It is good for the price of gold that the media is starting to give more attention to US debt, budget deficits and the dollar. Still, the main stream media has a long way to go to paint an accurate picture of the dire financial state that our federal government is in.
The MSM needs to cover the viewpoints of people such as David Stockman, former Budget Director under President Reagan, and John Scurci, Partner and Chief Investment Officer of Corona Associates Capital Management, LLC.
Stockman and Scurci warn of not only the dire financial condition of the US government, but also about the huge private debt overhanging the American people ($67 trillion of public and private debt outstanding.) And, both are fearful of the levels at which stocks are trading.
Scurci, in his 2017 Year in Review, talks about “’bubbles on steroids’ as even brand new classes of assets [crypto currencies] became birthed and then rationalized even with returns of many thousands of percent as brand new ‘stores of value’.”
Scurci asserts “…that all of this was the unnatural stepchild of a nine year orgy of central bank liquidity in the form of a $20+ trillion tsunami of printed money and expanded credit.” He sees an “. . . inevitable market crash. . .”
As for central banks responses to any such crash, he sees “. . . central banks reviving their one and only crisis prevention tool of choice: renewed money printing and currency and debt debasement thus Stage II of an explosive upturn in gold and gold related assets.”
Below is reprinted Scurci’s 2017 Year in Review.
2017 Year in Review
2017 turned out to be an epic year for investing particularly if you were in the business of either predicting bubbles, blowing bubbles, or riding bubbles. It was a year in which buying high and anticipating higher was well rewarded. If 2017 was the year of bubbles it was more akin to “bubbles on steroids” as even brand-new classes of assets became birthed and then rationalized even with returns of many thousands of percent as brand new “stores of value”.
This bubblicious backdrop became the new normal for investment expectations where somehow lost in the mix was the realization that all of this was the unnatural stepchild of a nine-year orgy of central bank liquidity in the form of a $20+ trillion tsunami of printed money and expanded credit. Is it any wonder we ended 2017 with the mania of all manias in the form of crypto currencies?
2017 was an investment party in the theme of a Roman Bacchanal where the Fed and assorted central banks supplied the free booze and non-stop dance music. If you were an investment fund whose core positions were gold centric, or leveraged toward the gold mining equities sector as was our fund, you were specifically uninvited to the best investment party since the roaring 1920s.
Buying High versus Buying Low
Fortunes are not made by buying high and selling higher. The bubble markets have only stayed bubbly because its long holders haven’t yet sold. Those prices are only held up by the momentum, and the supply of greater fools supplying that momentum. The minute that momentum ends and the selling begins there is only an elevator shaft that awaits these prices as they are so far away from fundamental values. The momentum seen in the first few days of this New Year is the proverbial chicken running with its head cut off. There is no further fuel to feed this momentum. The Fed’s free booze was cut off in October as the mammoth Fed balance sheet has begun to be reduced, albeit in baby steps, but reduced nonetheless.
The ECB in turn has begun its own quantitative tightening this week by cutting in half the sum of new euro bond purchases by 50%. When you consider that 100% of the so-called economic recovery was derived by the artificial means of money printing and credit creation, the likelihood of additional economic growth or market momentum absent the artificial central bank stimulus is exactly zero. The closure of the liquidity spigot is virtually guaranteed to bring about a crash in the bubble assets while gold as the negatively correlated “un-bubble” asset is set to soar. What follows this inevitable market crash will be the perfect and desired rationale for central banks to revive their one and only crisis prevention tool of choice: renewed money printing and currency and debt debasement thus setting ourselves up for Stage II of an explosive upturn in gold and gold related assets.
How Cheap is Cheap?
While general stock prices have set all time valuation records in terms of any traditional value metric including price to sales, price to earnings, price to cash flow, etc. and investor allocations towards equities have reached new highs including the use of record amounts of margin debt to hold such added allocations; gold mining stocks as measured by the level of the oldest gold mining index, (XAU), is sitting near 50-year lows.
