“In 2019, priced in dollars gold rose 18.3% and silver by 15.1%. Or rather, and this is the more relevant way of putting it, priced in gold the dollar fell 15.5% and in silver 13%. This is because the story of 2019, as it will be in 2020, was of the re-emergence of fiat currency debasement.” – Alasdair Macleod, monetary economist and former fund manager
Per the quote above, the general “theme” for 2019 is the re-emergence of currency debasement, most notably with the U.S. dollar. We’re growing more confident that we’re on the cusp of a big move higher in the precious metals sector because of the Fed’s massive money printing. Also, because the money printing and near zero interest rates are visibly not stimulating economic growth, we’re at the point at which unless the Fed continues increasing the amount of money it puts into the system, the melt-up in the stock market is completely unsustainable.
This is very similar to late 1999/early 2000. Not only did the tech stocks collapse then, but also the precious metals sector transitioned from the end of a 19 year bear market into the current secular bull market.
The Federal Reserve has painted itself into a catastrophic corner. The money printing from late 2008 to the end of 2014 papered over the financial problems that led to the great financial crisis but did nothing to address the causes. Over the last five years, the same type of reckless lending by banks and non-bank finance companies, combined with the reinstatement trillion dollar spending deficits, has created a set-up similar to the conditions that caused the 2008 crisis.
The current financial and economic conditions are strikingly similar to those that were in place in late 1999 and late 2007. Money printing and credit expansion has stimulated yet another stock and housing bubble of historic proportions. But the backlash from the laws of economics will be more severe this time. Massively underfunded corporate and public pension funds and a Treasury debt to GDP ratio in excess of 100% were absent from the two previous set-ups. The problem for the Fed is that it in the previous two asset bubble cycles, it had the luxury of lowering the Fed Funds rate from over 5% in order to cushion the blow from errant fiscal and monetary policies and the popping of asset bubbles. Today, the starting point was just over 2%.
Make no mistake, the restarting of the Fed’s repo operation in mid-September has been primarily to give big banks money to monetize deteriorating bank assets in the form of leveraged loans, CLO holdings (CLO blow-ups were one of the primary culprits in 2008), OTC derivatives and subprime consumer loans (credit card, auto debts, home equity mortgages). Yes, the conditions that led to “The Big Short” have returned.
The reality is that the Fed’s repo operations are nothing more than de facto bank bailouts as well as indirect monetization of the escalating Treasury debt issuance. In fact, during the last couple months of 2019, the Government was spending and issuing Treasury debt at an annualized rate of close to $2 trillion. If the Fed had not injected half a trillion dollars of printed money into the bank system – which was used plug holes forming in bank balance sheets and fund Treasury debt issuance – interest rates would have soared and the stock market would have had a severe sell-off. Of this we are certain.
Notwithstanding official (Fed, Wall St, etc) claims to the contrary, many areas of the economy are starting to decline precipitously. Freight transport, manufacturing and construction spending data show that the real economy is starting to contract. The contraction in these sectors is confirmed weekly by regional Fed Bank economic surveys. If the economy was in good shape, why has the Fed increased the money supply at the fastest rate in U.S. history?
The narrative in the mainstream media is that the consumer is still “strong.” But consumer spending is being funded primarily by a rapid escalation in consumer borrowing. Consumer debt used to finance auto purchases and credit card spending is at all-time highs. The same now holds true for mortgage debt. 100% loan-to-value mortgages are back as well non-income verification auto subprime auto loans.
Though it’s impossible to predict the timing, the financial and economic system based on the characteristics of past credit boom/bust cycles (1929, 1987, 2000, 2007) is on the verge of a massive heart attack. The re-implementation of the Fed’s repo operations – which is a fancy name for the restarting quantitative easing also known as “money printing” – is the give-away.
Because of a deteriorating economy, the rapidly rising Government deficit, geopolitical considerations, and the certain eventual official reinstatement of Federal Reserve “quantitative easing,” the precious metals sector is likely on the cusp of a substantial upside price reset. We are confident that within the next 18-24 months, if not sooner, gold and silver will hit new record highs. This will be triggered a substantial upward move in mining stocks.
The rise in the price of gold and silver drove most of that gain in our fund during Q4. PMOF’s mining stock portfolio is concentrated in junior exploration stocks, which somewhat lagged the sector during Q3 and Q4. While a couple of the stocks in our fund doubled or tripled during Q4 – like Minera Alamos and Precipitate Gold – others lagged. However, we are confident that every stock we own will be considerably higher over the next six to nine months.
During Q4 we kicked some non-performing stocks out of the fund and added to or replaced them with stocks we believe are poised for substantial upside revaluations. Some of the stocks, like Fortuna Silver and New Gold, were sold off irrationally before we bought them and have already yielded gains in our fund. Others, like US Gold and Integra Resources, are advancing gold/silver exploration projects which we believe hold the potential for 5-10x returns on our investment.
The next cyclical move higher in the precious metals bull market that begin in late 2000 has begun. This one will likely provide investment returns even greater than the cyclical move that occurred from late 2008 to mid-2011.
We hope everyone had and enjoyable holiday and we wish everyone a happy 2020.
Don, Dean and Dave