Jay’s Week in Review

The S&P 500 fell 2.25% this week to close at 2,748.7. With equities down, it’s no surprise that money flowed to safe havens like the T-Bond and gold. The T-Bond rose from 143.44 to 145.91. And although the dollar Inex rose from 96.104 to 97.355, gold held its own, rising by $3.90 to $1,298.60 thanks to a Friday rally. In the middle of the week the yellow metal had fallen to $1,280.

That brings me to a couple of momentum charts Michael Oliver sent out to his subscribers this past week. The top chart on your left is the long-term momentum chart for gold. The bottom chart is the long-term momentum chart for the T-Bond.  He posed the following question: Would you be more inclined to sell the recent downside/pullback, or would you be more inclined to buy the dip?

It seems highly likely to me that 2019 will see a very substantial equity market decline. In other words, we will likely be entering a “Risk Off” environment. So the question is which safe haven will investors flock to protect their wealth? Michaels Charts suggest at least for now, there is a momentum shift to both gold and T-Bonds. But as you can see from the illustration below on your left, there have been quite a few years when money has flowed out of both stocks and bonds. All but one of those years, namely 1981, gold has risen in value. The one year when that wasn’t true was 1981.  That was the year when Fed Chairman Paul Volcker slammed on the monetary breaks and the T-Bond hit a yield of 15.08%. Given the fact that the Federal Debt is now $22 trillion, a 1% rise in the rate of interest adds $220 billion to U.S. Federal government expenditures.

If you think the Fed is about to allow rates to normalize, I have a bridge in Brooklyn N.Y. to sell you.  Michael Oliver has held the view that as long as people have confidence in the U.S. dollar and the U.S. monetary system, gold will have to share safe haven status with the Treasuries. But he also thinks that ultimately during the current long-term cycle, there will at some point be a mass exodus form the dollar and as with that also from U.S. Treasuries which will put the Fed in a horrific bind. As Alasdair Macleod recently pointed out, if the Fed chooses to give into the temper tantrums of Wall Street and once again print endless amounts of money to try to keep rates down, at some point it will have the opposite effect causing everyone in the world to realize that the U.S. is dead broke! When the empire is broke all the world will see a buck naked Emperor.

When no one wants to lend America the money it has become accustomed to in order to live beyond its means, how do you think the dollar will fare? It is my belief that the brief periods of time experienced in the past when money flowed out of financial assets into gold, will become a prolonged event and a new monetary system will be upon us. That is when gold will be priced in unimaginable numbers of dollars because the dollar, like the emperor will be seen for what it is—a worthless unit of account.