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Dear Fellow Investor,
We’ve seen tremendous volatility in equity markets this year. Even though the dollar has recently rallied as gold has taken another downturn, the volatility in these markets haven’t approached what we’ve seen in stocks.
The bottom line is that, with stocks priced not only for today’s perfection but also tomorrow’s, equity investors are being spooked by every new data point.
In some cases, rightly so. As developed economies were being showered with easy money and zeroed interest rates, everyone waited anxiously for the inevitable surge in inflation. Then they waited, and waited, and waited some more.
Well, we’re finally seeing it begin to kick in. Input prices as tracked by the producer price index have been rising, energy prices are elevated, transportation costs have been skyrocketing and, most recently, data is showing that manufacturers are not only starting to raise prices but end-users are paying them.
Higher inflation is baked into the cake, and equity investors are scared out of their wits. Fanning the flames is talk of stagflation, as some economic indicators are pointing toward imminent, even coincident, weakness.
I think it’s too early to worry about stagflation (although considering the experience of the 1970s, gold bugs can dream). But it’s definitely past time to start worrying about inflation.
Treading A Well-Worn Path
The fact is, inflation is just one of the things worrying investors right now.
Chief among the other concerns are rising interest rates. The markets shuddered as the 10-year yield recently drove to and above 3%. The 10-year has dropped back below that key benchmark, so perhaps the big storm has not yet arrived.
But the pressure is dropping...and we’d be smart to lift our gaze to the horizon to see what’s coming.
Or, we can look backward — because history can tell us precisely what’s on the way.
You see, everything we’re seeing and are about to see has happened before...over and over...with but one crucial difference from today’s experience. And in each of those previous occurrences, the outcome has always been the same.
Consider that over thousands of years of human history, nations have overspent their means in pursuit of wars and/or entitlements, creating debts too large to address through growth, tax collections or spending cuts.
The prescription in every case was a debasement of the currency. When gold or silver was the currency, the edges of coins were clipped or the metals themselves alloyed with cheaper alternatives.
When paper currency was supposedly backed with gold, the fraction of that backing grew ever smaller, either overtly or covertly.
And when currencies became completely detached from gold or silver, the process of debasement was suddenly quicker, easier and more appealing.
Thus, we saw profligate governments increasingly yielding to the temptations of monetary inflation which, once sparked, often grew to hyperinflations. Venezuela today and numerous other undeveloped nations before it have been notable examples over recent decades.
Partly because of these prior examples, many people go about their business today confident that such an event can’t happen in a well-managed, developed economy such as found in the U.S.
What they don’t realize is that it’s already happened, twice:
First, the immediate, 69% devaluation of the dollar as a result of FDR’s Gold Reserve Act of 1934, and
Second, the 88% devaluation of the dollar (as measured by the government’s own CPI) since silver was removed from coinage in 1965.
What most people also fail to realize is that another very significant devaluation of the dollar, and all fiat currencies, is a mathematical certainty.
And it looms just ahead.
The Difference Today
I noted earlier that there is one crucial difference between today’s debt situation and every previous example over the long sweep of human history.
That difference is that, unlike a single economy devaluing its currency to depreciate an unmanageable debt load...every developed nation in the world is now traveling the same path of devaluation.
Never before in human experience has every major economy been forced to devalue its currency.
But today, after pushing interest rates to 5,000-year lows and printing unprecedented amounts of currencies through quantitative easing, every developed nation has created its own mountain of debt — debt that can only be addressed through currency significant currency depreciation.
The repercussions are enormous. In previous examples, a single nation could devalue its currency, often gaining a trade advantage over its peers that helped it back onto a path of economic growth. Today, every nation, currency, is racing the others to the bottom of the hill.
One may temporarily gain the lead while others may lag for a bit, but they’re all headed in the same direction. Down.
But if every currency is headed lower against the others, then the trend is masked...leading analysts and investors to believe that everything is fine.
In fact, those currencies are still devaluing against things — tangible assets that exist and hold value outside of computer bytes and public perceptions. Foremost among these tangible assets are gold and silver, the traditional stores of value and wealth through the human experience.
The day-to-day fluctuations in the gold and silver prices hide the much larger and longer trend of rising metals valuations relative to fiat currencies.
But the inevitability of much higher relative valuations for gold and silver remains assured as we approach the point where the devaluations of currencies must accelerate.
The process will be akin to how Ernest Hemingway reputedly claimed he descended into bankruptcy: “Slowly at first. Then all at once.”
Our job is to make sure we’re prepared while things are still moving slowly.
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
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