Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

In Defense of Gold

Commodities / Gold and Silver 2015 Sep 28, 2015 - 06:40 PM GMT

By: Michael_Pento

Commodities

There has been an unprecedented attack on gold and mining shares over the past three years emanating from financial institutions in order to support the government's supposed success in bringing the economy back to health. And even though gold mining shares are down 85% during this tenure, the case for owning gold-related investments have never been more compelling.

The reason to own gold is the same today as it has been for thousands of years: it is the perfect store of wealth. Gold is portable, divisible without losing its value, beautiful, extremely scarce, and virtually indestructible. It is simply the best form of money known to mankind.


The case for keeping your wealth in gold only becomes more bolstered when real interest rates are negative, faith in fiat currencies is crumbling, and nation states are insolvent. The massive and unprecedented Quantitative Easing programs and Zero Interest Rate Policies among the Bank of Japan, Peoples Bank of China, European Central Bank and Federal Reserve clearly show that Central Banks have no escape from manipulation of their bond market, currencies, equities and economies. Ms. Yellen's recent tacit admission that the Fed Funds Rate must remain at zero percent for at least a full seven years was a clear validation of this premise.

For example, if the BOJ were to stop buying every Japanese Government Bond issued; interest rates would skyrocket, the stock market would crash and the economy would melt down in a matter of days. This is because any nation that has a debt to GDP ratio of 250%, over a quadrillion yen in debt, and is in a perpetual recession should never be blessed with a 0.3% 10-Year Note yield.

Turning back to the Fed's recent decision to hold rates at zero, its inaction should lift the veil on its omnipotence. As Clark Kent can attest, being "Superman" is easy; returning to normal can be awkward.

With $44 trillion in total non-financial debt, which is up $12 trillion in the last 10 years alone, we have also become a highly indebted nation that has become completely addicted to lower rates. The U.S. high-yield bond market, which was the catalyst of the 2008 financial crisis, has grown to $2 trillion in size--a full $1 trillion of these new loans have been added since 2009.

But high yield isn't the only lesson unlearned since the 2008 crisis. According to CNBC, nearly two-thirds of the high risk Ginnie Mae guaranteed securities are issued by independent mortgage banks, affectionately referred to as part of the "shadow banking system". And those independent mortgage bankers are deploying some of the most sophisticated financial engineering that this industry has ever seen...sound familiar? With credit scores of 520 and down payments of just 3.5%, indeed it is clear that subprime mortgages are back with a vengeance.

Therefore, a rise in rates would further cool the already lukewarm housing market. According to the National Association of Realtors, sales of existing homes dropped 4.8% in August month over month to a seasonally adjusted annual rate of 5.31 million. Home ownership rates at 63.4% are already at the lowest level since 1967. Rising interest rates would not cause renters to become homeowners. Instead, it would likely send the home price to income ratio, which is currently at 4.4, crashing back to its long-term average of 2.6.

Turning to the interest paid on U.S. bonds, it is clear that mean reversion of the 10-Year Note would bankrupt the Treasury. This is because that average rate is north of 7%. If the Treasury was forced to service the existing $13.2 trillion of publicly traded sovereign debt at that rate it would take about 30% of all Federal tax revenue. Just imagine what will occur when rising rates cause the economy and revenue to decline, as deficits explode. Remember that annual deficits soared to $1.5 trillion during the Great Recession; and that was with interest rates plummeting towards 2%.

And then we have emerging markets, where a rise in US interest rates will reveal one of the great instabilities in the global economic system today. A total of $9.6 trillion in U.S. dollar denominated debt is owned by non-U.S. borrowers. When the U.S. dollar strengthens the cost to those foreign borrowers rises...a lot. Emerging-market economies' debt is now 167% of their gross domestic product, this is up 50 percentage points since the end of 2007, according to figures from the Bank for International Settlements.

This led the economy of Brazil, which was already suffering the effects of a slowdown in China, to announce austerity measures totaling $17 billion to bridge the gap in its budget, after Standard & Poor's Ratings Services downgraded the country's rating to below investment grade.

Turing back to the U.S. stock market, low interest rates have fueled a whopping $2.5 trillion stock buyback binge since the end of March of 2009. Higher interest rates would see the end of this corporate buyback scheme that provides an artificial boost to EPS and share prices.

And not to forget the several hundred trillion dollars' worth of interest rate sensitive derivatives, including credit default and interest rate swaps underwritten by institutions, which will have to once again crawl back to the government for another bailout once their bets become insolvent.

Finally, seven years of ZIRP has forced pension plans far out along the risk curve in search of higher returns: vastly increasing the amount of equity exposure in the portfolios in an attempt to generate the necessary 9% average annual returns. However, the Dow Jones Industrial Average is already dropped to a two-year low without one single basis point rate hike in the last nine years. Ms. Yellen and company must be aware if a cycle of rate hikes were to take place now it would not only bring increased competition for stocks but also help push the anemic global economy into a recession. The result being that there wouldn't be a solvent public or private pension plan in the entire nation.

The Fed is beginning to wake up to the fact that there is no easy escape from its artificial zero interest rate policy. The Fed will not be able to move very far off of the zero-bound range before the yield curve inverts and the US, and indeed the entire global economy, melts down. This means real yields will become more negative, the US dollar will lose more of its purchasing power and economic instability will intensify over time--the perfect fundamental backdrop for rising gold prices.

As the credibility and effectiveness of central banks comes more into question, investors will seek comfort in gold because it is the sole monetary solution that has stood the test of time. This is why there is a direct inverse correlation between the faith in fiat currencies and the price of gold. Every few decades a reminder is needed that all fiat currencies throughout history have lost all of their value.

Therefore, if you are among those who own gold and gold mining shares...consider yourself a part of a small and very fortunate club. A cadre of investors that will be able to maintain its purchasing power and standard of living; while those with complete faith in fiat currencies get summarily remanded to the lower class.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2015 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules