The prevailing mantra on Wall Street is that gold's bull market is now over
and it's time to bury precious metals as an investment theme for the indefinite
future. Their rational is based on the belief that many investors held misguided
fears during the credit crisis about a breakout of massive inflation and economic
chaos, which drove gold to nearly $2,000 per ounce. Of course, (the perma-bulls
claim) those worries have now completely failed to materialize and will never
be a genuine risk in the future.
This argument is blatantly false because it assumes that the final chapter
has been written on the Great Recession and debt crisis that paralyzed the
entire globe back in 2008. The truth is the most pernicious effects of the
devastating economic collapse that began five years ago has been merely held
in abeyance due to record low interest rates and an aggressive expansion of
central bank assets; which is being used to boost real estate values, equity
prices and the economy.
For the crisis to truly be declared over, the Fed would have to raise the
overnight lending rate to near 6%, while selling nearly $3 trillion worth
of MBS and Treasuries. Then, if the real estate and equity markets can withstand
interest rate normalization and the paring down of the Fed's balance sheet
to a sustainable level, we will be able to finally give the all clear signal.
However, if the now record $54 trillion in total U.S. debt cannot be serviced
under a normal interest rate regime, investors will know nothing has been
resolved. And, since the progenitors of inflation are; massive debt levels
(especially on the government level), artificially-low interest rates and
an ever-expanding central bank balance sheet, it is far too early to declare
a victory over inflation.
The Fed is aware it cannot ever allow interest rates to significantly rise
without destroying housing, stocks and the economy. Therefore, this dangerous
cocktail of low interest rates, continuous and massive money creation from
the Fed and intractable government debt will be in place for a very long time.
Unfortunately, those factors taken together will eventual bring to fruition
runaway inflation and economic chaos that the perma-bull crowd on Wall Street
and Washington have summarily declared vanquished.
Once investors become aware that the economy has become completely addicted
to the provisions of perpetually low interest rates and central bank asset
purchases, the gold market will then resume another leg higher in its secular
bull market and eclipse its all-time record high soon thereafter.
