September 2021 - Week 4 Edition
Gold Continues to Climb
Gold rose from $1,745 to $1,765 Monday morning, September 20, then rose to $1,780 before settling back to $1,775 on Tuesday. This past Friday, gold touched the lowest closing price in over a month, but it quickly rebounded this week, a good sign the bull market is still in force. Gold and the stock market were down fearing the solvency of a huge Chinese property group, Evergrande. A possible bankruptcy there could become a Lehman-like moment and trigger a 2008-style global financial crisis if Evergrande is not bailed out by Beijing, a government already far deeper in debt than the U.S. government.
Bitcoin is Down $10,000 (-20%) in Two Weeks
Barron’s had an interesting cover article last weekend: “The Coming War Over Money.” The article also turned out to be prophetic. The magazine reached the news racks, mailboxes and websites Saturday morning, September 18, when Bitcoin traded for over $48,500. Twelve days earlier, the popular crypto-currency peaked at $52,656 on Labor Day, September 6. Now, Bitcoin trades around $41,200, over 20% off in two weeks. There is no doubt this electronic currency will stage some rallies in the future, but investors need to ask what is the basis for this new currency vs. the tangible asset we know as gold.
There is no meaningful regulation of cryptocurrencies, yet. Multi-billion-dollar theoretically taxable transactions – now netting over $1 trillion in aggregate – are being conducted under the nose of global tax authorities with little consequence. Cryptocurrencies are now worth $2.1 trillion in market value, doubling in this year alone. Bitcoin, the leading cryptocurrency, was valued at nearly $900 billion when Barron’s went to press last Friday. That value is still only a small percentage of the $19.4 trillion U.S. money supply, but if Bitcoin can somehow hold value and avoid taxes and regulation (a HUGE if), many more users will switch from dollars to cryptocurrencies in the future. The switch is the “War Over Money.”
This is ironic, coming right after the 50th anniversary of President Nixon taking the dollar off any gold backing. Bitcoin has backing issues, no history of usage before the year 2010. When gold was removed from the dollar, paper money did not float up, every form of paper money sank in terms of gold. Those who love cryptocurrencies call it digital gold, since it has a fixed supply of 21 million tokens. A price of $50,000 per Bitcoin makes the full Bitcoin market capitalization just over $1 trillion, making Bitcoin scarcer than U.S. dollars. The U.S. government has assets ranging from a billion acres of raw land to the world’s most powerful military. How many assets does Bitcoin have in storage defending its value?
I’m not defending the U.S. dollar here, but gold. Bitcoin might indeed outpace the dollar in the long run, but probably not gold. There are some dangers in Bitcoin not inherent in gold. I also like the fact that gold has been money for 5,000 years, not 10 years, and gold has heft, beauty, history and rarity. I have heard from many clients as well as prominent talk-show hosts who interviewed me about how easy it is to buy and store gold, and how pleased they are to hold real money with real weight and real history in their hands. Try holding a Bitcoin! We have also heard stories of Bitcoin owners forgetting their password and losing their stored Bitcoin or being victims of fraud. This is similar to gold investors buying counterfeit coins or burying their gold in tubes in their back yard; then forgetting where they were buried or dying without telling any family members where their treasure was hidden.
Barron’s concludes: “History is also on the dollar’s side in the sense that governments have never allowed rival currencies to usurp their authority. Technologies make the job tougher but not insurmountable, and the greater the success of currencies, like Bitcoin, the more governments may try to kill it.” They add that, “Cryptos and other tokens haven’t been tested in a crisis, when investors dump anything with a whiff of risk. The diciest currencies fall the hardest during panics, and cryptos could follow precedent.”
This week, the head of the Securities & Exchange Commission (SEC) merely hinted that cryptocurrencies might be treated as a security, and prices plunged – so Barron’s has been proven right in this instance.
The Federal Government Faces Imminent Spending Limits – Starting Next Week!
Last week, we brought you our monthly update of the federal budget deficit, year-to-date, at $2.7 trillion. The Federal Fiscal Year 2021 ends on September 30 – next Thursday – and the Treasury may default on its debt soon after that if the debt ceiling isn’t lifted. After eight months of promoting one multi-trillion spending package after another, Congress now faces two deadlines – (1) finalizing their 2022 budget, including ways to fund the deficit, and (2) raising the debt ceiling. Failure in either task could result in a shutdown of most agency activities and all non-essential operations. The last shutdown lasted 35 days.
Treasury Secretary Janet Yellen has warned that any extraordinary measures to postpone the debt limit are likely to run out by mid-October. “Based on our best and most recent information,” she said, “the most likely outcome is that cash and extraordinary measures will be exhausted during October.”
When funding the deficits, the Democrats’ normal solution is to soak the rich. There aren’t enough multi-millionaires to finance even the current $3.5 trillion budget proposal, much less the full $7 trillion annual operating costs for the federal government – and you can only soak the rich once. After Year One of fleecing the rich, they will find legal ways to park their prime assets elsewhere.
As far as raising the debt ceiling goes, Jack Hough wrote in Barron’s this week in Fiscal Chicken, Anyone? How to End Debt Ceiling Fights, “America has imposed a statutory limit on its debt for just over 100 years and has raised that limit around 100 times. ‘Ceiling’ probably isn’t the best metaphor – debt hat, maybe.” He reminds us that the federal debt was only 35% of GDP in 2007, but this year will nearly triple to 101% of GDP and, “the debt-limit standoff amounts to performance art, not financial restraint.”
For example, Mitch McConnell, the top Republican in the Senate, said last Tuesday, “Let me be crystal clear about this: Republicans are united in opposition to raising the debt ceiling.” Meanwhile, the Democrats may want to link a debt ceiling increase to a $3.5 trillion social spending bill under budget rules that would allow it to pass with just 51 Senate votes and thereby avoid a GOP filibuster.
We’ll see how this battle works out, but gold investors will have a wonderful opportunity to profit from this opportunity. The last major debt ceiling battle in August 2011 saw gold rise from $1,500 to $1,900.
I urge you to call an account representative today to get the latest information and pricing on popular gold and silver.
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