Corona And Debt: A Twin Virus Horror

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Published : February 11th, 2020
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Category : Gold and Silver

The only virus more concerning than Corona, the global government debt virus!

In America, the government’s debt to GDP ratio is now three times the level it was when Ronald Reagan got elected.  Simply put, Donald Trump doesn’t have the wiggle room that “Jellybean Ron” did… to ramp up debt, produce GDP growth with that debt, and then claim all the growth came from tax cuts.

Poor demographics and global de-dollarization put additional pressure on any attempt to use debt to produce growth today. 

The good news is that Trump seems aware of the situation, and he’s adding to debt only at a moderate pace.

The bad news is that the absolute level of debt is so high that even moderate increases in debt are producing no additional growth.

The bottom line: Reagan was able to produce a dollar of GDP growth with fifty cents of debt growth.  He had great demographics, the biggest rate cutting cycle in US history, and numerous other tail winds at his back. 

That’s no longer the case, and the debt clock shows the situation is getting worse every day.

Many gold analysts feel the US stock market is at risk of a crash, and they feel the Corona virus is the black swan that could make it happen.

In contrast, I’m on record stating the dollar is the major market at risk and already in downside play, not the stock market.  I see the US private economy as relatively healthy, while government is infected with a horrifying debt virus that threatens to kill the dollar.

Stock market crash enthusiasts should keep a close eye on this key chart. 

I’ve highlighted most stock market swoons and it’s very rare for the stock market to crash without a Fed rate hiking cycle in play.

Stock markets aren’t the real economy, although governments like to use them as “poster boys” for growth.  The US stock market rises and falls mainly on the actions of the Fed, and the Fed is very dovish now, after throwing in the towel on an attempted normalization of rates.

A stock market decline is possible but not too likely until the Fed begins a fresh hiking cycle, while a continued meltdown of the dollar against gold is a near-certainty.  The bottom line:

With Corona “on deck”, is the Fed likely to hike now?  No! 

The exciting daily gold chart.  There’s a flag-like pattern in play, with an upside target of at least $1670.

Tuesdays are generally soft days for the gold price, but I don’t think investors should be concerned about any of the minor pullbacks within the flag pattern. 

I view the entire $1570-$1520 zone as a buying area, with a focus on the miners more than bullion.

More government debt and more Fed liquidity just produces more debt rather than growth. 

Corporate boards are incentivized to borrow more money to do stock market buybacks rather than invest in business expansion, government talks growth while sinking deeper in debt, and gold outperforms everything. 

This is the world of today… and it’s here to stay!

The GOAU ETF versus Dow ratio chart.

Gold stock investors certainly aren’t “missing out” on anything offered by the US stock market.  The price action of gold stocks is solid.

The gains from the 2018 summer low to the 2019 summer high have been mostly retained, and against the dollar GOAU looks spectacular.

Investors should buy the $15 area, buy a breakout over $18, but right now the operational word is… enjoy!

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form, giving clarity of each point and saving valuable reading time.
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