy?”
https://www.cbsnews.com/news/economy-inflation-why-americans-are-so-unhappy-three-charts/
Brookings - “Why are so many Americans unhappy about the economy?”
https://www.brookings.edu/articles/why-so-many-americans-are-unhappy-about-the-economy/
Yahoo Finance - “Why Americans are unhappy despite a thriving economy.”
https://finance.yahoo.com/news/why-americans-unhappy-thriving-economy-163854615.html
In fact, The Financial Times reported that only 14% of American voters believe they are better off financially now than when Joe Biden took office, according to a recent poll. At the same time, nearly 70% of voters thought Biden’s economic policies had either hurt the U.S. economy or had no impact. Just 26% of respondents said his policies had helped.
Again, these statistics seem counter-intuitive. According to government measures, the economy is doing great, yet everyone is miserable. Why?
There are a multitude of reasons, including inflation, people working multiple jobs, gains not being distributed evenly, etc., however, I think that the average person has an intuitive sense that something is not quite “right”. If you talk to people that operate in the economy, everyone from an entry level worker to a CEO, they will often tell you they are concerned about the economy or that the economy is terrible.
Again, how is this possible? All the economic numbers are stellar, stocks are at record highs and yet everyone thinks things are terrible.
If the economy is so great why is that almost 40% of generation Z has gave up on the idea of ever owning a home? Shouldn’t the roaring economy give our newest class of workers increased hope that they can move up in society and eventually afford a home and start a family?
Real world experience is clashing with the economic numbers touted by economists. In other words, NONE OF THIS MAKES SENSE.
It is quite clear to the average person that the economy is not healthy.
I heard a great interview with a long time financial expert Simon Mikhailovich, a former refugee from the Soviet Union, who stated that he saw a similar experience before the Soviet Union collapsed. Essentially, the average citizen was looking at how the Soviet Union was operating and could intuitively “feel” that something was not right, that “none of this made sense”, yet, the system kept going until the inevitable collapse. This term is coined “hyper-normalization”, meaning that although the situation seems abnormal and does not make rational sense, the system has been going on for so long that no-one can picture anything different. The longer the system survives without something catastrophic happening, people shrug their shoulders and just live within the system they are given.
For example, imagine an investment advisor in 2020 telling his clients that the markets are moving away from fundamentals and something will break in the markets. The advisor tells their clients to move out of the markets and into cash or precious metals. Well, even though economic theory says the markets should be valued less, the federal government pumped trillions of dollars into the economy and the markets went up anyway. That investment advisor would be fired within 6 months as their clients sat on the sidelines and watched markets reach new highs everyday. So what happens is that advisors push their clients into stocks because even though “it doesn’t make sense”, markets are moving up and their clients need to be in the markets.
The problem with this “go along to get along” attitude is that eventually economic theory and reality wins out. The US has survived this long without an economic calamity because of the wrong lessons learned during the 2008-2009 “Great Financial Crisis”. When banks took on trillions of dollars in toxic loans and debt instruments and the entire financial system was on the brink of collapse. The Federal Government swooped in and digitally printed trillions of dollars and gave them to the banks. The Federal Government also bought trillions of dollars in toxic debt, derivatives, and Mortgage-backed securities.
The lesson learned from the Great Financial Crisis was not “dont take on toxic or risky loans”, it was “take on as much risk as you can, because if it goes wrong the government will bail you out”. This new lesson is now baked into every aspect of the financial system, even down to the personal level. During Covid, trillions of dollars were printed and given to business through PPP loans, E-dil loans, and direct to citizen “stimulus checks”. This created an inflation nightmare which we are still dealing with the remnants of. The Federal Government is now $34 TRILLION dollars in debt and the debt situation is so terrible that just the interest alone on the debt is large than the entire defense budget. The CBO projects the US debt will reach an astonishing $50 Trillion dollars by 2033. Their projections are often conservative. Unless something radical changes, the expected US debt will probably reach $50 Trillion dollars by 2030. Think about that, in just six years we will reach FIFTY TRILLION DOLLARS IN DEBT. At this point, we know this can never and will never be paid back.
Economic experts, often cautious about expressing and any negative news about our debt problem are actually beginning to sound the alarm. The current federal reserve chair, who is often very cautious and careful about saying anything that may be seen as a criticism of the administration said this on 60 minutes:
“The U.S. federal government is on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. . . . I think the pandemic was a very special event, and it caused the government to really spend to ward off what looked like very severe downside risks. It's probably time, or past time, to get back to an adult conversation among elected officials about getting the federal government back on a sustainable fiscal path.”
