The Two Things Investors Need to Know About Gold Right Now

Warren Buffett once noted, Gold doesn’t do anything “but look at you.” It doesn’t pay a dividend or produce cash flow.

However, the fact of the matter is that Gold has dramatically outperformed the stock market for the better part of 40 years.

I say 40 years because there is no point comparing Gold to stocks during periods in which Gold was pegged to world currencies. Most of the analysis I see comparing the benefits of owning Gold to stocks goes back to the early 20th century.

However Gold was pegged to global currencies up until 1967. Stocks weren’t. Comparing the two during this time period is just bad analysis.

However, once the Gold peg officially ended with France dropping it in 1967, the precious metal has outperformed both the Dow and the S&P 500 by a massive margin.

See for yourself… the below chart is in normalized terms courtesy of Bill King’s The King Report.

According to King, Gold has risen 37.43 fold since 1967. That is more than twice the performance of the Dow over the same time period (18.45 fold). So much for the claim that stocks are a better investment than Gold long-term.

Indeed, once Gold was no longer pegged to world currencies there was only a single period in which stocks outperformed the precious metal. That period was from 1997-2000 during the height of the Tech Bubble (the single biggest stock market bubble in over 100 years).

In simple terms, as a long-term investment, Gold has been better than stocks.

Now, let’s compare Gold to the US Dollar.

Every asset in the financial system trades based on relative value. Ultimately, this value is denominated in US Dollars because the Dollar is the reserve currency of the world.

However, even the US Dollar itself trades based on relative value. Remember the Dollar is merely a sheet of linen and cotton that is printed by the Fed and is backed by the full faith and credit of the Unites States.

In this sense, the Dollar’s value is derived from the confidence investors that the US will honor its debts.

Moreover, the Dollar’s value today also derived from the Fed’s money printing. Indeed, a Dollar today, is worth only 5% of a Dollar’s value from the early 20th century because the Fed has debased the currency.

As a result of this the world has adjusted to this change in relative “value” resulting in a Dollar buying less today than it did 100 years ago.

In this sense, Gold’s value is derived from investors’ faith in the Financial System (ultimately backstopped by the Dollar) and the Fed’s actions.

If you remove this confidence, then the entire system collapses as the reserve currency is no longer perceived has having value.

The problem with this setup however is that the US, like almost every other country in the world (I’m including China which is sporting a Debt to GDP ratio north of 200% if you account for its Shadow Banking liabilities), has made promises that it cannot possibly keep.

The US “officially” owes nearly $17 trillion in debt. However, if you include unfunded liabilities this amount surges to at least over $80 trillion and likely north of $100 trillion.

These are promises the US has made. And the US Dollar’s value is based on the belief that the US will honor these promises.

The US is not isolated in this regard. Indeed, the problem of unfunded liabilities exists throughout the world.

In the case of Europe, the situation is so bad that the average EU country would need to have an amount equal to over 400% of its GDP sitting in the bank, earning interest at the government’s borrowing rate, in order to fund its unfunded liabilities.

The same goes for Japan and even China where the shadow banking system has liabilities north of 200% of China’s GDP.

These are promises that cannot be kept. And when these promises are broken confidence in the system will be broken. This will inevitably lead to a period of currency collapse. After this, ultimately there will be a need to restore confidence in the system.

The only way to do this will be by backing currencies with Gold again (or a basket of items that includes Gold).

Given the limited amount of Gold in the world, (a little over 171,000 tons) and the enormous amount of US Dollars in the world, this would require a revaluation of Gold to north of $10,000. Dylan Grice formerly of Societe General lays this out beautifully in the below chart.

I cannot possibly predict when all of this would happen. All I can state with 100% certainty is that ALL fiat currencies throughout history have failed.

This failure has been based on a loss of confidence. And the only way to restore confidence is to limit the ability of Central Banks to print money.

This will inevitably lead to some form of a Gold backed currency. Gold has been used as currency for over 5,000 years. It will be considered currency again in the future. When it does, the price of Gold will be much higher (remember, Gold has risen over 34 fold in the last 40 years).

On that note, if you’re seeking investment recommendations along with laser pinpointed investment research, you should check out our paid monthly newsletter Private Wealth Advisory.

Private Wealth Advisory is a monthly investment advisory that outlines the market action and shows you how to profit from what’s to come. On that note, we currently are sitting on over 17 winners in our Private Wealth Advisory portfolio, with gains as large as 18%, 21%, even 33%… all opened in the last year.

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Phoenix Capital Research

 

 

The Fed is Beginning to Freak Out About Bubbles

As we noted earlier this week, the Fed is growing increasingly concerned of a bubble forming in the financial markets. Previously we noted that Janet Yellen was concerned about another bubble forming.

Now St Louis Fed President James Bullard is saying the same thing.

