Rational Exuberance
Thankfully, it’s that holly-jolly time of year again! For this author, that means it’s the very best time of the year. That said, after heavily delayed and diverted weather-related holiday travel with the family (on the way to see more family), this author is beyond exhausted and very happy to have arrived. To be sure, a little holiday travel stress is small price to pay for “the most wonderful time of the year.” HAI wishes easy breezy travel for all readers hitting planes, trains, and automobiles this special season!
As HAI pointed out last week, the latest Trump administration U.S. National Security Strategy (NSS) has essentially made the re-industrialization of America the top MAGA priority. In short, if administration policy follows through with that new priority, it will be extremely bullish for precious metals and very bearish for the post-1971 dollar-based global system.
That’s because if U.S. national security now necessitates that we revitalize and reshore our atrophied manufacturing base, it means the U.S. must weaken the dollar and end the chronic U.S. current account deficits that are absolutely necessary for the functioning of the global dollar recycling system that has defined the post-1971 dollar-based global system.
In other words, if U.S. policy adheres to the new national security priority, it ultimately implies that the world needs an alternative global reserve system. In HAI‘s view, that new system increasingly appears to be based on gold as the primary reserve asset.
So, what does that uber-bullish fundamental set-up translate to for gold price expectations? After all, gold has already had an exceptional run. Not surprisingly, HAI‘s expectation is: much higher still. Likely at least $8,000/oz, with significant upside.
The breakdown of the post-1971 global system—and the emergence of its replacement—is nothing short of a generational paradigm shift. In HAI‘s view, history repeatedly describes the onset of paradigm shifts as Hemingway describes going broke—slowly, then all at once.
So far, in HAI‘s view, we’ve only seen the “slowly” part of this paradigm shift, but the “all at once” phase looks like it could begin very soon. China and the BRICS nations are advancing a gold-based trade settlement system, Trump’s new national security priorities imply that Washington now wants to move past the post-1971 system, and the credibility of the Fed (the keeper of the old dollar-based system) has plumbed ridiculous new lows of late.
Incredibly, in the face of these major developments, Wall Street and the Western investor have only just started to notice gold’s exceptional performance, let alone the generational paradigm shift driving it.
Edward Chancellor is a financial historian, journalist, investment strategist, and acclaimed author. In his latest Reuters article titled, “Gold’s Bubble Behaviour May Signal Paradigm Shift,” Chancellor provides important insight into the state and status of the accelerating gold bull:
“At first glance, the gold chart over the past three years looks like a classic investment bubble. But the irrational exuberance that normally accompanies a mania is absent. Speculators are too busy obsessing about cryptocurrencies and anything related to artificial intelligence to pay much attention to the barbarous relic. The number of ounces of gold held in exchange-traded funds remains more than 10% below the October 2020 high, according to Caesar Bryan, portfolio manager of the Gabelli Gold Fund. Furthermore, the number of shares outstanding in the VanEck Gold Miners ETF, which invests in publicly traded companies involved in gold and silver mining, has fallen by around a third from the 2020 peak.
“Bryan observes that Wall Street remains unenthusiastic about gold’s prospects. The consensus gold price for 2028 projected by investment analysts is nearly $1,000 below the current spot price.
“Bryan has witnessed many bull and bear markets over his four decades in the gold business, but, he says, ‘it does feel different this time.’”
In HAI‘s view, it feels different this time because it is different this time—fundamentally, in almost every possible way. This is the first time since the freely traded gold era that gold is moving back into the global system. Still, almost nobody really gets that.
Chancellor continues, “Central bankers have significantly increased their gold holdings, but most investors have not. That has proved a costly mistake. According to Goldman Sachs, the optimal portfolio over the last 10 years would have held half its assets in gold… Enthusiasts never cease reminding us that gold is the only genuine[ly] risk-free asset. Private investors currently have negligible exposure to the precious metal. A little rational exuberance on their part and gold really would take off.”
Gold is still dramatically under-owned, underappreciated, and misunderstood. Some are now noticing performance, but data and observation suggest that only the smallest minority fully understand the massively powerful fundamentals explaining why gold is moving higher so aggressively.
In HAI‘s view, as those generational fundamentals continue to play out and accelerate into the “all at once” phase of the monetary regime change paradigm shift, those with “negligible exposure” will find their “rational exuberance,” and gold will indeed “really take off.”
You don’t get bubbles without aggressive positioning, and that chapter of this gold story hasn’t even begun yet. Gold’s done what it has done so far on the strength of global central banks and buying by the few investors who grasp the full might of gold’s bullish fundamental set-up.
In 1997, storied anonymous monetary blogger “Another” is quoted as saying, “gold will be repriced once in life, and that will be much more than enough.” In HAI‘s view, we are now witnessing the one-time gold repricing Another was referring to. We’ve seen two prior powerful bull markets in the freely traded gold era, but, in HAI‘s view, this one is the repricing—and it still has serious unfinished business.
HAI expects gold to rip higher in the new year, and that enthusiasm also extends to silver and the precious metals miners. This author expects both will outperform gold.
For silver, Samsung’s new silver solid state battery specifically has the potential to dramatically ramp silver demand into what’s already been five years of ongoing silver supply deficits, just as investor demand swings into high gear. It’s a potentially explosive situation for silver that HAI will cover in more detail ahead.
HAI wishes all readers the merriest of merry Christmases and the happiest of happy holidays!
Weekly performance: The S&P 500 was up 0.10%. Gold was up 0.93%, silver gained 8.4%, platinum surged by 14.40%, and palladium launched higher by 15.50%. The HUI gold miners index was up 2.32%. The IFRA iShares US Infrastructure ETF lost 0.81%. Energy commodities were volatile and lower on the week. WTI crude oil was down 1.55%, while natural gas was off 2.31%. The CRB Commodity Index was off 1.07%. Copper was up 2.57%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 1.93%. The Vanguard Utilities ETF was down 0.62%. The dollar index was up 0.31% to close the week at 98.70. The yield on the 10-yr U.S. Treasury was down 4 bps to close the week at 4.14%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
