Gold has your back when central bankers don’t.

Photo: Gold has your back when central bankers don’t.

Two weeks ago, I interviewed over 50 finance experts and company CEOs at the VRIC to fine tune my investment strategy for the year. I’ve consolidated my learnings into a three part email series beginning today - including key takeaways from my conversion with Former Prime Minister Stephen Harper, who led the Country through the last great crisis in 2008.

Since the event, everyone has been asking me about the sentiment on gold. So we will start with that.

Supply and Demand - Short Term

Since 2017, there have been no new gold discoveries with more than 2 million ounces of minable gold. Meanwhile, precious metals advocates like David Morgan and Alisdair Mcleod noted that there has been a “run” on physical metal on the COMEX exchange in 2020.

What does this mean? Large institutions are lacking faith in banks and regulators ability to track physical ownership of bullion.

This has happened before - Let’s look at the historical relationship between gold deliveries (blue) and the gold price (yellow)… Similar to 2006 - demand has recently skyrocketed. Supply has not.

Macro-fundamentals - Long Term

Right now, we are witnessing a coordinated global effort to debase fiat currencies. Almost every global economic power is using its central bank as a tool to debase its currency.


Here is a quick anecdote:

Let’s say a government called “ABC” issues bonds (debt) to finance its deficit spending, at a 1% interest rate. Creditors buy the bonds expecting to be paid back accordingly.

But one day, it becomes very difficult for ABC’s Treasury department to pay the debt back. They have been spending like drunken sailors - and the deficit balloons.

This is occurring right now, as governments around the world are reacting to the global pandemic.

In our thought experiment, Government politicians aren’t willing to face a default, so they devise a plan to pay back their creditors:

First, they drive inflation - whether 2.5 - 3% - the key, is a number larger than the (1%) government’s borrowing rates. To achieve this, ABC’s central bank increases its money supply, with the aim of hitting target interest and inflation rates.

If successful, ABC government can repay their creditors with money they printed, while bearing the burden of a depreciating currency, as no true value was created with this increased money supply.

This is also known as an inflation tax.

Government bond investors end up being the “bag holders,” as the government has benefitted from a negative “real yield” on its debt.

It’s a sleight of hand that even the best magicians would admire.

As we know, real yields in the United States and most of the developed world already dipped below zero in 2020:

This means, adjusted for inflation, US Treasury investors are no longer making a profit. The same can be said for investors in Eurozone bonds, and many other global powers.

The rate at which the money supply is expanding today makes the 2008 great financial crisis look like nothing happened:

I remember how well gold performed in the wake of 2008...

A Big Question I asked at the VRIC: Is there any way out of this debt trap? Any solution?

No. There is no simple solution, there are only trade-offs to be made.

The entire global economy now relies on low rates to remain solvent, and governments will not choose to default. This would set their economies into severe downward spirals.

This is a very high stakes game and like it or not, we are all playing.

Founder of Real Vision TV and Global Macro Investor Raoul Pal speculates that we have reached the logical conclusion of our financial system. In the chart below, history will remind us that no financial system or fiat currency lasts forever.

We could select a handful of hard assets to compare, but for the context of this conversation let’s stick with gold:

I am looking for ways to retain some sovereignty through what could be a generational shift in our financial system. Gold is a steady, safe bet - an insurance policy.

In the words of one of my guests, Luke Gromen, "There have been moments in history where you wanted to own gold, and in those moments, it might be all you want to own."

I am 36 years old. I am not an old school gold bug. But last week when I spoke to Former Prime Minister Stephen Harper, there was fear in his eyes when he discussed the sovereign debt crisis. The music is stopping, and no-one knows exactly how this will end.

Gold has your back when central bankers don’t.

If the above thesis is correct, then holding physical gold is smart. But I want to do more than weather the storm, so I am looking for leverage. I asked every one of my guests at the VRIC for their 2021 game plan - portfolio strategy and stock picks. We will get into that tomorrow.

To recap:

Gold supply and demand fundamentals firmly support the gold sector.

Domestic and foreign governments will continue to print money to support spending in the near term. It’s the only way to avoid defaulting on their debts.

Real interest rates are going to remain negative while the central banks try to keep nominal interest rates low and manage inflationary pressures.

Gold and gold equities can provide insurance and leverage for investors.

Stay tuned, tomorrow…

I’ll cover the most critical variable my guests at the VRIC are watching out for in 2021.

Jay Martin
CEO, Cambridge House