Chris’ Thoughts on Gold for 2013
Chris was recently polled by Casey Research for his outlook on the economy in general and gold in particular for 2013. Here's what he had to say:
What do you expect to see for both the US and global economies in 2013?
My view on the global economy is that it is in very weak shape and is barely above stall speed once we account for all the places that are already in recession (UK, Europe, Japan), probably in recession (US), and those that are still growing (developing India, and China). That's based on macro data, which I tend to discount a bit because of the widespread practice of fudging the numbers. The US has perfected it into an art form, but they are certainly not alone in the practice.
The political atmosphere in DC is so toxic that I think there is a better chance of discord and gridlock than unity and productive decision-making. The phrase that comes to mind is to cut off one's nose to spite one's face.
Accordingly, I think there's not much chance of the federal government increasing their spending this next year, and that, of course will be a drag on economic growth. Any tax hikes will be extractive from the broader economy, as those increased revenues will simply be passed through to some other recipients, which means that we will be trading reduced deficits for lower GDP.
My view for 2013, then, is one of recession for the US and for the world in combination, but not everywhere. Much of the developing world is entering this period with low debt and high resource bases, so some places will do reasonably well, just not the OECD.
Though the fallout from high debt levels and money printing has been muted thus far, what do you see as the most likely consequences of these actions? To what extent does this start in 2013?
Underneath the covers, I am certain there is much that remains hidden, as the Federal Reserve's actions in committing to ultra-low interest rates and QE Forever (possibly) to the tune of $85 billion per month are those of a very scared organization, not one viewing 0.4% drops in the unemployment rate in a single month (okay, that was pre-election, so perhaps they discounted it like everyone else) and a Q3 GDP growth rate of 3.1%. What they are looking at that worries them so much is not a matter of public record, but it's not hard to guess. After the US government allowed banks to mark their assets to myth, rather than market, I turned to the Fed's actions to tell me when that program had run long enough to fully repair the bank balance sheet. QE forever tells me that there is still much damage lurking there.
Here's what I learned in 2009: Any negative growth now threatens the stability of the entire financial system. If anything is being fought tooth-and-nail by the Fed right now, it is lack of growth generally, not unemployment specifically. Our financial system is now so shot through with 'too big to fail' institutions, carrying such monstrously over-leveraged positions that are insured via derivatives that will protect them against everything but a modest (or worse) downturn, that a lack of growth is no longer an option.
Unfortunately, low to negative growth is what we will experience, and $100+/barrel oil virtually assures that. Trading private debts for public debts buys time, but nothing more, and so debt remains a significant source of pressure in 2013.
I am expecting a quite serious financial accident in 2013, and I expect it to initiate either in Japan, southern Europe, or in the US (as a distant third). Once initiated, it will spread quite rapidly through all of the intertwined entities that span the globe, taking out the weaker ones first and necessitating some very serious interventions by the usual assortment of central banks.
Based on what you see ahead, how would you recommend investors allocate their portfolio?
To answer this, I want to first expand the idea of investing to something that business people will immediately recognize. This means including the idea of dedicating money today towards reducing future expenses as a form of investment. If we can reduce future cash outflows to a greater extent and with less risk than attempting to increase future cash inflows, then this is where we should put our funds first. With this in mind, the very best possible investments that can be made by the typical investor today exist in and around their home. Solar, insulation, and other forms of energy-efficiency increase resilience and provide guaranteed returns that vastly exceed anything Wall Street can offer.
After various forms of investing in self and even your local community, I then recommend at least a 20% allocation to physical gold and silver in a 2/3-to-1/3 dollar-based proportion. I personally have a higher weighting because the way the Fed is steering the monetary ship makes me nauseous. But 20% is the minimum I would personally tolerate here.
After this, any and all money needs to be very carefully managed, and here I am ultra cautious right now. A return of capital is more important to me right now than a return on capital.
Gold will end 2012 with a modest gain, in spite of plenty of positive catalysts. What will break the metal out of its trading range? What’s your expectation for when that happens? What trading range do you see for gold in 2013?
I happen to think that our markets are telling us the price of everything but the value of nothing. Of course, that is exactly what you get when the central bank misprices money at zero and the markets themselves are battled out by computers armed with better information than retail investors and which operate with sub-millisecond precision.
After watching several bear raids on gold and silver in 2012 where thousands of contracts were dumped in a literal blink of an eye, if not faster – a move that has nothing to do with 'exiting a position' and everything to do with driving the price down – I came to a final acceptance of the idea that US regulators will do nothing to explore obvious price manipulations in US markets. And this extends to many other commodities, equities, options, futures, and even bonds that I have studied. These games are happening every day, all the time.
This means that price discovery is now a broken concept, and so I really do prefer to turn to other information besides the current dollar price of gold or silver to assess whether those are good investments at this time. Right now, three things are front and center in my decision to not only hold all of gold and silver, but to consider adding more:
- A fiscal travesty in DC that will assuredly lead to at least 5 more years of 1 trillion dollar deficits under the best of circumstances, and possibly twice that if the next recession is deep enough
- $85 billion per month from the Fed in hot, hot, hot base money
- A pronounced West-to-East flow of gold
As long as those three bits of information remain in place, I am a holder or an accumulator, depending on my current cash position and whether I think the current market price has been rather helpfully smashed low enough by whomever it is that repeatedly does this.
If pressed for a view on price, my thoughts here at the end of 2012 are that the next down leg in the markets will quite probably take gold and silver down – at first – but then the dawning realization that things really are quite out of control in the financial universe will serve to draw their prices back up and quite a bit higher than their prior recent highs.
So in 2013 I am looking for bottoms in gold at around $1,500 and in silver at $25, probably in Q1 but possibly Q2, and then highs that take them over the $2,000 mark and $50, respectively.
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It should go without saying: These price prognostications should not be construed as individual financial advice. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which Chris is obviously unaware of) and should be obtained directly from a financial adviser whom you trust. Before acting on any of the statements made in this podcast, we advise you do just that.