Mixed Safe Haven Messages

The picture provided by the key metrics on your left might appear to be confusing. Gold was significantly higher but so were stocks. Also confusing might be one safe haven (gold) was up while the mainstream’s safe haven (T-Bonds) were down. Now it’s likely part of the reason for the decline in the T-Bond was due to continued confidence, albeit misplaced, in stocks. A lack of ramped up hostility between Iran and the U.S. after the Iranian general was assassinated no doubt boosted confidence in American power and a feeling among investors that America is indestructible. Your editor of course doesn’t believe that propaganda for one minute.

As Eisenhower warned Americans, most superpowers are destroyed from within, not from outside force. I could argue any number of areas where America is in moral decline but the one that fits best with the theme of this letter is on the financial front. Living beyond your means is immoral for sure because not even a superpower like the U.S. can do that forever. And there are increasing signs that the days when this empire can fund its extravagant military and socialist escapades are most likely nearing an end. For decades since Nixon removed gold from the dollar, America has not funded its own budgets but instead relied on net exporting nations, most notable of which was Japan and then more recently China.

But now Japan needs to consume its own resources for its aging population, and as a geopolitical and economic opponent to the U.S., China needs to draw down its holdings of U.S. Treasuries to fund its Belt and Road Initiative (formerly known as One Belt One Road) as it is in the process of building its own empire. It may be a telling sign that since August the U.S. has had to rely on money created out of thin air by the Fed to fund 90% of new Treasury borrowings during the last quarter of 2019. What happens when no one wants to buy U.S. Treasuries at their current paltry rates? The Fed can’t let rates rise or the financial markets will tank, as they started to when Fed Chairman Powell chose to pivot to easy money at the start of 2019.  In addition to the declining desire by the Japanese and Chinese to own U.S. Treasuries there is growing discontent toward America in general by our mainline Europeans, who are very unhappy with heavy-handed pressure put against their trading with Iran and Russia. Remember that Vice President Kerry warned that if the Iranian nuclear deal did not happen, that could very well lead toward the demise of the U.S. dollar as the world’s reserve currency.

It’s not difficult for this observer to envision the following scenario: There is a declining number of buyers of U.S. Treasuries, causing the Fed to need to fund most of America’s surging deficit with money created out of nothing. As the world becomes aware of that problem, mass psychology causes investors to exit the dollar to the extent possible by exiting stocks and buying tangible assets including commodities that lead to rising levels of consumer inflation. With rising levels of inflation, interest rates begin to surge higher, leading to the need for the Fed to step up their printing presses at an ever more torrid pace, which in turn leads to a plunging dollar that leads to more inflation that leads to a need for still another cycle of massive money printing. For more insight into why this scenario is possible I would encourage you to listen https://www.youtube.com/watch?v=mqEvjMFMJa8 to hear my discussion with Alasdair Macleod on my show last week when he discussed a recent essay he wrote titled, “Bond Worries & Gold.” And it’s interesting to note that Michael Oliver is of a similar mind regarding the dollar, commodities, and interest rates as well. You can listen to Michael’s comments on last week’s show here, https://www.youtube.com/watch?v=lF7WFzjRVi4. And while I am plugging my radio show, go here https://www.youtube.com/watch?v=zfssjsYtfXc to hear what Hamish Greig and Quinton Hennigh have to say about one very exciting gold exploration stock, namely, Lion One.

Gold’s move last week once again reminded me why Michael Oliver is my favorite technical analyst. With gold’s $50 plunge on Wednesday, price-orientated analysts like in the McClellan Report stated that, “Gold is in the midst of a classic blow-off top, and the blow-off work is likely done….the slope down the back side is usually symmetrical to the slope going up into the top…Longer term, gold is entering a new 5-year bearish phase of its 8-year cycle. It consists of a 3-year up phase, and then a two-step 5-year declining phase. We are now at a point when this cycle is saying that gold should be seeing a major top that has led the smart money to increase their collective net short position to an all-time high.”

“Nonsense!” said Michael Oliver on January 9. The trend higher was beginning well before the assassination that caused the sudden rise higher in gold. The assassination of an Iranian general simply caused a spike higher but the underlying momentum and structure were in place. Michael acknowledges he could be wrong but he doesn’t think so. He expects the gold price to fall back to around the three-week average, around $1,539. Certainly, we are not seeing the same kind of downside slope as gold has stabilized by weekend. Yes, I have a bullish bias. But believe me, I’m watching for Michael’s first bearish indications. I’m too old to go to face another bear.

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.