St. Louis Federal Reserve Bank President James Bullard said Thursday that the key risk for U.S. economy would be a bubble forming as the central bank removes monetary-policy accommodations, while he also raised concerns about financial stability in the U.S. economy.

“I don’t see a major bubble right now, but one will form as we are trying to remove the accommodation in the years ahead, because that’s what exactly had happened in the 2004-2006 period,” Bullard told the Credit Suisse Asian Investment Conference in Hong Kong. “I do think that’s a key risk going forward,” he said.

Bullard related the risk to the situation in 2006, the housing prices had already started to peak at the same time as the central bank was in a tightening cycle. “Just because you are moving away accomodation doesn’t mean the risk of bubble forming is going away,” he said.

Bullard also emphasized that financial stability concerns are “looming large,” as policy makers are thinking about how to accommodate those concerns. He said macroprudential tools, which have been strengthened, can be used to address emerging bubbles. Bullard is a non-voting member of Federal Open Market Committee this year.

http://www.marketwatch.com/story/feds-bullard-financial-stability-concerns-loom-large-2014-03-26?mod=BreakingNewsMain&link=sfmw

Granted Bullard is a non-voting member, but his sentiments are beginning to echo throughout the Fed in general.

To whit, Bill Dudley, who is Fed President of the NY Fed and possibly the single biggest dove at the Fed, made a speech yesterday. Instead of issuing the usual “the Fed should print more money mantra,” he actually commented:

In my view, the fact that our large scale asset purchase programs affect the size of term risk premia globally is important.  This set of monetary policies affects financial asset prices in a different way compared to changes in short-term interest rates, and we should be humble about what we claim about understanding the importance of this distinction…  There is, of course, the argument that Fed policy has been too accommodative for too long, creating risks for financial stability worldwide.

http://www.newyorkfed.org/newsevents/speeches/2014/dud140327.html

Bill Dudley is never going to say that the Fed has made mistakes or created bubbles. So the fact that his comments indicate that he is thinking about financial stability is highly significant.

These kinds of changes in Fed policy are never blatant. You have to dig deep to find the hints that are being dropped. We’re doing that, and we’re already aligning our investors’ portfolios to accommodate the coming changes.

On that note, if you’re seeking investment recommendations along with laser pinpointed investment research, you should check out our paid monthly newsletter Private Wealth Advisory.

Private Wealth Advisory is a monthly investment advisory that outlines the market action and shows you how to profit from what’s to come. On that note, we currently are sitting on over 17 winners in our Private Wealth Advisory portfolio, with gains as large as 18%, 21%, even 33%… all opened in the last year.

Every Private Wealth Advisory subscription comes with a iron clad 90 day money back guarantee. So if you find Private Wealth Advisory is not for you at any point in the next three months, simply drop us a line and we’ll issue a full refund.

The reports you download and investment ideas you get between now and then are yours to keep.

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Phoenix Capital Research

 

How Will You Profit From a Market Drop?

Many commentators witnessed the first Q&A session with Janet Yellen as a disaster.

We don’t see it that way at all.

Yellen is widely believed to be a super dove at the Fed. This is largely due to her being a firm advocate for QE in the past few years.

However, Yellen is at least intelligent enough to know when the markets are out of control (something neither Bernanke nor Greenspan could do). To whit, Yellen publicly stated that housing was in a bubble in 2005. At the time she suggested deflating it (but was concerned about the deflation being too intense).

So, regardless of her various flaws as a forecaster and economist, Yellen has shown herself capable of:

1)   Identify bubbles.
2)   Calling for action for rein them in.

With that in mind, Yellen’s decision to continue tapering QE indicates that she is aware of the fact the markets are getting out of control again or are approaching a bubble.

This is further confirmed this by her decision to drop the 6.5% unemployment threshold as well as her suggestion that interest rate hikes could come as soon as six months after QE ends this coming December.

In simple terms, Yellen is alerting Wall Street that she will not be the second coming of Bernanke (at least for now) and that she is going to be removing the punchbowl.

The markets typically take a while to register this. The fact that last week was a quadruple witching options expiration helped hold things together. But now that options expiration is over, we’re running out of reasons for the markets to hold up.

Moreover, we’ve recently seen a number of high profile investors (Icahn, Grantham) warn that the markets are overvalued and primed for a sharp drop.

Thus we find the following:

1)   Yellen is moving to rein in the markets.
2)   Investment legends are warning of a potential drop in asset prices.
3)   Corporate profits falling.

This environment is ripe for a market pullback. Smart investors should take this opportunity to prepare for it.

On that note, if you’re seeking investment recommendations along with laser pinpointed investment research, you should check out our paid monthly newsletter Private Wealth Advisory.

