Gold: A turning point

“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from” – T.S. Eliot

Eliot, in 1942 wasn't writing about monetary finance in his nationally famous Little Gidding. His poetry explored themes around history, time and contemplation. He could just as well have been talking about monetary resets however in Four Quartets.

Over the last two months there have been several events, developments and pronouncements, which are not directly connected per se but together indirectly point to a continuing reset, or beginning if you will. These include Jamie Dimon's 'ah-hah' moment, a major portfolio change suggested from JP Morgan's CIO and the US Treasury Secretary's obliqueness in response to a question about gold.

Half rational

2025 is nearly up, and it has been a vintage year for precious metal investors. Year to date gold and silver are up 53% and 72% respectively. Platinum has had a strong 71% move also. Across the board metals have risen, and these movements are not coincidental, but are primarily a consequence of persistent fiscal (& trade) deficits. Or in layman's terms, inflation.

Jamie Dimon, a heavy weight of global banking, has even come out with some gold predictions of his own. “It… [gold] …could easily go to $5,000 or $10,000 in environments like this,” he said. “This is one of the few times in my life it’s semi-rational to have some in your portfolio,” he said.

Note the use of the phrase ‘semi-rational’. Putting aside the ‘first time in my life’ element which is incredulous, it does raise a further question for the Chairman of JP Morgan. Which is, if it is rational to own gold now at $4,000, surely it was rational to own gold at recent record highs of say $2,000/oz in 2022. Or perhaps $300/oz in 2002.

We will probably never know the answer to this question, but what we can say is that these are not throw away comments from any other banking conference, though they appear as such. This is a significant event, in that this is a major Wall Street figure publicly espousing the benefits of holding some gold.

One interpretation of Eliot's literary quote was that it is often difficult to distinguish between what is a beginning and end, and in this case the same can be said. However this is a turning point for Wall Street when it comes to gold.

60 / 40 / 20 / 20

Mr Dimon's comments do not come long after his own (or JP Morgan's CIO) suggested that a 60 / 20 / 20 portfolio is now favoured. The traditional 60% equities and 40% bonds was always seen as an all weather way to balance risk and returns across time and asset classes. The underlying belief that if bonds suffered equities would provide portfolio ballast and vice versa.

Chief Investment Officer Mike Wilson said "A 60/20/20 portfolio strategy that includes 20% gold is a more resilient inflation hedge at a time when U.S. equities are offering historically low upside over Treasuries and investors are demanding higher yields for long-term bonds".

What he is really saying is that equities are expensive, and bond yields are likely to be 'demanded' higher. Demanded meaning investors requiring higher yields, which would equate to lower bond prices. Most tellingly he said the part that his boss Jamie Dimon didn't in that a 60 / 20 / 20 portfolio is likely to more resilient hedge against inflation.

This is significant not just because another Wall Street figure is confirming that inflation is here to stay, but that he is in essence recommending that investors sell half(!) of their bond holdings. So whilst a 20% allocation is a starting point seems high, to get to that half of an investor's bond holdings needs to be divested which is a significant reset and not a mere portfolio tweak.

There are lies, damned lies and statistics or so the saying goes.

Speaking of major wall street figures, the US Treasury Secretary had a tough time explaining the recent rise in the price of gold. On a recent CNBC interview he was asked about gold's rise.

All Bessant could muster to the reporter's question was “that there are more buyers than sellers”, which is a glib response at best. In times gone by, the US Treasury Secretary’s outlook and comment on gold was significant and acted as a north star for interest rate policy.

So his non-answer response is significant for what he didn’t say, in that he didn't want to acknowledge the reasons behind the gold buying. It amounts to a confirmation from a senior US official that the financial system is stressed. Or it is the proverbial canary in a coal mine.

Lets remind ourselves, the US Treasury Secretary’s main job is to sell dollars, or treasuries, or in other words raise debt from domestic and foreign investors. This being to fund the US government's (ever growing) fiscal deficits. Of course, I do have one semantic error in my post, in that I am writing about gold’s rise. But gold doesn’t have any inherent property of ‘value’, so its rising price is actually the dollar falling, (hence the rising yields, as the cash is more expensive) as we have alluded to above.

So in some ways we shouldn’t be surprised that Bessant sidestepped the question. To ventilate the reasons for its steady rise would be to acknowledge the elephant in the room, being inflation, fiscal deficits, the fall in the dollar (against both gold and other currencies), a weakening economy and a strained financial system. But mainly inflation. A US Secretary acknowledging an inflation problem is akin to a a bank announcing there aren't enough reserves to meet deposits.

The announcement triggers the panic. This is not quite like Ben Bernanke’s “subprime is contained”, but the parallels are striking. Bernanke never showed any contrition or offered a mea culpa for his assertion that proved grossly misleading in the aftermath of the GFC. The reality was the stress was contagious. This may yet prove to be an uncomfortable record of Bessant’s feigned ignorance just as it did for the former Fed chairman.

A (new) beginning

We have reached new ground, or silver has to be precise. For the first time ever Ag is trading above $50. This being above the previous 1980 Hunt Brothers high. It is arguably the most under valued asset on the planet.

How many assets/commodities can be bought at 1980 prices, the answer of course is hardly any. Imagine being able to buy land or property at 1980 prices today. So while we are in a new era of monetary metals resetting, they are still cheap.

This extends to the miners of the metals too. Guanajuato Silver, Excellon Resources and Pan American Silver are likely to experience significant re-ratings once Wall Street recognises silver's potential as it is beginning to for gold. What is often overlooked is that silver mines are few and far between. The metal is usually extracted as a byproduct of other commodity producers (gold, copper, PGM’s).

This reality has now been belatedly acknowledged by the US. The gold price may ‘correct’ in the short term, or take a breather but given the depth of buying it is not likely to last long.

Debt

If you are in the habit of wondering whether the bull market will continue, just remember that a further milestone was reached in late October. For the first time the US national debt reached $38 trillion. What makes this unbelievable is that it reached $37 trillion only last August. So it has taken less than 12 weeks to add one trillion dollars to the national debt. For context, prior to the pandemic it took roughly 15 months to add a trillion, not that that is something for the United States to be particularly proud of either.

This gathering pace goes some way to explain the sharp accelerated uplift in gold from $3,200 in September to a little over $4,000 today. Although a recent FT Op-Ed would have a reader believe that this rise is the product of a bubble. The sub heading in particular is rhetorical-babble. Whilst it is not surprising the Financial Times now publishes such pieces given it is quite fiat centric, the opinion completely ignores the sole structural driver for the rise in gold, which is that the debt cycle is unresolvable without debasement. Nothing to do with buyers being a “thoughtless prisoner of history” as the article derisibly suggests.

An End

Since 1971, the world has operated on floating and unbacked fiat currencies. By Eliot's symbolic reasoning, that this monetary regime had a beginning implies it must also have an end.

While at this point in time these developments may not be the ending, it is surely a turning point, or for Scott Bessant it may be a golden beginning disguised as a greenback end.