IN-DEPTH: TRANSCRIPTION - LONGWave – 03-09-22 - MARCH – Gold the Geo-Political Risk Hedge
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
COVER
It seems that at least one video a year is focused on Precious Metals.
The reason is that one or the other of certain factors often takes center stage. Such as:
- Inflation,
- Currency Debasement,
- Sovereign Debt Monetization,
- Competitive Currency Wars,
- De-Dollarization, or the status of
- US Dollar Reserves,
AGENDA
In this session however we have another reason to talk Gold and that is the fact it is once again assuming its long held role as a Geo-Political Risk Hedge. In my mind it has been a couple of decades since this was actually the case.
Specifically, the last time I saw Gold spike like it has in recent weeks was on the morning of 911. I remember it well because before we even understood what was going on that morning, we knew something serious was up because Gold was reacting as it normally did as a Hedge against some sort of major Geo-Political shock – not yet fully understood!!
I want to show why I believe this is now again the core reason Gold has recently spiked and why this renewal of its past status as a Geo-Political Risk Hedge is going to be very important in 2022.
As such I would like to discuss the topics outlined here.
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First for the positioning of what is happening, is a reminder of …
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… our 6 major Macro Themes for 2022 and the supporting 9 Investment Themes we outlined in the Year-Beginning UnderTheLens and LONGWave videos.
This slide summarizes both with the 9 Investment Themes highlighted in read.
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The first is the Weakening US Leadership role in the global stage and how as a result of this, 2022 will be punctuated with major Geo-Political Events. We produced this list and the 2022 macro Thesis video long before there were winds of a war in the Ukraine. We highlighted it because it was part of the world shifting from a Uni-Polar world to a Multi-Polar world. We will talk more about this later.
We actually started writing extensively about this coming shift in our 2018 Thesis paper: “A New World Order”
We felt the US debacle that was the Afghanistan withdrawal sent a clear message to the world. It wasn’t that the US was withdrawing. It was the shocking way it was done. A super power does not conduct itself in such as fashion. Only a broken power does.
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It laid bared to the world the very serious problems that the US, as the “torch bearer” for the Free World has!
The incompetence, lack of foresight, leaving people behind and deserting its supporters in the dead of night was something even America citizens had problems believing.
To foreigners however it matched the news coming out of the US of broken borders, law & order breaking down, smash and grab without prosecution and what appears on the nightly news broadcast around the world of the complete political disarray in the US Congress! Americans don’t fully appreciate the detail of how what is going in America is seen by the citizens of the world – including despot rulers.
It was sure bet that the enemies of the US were not going to let such a situation go by without fully capitalized on it to their full advantage!!!
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We see the Ukraine conflict as only the beginning of what is yet to come!
China, Iran, North Korea and many other dis-enfranchised sovereign states will soon be much more aggressive.
To Americans it is likely to be something we have never experienced nor believed could happen!
It is seen in US leadership polls of the current administration. They are at near historic lows for any US administration.
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The Geo-Political Turmoil and financial fallout presently occurring globally is dramatic when you stop listening to the mainstream media and delve into the underlying financial details.
Let me take you on a tour s you gain some perspective of what we have seen and are now seeing:
- A whopping $46.3BN has fled to cash - the largest inflow in 9 weeks,
- $1.9bn has fled to gold,
- Meanwhile, $5.0BN has been pulled from equities, the 1st outflow in 10 weeks, and $10.6BN from bonds.
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We have just witnessed the largest outflows in European equities – EVER - at $6.7bn in a single week as investors dump the one trade that everyone on Wall Street was consensus bullish on just one month ago.
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We just had the largest outflows from global financials on a weekly basis – EVER - at $3.5B.
- We had the largest outflow from MBS since March 2020 with $1.6bn - front-running end of QE,
- The largest outflow from real estate since May 2020 at $1.1bn,
- The largest inflow to energy since March 2021 at $2.4bn,
- The largest inflows ever to materials at $4.1bn.
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The Russian Ruble has completely collapsed which is not only a problem for Russia but European banks who have heavily financed Russia energy expansion and in many cases in Russian Rubbles.
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Russian Bonds have become almost “worthless" collateral. This hurts VaR requirements at banks around the world holding Russian assets.
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Russia is now basically giving away its oil to find buyers. It is selling at a $28.50 discount to Brent the last time I looked.
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Russian stock values have simply disappeared!
… and the list goes on.
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… with European banks in trouble and particularly the major banks in France and Italy.
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Exploding EU Energy costs and shortage went from a major concern to Crisis levels.
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… meanwhile the average price at the pump has exploded higher with the 2nd biggest jump ever and looking set to go even higher given the price of crude and wholesale gasoline.
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We have been a major proponent of the Commodity Super-Cycle which has been a big beneficiary of the political and financial turmoil.
We believe the market is finally starting to sniff out the coming stagflation which we have also been writing about.
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The net result of all this has been a Flight-to-Safety!
The traditional Flight-to-Safety has been to the US Dollar often in the form of US Treasuries. The last spike up to our target price and time objective reflected this.
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On the other hand we are not at all confident this will last.
In fact as reflected by the dotted red line on the left we are decidedly in the camp of a weakening dollar in 2022 which we have also outlined in previous videos specifically on the US Dollar.
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Gold has also been the recipient of this Flight-to-Safety since late January, as can be seen by the shaded area.
We have put in recent highs that show double top formation with the 2020 high that kicked off a 20 month consolidation before leaping from a “coiled” position.
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Our view however on Gold is that it is only beginning to be a Flight-to-Safety instrument as it increasingly becomes once again a Geo-Political Risk Hedge!
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We are now experiencing the results of mounting global tensions and the beginning of a shift in the World Order.
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We laid this out beginning in 2018 within our Thesis Paper ”The New World Order”. We followed it in 2019 with our annual thesis paper entitled “De-Dollarization” and in 2020 with our Thesis Paper entitled “Global Conflict”.
For new subscribers and MATASII followers, all three of these papers are archived for download at the MATASII.com web site.
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In Global Conflict we specifically addressed concerns with Russia, China, Iran and North Korea. All four of which (along with other) will be prominent in the news in 2022.
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What we need to understand is Conflict or War is Inflationary!
Conflict or War is also stagflationary! … And
Conflict or War Creates Recessions – often deep and protracted ones!
It will likely be the same again!
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Over the last decade the world has gone through profound Economic, Financial and Social changes.
All important but when taken in mass leads to secular regime change from globalization to the three “I”s:
- Inflationary isolationism (human, social, regional)...
- Intervention (sanctions, confiscation, tariffs), and
- Insecurity (trust in a global financial system)
This means a new era of inflationary boom-bust cycles seen in a secular reversal in:
- Inflation vs Deflation assets,
- Commodities vs Bonds,
- Value vs Growth
All of which we have been talking about for a couple of years now in the ongoing shift from:
Capitalism to Creditism to Socialism
As well as a shift from a Uni-Polar World (centered by the US), to a Multi-Polar World with increasingly strong regional powers.
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What we need to remember is that historically the “Great Game” as it is referre d to in Geo-Politics is always about Energy. Who has it and who needs it.
Those who command it have control and advantage with economic productions costs, productivity levels and standards of living.
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The last time we saw a major problem with Inflation, Economic Growth and Stagflation was in the 1970’s.
There we also found Energy at the center of the problem.
Energy independence has proven to be a cornerstone sovereign liberty. Without it tensions often arise with those powers who have it.
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With Gold becoming once again a Geo-Political Risk Hedge we need to revisit what has been driving Gold pricing over the last decade and half.
Also what has been driving it valuation.
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First is INFLATION as measured by Inflation Breakevens. Shown here is the benchmark 10Y Breakeven Inflation rate from the Fed.
As Inflation Break-Evens rise gold rises with them. When they fall gold falls with it.
This is why we haven’t seen a surge in Gold for a few years, as central banks desperately tried with monetary initiatives to drive Inflation to their 2% or greater goal. Inflation was too low and a problem for central banks as it steadily fell until the Covid pandemic and money printing stimulus exploded.
