The Impending Financial Crisis: Should We Prepare for Another 2008-09 Deflation?

The first four months of 2018 have been a disappointment. Our Model Portfolio is down 4.14% and my own portfolio is down 2.15% since the start of the year despite my largest holding, Novo Resources, being up 34% since January 1. We can’t blame gold for the decline in the shares. The yellow metal is up 1.70% so far this year. Silver has declined by 2.47% so far this year, but our exposure to gold is many times greater than to silver. I can only explain the lackluster decline for shares on a lack of interest in this sector by the larger markets. I firmly believe Michael Oliver is right when he says traders will have to be convinced there is no more joy in owning mainstream stocks and bonds before gold shares have their run. Michael’s work continues to point towards a tectonic shift out of stocks and bonds into commodities. But you can bet Washington and Wall Street will fight tooth and nail to keep the financial orgy going for as long as possible.

Alasdair Macleod, who will be my radio show guest next Tuesday, will discuss the issue of whether we should now prepare our investments for an inflationary or deflationary world. Alasdair has explained the normal credit cycle which at this time bodes well for commodities but suggests very strongly that financial assets are set for a significant bear market. But there is increasing concern from Alasdair and others like David Stockman who will be on my show on May 8th that the next decline won’t be at all normal. It may in fact force the first major change in the global monetary system since Nixon removed gold from money in 1971.

I am going to look to Alasdair on my radio show to help us understand whether we should be preparing our investments for a deflationary implosion like that of 2008-09 or for a massive destruction of the dollar that would lead to a hyper inflationary environment. Of course, in terms of actual inflation, we have lived in a massively inflationary world for many decades now. But with the exception of the late 1970s, most of the inflation has been evidenced in stocks and more so in bonds, which has served to hollow out the middle class and make the upper classes filthy rich. It has also lead the world to the brink of debt-laden insolvency.

The big question now is how much further can the current fiat debt-based system expand before it implodes into a devastating global depression?  The problem is that none of the past natural market clearing deflationary events have been allowed to run their course to clean the system. Instead, debt of one cycle has been piled on top of each prior cycle such that the system has become ever less productive, far more leveraged and far less stable than ever before. It can only be a matter of time before the entire system blows up because with each cycle the level of interest rates tolerable by the system declines. As David Stockman points out, we are now at a point in time that, because of massive debt loads inspired by bastardized monetary creation, not even 3% to 4% rates will be tolerated.

But not only is the existing system nearing its end because of internal debt load stress, but  since the 2008-09 financial crisis, there has been an increasing lack of confidence in the dollar based global monetary system. So, nations most perceived as adversaries of the U.S. are determined to dethrone the dollar as the world’s reserve currency. Why? Because the dollar system lead to global financial instability and it has given the U.S. an unfair advantage by being able to print dollars out of thin air to buy up the world’s goods and finance a military that is used to force countries into accepting dollars.  It’s not unlike a mafia don who murders anyone who objects to his counterfeiting crime. As I have mentioned frequently in this letter and on my radio show, the Chinese, Russians and other highly populated countries have been setting up a trading infrastructure (“One Belt, One Road”), both in physical terms and in terms of financial systems that is geared to empower their currencies over the dollar. And making their efforts a credible threat is the buildup of massive supplies of gold which is a far superior money to the dollar. Market institutions to create a gold-backed monetary system are being established. As we have noted, oil on the Shanghai Int’l. Energy Exchange is trading in yuan, not dollars. And if countries are not comfortable in holding yuan, they can hedge into gold on the Shanghai Gold Exchange (SGE). By the way, the SGE is reportedly not like the fraudulent LBMA which is dominated by massive dollar-denominated paper manipulation that effectively suppresses the dollar price of gold. The Shanghai Gold Exchange is reportedly a pure physical gold exchange, not inflated by paper.

The work of Michal Oliver provides confirmation of major tectonic changes favorable to commodities and precious metals markets that are consistent with the current credit cycle. Moreover, it’s quite possible that we are now facing the mother of all gold bull markets for gold as measured in U.S. dollars because the “Greenback” is most certainly nearing its time to enter the home of its fiat currency ancestors, namely the dustbin of history! In light of the current cycle and global changes, and given the significant amount of work carried out by junior mine exploration companies over the past few years, I believe we are at the dawn of a major run for junior gold stocks.  My following comments this week for some of the stocks covered in this letter may help explain my optimism.

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