History Rhymes: Is $2,100 Gold Next?

Posted On Aug 11, 2016 By Dave Gonigam

  • The gold “fear trade”: It’s back!
  • This event hasn’t happened since 1980… and could mean a 60% boost for gold
  • Markets shrug off a catalyst for World War III, but we won’t
  • A forecast that didn’t go our way… but also had zero downside
  • Useless and costly surgery… the end of health care as we know it (again)… The 5 searches for its sense of humor (did we leave it in the car?)… and more!

The “fear trade” is back in play.

Global demand for gold rose 15% in the second quarter, according to figures out this morning from the World Gold Council. The driver – investment demand from Western nations.

That’s the “fear trade” – a useful term coined by our friend Frank Holmes, manager of the U.S. Global mutual fund family. He means that Westerners usually buy gold at times when they lose faith in politicians and central bankers. The “love trade,” in contrast, signifies the cultural affinity for gold in China, India and the Islamic world.

Right now, it’s the fear trade that’s the bigger factor. Thus, the U.S. gold price has leaped 25% this year – which the World Gold Council report says is the strongest first-half-of-the-year increase since 1980.

Not a coincidence: Real interest rates just hit their lowest level since 1980,” says Jim Rickards. And that fact will prove a catalyst for gold’s next big leap – perhaps to $2,100.

“Gold competes with dollars for investor allocations,” Jim explains. “When real rates are high, the absence of yield in gold becomes expensive. When real rates are low (or negative), owning gold is cheap.

“The last time real rates were this low, gold spiked from $500 per ounce to $800 per ounce in weeks. That’s a 60% increase. Something comparable today would take gold to $2,100 per ounce and produce 500% gains in gold mining stocks. That hasn’t happened yet, but markets seemed poised for liftoff.”

Key point: We’re talking about real interest rates, after inflation.

“Nominal rates are already negative in much of the world,” Jim reminds us, “but real rates have been high until recently because inflation is so low. Negative real rates are an early sign of inflation, and that’s a huge tail wind for gold.

“Central bankers are no friends of gold. But they love negative real rates because they stimulate investment and increase inflation expectations among savers and consumers. That’s needed to stimulate the economy. Central bankers are rooting for negative real rates and (unintentionally) for higher gold prices.”

[Ed. note: Just this morning, Jim Rickards and Byron King released their latest “Penny Gold” recommendation. Byron believes it has the potential to double your money over the next 18 months. And that’s if gold doesn’t leap to $2,100, as Jim surmises.

As always, pay heed to Byron’s buy-up-to price. As we check our screens, it’s slightly above that price… but if you put in a limit order, it’s highly likely the price will come to you. If you’re not yet a subscriber to Rickards‘ Gold Speculator With Byron King, it’s not too late to juice gold’s action for much bigger gains with well-chosen gold stocks. Seize the moment right here.]

The markets are eerily quiet in light of a new flashpoint for World War III.

Gold is up a touch, recovering the $1,350 level for the first time in a week. And that comes in spite of the dollar index holding its own at 95.6.

Crude is up nearly 3% at $42.89, but we’re getting used to these big day-to-day swings in the oil price.

Treasuries are selling off a bit, the yield on a 10-year note at 1.53%.

Stocks are drifting up, the Dow industrials adding more than 110 points at last check.

That rising oil price helps, and so does a rally among retailers like Kohl’s and Macy’s. Macy’s delivered a “beat” on both earnings and revenue… and announced it will clear out some deadwood, closing nearly one in seven of its retail locations, about 100 stores in all.

Macy’s is up 15% as we write. Readers of Lifetime Income Report should be smiling.

Right, but what about World War III, you ask? The news hasn’t prompted the cable channels to roll out the “Breaking News” animation yet… so allow us to be the first to tell you the excrement’s getting real again between Russia and Ukraine.

There was a murky “border incident” a few days ago, and now Ukraine is massing troops on the edge of Crimea – the territory annexed by Russia in 2014 after the United States engineered “regime change” in Ukraine. Russia’s President Putin is meeting with his security council.

Allow us to also be the first to ask: What the hell is it about these provocations in Russia’s backyard coinciding with the Olympics?

During the 2008 Summer Games in Beijing, Washington’s puppet president in the former Soviet republic of Georgia decided to attack separatists in a quasi-independent region called South Ossetia. Russian troops intervened on behalf of the separatists, and the Georgian forces retreated after five days.

And the aforementioned regime change in Ukraine occurred during the 2014 Winter Games in Sochi, Russia. Foreign Affairs editor Gideon Rose went on the old Colbert Report and pithily described events from the D.C. establishment’s point of view…

Rose: We want to, basically, distract Russia. Oh, look, you have the highest medal count, oh, you did really well…

Colbert: Here’s a shiny object, we’ll just take an entire country away from you!

Rose: Basically.

Back to the present moment: At this stage, Putin isn’t taking the bait set by Ukrainian leaders. But there are testy words on both sides, and the United Nations Security Council will meet sometime today.

Maybe it’ll turn out to be nothing. We certainly hope so. But we’ve been on alert ever since those Winter Olympics 2½ years ago – heres a good refresher from early 2015 – and we’d be remiss not to say something.

Well, we’ll have to settle for half a loaf when it comes to medical marijuana. OK, maybe a couple of slices.

The Washington Post tells us sometime today the Drug Enforcement Administration will turn down two requests from a group of U.S. senators to remove marijuana from its “Schedule I” blacklist. Schedule I drugs have “no currently accepted medical use” in the eyes of the feds and cannot be used safely even under a doctor’s supervision.

On the other hand… the DEA did agree to start licensing additional suppliers of marijuana for research into pot’s uses as a treatment for chronic pain, epilepsy and other conditions. Right now there’s only one license, and it belongs to the University of Mississippi.