This is just the United States Government debt, there is also record levels of US consumer debt, as well as debt in other countries. There is no denying there is a “debt bomb”, awaiting. Besides the debt, the “financialization” of everything, meaning the derivatives being passed back and forth between banks as collateral to offset risk is expanding a an eye-watering pace.
Famous investor Warren Buffet, described the derivative debt problem as “financial weapons of mass destruction.” Others have used similar language such as “ticking time bomb”, “a web of guarantees that makes it impossible to know who will be left holding the hot potato at the end”, etc.
This is why people feel so uneasy or so unhappy about the economy. They know something feels really “off”. They just cannot put their fingers on what exactly it is. They know what is happening makes no sense. The idea that a government can just print money out of thin air and give it out banks and somehow the economy will thrive while inflation stays low makes zero sense, and people can feel it. If the government can print money and give it away, what is the purpose of paying taxes?
So why has this worked for so long? Why has the US been able to get away with this scheme without a serious long-term catastrophe in the economy? The dollar reserve currency status. Right now, the dollar reserve currency forces other countries to use our dollars for transactions, allowing the US to print as many dollars as needed and those dollars still maintain value. The price of oil is listed in dollars as is most foreign loans, commodities, etc.
However, with the US imposing sanctions on other countries, effectively “weaponizing” the dollar, countries are quickly scrambling to get away from the dollar as fast as they can. The so-called “BRICS” countries such as Russia, Brazil, India, and China have been developing systems trade within their own currencies and without the use of the dollar. Not only do they sense the inevitable decline of the US dollar, they are fearful that if the US does not agree with them politically, the weaponization of the dollar will turn on them in the form of sanctions or asset seizures of their currency reserves. The lesson learned from the seizure of Russia’s foreign reserves and use of the dollar to punish Russia, was that if you US does not like you they can seize your foreign reserves and impose sanctions in an attempt to cripple your economy.
The entire house of cards of the US economy will come crumbling down if the US dollar loses its reserve currency status. That will create a situation where our debt actually matters and the value of the dollar becomes significantly less. This will inevitably drive up the price of commodities in US dollars such as gold and oil, much higher. The current gold price to oil price ratio is about 2:1. One ounce of gold is currently worth $2,000/oz and the current price of a barrel of oil is $80. If the price of gold rises to $6,000/oz that will put the price of a barrel of oil at roughly $250 - $300.
Now, gold investors have been making this argument for a long time and gold has held value, but never made the type of gains they argued for. However, I am seeing signals that the tide for gold investing is starting to turn.
In the last few months, drowned in the news of the AI and technology stock mania that is currently occurring, two of the most well-respected hedge funds revealed that they have been buying up tons of stock in gold mining companies. First, in October, billionaire Paul Tudor Jones stated that the U.S. is moving toward an “untenable fiscal position” and recommended positions in hard assets such as gold. David Einhorn of Greenlight Capital, announced in November that he has started purchasing physical gold for his hedge fund clients. In the last few weeks two of the top hedge fund managers, David Einhorn and Paul Singer- Elliot, announced they will be buying up gold and precious metals mining companies for their hedge fund clients. These stocks are at extremely low valuations currently, and in their opinion are poised for a big moves as the second wave of inflation takes hold.
Its not just hedge fund managers either, Central Banks around the world are buying up gold and replacing their US dollar reserves with gold. Axios posted an article titled “Central Banks are buying gold at a record pace.”
https://www.axios.com/2024/01/31/central-banks-buy-gold
The article states that “Central banks collectively bought more than 1,000 tonnes of gold for each of the past two years — a pace unprecedented in modern history.”
Additionally, and of most concern, the article talks about gold purchases by China.
The People's Bank of China alone bought 225 tonnes of gold in 2023, worth some $15 billion at current prices. Its current holdings now stand at 2,235 tonnes and represent about 4% of its international reserves.
It seems obvious that the so-called “smart money”, everyone from individual hedge funds to world governments, are buying up gold at a record pace, yet individual retail investors have the lowest allocation towards gold in modern history. If you follow the old investing adage of buy low, sell high, this looks like the perfect time to buy yourself some protection.
In the next downturn, the government will follow the same playbook they have been cultivating since 2008. They will lower interest rates to zero and print even more money than the previous two recessions. In my opinion, this will be the final nail in the coffin for the US dollar and create an inflationary wave sending the US dollar dramatically down in value. This would send gold to $6,000 or possibly much higher, and oil will reach nearly $300 per barrel. When this may happen, no-one knows. However, I do know one thing, you cannot buy insurance if your house is already burning.
-Russell