Private Wealth Advisory is a monthly investment advisory that outlines the market action and shows you how to profit from what’s to come. On that note, we currently are sitting on over 17 winners in our Private Wealth Advisory portfolio, with gains as large as 18%, 21%, even 33%… all opened in the last year.

Every Private Wealth Advisory subscription comes with a iron clad 90 day money back guarantee. So if you find Private Wealth Advisory is not for you at any point in the next three months, simply drop us a line and we’ll issue a full refund.

The reports you download and investment ideas you get between now and then are yours to keep.

To subscribe now to Private Wealth Advisory for just $179 (a 40% discount from the normal market price of $300)…

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Best Regards

Phoenix Capital Research

Will Inflation Collapse the Chinese Economy?

A growing concern for the global economy is inflation.

We’ve recently detailed this issue for the US economy earlier this week.

Global Central Banks, concerned with a potential deflationary collapse, have allowed inflation to seep into the financial system. In developed nations like the US, this puts a squeeze on consumers. But in emerging markets like China, inflation is outright disastrous.

Nearly 40% of China lives off of $2 a day. Your average college graduate in China makes just $2,500 per year. In an economy such as this, a rise in prices in costs of living can be devastating for the population.

Why are we not seeing this in the Chinese stock market?

In China, the banking monetary mechanism tends to funnel cash directly into the economy, rather than stocks (note that bank lending remains anemic in the US, while the stock market roars higher).

Indeed, China’s shadow banking (financial transactions outside of formal banks) has expanded to over 200% of China’s GDP or well north of $18 trillion in dollar terms.

This situation favors the well-connected Chinese political elite and lends itself to corruption on an epic scale.

Consider the following:

1)   In 2010 alone, 146,000 cases of corruption were launched in China (that’s 400 PER DAY).

2)   Between 1995 and 2008, it’s estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China’s entire GDP was just 2.1 trillion RMB in 1991.

3)   It’s believed that $100 billion in corrupt money fled China through Government officials in 2012 alone.

Corrupt officials favor real estate as a means of acquiring assets because they can put properties in relatives’ names. Between this and the fact that stock investing has yet to become a cultural phenomenon in China as it is in the US, China’s stock market has languished while its real estate market has boomed.

However, the fact that so much “funny money” has moved into the Chinese economy via so many shadowy conduits makes the Chinese economy a potential inflationary nightmare.

The “official” Chinese inflation data won’t show this, but you can see the clear signs:

1)   Wage protests have become commonplace in China (a clear sign that the cost of living has outpaced wage growth).

2)   Wage increases have grown to the point than numerous US factories have begun moving their manufacturing bases back to the US (the profit differential is no longer big enough that it’s worth the expenses in shipping).

3)   China’s Government has made an official show of clamping down on inflation.

Inflation is already present in the financial system. The signs are there if you know where to look. The question now is how the markets will adjust as it spreads.

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Don’t Look For Economic Truths In the “Official” Numbers

The US today is facing a serious issue of stagflation.

Stagflation is an economic term for a weak economy with higher than usual inflation. This is what crippled the 1970s. And it looks like we might be in for another similar period.

Let’s first consider the economic weakness, the “stag” in the stagflation term.

The US economy is weaker than most know, largely because the official economic data is massaged to make things look better than they really are.

How do you massage economic data?

Let’s take jobs for instance.

According to the “official numbers” the US economy added 113,000 jobs in January and another 175,000 in February. So, one could argue the US has added nearly 300,000 new jobs to its economy in the first two months of 2014.

The problem with this is that other metrics negate this alleged growth. The Wall Street Journal notes that the average hours worked in the US economy FELL by 3/10ths of an hour in the last six months.

When you account for this, you will find that in actual terms, the US has effectively LOST the equivalent of 100,000 jobs since September 2013.

Put another way, the US seems to be adding jobs to its economy, but given that on average workers are working less, the economic output in the US has been that of LOSING 100,000 jobs in the last six months.

One can find other similar issues with the US’s GDP numbers, alleged manufacturing renaissance and other key economic metrics.  And all of these issues point to our economy being WEAKER than the headline numbers claim.

Indeed, perhaps the most glaring issues in our GDP numbers relates the CPI or Consumer Price Index, which measures the official inflation numbers in the US (the “flation” portion of stagflation).

The official CPI measure for the US claims that inflation has risen 1.6% in the last 12 months.

This is rather extraordinary given that food, energy, housing, and just about every other item consumers need has risen in price significantly more than this Indeed, if you remove the accounting hocus pocus from the “official” inflation measures, you’d find that inflation today is over 5%.

So we have an economy that is weaker than the headline numbers claim with inflation that is higher than the headline numbers claim.

That is STAGFLATION. And given that the Fed is behind the curve on it, it’s only going to get worse before it gets better.

Best Regards

Phoenix Capital Research