Heading Over Into the Abyss

IDW-componentsMy Inflation-Deflation Watch (IDW) was designed on January 31, 2005 for the purpose of providing price data points of key commodities and proxies for major economic activities to give me a sense as to whether the global monetary and economic system was expanding or contracting. Having a sense of whether the system is expanding or contracting should help us know whether to be more or less aggressive in our investment strategies. The items in the IDW and their respective performances since its January 31, 2005 inception as well as the performance of each item since the April 28, 2011 peak are displayed below.

Being the gold bug that I am, it should not have surprised me, but I admit that it did, when I took a look at the chart directly on your left. From Jan. 31, 2005 to Jan. 8, 2016 gold rose more than any other item in my IDW. It’s up 163.44% since then! Silver was not a close second, gaining 108.06%. Indian stocks were third, up 91.67% and Chinese stocks were 4th, up 89.37%. The S&P 500 rounded out the top 5, up 68.62%. Why was I so surprised? I think it’s because I have been focusing on the most recent experiences in the market, especially since the peak for gold and commodities in April 2011 through Jan 8, 2016.

Now, check out the picture since April 2011 when the policy makers and the plunge protection team began manipulating the price of gold downward following the S&P downgrading the U.S. Treasury debt at that time. Not only did gold lose 30.62% during that time frame, but the items most easily manipulated to the upside by the Fed and the Treasury department scored the highest gains. I’m talking about housing, which benefits from trillions pushed into Freddie and Fannie by our government, and auto purchases which have benefitted from extremely low interest rates. Of course low interest rates have also been part of the manipulation story in the housing sector. So what we have is mountains of new debt but a housing market that was not allowed to be cleansed during the 2008-09 debacle.

The big question is, “How much longer can this manipulation go on?” I think we may be on the verge of seeing the entire political and economic scam perpetrated by the ruling elite come to an abrupt end. The Fed pushed huge amounts of money into the financial system but then encouraged the banks to keep it inside the banking industry by paying ¼% to banks simply to keep dollars in reserves with the Fed as Federal Funds. And if you think the Fed cares two hoots about the economy, you have to let go of that idea because just recently it increased the rate it pays banks to hold cash and not lend it into the real economy to ½% guaranteeing it stays in the banking system! I suspect that is because the system remains very sick with bad assets that are not allowed to be priced to market. In any event, half of the printed money the Fed created over the past few years has stayed inside the banking industry and the other half went to the housing industry via Freddie Mac, Fannie Mae and the FHA via the banking system. This is crony capitalism as egregious as any fascist system ever devised.

As you can see from the top chart, my IDW is now starting to plunge over into the abyss. It closed the week at 133.93. The three-year average is 152.53 and the five-year average is 145.37. To me, this indicator is saying the global economy is in a heap of trouble when you consider that this abysmal performance has occurred in light of unprecedented money printing not just by the Fed but by all major central banks. George Soros is a human being whose values I am not in sync with. But I believe he was right when he said last week that the global economy is looking like 2008 all over again, or something to that effect.

modelI don’t want to overreact on the basis of the first week of trading even though it is the worst first week of a new year for stocks EVER and what has proven to be a pretty good week for gold and silver! But a look at the long term performance of honest money over the past 10+ years compared to the fraudulent dollar and heavily manipulated markets. With my energy and techs stocks posting a 9% loss in the first week while the gold shares and short strategies wre quite profitable, I am allocating 20% of my Model Portfolio starting next Monday to the Central Fund of Canada (NYSE-CEF). It gained 4.7% during the first week of this year. I’m reducing exposure to the energy and tech sector by the allocation granted to CEF. On your left is my revised portfolio as of the close of this week.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.