I See Something Sparkling at the End of the Stimulus Rainbow

This year saw $21 trillion in global fiscal and monetary stimulus, according to a recent Bank of America Securities report. Over the same time, the U.S. federal deficit moved to 25% of gross domestic product — this is second only to World War II, when it reached 27% of GDP. Global debt, meanwhile, is estimated to reach about $277 trillion, or 365% of GDP, by the end of the year.

Let’s take a step back and just think about those figures: This year has been anything but normal, but the world has never been so levered. All this is landing at a time when global interest rates are at their lowest levels. After decades of not being able to get the desired inflation, the central banks might just get their Christmas wish. Can we keep raising and raising without any consequences? The last decade has shown that there are zero consequences for doing so, so why should it be different this time around? There is just one solution, inflate the heck out of it, as there is no other way of paying it back notionally.

After all this quantitative easing, it only showed up in risk assets like equities and risk assets, but not where it really matters, the labor market or wage growth. The only way to get the “desired” inflation is the shift toward central bank digital currencies as a conduit for policy; pure helicopter money, universal basic income and yield curve control. For the preparation of these so-called digital wallets, we can understand why bitcoin is getting so much attention and even institutions are waking up to it. At the time of writing, bitcoin is back-testing its all-time high of close to $20,000. But is bitcoin — and other “alt coins” — the only mechanism to play this demographic shift? Gold and silver may be the ugly step sisters of bitcoin, but they nonetheless denote the same thing theme. So then, why is there no love for the two?

Since September, the price of gold and silver has been flat in a small, tight range, severely underperforming any of the recovery cyclical stocks and bitcoin. In absolute terms, it really has not broken to new lows until last week over a quiet Thanksgiving holiday period, when gold broke below $1,800 and silver below $23.50. One can understand the reason for wanting to buy the recovery basket, but that is mutually exclusive to fiscal stimulus — and certainly to more money getting printed, even if it’s digital money. The true drivers of gold and silver are real yields, which is just gross yields less the level of inflation. We know inflation is moving higher and gross yields are getting capped. With real yields lower, there is a clear disconnect, as gold and silver are massive outliers.

Another factor that stands out is the dollar. Against a basket of currencies, the closely tracked dollar index, has been breaking lower. We are now even below the summer range of $92.50-$94.50, but this is also ignored by gold and silver, which tend to be inversely correlated with the dollar. Since September it has diverged. We know central banks are only raising more dollars, extending credit facilities and possibly announcing a fiscal stimulus, as well. The real economy still needs stimulus and assistance. The vaccine and fiscal stimulus are not mutually exclusive, as it has been playing out recently.

Commodity markets are physically led. If one were to look at the price of physical silver, it is trading at a stark premium over the paper market. We all know about the games traders, especially the bank plays in the precious metals futures market. The paper market can be manipulated outside of the physical market. They typically are running a short position via swaps, and are leaning into the thin markets, trying to squeeze out all the weak longs. It has been right to be long gold and silver all throughout this year, and a lot of retail players are long.

It will only be a matter of time before this recent gap converges again. It is not an either/or decision vs. bitcoin. The only thing that matters is how much liquidity and latitude you have to weather the illiquid manipulation. Investing is not about getting the exact timing right, it is about getting in when the scales are in your favor and risk vs. reward looks compelling. Because when it turns, there will be a wall of money rushing in, quicker than you can even get time to pull up your charts.