This heralded in a short term problem of “too much money chasing too few goods”.
We now have 10y Breakevens at highs last seen since 2004 to 2006 and CPI prints at levels not seen since the 70’s and in some cases never before.
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Secondly, Gold moves inversely to the Real Rate.
Here I show the 10y Treasury Inflation Protected Security or TIPS. Gold tracks very closely to any drop in real rates. You can see it has been steadily deteriorating as it went negative in 2020 and is currently at approximately -1.0%.
How these tie together is based on Fisher’s Law:
The US Treasury Note Yield Equals the 10Y Breakeven Plus the 10Y Real Rate (normally measured from the 10Y TIPS).
Therefore from this chart and the last one the 10Y US Note should have traded at 2.77 + -0.99 or 1.78% on March 7th. In fact that is what it did do after falling significantly from over 2% two weeks before.
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The reason is the significant moves in both the 10Y Inflation Breakevens and the 10Y Real Rates as shown here.
The reversal is unprecedented. But even this move didn’t justify the move in Gold to all time highs on Tuesday March 8th. And that is the point here.
The difference with the net change in the Inflation Breakevens and Real Rate is Geo-Political Risk being priced into Gold from the fallout from the Ukraine Conflict,
This is about the Geo-Political Sanctions and their Unintended Consequences. We saw that across the raft of charts we showed previously.
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I show here an illustration reflecting the Gold Reserve Holdings and changes of central Banks around the world since 2000.
MOST GLOBAL CENTRAL BANKS HOLDING HAVE BEEN FLAT TO SLIGHTLY DOWN WITH SOME BLATANT EXCEPTIONS:
RUSSIA: Increased by 443.2%
CHINA: increased by 393.2%
INDIA: Increased by 891.1%
TURKEY: Increased by 352.7%
These are major countries aligned in many ways against a US Uni-Polar world and the control the US Dollar has over them as the US exports its inflation from consuming more than it produces to others.
These are countries doing everything in their power including alternatives to the SWIFT system to stop the US weaponization of the US dollar as its foreign policy instrument.
I laid all this out in our most recent newsletter entitled “Ukraine Places Focus on Failing US Energy Policy”.
Don’t for one moment allow the apparent the size of US Gold Reserve holding shown here fool you. For decades the US leased out its Gold Holdings. Many of those large bullion bank leasers sold that gold into jewelry. How exactly is it to be returned?? If the counter party is incapable of returning it or buys it from others, the leaser goes broke and the US Gold Reserves disappear in bankruptcy court.
I hope you can see how gold and inflation over the years was manipulated through this “sleight of hand”? A day of reckoning is coming on exactly what is the value of US Reserve Assets.
Is it any wonders these countries can’t accumulate Gold fast enough? Gold is their ultimate Hedge against this exposure! It is also your Geo-Political Risk Hedge!
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So what our conclusions?
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A recession and an era of stagflation is dead ahead for the US and possibly for a big part of the global economy. It will be very problematic for the US particularly.
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Secondly, many of the issues we have been writing about are now upon us which will drive Geo-Political Risks and hence a Geo-Political Hedge like Gold.
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Of the many changes we should expect resulting from a highly interconnected, socially networked world, (all laid out in the 2018 New World Order Thesis Paper) was the shift from a Uni-Polar World to a Multi-Polar world.
This would mean strong Country and Regional powers which inevitably would lead to Conflict.
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In the 2019 Thesis Paper “De-Dollarization” we laid out how the continuous, on-going use of sanctions, effectively weaponizing the US Dollar as a tool of foreign policy was fraught with problems. In fact over the last decade the broad range of impacted nations have adjusted for this, prepared counter measures and will be less tolerant to what they believe is a belligerent and corrupt US foreign policy.
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In the 2020 Thesis Paper “Global Conflict” we lay out why broader global conflict is soon to control the social order. It won’t be just about Military or Cyber Conflicts but through other tools using the media, social networks, social influencers to control the narrative, attitudes and demands of the citizenry.
Expect it to be a brave new dangerous world
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2021 turn out to be an outstanding investment year for you and your family.
Thank you for listening
