My Mind Is Waving A Yellow Flag, Something Doesn’t Feel Right!

Lately, I’ve felt downright giddy! Every Friday, I update our investment portfolio. Our top mining stocks are up 400%, 158%, 53% and 46% respectively. In the last year, we’re up 21%.

Not wanting to overtly brag, I’ll exclaim, “Wow!” hoping to draw my wife Jo’s attention to show her our gains. The euphoria carries over to enjoying a nice evening dinner.

Dan Denning hit a nerve in his weekly update, Natural Entropic Tendencies (all bubbles pop):

“Most things stay the same day after day. And then one fine day everything changes – or something happens that forces everyone to change their mind at the same time. This is why stock market panics become crashes.

Well, not EVERYONE. Some of the people who are already thinking (for themselves) can change their minds through that subtle process (independent thought). Others require a good smack upside the head.

…. Gold is up 43.12% in the last 365 days.”

While proudly racing along, deep down, it doesn’t feel right. I examined his graph. On January 1, 2020, gold closed at $1,517.30. When I wrote this, the spot price was $3,643.90, a 140% increase. Two weeks later, it’s up another $100. Silver is also roaring!

While I want to keep the pedal to the floor, my instincts are screaming, “Caution.” I’m reminded of an unforgettable lesson about trusting your instincts:

“Friday, December 13th, Atlanta Hartsfield Airport. It was a long, exhausting, year, 40+ weeks on the road, all over the world. Heading home for Christmas vacation…. finally.

Engines roared, we rolled down the runway. Suddenly the pilot reversed thrust, slamming on the breaks. My seat belt was straining; we all lurched forward. Several people screamed.

The plane chattered and shook, coming to a full stop; aborted takeoff. The captain calmly announced, ‘Ladies and gentlemen, I apologize for the abrupt stop. Nothing on my instrument panel indicated a problem. I’ve been flying for a long time; something just doesn’t feel right. I’m going to get things checked out.’

Mechanics flocked into the cockpit. It didn’t take long; the dreaded announcement, ‘Ladies and gentlemen, this flight has been canceled due to mechanical difficulty.’

Rebooking at Hartsfield on a Friday night is a nightmare. Passengers began complaining. The elderly woman next to me spoke up, ‘I’d rather be late than in a crash.’ Complaining stopped. I stuck my head in the cockpit and said, ‘Captain, I’m a million miler and I’ll gladly fly with you anytime.'”

There were no caution or alarm bells on his instrument panel; the yellow flag went off in his brain. He took caution and checked things out.

OK, now what?

Our recent metals surge doesn’t feel right; much too easy. This isn’t “that old familiar feeling.” Historically, our nice gains were individual stocks where something happened (takeover, etc.) Better check things out.

I sent Chuck Butler a note,

“Check out the gold price chart. Looking at the last few months, I feel uneasy, too much, too fast. Not sure where, or when, to take some profits.”

Chuck responded:

“Yeah, I do too… Gold & Silver are overbought on the RSI… But that hasn’t stopped them before…”

I looked at history. Almost 50 years ago, gold experienced incredible gains.

In three years, gold rose 345% and then radically dropped. Federal Reserve History explains:

“By January 1979, inflation was threatening to rise further, as prices jumped 7.7 percent from the year before…. At the same time, there was concern about the US dollar, which had lost 12 percent of its value against major foreign currencies since late 1976.

During Volcker’s confirmation hearing in July 1979…the soon-to-be Fed chairman made his intentions clear. …. Volcker pledged to make fighting inflation his top priority, telling lawmakers the Fed would “have to call the shots as we see them.”

…. Some members of the Federal Open Market Committee remained concerned about the level of inflation, and Volcker made a dramatic move to attack the problem. ….(Saturday) evening, October 6, 1979,…Volcker announced the results of an unscheduled FOMC meeting held earlier that day.

…. As a result, the new focus and the restrictive targets set for the money supply, the federal funds rate reached a record high of 20 percent in late 1980. Inflation peaked at 11.6 percent in March of the same year. Meanwhile, the new policy was also pushing the economy into a severe recession where, amid high interest rates, the jobless rate continued to rise and businesses experienced liquidity problems.”

This time IS different?

During Volcker’s term, Glass-Steagall was in force, commercial and investment banks were separate; none of this “too big to fail” crap. Politicos were screaming about rampant inflation; something must be done.

The difference between the Fed Fund rate in 1979 and today is glaring:

Interest rates were over 6%. Inflation fighter Volcker raised rates and held them high until inflation was brought back down. Since the 2008 bank bailout, interest rates have been historically low.

More recently, Fed Chairman Powell was finally forced to deal with inflation, raising rates to 5%. Inflation is still high, yet President Trump demanded the Fed cut rates to get the economy moving.

The head of the Bureau of Labor Statistics (BLS) was fired, accused of politically “cooking the books.” NPR (noted for extreme political bias) reports:

“U.S. employers are adding far fewer jobs than initially tallied, in the latest sign that the labor market may be weaker than expected….

The BLS shows hiring for the 12 months ending in March was overstated by an estimated 911,000 jobs. It was the largest such preliminary revision on record, going back to 2000.

The revision comes at a time when President Trump is politicizing the BLS and casting doubt on its data, as part of his wider efforts to exert more control over all aspects of the U.S. government.”

While the president demands rate cuts to spur the economy, he better be careful what he wishes for. If the BLS reports inflation data correctly, it’s likely to be double digits. Cutting rates may help employment, but it sure won’t help inflation.

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Is the gold bubble about to burst?

Chuck Butler writes:

“Gold is over $3,600 this morning, up $30 to start our day/ week… I read where a writer was questioning if this was the end of the Gold run, or just the beginning of a new run up…

I have my opinion, which could end up being wrong, but you know how I love to give my opinion, so here goes…. In my mind, this is the beginning of a new phase of run up for Gold…. There are just too many things stacked up against the dollar right now, and investors are going to Gold because it makes abundant sense!”

Sound Money, citing several examples, agrees:

“These metrics by no means suggest that gold is about to leap to those lofty heights by tomorrow. However,…they help illustrate the catastrophic failure of fiat currencies as stores of value.

…. We are not alone in our beliefs…as evidenced by the recent, and sharp, uptick in central bank gold demand, which has danced to the tune of 1,000+ tonnes per year for the last 3.”

They emphasize that gold is overtaking US treasuries as international reserves:

“…. With this in mind, we think it’s fair to say that gold is not yet overvalued, despite some “experts” calling the top.”

What to do???

Don’t misunderstand “caution.” A red flag is not waving – yet… Proceed with caution – pay attention and take precautionary measures.

First, a reminder. “Core holdings” are protection against Armageddon, Weimar Republic-type inflation. I hope things never get so bad that I have to sell any. Selling off any core holdings for a nice profit defeats the purpose; we lose our fallback asset protection insurance. Add? Maybe. Sell? Nope!

Timing the market? Attempting to time a market top or bottom is risky; what if you are wrong? Stay on top of things; it’s more important to let things play out and be right than first.

Rebalance. One rapidly increasing royalty company shot into double digits as a percent of our portfolio. Nice, but risky; too many eggs in one basket. Too many things happen, shady accounting, oil spill, mine disaster, etc. that can tank the stock.

While rebalancing can be among asset classes, fixed income, metals, energy, utilities, etc. – one can also rebalance within an asset class – horizontal rebalancing.

I sold a portion of a royalty company and bought another that’s also been climbing rapidly. Dividends are similar; spreading the risk made sense.

Pay attention to taxes. We held royalty company shares in three different accounts, one being a Roth IRA. We sold/bought in the Roth account. We wanted to keep the same amount allocated to metals, preferring not to share part of our nice gain with Uncle Sam.

While countries worldwide are debasing their currency, gold and silver are doing their job. Goldman Sachs estimates:

“We estimate that if 1% of the privately owned US Treasury market were to flow into gold, the gold price would rise to nearly $5,000 an ounce, assuming everything else constant. …. As a result, gold remains our highest-conviction long recommendation in the commodities space.”

Chuck Butler calls Goldman Sachs “Lola.” Whatever Lola wants, Lola gets…

Proceed with caution! Stay on top of things and enjoy the ride!

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On The Lighter Side…

We are still in The Villages, Florida, looking for a winter home. So far, so good; love the lifestyle and weather. Looking forward to spending several months here over the winter.

At the time of this writing, the baseball playoffs are shaping up. When this is released, the baseball Wild Card round should be completed. Our beloved Cubs exceeded our expectations, making the playoffs. Hope springs eternal in the hearts of Cub fans. They struggled down the stretch, and the Las Vegas odds of them making it to the World Series are understandably very high. Wild Card teams have got hot and won it all in the past, so there is always hope.

Quote of the Week….

“Gold is unique among assets, in that it is not issued by any government or central bank, which means that its value is not influenced by political decisions or the solvency of one institution or another.”

— Salvatore Rossi, Central Bank of Italy, 30 Sept 2013

And Finally….

Some thoughts from friend Sarah W. on aging:

• “I’m at that age where my back goes out more than I do.” (Phyllis Diller)
• “The years between 55 and 75 are the hardest. You are always being asked to do things, and yet you are not decrepit enough to turn them down.” (T.S. Elliot)
• “At age 20, we worry about what others think of us… at age 40, we don’t care what they think of us… at age 60, we discover they haven’t been thinking of us at all.” (Ann Landers)
• “When I was young, I was called a rugged individualist. When I was in my fifties, I was considered eccentric. Here I am doing and saying the same things I did then, and I’m labeled senile.” (Milton Berle)
• “The important thing to remember is that I’m probably going to forget.” (Martin Scorsese)
• “We don’t grow older, we grow riper.” (Pablo Picasso)
• “Everything seems to slow down with age; except the time it takes cake and ice cream to reach your hips.” (Elizabeth Taylor)
• “Grandchildren don’t make a man feel old, it’s the knowledge that he’s married to a grandmother that does.” (Norman Vincent Peale)
• “Looking fifty is great — if you’re sixty.” (Joan Rivers)
• “Time may be a great Healer, but it’s a lousy Beautician.” (Zsa Zsa Gabor)

And my favorite:

• “When your friends begin to flatter you on how young you look, it’s a sure sign you’re getting old.” (Mark Twain)

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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