Gold itself is resting presently only 35% above its 1980 levels while at the same time stocks are priced at approximately 3,000% above 1980 levels. All of this is happening at the moment of the world’s greatest ever monetary debauchery, greatest ever systemic leverage, and highest ever financial asset pricing.
Using the thinking side of the brain it is not hard to conjure up the significant investment opportunity for gold and the companies that mine gold. Instead of focusing on this opportunity the public has seized upon mining new phantom mathematical currencies which have been absurdly propelled to valuations that are many fold the combined market value of all precious metal mining enterprises on planet earth.
Gold versus Stocks: An Historic Opportunity
The two most important ideas to consider are the following:
Firstly, consider that the spectrum of valuation ranges for gold over a very long-time horizon has varied from a high where gold is priced at one times (100%) of the Dow Jones Industrial Average; to a low where gold is priced at 3% of that same average. Gold presently sits at 5% of the Dow Jones Industrial Average. This would imply that for gold to traverse to its opposite extreme, that it would multiply by 20-fold while stocks from current levels would decline by more than 90%.
Secondly, consider that the financial system was brought to Death’s door and was only kept alive since then with a continuous application of made up money and debt creation on a scale never before seen in modern economic history. Investors accepting this as their “new normal” are making a fatal mistake in terms of thinking that this is anything but normal and in fact 100% unsustainable. Investors have gone “all in” at the worst possible time, precisely 9 years after the risks to a bullish scenario were lowest to place themselves fully long the most vulnerable assets of all, financial assets and the U.S. dollar, just as the punch bowl is being removed. Already and rather ominously, one of these, the U.S. dollar, has just finished its worst year in decades just as U.S. financial assets partied on, hardly a ringing endorsement of the other’s bullish move.
2018 is poised to be the exact opposite of 2017. The best performers of 2017 will be the worst. Investor sentiment will shift from unbridled optimism to abject pessimism as reality sets in, and in the process vast amounts of fictional debt based wealth will disappear. The Fund is positioned to capitalize on this inevitable re-shift. 2017 with all of its frustrations did not invalidate the strategy, but instead only lengthened the runway while also raising the reward opportunity. We are invested in assets that are undervalued by orders of magnitude. The prize we are reaching for is measured in hundreds of percent. This prize is achievable and likely for 2018.
The dollar has already started its descent. Bullion prices have already started their ascent. The Fund’s progress in just the early few days of this New Year have already erased the last two months’ negative NAV (net asset value) performance. Much more will follow and all of our considerable frustration and endurance this past 18 months will be amply rewarded and we are beginning to see this unfold in the here and now. That was the motivation for me to add to my personal stake in the Fund.
2018 will be a very good year to us and I would like to thank our fellow partners for your continued confidence and support as I wish us all the very best in this New Year.
Partner and Chief Investment Officer
Corona Associates Capital Management, LLC
2017 Year in Review is provided for informational purposes only and is not meant to recommend any asset investment.
1 Legal Disclaimer – Attention: The information contained herein is confidential and is intended solely for the use of the intended recipient. Access, copying, distribution or re-use of this letter by any other person is not authorized. If you are not the intended recipient please advise the sender immediately and destroy all copies of this letter. Nothing presented herein should be deemed to constitute a recommendation or an offer to sell any investment product. This letter contains forward looking statements, as defined by SEC Regulation D, and the Investment Act of 1940, which are the original ideas and best judgments of the authors. The conclusions expressed herein are not guaranteed, and past performance is not predictive of future results. Circular 230 Notice: Any written advice provided herein (and in any attachments) is not intended or written to be used, and cannot be used, to avoid any penalty under the Internal Revenue Code or to promote, market, or recommend to anyone, a transaction or matter addressed herein. Past performance is not necessarily indicative of future results. All investments involve risk, including the loss of principal. The views expressed herein are those of Corona Associates Capital Management,(“CACM”), as of the date indicated and may change without notice. CACM may buy or sell any security at any time and is under no obligation to provide updates to the information contained herein. This is not a recommendation to buy or sell any security.