An investor would be fortunate enough if he or she were to encounter one or two secular bull markets in their lifetime. Secular bull markets can last a long time and make investors a lot of money. If an investor can get onboard early enough and simply ride the bull, it is one of the few ways that real fortunes can be made.
New bull markets when they begin are seldom recognized. Emerging trends are difficult to discern when they begin because investor attention is still focused on the last trend not recognizing that the rules of the investment game have been altered. Supply and demand fundamentals alter and change investment markets, giving rise to new bull markets and bringing others to a close. The key is to recognize when one trend is coming to a close and another trend has emerged to take its place.
This is one of those times.
A new bull market has begun in commodities, especially gold and silver. This new bull market is a secular bull market and it coexists with a cyclical bull market in equities. It is one reason that it has gotten little attention and has gone unnoticed by the vast majority of investors. Most investors are playing the cyclical bull markets in equities believing that the good times of the 1990s have returned. Investing in commodities or commodity-like stocks is simply not on the radar screen of most investors. Everyone knows the price of the Dow or the NASDAQ, but few are even aware of what has happened to gold, silver, copper, nickel or lead. The old trend is still the most relevant trend for investors. Precious metals and precious metal equities remain ignored and under-owned.
During the great monetary expansion of the 1970s money went into tangible assets as investors sought a refuge from a depreciating U.S. dollar. Decades later under the expansionary policies of the Greenspan Fed money went into paper assets. Greenspan like Burns did not recognize monetary policy as the primary source of inflation. Greenspan has always been fond of quoting productivity miracles and rising U.S. financial markets as a sign of America’s industrial enterprise. It has never occurred to Greenspan that too much credit and money growths were responsible for America’s equity bubble. Yet no other Fed chairman has acted with such recklessness in fostering a monetary and credit bubble of biblical proportions.
This new bull market in gold and silver has no greater friend than Mr. Greenspan. Mr. Greenspan's penchant for fighting every financial crisis and every recession with more money and credit are creating the ideal monetary conditions for a major bull market in the precious metals. His expansionary monetary policies know no equal. The only equivalent would be the expansionary polices of John Law’s Mississippi scheme in 18th century France. The expansion of the money supply under the Greenspan Fed has been greater than Mr. Greenspan’s entire predecessor’s combined. Government fiscal polices are also expansionary as the U.S. budget deficits grows to record levels, now estimated to be close to 5% of GDP. At the same time the U.S. trade deficit is headed higher with the trade deficit hitting 5-6 % of GDP. That is putting a lot of U.S. dollars in foreign hands much of which is currently being disposed of which is why the dollar is falling to new depths.
The point to understand here is that the U.S. debt figures are too large and unpayable. The only way out for government is to inflate its way out. The current debt on America’s balance sheet is over $34 trillion. There is another $44 trillion that is unfunded primarily Social Security and Medicare which is growing at $1.6 trillion a year. There is no way that these debts can be repaid honestly. Instead with debt levels this large the only solution politicians will use is a monetary one, which means eventually hyperinflation. The stage for hyperinflation is in place with growing trade and budget deficits. In addition to large country debts the nation’s citizens and corporations have also been going on a debt binge borrowing and spending their way into oblivion. Consumer debt hit a record $1.98 trillion in October, 2003. That figure according to the Federal Reserve translates into $18,700 per U.S. household excluding mortgages. Add mortgages into the equation and the figures become unfathomable.
As Bill Gross recently penned last month “when too much debt infects the heart of capitalism you either default or inflate it away and the latter is by far the easiest (although not necessarily the wisest) policy." As mentioned previously in past essays the stage is set on the monetary front for higher rates of inflation. One of this year’s big surprises for the financial markets is going to be higher rates of inflation. If they measure it properly the true inflation rate is already in the high single digits. The first major pillar of this new bull market in precious metals is a monetary one and monetary conditions are now primed for higher precious metals prices.
In summary, a new bull market in metals is now in place as shown in the charts of the HUI and the XAU below. The reasons are summarized below:
- supply/demand imbalances which have created bullion deficit
- large U.S. current account deficits
- breakdown of the monetary system and the drop in the dollar
- distrust in paper assets and their substitutes
- depression and war
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