An Update on Gold | Bob Klein of Medici Capital

On July 24, 2020, gold hit a new all-time closing high in dollar terms, $1902, eclipsing the prior closing high in 2011.  (Some time ago, it hit an all-time high in all other major currencies.)  The catalyst this week was yet another $1 trillion stimulus package announced by the White House with an agreement in principle from Senate Republicans.  Currency/gold traders know that the financially-strapped U.S. government will need to print another trillion dollars to pay for this new program.  Given the money supply is approximately $5 trillion, $1 trillion in new dollars will cause a significant debasement of the dollar.  Over the next year, I expect prices to rise on the things that we buy.  As I’ve said in prior notes, the government is simply grabbing the wealth of dollar holders and doling it out to the government’s preferred recipients.  The famed French thinker, Voltaire, captures the essence of this maneuver, “The art of government consists of taking as much money as possible from a class of citizens to give to another.” 

Most Wall Street and Washington elites buy into this nonsense because they only focus on the very short-term effects.  The stimulus checks that are mailed out get spent.  This is very visible.  The beneficiaries are interviewed by the media, and they marvel at the spending that results from this redistributed money.  However, the dollar holders are not interviewed about their loss in purchasing power, and thus this corresponding loss in spending is not apparent.  If this were sound policy, why wouldn’t we just cancel a significant amount of our taxes and simply print the money instead?  Of course, it is not sound policy, but those in charge are counting on the public not being able to trace the negative effects.  Most commentators focus on the benefits of the additional spending; they are in the dark about who bears the cost.

Fortunately, there are those who can see around corners to trace the longer-term, negative effects.  The Economist magazine on this week’s cover captures the essence of what is happening as they display a factory spewing out cash entitled, “Free Money. When government spending knows no limits.”

The dollar hit a new 1-year low as measured against other currencies.

This is because our government has been especially reckless relative to other countries in ignoring the limits on money printing.  Trump and the both parties in Congress operate as if there is no cause and effect.  They believe they can endlessly crank out yet even more dollars, with no downside consequences.

This is very naïve and dangerous.  The money changers are doing the math, and they are buying gold whose quantity is limited by nature, unlike the paper/digital currency conjured up by Jerome Powell, who knows no restraint.  

Predictably, like every Fed Chairman before him, Powell claims his money-printing program is just temporary, and now is not the time to worry about the negative effects, as he “has an economy to save.”   Ignoring his pretentiousness, this is just plain monetary quackery.

In due course, the markets will shut down Chairman Powell.  We will begin to see the very negative consequences in the form of rising prices on Main Street.  We have already seen the distorting effects of rising prices on Wall Street.  The Fed-induced hysteria has pushed up stock prices in some cases to meteoric levels with little connection to the prospects of the underlying companies.  The surging gold price is simply the canary in the coal mine for the rising prices to come on Main Street. 

As I’ve said in my recent notes, the stock market is looking toppy.  Slowing growth in China and the new strategy to disengage from China by the Trump administration will cause more trouble for the market.  On top of this, we face the prospect of more government controls in a Biden administration.  Not to be outdone, Trump, after the market closed today, announced what will amount to new limits on prescription drug prices.  Every industry will be gored in the years ahead, as government in the U.S. continues to grow relentlessly at the expense of individual choice.  This alarming trend has been spurred on by the growing popularity of the economic philosophy of the likes of Alexandria Ocasio-Cortez, Elizabeth Warren and Bernie Sanders.  Blinded by rising stock prices, the promise of a vaccine and an economic recovery, investors are not pricing in the coming political turmoil.  I believe investors will soon pay a heavy price for this oversight.