March 31, 2022
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I had a great discussion this week with Craig Hemke on the Sprott Money Monthly Wrap-Up, available here:
With an emphasis on the bigger picture, we focused on the primary drivers of the markets over the past month and going forward. Today, I am going to repeat much of what I said but with far greater detail and add some items we didn’t cover.
The two primary drivers of the markets in general from my perspective were and are the following:
- The ongoing situation in Ukraine and the escalation of tensions between the East and West
- Inflation and monetary policy tightening in response by the Fed, BoC, and BoE to name a few
Starting with the Ukraine situation…
In response to escalating sanctions from the U.S. in particular on Russia, and now China too, Putin declared last Wednesday that “unfriendly” countries—namely the U.S. and all EU countries— must pay for their natural gas in rubles. This is a huge development - a potential game-changer! Especially given that Saudi Arabia is considering selling oil to China in yuan instead of dollars. That creates tremendous concern about the remaining lifespan of the Petrodollar.
Taken together, the fate of the dollar’s role as the global reserve currency is increasingly under threat.
One can only imagine what would happen if China attacked Taiwan and the U.S. responded either financially or militarily? What if China said they would only accept payment for their exports in yuan or stop exporting some key items altogether?
Then there’s the nuclear option of China declaring just how much Gold they really have. The dollar is on an increasingly fragile ground here with the prospect of two commodity-backed currencies, the ruble and the yuan, challenging its reserve status.
Now people look at the DXY and say the dollar is doing just fine. But the DXY is rising because the dollar is rising against the euro and the yen. All that means is that the dollar is devaluing at a slower pace than the euro and the yen. All fiat currencies are being devalued to some extent or another due to soaring inflation everywhere, but especially in the West. All you have to do is look at what has happened to all commodity prices recently. It also explains why Gold and Silver remained resilient despite a rising dollar and soaring nominal and real yields recently. The dollar’s days as the global reserve currency appear to be a few geopolitical headlines away if this continues or, more likely, gets worse. What happens to Gold and Silver?
Switching to central bank tightening and focusing on the Fed: They’re committing a policy error on steroids because the trap has been sprung on them. It’s called stagflation, the Fed’s worst fear. Sure, it makes sense to hike rates to stem the rise in inflation, or better, reduce it. But they are doing so into an already slowing economy! Ask the Atlanta Fed or the 2-10Y Yield curve, which is close to inverting. That seems to be the intent, to create a recession in order to bring down inflation. Reduce demand for goods and services and thereby force prices to slow their ascent. But how far are they willing to go?
Housing markets are already decelerating as mortgage rates soar and mortgage applications are evaporating. I believe it all depends on stocks. When the S&P falls hard again, perhaps to a lower low, the Fed will be forced to revert to zero rates and QE to avoid a systemic collapse.
“When” the Fed opens the floodgates of liquidity again, inflation will resume its upward trajectory, bearing on hyperinflation. If 2020 and 2008 are anything to go by, Gold and Silver will go vertical at that point.
When does this Fed 180 occur? When it comes to timing, I prefer to stand on the shoulder of giants like Michael Hartnett of Bank of America, who is expecting the depth of the recession and the associated stock market crash in the Sep-Oct timeframe this year, which is typically bad for equities.
To make matters a little more complicated, Gold could rise in anticipation of this inevitable outcome, much like it did in October 2008, six months ahead of the bottom in stocks and the inception of QE1 in March 2009. There are several potential catalysts for this to happen again this time around.
Last month, the Canadian government took the unprecedented step of freezing individual accounts for donations as little as $20 to the Truckers’ movement. That set a precedent that scared a lot of well-heeled people to move a large chunk of their cash out of Canadian bank accounts, and much of it went into precious metals. Imagine what could happen if the WEF’s warnings of potential cyberattacks on the West occur, including attacks on the financial system?
In summary, while the short-term remains uncertain for Gold, Silver, and the miners, especially given the record short position of the Bullion Banks, I believe they will all begin to soar to new record highs this year, perhaps sooner rather than later.
Unfortunately, following the ensuing melt-up in everything once the Fed and other central banks go Zimbabwe on currency printing, I expect the Greatest Depression to begin in earnest sometime in 2023, latest 2024. That’s a conversation for another day, but if that does play out, Gold and Silver will likely outperform every other asset. That’s the beauty of precious metals, they outperform almost everything else in the extreme situations of inflation, stagflation, hyper stagflation, and deflation. I struggle to find any other assets that can provide such insurance and performance under those circumstances.
This brings me to a final point: preparing for the worst-case scenario now means:
- Getting out of the cities
- Loading up on food stores
- Being able to grow your own food (buy seeds, fruit, and nut trees)
- Your own water supply
- Diverse energy sources: solar, wind, natural gas, diesel, wood
- And a community of like-minded people.
The downside risk is that everything turns out to be just peachy and we all go back to normal. In that case, you may be out a few pennies at most. The upside is that you’re far better prepared to survive the coming Depression and the collapse of everything. The risk-reward of preparing now is skewed dramatically to the upside. There isn’t much time left, unfortunately, IMHO.
Given the two trips below 1900 but failure to close below there, we clearly have our support level. Better, the recent lower low on both an intraday and closing basis was positively divergent. Above 1967 and another test of the record high of 2089 is likely. Below 1900, and 1780 or possibly even 1675 again are back on the table.
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