Is Your "Money" in a Bubble?

by Scott Causey, GWP Resource Correspondent

goldTens of trillions of multiple currency units slosh around the financial universe everyday. Japan’s sovereign debt is measured in a metric called a quadrillion. So is the derivatives market. Going back over 100 years, central bankers around the globe have been the masters of the Universe. Stand close enough to the waterfall of paper money creation through banking or government and you indeed have been richly rewarded for running with the ones who brought you, so to speak. These things have gone on for so many generations that the pervasive attitude seems to be one of, “The more things change, the more they stay the same”. If you can count to 10 without phoning a friend or using fingers and toes, now might be the time to re-think everything you thought you knew as real.

Let’s imagine I’m a widget maker. I put you in charge of ascribing a value to my widget. Your first question is, “how many widgets do you make per month?”. I answer, “85 billion”. You ask, “Do you plan to increase production even more?”. I answer, “Oh yes, most certainly, likely dramatically so”. You ask, “How many of these widgets are already in circulation?”. I answer, “tens of trillions”. Based on those answers, what value would you ascribe to my widget now and in the future? Seems a simple enough problem to contemplate, doesn’t it? More importantly, would you save in and hoard those widgets? Most of you, I’m sure, realize I’m making a simple comparison to the US dollar and QE3. The entire Western World’s liabilities are completely unpayable in today’s money. The only practical solution to erasing these debts is to monetize them. IE print money and inflate it away. There are tremendously negative outcomes to this path, but it is slightly more politically correct than just outright saying “screw you creditor, I can’t or won’t pay”.

It is absolutely mind-boggling to me to consider that 11 straight years into higher gold prices and still less than 1% of global assets are held in gold. Even more astonishing is to consider that the majority of this 1% held in gold includes exchange-traded funds, mining shares, and unallocated accounts! In other words, these are paper promises held and controlled by the very same banks that would kill your grandmother for a bonus and feel damn good about it. If you think that is an exaggeration, I encourage you to learn more about finance. How much money would be in a housing market that went up for 11 straight years? Stocks? Bonds?

Well why don’t we let the numbers speak to us for themselves? Bonds have been in a 30 year bull market. Not since the early 1980’s have Americans in general been concerned about sustained high inflation rates. The brief oil peak of 2008 notwithstanding. (Note oil goes higher from here). Take a look.


So let me get this straight. A tiny fraction of 1% of global investable assets is in what the world considers to be the benchmark of precious metals? That’s what a “bubble” looks like? If you ask me, it’s pretty clear what the most over-owned asset is in the world today at 49%. Over 400 billion dollars has been withdrawn from American stocks in the past few months, and the majority of those funds were re-allocated into bond funds. Word to the wise: The more people think something is foolproof and “safe” in the market, the more the opposite becomes true. My god, people, PIMCO rules the bond world and they repeatedly have posted on the front page of their website in recent years that bonds are now a bad investment! PIMCO makes their living selling and managing bond funds!!

The precious metal market is a relic of history to the vast majority of today’s investors in advanced economies. Warren Buffet says he will never invest in gold. CNBC continually bashes physical metal ownership. If you catch them on a desperate day, they might push you towards GLD, the ETF managed by Bank of NY Mellon, AKA, the right arm of the Federal Reserve Bank of New York. Absolutely nothing is more of a threat to the paper dynasty than complete loss of faith in the system. Take a step back and consider the markets that are currently being “supported” by various programs. Currency, real estate, bonds, and stocks are all currently backstopped by an alphabet soup of financial engineering initiatives to help maintain “orderly markets”.

Back to the chart above and you’ll also notice that silver doesn’t even register on the scale. Using rough numbers and a quick calculation will show you why. Annual global mining production of 700 million ounces X ballpark 30 bucks an ounce. So essentially every new ounce of production on earth for an entire year can be bought for around 20 billion dollars. When you consider that above ground stockpiles of gold are north of 6 billion ounces and silver only north of 1 billion ounces, this is utterly laughable. Modern society simply ceases to exist without the miracle that is silver. This is simply not true of gold, from an industrial or military standpoint. The business end of a Tomahawk cruise missile has approximately 500 ounces of silver in the “smart” part of the bomb. Current strategic stockpile levels are 0 ounces. Current chance of more shots fired all across the middle east, 100%. Has the phrase, “This is not rocket science” ever looked more sexy?

I’ve spoken at length in these pages before about market cycles from a historical context. The bogey number being 16-18 years. Eleven years into this bull move in metals and still by and large the world’s money managers are not ready to play in size yet. Two points. If they decide to invest in this trend, there is simply not enough physical metal out there to satisfy the paper demand at any realistic cost. The second point being, the public at large will not participate in this opportunity until the blow off top phase of the moves to come begin to occur. For a hint of what that might look like in chart form, imagine a hockey stick formation. To imagine what that might look like in real life, imagine everyone at a dinner party speaking of how you can’t miss with gold these days. In other words, let reality and hard numbers speak to your clear mind, instead of listening to endless “experts” advise you on how much speculative money is in this space.

“Tail risks” or “Black Swans”, are what drive people into the perception of safety. This “flight to quality” in bonds will not end well. When something performs people typically buy it with little, if any, thought. This includes the “long only” money managers on Wall Street that people confuse with being geniuses because they have a 6 or 7 figure job at Fidelity. In reality, these people have very little skin in the game. They will be paid whether your return next year is -40% or +40%. The baby boom generation is more educated on these ideas and have voted with their FIAT to go to bonds for shelter. Run in the opposite, well informed direction to benefit from this trend. The move into bonds over the last few years has stunned many long time market watchers. The move out will be even more so. As anyone who has seen a few market cycles knows, things go up until they don’t.

With most of the public terrified to own a stock when nearing retirement, and 49% of the world’s investable assets in bonds, what comes next? Money printing overdrive, yet another attempt to re-liquify money center banks from a sea of neverending mortgage defaults, and a tidal wave of fiat paper money searching for an inflation hedge….any inflation hedge. A parking space in the exclusive area of Repulse Bay in Hong Kong recently sold for $387,000 dollars. Property values have been soaring in various locations around the world as well. Now, do tell me all about how $1700 gold, $1600 platinum, and $33 dollar silver is pricey. Hindsight is 20/20. Historical foresight is gold in the bank.


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