“Sooner or later, everybody sits down to a banquet of consequences”
– Robert Louis Stevenson
Gordon Brown, back when he was the UK Chancellor of the Exchequer, distinguished himself by selling off approximately one-half of Great Britain’s gold reserves at what turned out to be a near-bottom at the end of the secular bear market in gold which lasted from 1980 to 2000-ish. He will probably be remembered for this more than anything else he ever did, even as Prime Minister. He’ll be somewhat of a laughing stock because of it (gold now, even after a vicious near 5-year cyclical bear, worth a paltry 300% to 400% more than what England garnered from it’s sales). That chapter among those who pay attention to this sort of thing is affably called “The Brown Bottom”.
Two events recently converged in the news to create an analogous moment here in Canada:
1) the news that the new Finance Minister Bill Morneau has completed selling all remaining Government of Canada gold reserves. Canada, the 5th largest gold producer in the world, as a nation holds exactly zero ounces of gold as currency reserves.
2) Gold has resumed it’s secular bull market. This is something I have not been alone in anticipating, but it looks like Mr. Morneau has managed to pick off the exact end of the cyclical bear, selling just as the price of gold, driven by negative rates, impending bans on cash and generalized financial repression, is commencing lift off.
Still it’s been a trying 5 years for gold investors. Even those who aren’t self-described “goldbugs” but who can’t bring themselves to drink the kool-aid of perpetual central bank intervention: ZIRP, now NIRP, war on cash – who were waiting, waiting, waiting for some kind of reaction to the grotesque distortions being driven into the markets by policy wonks, banksters and academics were close to capitulation.
Something had to give, and the shortlist included precious metals – but when? Was it possible the central banks really did pull off a perpetual motion machine? Could a handful of academics suspend the business cycle by suppressing market signalling, printing money, expanding credit, screwing savers and bailing out their financier friends whenever their rent-seeking, plutocratic excesses experienced a speed-wobble?
It is clear that Central Banks believe it is impermissible to let the incumbent equity markets go down, also impermissible to allow interest rates to rise (and thus it is impermissible to allow bonds to go down either). Given the ECBs latest maneuver, and further hinting they may even buy equities outright, it sounds more like Motorhead’s “Everything louder than everything else” rather than rational economic stewardship.
The Fed-Put addicted financial sector of petulant babies have been calling for more intervention after a 10% decline, are you fscking kidding me? We’re at the end of the runway for Keynesian interventions. It doesn’t work anymore. It’s like heroin or hair-of-the-dog, you may get away with it a few times in the early going but once one becomes dependent on it each dosage causes more damage than the returns. And what’s worse, we’re at the end of that runway and we don’t have lift-off, we don’t have green shoots, there is no escape velocity. What we’re looking at instead is coming face-to-face with a brick wall called “consequences”.
In this scenario, Morneau sends what will someday be regarded as a famous miscue. It’s a miscue because selling gold signals “everything is fine”. Canada’s foreign currency reserves are now 80% in a foreign currency even non-fringe, well respected observers like the Economist are signalling will someday, inevitably lose it’s world reserve currency status. What do you think will happen to the value of those reserves when that inevitably happens? Think maybe they’ll go up? I’m not seeing it but then again I’m not a central banker. (All I do is run a few businesses with customers all over the world, so wtf would I know about anything…)
People who are skeptical of gold’s secular bull market still being intact tend to forget the 1970 – 1980 gold bull which was bisected by a brutal cyclical bear midway through which took 50% off the high, before appreciating another roughly 800% (within a climate of rising real interest rates I might add)
I think we’ll see another case of history rhyming on this cycle, except the second leg of the reasserted gold bull may outpace the 1976-1980 phase because of the sheer magnitude of the imbalances within the system, thanks to our economic overlords. Against this scenario, picture the Brown Bottom happening in 1970, ahead of a 400% rise into 1974, and then this Morneau Miscue happening in say, August 1976, just before the 800% blast off.
Economic historians will look back on this phase of the gold bull and call it obvious – negative interest rates and growing calls for a ban on cash, what did you think was going to happen? What asset class was left for capital to flee to? Gold for the storage of value and bitcoin for the liquidity, that’s where. It’ll be interesting to see how Morneau get’s remembered although if history truly does rhyme then at some point I guess he’ll end up as Prime Minister.