Silver: Canary In An Inflationary Coal Mine

The demand-side drivers of the gold price are the Western fear trade and the Eastern love trade.  The fear trade has languished in recent years, leaving the love trade to do the “heavy lifting” for the price.

That has gone reasonably well; China’s gold mining industry has consolidated and embraced environment-friendly mining.  India’s jewellery industry has restructured, with hallmarking poised to become mandatory. 

Both countries have strong GDP and wage growth.  In the short term, the US government’s hastily-imposed tariff taxes have hurt Chindian stock markets and fiat currencies.  That’s put a modest damper on the growth of love trade gold demand. 

That demand is solid, but it’s not powerful enough to overcome the weak fear trade demand and push the gold price higher…yet.

This is the important Chinese stock market chart.  All gold investor eyes should be keenly focused on the bull wedge pattern in play here. 

I believe a breakout is imminent, and that breakout should be accompanied by a stunning gold price rally.  A few large speculators on the COMEX hold enormous short positions, and a surge in love trade demand would likely cause a massive short-covering panic amongst these speculators.

It’s easy for amateur investors to become over-focused on a tiny US tariffs tree and lose sight of a three billion Chindian citizen forest.

China is already launching stimulus programs to make up for the minor drop in their GDP bucket that was caused by Trump’s tariff tantrum.  Copper, aka “Doctor Copper”, is already strengthening, a sign of global economic strength.

China’s GDP in US dollar terms is set to surpass America’s in just twelve years, and in terms of “stuff used and produced”, China’s economy is already substantially bigger than America’s is.   

China can easily outlast America in a long-term trade war; the US government’s debt is too big, its population is too small, its consistent GDP growth rate is far too low, most of its citizens have huge debt, and most of them own no gold!   

Trump probably should get focused on what ultimately matters to the long term living standard of his nation’s citizens, which is the insane growth of his government’s debt.  It is that debt that will rejuvenate the Western fear trade for gold, and it will happen much sooner than most people realize.

Clearly, top bank analysts are extremely concerned about the US government’s debt situation and becoming positive about gold. 

They are also almost unanimously forecasting a significant drop in corporate earnings growth in 2019.  I’ve predicted that earnings growth falls to ten percent by 2019 Q3, and then goes negative by late 2020 or early in 2021. 

That’s going to reduce falling tax revenues even faster, and Trump’s infrastructure spending program will do more damage to the government’s debt position.  America’s infrastructure needs rebuilding, but so does the government’s balance sheet!

What most amateur investors fail to understand is that not every corporate or personal income tax cut produces increased revenues for a government or a sustained increase in GDP growth.  Population demographics, debt levels, interest rates, and the current tax rates are all factors in determining what tax cuts do. 

In the case of the United States, tax cuts are reducing government revenues at the start of a global inflation and rate hiking cycle.      

If inflation begins to rise more significantly, the Fed is not going to stop hiking rates even if GDP growth and corporate profits are falling fast.  This is a situation much different from the crisis of 2008 where system risk convinced the Fed to engage in QE.  The next crisis is likely to be related to inflation caused by government money printing.  That’s going to bring more rate hikes from the Fed rather than fresh QE. 

As the US government’s financial situation deteriorates more drastically, it’s going to cause Trump to order the Fed to start printing money, and he also might order the Treasury to devalue the dollar.

The US Treasury is already issuing new debt at a rate not seen for many years.  I expect that trend to dramatically accelerate over the next 24 months.  If corporate profits stay positive, the US stock market can keep rising (albeit at a much slower rate and with much more volatility) for years, but the fear trade for gold isn’t really about corporate America.  It relates mostly to the fiat dollar and the changing debt position of the US government. 

In my professional opinion, the best way to play the late stage of the US business cycle and bull market in stocks is with call options.  There is less investor capital at risk with this strategy, and the potential reward is much higher.  The US stock market can go modestly higher for several more years, but when it peaks, investors buying now in a happy mood based on the “Trump Effect” will likely experience significant drawdowns.  They will break down emotionally as they get overwhelmed by negative news. 

The bottom line: If investors buy anything when they are happy, they almost always sell when they are demoralized or terrified.  That imminent negative news from major institutional analysts will cause them to sell at large losses, like they did in 2008, 2002, 1987, 1966, 1929, and in all the other market sell-offs throughout history.  Call options let the investor stay in the current stock market with a fraction of the risk that buying stock brings.

Gold bullion continues to form a nice double bottom pattern on the daily chart.  The second “Golden Week” holiday of 2018 began yesterday in China.  With the Chinese gold market closed, the global price can soften, creating the final part of the double bottom pattern that I’ve been highlighting.  It’s a spectacular buying opportunity for eager precious metals and mining stock accumulators.

Inflation enthusiasts should consider adding some silver bullion to their investing “repertoire”.  On this gold versus silver ratio chart the 75 area and higher has been a great place to sell gold and buy silver and the 50 area has been an equally great time to sell silver and buy gold.  Significant wealth can be accumulated with this strategy.  What’s particularly exciting now is that some major bank analysts are recommending this trade.  I’ll also note that Indian demand for silver appears to be gaining traction, and hallmarking could cause it to spike dramatically.  That puts a powerful floor under the market.

When sugar begins to rally strongly, silver usually follows.  In the early 1970s, movie star Omar Sharif made a small fortune buying sugar futures, as inflation skyrocketed during the OPEC-related oil crisis.  Is history about to repeat?  I think so, but I would be more focused on silver and related mining stocks now than on sugar.  Silver is really the ultimate canary in the world’s inflationary coal mine, and it is starting to sing!

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