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It’s been a bit longer than usual since my last newsletter as I had to do some family caregiving, but I am glad to be back with gold soaring and the government shutdown! I thought today we would do a deeper dive into gold, as well as hit a few more pressing topics…
All That Glitters
Gold has continued its march higher, surpassing $4000/ounce, but retreating slightly because of hope for a Hamas ceasefire and some profit taking, then gaining a bit again on Trump’s China tariff threats Friday.
If you have been with me for a while, you know I have been suggesting gold for the past few years (back when it was in the $1600-1800/ounce range; as well as silver, which has more than doubled since I talked about precious metals as a portfolio hedge).
It’s important to remember that gold is not a risk asset. That means it is not an asset where you take on more risk in exchange for a higher profit and are expected to see more volatility. It is meant as a safe-haven store of value and a hedge against the risk in your portfolio, these days especially against the eroding purchasing power of your dollars (meaning, your dollars buy you less in terms of groceries, housing, etc.)
Some points I want to highlight (both from the interview and otherwise):
Your investments are up in dollar terms, but not as much in gold terms—in fact, your holdings may be down.
From Luke Gromen/FFTT:
This was measured for seven years since the end of sept 2018:
In USD terms: NDX (Nasdaq 100) up 236%, SPX up 133%, Case Shiller Home Price Index (CSHPI) up 60%.
In gold terms: NDX up 4.7%, SPX down 27.6%, CSHPI down 50.2%.
Another supporting point, came from the @KobeissiLetter account.
They said, “This is incredible: It now takes 102 ounces of gold to buy the median-priced new single-family home in the US, the lowest amount in 46 years. Excluding 1979, this is the lowest level in at least 65 years.”
This means that things are less affordable because your dollars are worth less. This is on the back of nearly 15 years of zero- or near-zero interest rate policy and trillions of dollars in money printing.
So, gold is going up via what we have all known for a while—our rickety fiscal situation, with Debt/GDP > 120%, Deficit/GDP in the 6-7% range, and interest on our debt > defense spending. Wall Street has finally caught on to what I have been telling you for years. They are calling it the “debasement trade”.
While gold is going up, remember that it isn’t about capital appreciation as much as capital preservation. You are trying to add something to your portfolio that preserves the buying power of the dollars you have earned and saved or invested in dollar-denominated assets.
In addition to the debasement trade, foreign central banks have been supporting gold’s rise. I have mentioned many times in this newsletter that for the past 10-11 years, central banks have not been net buyers of Treasurys (they have been net sellers) and they are replacing their reserve holdings with gold instead of another currency.
We have seen that central banks are now holding more gold…
This has come on the back of the Fed not managing the dollar well on the international front (or on the home front, either), and the Biden administration’s weaponizing of the dollar when it confiscated Russia’s reserves. You can’t be the global reserve currency if there is a threat that such reserves will be confiscated, as I discussed extensively (along with other themes here, in You Will Own Nothing, which is more relevant today than when it was released 2 years ago).
The East is now exerting more influence over the pricing of gold, which has been suppressed by a variety of factors, including derivative trading. China is also making a move to not only trade using gold as their de facto settlement currency (meaning they trade with other countries and if there is a balance in Chinese RMB, they offer physical gold as a back up), as well as expanding gold trading in Shanghai and opening a vault in Hong Kong.
This is all a part of the shifting financial order. It doesn’t mean the dollar is dead, it just means there won’t be one King ruling the global economy. We are returning to a multipolar financial regime with gold playing a stabilizing role.
You can read more about that in Bloomberg here.
Another wild piece of information, referenced in the chart above from State Street Global Advisors is related to allocations of gold. Interestingly, among high-net worth investors with at least $250,000 in investable assets, substantially more Millennials own gold in their portfolios than Gen X or Boomers!
I keep getting asked about whether gold is too high to get in. Again, looking at it as a hedge, we are taking a dollar-cost averaging approach, which means we buy on the regular, which averages highs and lows. We have also been getting exposure in a variety of ways, including physical gold, ETFs and gold miner stocks, as well as buying other precious metals like silver.
Fixing the American Dream
In addition to the fiat debasement issues discussed above, there are other factors influencing housing that are putting the American Dream out of reach (and causing more young people to embrace socialism). I offered up some suggestions on how to fix that, at least temporarily, here.
Is AI in a Bubble?
This is the multi-trillion dollar question that I have been asked about a lot recently. Below are some yes and no answers, but the answer is somewhere in the middle.
Pro-bubble side:
-Nonsensical valuations
-Billions being raised for anything AI with high growth expectations vs reality
-Lots of AI washing (meaning, everyone is putting “AI” on everything)
-Disruption and adoption is behind
-60% of AI startups are pre-revenue
-Infrastructure costs going up and environmental fights are increasing
-We don’t have ROIC case studies yet
This could impact risk capital, create a market contagion, and hurt jobs.
Against-bubble side:
-Leaders have strong balance sheets and diversified businesses (big companies like Microsoft with strong non-AI businesses vs Pets.com-type dot com startups)
-They have pivoted to the next best tech thing seamlessly (Internet of Things à Cloud à AI à whatever is next)
-Spending and adoption, although lagging, is still increasing
-We are in the early innings—remember that the dot com bubble burst, but then the next generation came and created a lot of value
-AI itself may create incremental demand as applications are created and incorporated into work flows
AI right now is important to asserting our US growth story—that is, we need AI to work and for the US to be a leader to drive future growth (and help our debt situation). Today, it is holding up the stock market, which is in part supporting the bond market.
So, while anything could happen, the likelihood is that there is more of a mini-implosion than a full on meltdown, and it is possible that there is a breather between today’s starts and what ultimately works.
An American Thriller
I love supporting good people and their work. Don Bentley is a friend of mine and the definition of good people. His new book in the Vince Flynn Mitch Rapp series “Denied Access” is out now. If you like a good assassin thriller-type book, this one is for you! Grab it now.
Random
A funny take on human behavior… (source unknown)
Another one I read: A guy was in a family group text where his uncle said he needed some money. The guy reached out to figure out how he could help his uncle. His uncle said, “I don’t need the money; I just didn’t want everyone asking me to borrow some!”
And finally, my husband shared this vintage Walter Matthau “toilet” joke on Johnny Carson here.
With Gratitude,
Carol Roth and Team
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