“As long as folks abide by the rules, and we’re going to regulate that, we want to expand the availability, the variety, the type of marijuana available to legitimate researchers,” acting DEA chief Chuck Rosenbergtells NPR. “If our understanding of the science changes, that could very well drive a new decision.”

If you’ve been reading the last two months, you know there was much reason to believe the feds would give marijuana a new classification… and Ray Blanco recommended two stocks on that basis for our premium biotech advisory service.

Fortunately, neither of those names depended entirely on a DEA rethink for long-term success. One is flat from Ray’s initial recommendation two months ago, and the other’s up 12%. Indeed, both are in the green today despite the news breaking before the open.

The story’s not going away, not with medical marijuana now legal in 25 states. We’ll stay on top of it.

A postscript to our money market fund guidance this week: When the next financial crisis hits, Fannie Mae and Freddie Mac will need a bailout of as much as $125.8 billion.

That’s according to a new report from the outfit that regulates Fannie and Freddie, the Federal Housing Finance Agency. So it’s safe to say the actual number might well be higher.

Again, with all the changes coming to money market funds in October, you don’t want to hold funds with corporate paper or foreign-government paper… or even “U.S. government” paper, a category that includes Fannie and Freddie. Treasury bills only.

“On the topic of Medicare-financed end-of-life surgery,” a reader writes in reply to yesterday’s episode:

“About 20 years ago, my grandfather was the court-ordered custodian over his 94-year-old sister-in-law, who was 100% bedridden, totally blind and never going to get better (obviously). Her doc contacted Gramps and told him she needed a knee replacement. Once he was able to stop laughing, the doc was informed a knee replacement was absolutely unnecessary for a woman who was bedridden, and my grandfather expressly forbid the surgery take place.

“You can probably guess the rest.

“A week later, she undergoes surgery for the new knee and dies in her sleep three days after that. ‘Natural causes’ is what the death certificate reads.

“I tried to get my grandfather to get a lawyer and go after these vultures, but he was already well into his 80s and he just didn’t have the energy to pick a fight at that age.

“So they got away with it then and are getting away with it today. I’m guessing the one in five who have surgery in the last month of their lives never wake up from the anesthesia.

“But what the hell. At least we don’t have soylent green factories springing up all over town. Yet.”

“Please!” implores an MD. “Stick to things you know about.

“Longevity is related to many factors, only one of which is the quality of health care. In case you don’t know. It is related to job, stress, demographics, diet, air quality, cultural attitudes toward modern medicine, genetics, drug use and alcohol use, among many other things.

[Did we assert otherwise? But please, go on…]

“Besides, it is not a ‘health care system.’ It is a disease treatment system. So a comparison of outcomes for specific diseases is more appropriate. Do you really want to get your cancer treated in the U.K.? I can tell you for sure five-year survivals are much less.

“In medicine, to find causation, all factors have to be equal, except for the one being studied.”

The 5: All true, and all splendidly beside the point.

Spending on the final year of life took up 16.7% of all federal health care spending in 2011 – that’s including Medicare, Medicaid, the whole shooting match.

End-of-life care as it exists in America right now is one of the biggest reasons that health care spending as a percentage of the federal budget keeps doubling every 20 years… and it will take up half the federal budget sometime in the early 2030s. Except it won’t… because it’s inevitable the system will break catastrophically before the cost curve goes completely hyperbolic.

“Sometime in the next 20 years,” our fearless leader Addison Wiggin wrote in 2012, “the ‘whatever it takes’ approach to keeping people plugging along in the final year of life will come to an end… because the costs can no longer be pushed off to the next generation.”

“Your ‘Raw Deal’ chart (health care costs versus longevity) was interesting,” writes one of our regulars.

“Even more interesting would be a similar health care profitability versus longevity chart. You may need to go to an exponential scale to accommodate the U.S. health care industry profitability. For example, with Medicare Advantage insurance coverage, out-of-pocket costs for an erectile dysfunction drug are a couple of hundred bucks a month. In Ecuador, the generic version (every bit as good and safe as what is sold in the U.S.) is over the counter at $17 per month without insurance.

“The USA used to have a health care system. Now we have a health care industry. The difference? In a health care system, the goal is a well and healthy population. In a health care industry, the goal is profit – and a healthy population is not a profitable population. And obscenely profitable… particularly when the health care industry has so many ‘bought and paid for’ elected ‘representatives.’ When high-quality elective procedures (medical and dental) can be had abroad for a fraction of the cost as in the USA, now you understand why Medicare does not cover medical care outside of the USA.”

“A few ramblings triggered by yesterday’s 5,” writes our final correspondent:

“Too bad Obama can’t run again: Let’s ban guns in the U.S. but ship them to Saudi Arabia. Brilliant!

“Over a billion in arms for the Saudis but nary a drop of water for the Yemenis (hard to make a profit on water?).

“What a success ‘Affordable’ care is, what with drugs that are cheap in Europe but pricey here (not to mention greater out-of-pocket costs for just about all of us).

“Love The 5, but seems more humorless lately. Let’s work on that, heh?”

The 5: Heh, we’re subject to summer doldrums too. But we appreciate the reality check.

As it happens, in the midst of refreshing our memory about the Russia-Georgia war during the Olympics in 2008, we encountered the following photo from our episode eight years ago today. Herewith, a 5 flashback…

Crazy to think that at the time, Lehman Bros. was still a going concern…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. As long as we’re teasing out historical parallels (and at the risk of getting serious again)…

Our team has uncovered some eerie patterns about events right now that look like events eight years ago… and eight years before that.

If you don’t want to be caught off guard by the next dot-com crash or Panic of 2008, please follow our virtual pages next week.


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