Markets often exhibit cyclical patterns, and these cycles can occur in various financial markets, including stock markets, real estate markets, and commodity markets. Interest rate cycles and business cycles are also very common based on monetary policy. Market cycles are driven by a combination of economic, psychological, and structural factors. A case can be made that we just started the third major gold cycle since the 1970s. Another case can be made that the Fed is wrong again and that our government has created this whole mess but we will save that conversation for another day.
Tavi Costa is a partner and portfolio manager at Crescat Capital. Crescat Capital is a global asset management firm that manages capital for institutions and family offices. In his roles, Tavi is responsible for developing Crescat’s macro models in line with the firm’s thematic investment process. Recently he did an in-depth video discussing the markets but more importantly the History of Gold Cycles. He made a compelling case that we are in the midst of the third great gold cycle since the 1970s for many reasons. His words echoed the thoughts of Midas Gold Group over the past few years in many ways.
The First Gold Cycle
The First Gold Cycle of this generation started in the early 1970s. In 1970, the President of the United States was Richard Nixon. He took office on January 20, 1969, after winning the 1968 presidential election, and he served as the 37th President of the United States until his resignation on August 9, 1974, due to the Watergate scandal. In the big picture, the early 1970s saw falling gold production, high and persistent inflation, accumulation of gold by central banks, and a basic lack of new gold discoveries. The price of gold reflected that and went from $30 an ounce to roughly $800 an ounce in approximately eight years. The first higher gold cycle was in the books.
The Second Gold Cycle
The Second Gold Cycle looking back started in the late 90s with gold around $250 an ounce. Everyone was concentrating on the Dotcom revolution and it was great for stock prices while it lasted. Remember the NASDAQ fell 80% from peak to trough from 2000 to 2003. Macro factors included falling gold production, China driving commodity demand, the gold-to-S&P 500 ratio at historical lows, and the War on Terror starting in 2002. All of this was followed a few years later by the CMO crisis engineered by Wall Street and the banking sector. The government developed many fancy names to print a lot of money and provide bail-outs. The gold cycle reflected that by going from $250 an ounce in 1999 to $1,900 an ounce in 2011.
Tavi Costa believes we are in the midst of another great gold cycle and we would agree. If you look at the previous two cycles, the price of gold always ends up reflecting the lost purchasing power from our currency. It’s not even called a US dollar anymore; it’s called a Federal Reserve Note. So far from 2011 to 2023 gold has consolidated its gains from the previous cycle and has just held its value. Based on all of the factors that we will discuss, the case can be made that our “dollar” or Federal Reserve Note is facing a huge loss of purchasing power thus ultimately reflecting a much higher gold price over the next decade. Let’s look at some of those reasons why we will see both a lower dollar and a higher gold price in the years to come.
Global gold production is at or close to full capacity
Global gold production has seen fluctuations over the years, but there hasn’t been a consistent trend of falling production. Gold production is influenced by a variety of factors, including gold prices, technological advancements in mining, exploration efforts, environmental considerations, and geopolitical factors. Tavi argues that we are seeing falling gold production. We would argue that gold production is at or close to full capacity. The bottom line is that gold can’t be printed with the click of a computer mouse like our currency is. According to the World Gold Council, there were 205,238 tons of gold above ground gold at the end of 2021 and 208,874 tons above ground at the end of 2022. Regardless, it is a much smaller increase versus the increase in the amount of currency printed for sure.
Central Banks are accumulating a historical amount of gold
Central banks around the world have historically held gold reserves as part of their foreign exchange reserves. Gold is considered a store of value and can provide stability to a country’s currency and financial system. Central banks often use gold reserves to diversify their holdings and reduce risk. The level of gold accumulation by central banks can vary over time based on various factors, including economic conditions, geopolitical considerations, and changes in global financial markets. In recent years there have been instances of increased gold purchases by some central banks. This was in part driven by concerns about global economic uncertainties and potential currency fluctuations. The way we look at it is central banks are pushing their paper on the people but they are buying a lot of gold behind the scenes.
Government debt is at historical levels
Many countries around the world are indeed experiencing high levels of government debt. The COVID-19 excuse led to unprecedented government spending on various forms of economic support, including stimulus packages, unemployment benefits, and healthcare measures. These expenditures, combined with reduced tax revenues due to economic slowdowns, contributed to significant increases in government debt. Global debt in 2000 was $80 trillion. Global debt today is over $300 trillion. Governments continue to spend money that they don’t have and are creating historical deficits. These high fiscal deficits are unsustainable. Markets and economies would already be demolished if it weren’t for all of this fake money and balance sheet shenanigans.
The gold-to-S&P 500 ratio is near historical lows
The gold-to-S&P 500 ratio is a financial metric that compares the price of gold to the level of the S&P 500 stock market index. It’s a measure that provides insights into the relative performance of gold and the stock market. The ratio is calculated by dividing the price of gold by the level of the S&P 500 index. Mathematically, the formula for the gold-to-S&P 500 ratio is gold-to-S&P 500 Ratio = price of gold ÷ level of S&P 500 Index. For example, if the price of gold is $1,800 per ounce and the S&P 500 index is at 4,000, the gold-to-S&P 500 ratio would be $1,800 ÷ 4,000 ≈ 0.45. This ratio in 1970 was .33. The ratio in January of 1980 was 7.6. The ratio in January of 2000 was .2. The ratio in 2011 was 1.26 and the ratio today is .43. According to the data when the ratio is under .50 you buy gold and expect the S&P 500 to underperform over the next few years to gold.
G-7 Economies entering a manufacturing revitalization era
The US has transitioned from being primarily a manufacturing-based economy to a more service-oriented and knowledge-based economy. Let’s face it; we have a Wall Street economy since the 1980s. This shift has been driven by various factors including technological advancements, globalization, changes in consumer preferences, and the increasing role of intellectual property and information-based industries. In our opinion, as countries move away from doing business more and more in the dollar, the US has no choice but to manufacture more tangible stuff rather than exporting dollars and inflation to other countries in exchange for refrigerators and cell phones. This is the result of many policy mishaps but mainly due to the continued de-dollarization of the US by other countries, especially the BRICS. We are experiencing severe de-dollarization trends and rising de-globalization trends that inevitably will destroy a lot of our currency’s purchasing power, thus higher gold prices.
Inflation is the devaluation of our currency
Fiat currency devaluation refers to the decline in the value of a country’s currency to other currencies or goods and services. This devaluation can happen for various reasons and has both domestic and international implications. Our government and central bank have chosen to inflate. The other choice is to destroy the economy and markets until they die. Possibly we will see more inflation and we will also see the markets die. The amount of money created in the last few years is now going exponential. Because politicians want to be elected, and because these politicians serve the elite, many more trillions will be printed to keep the markets propped up. That’s all fine and dandy until that bubble pops. Everyone supports the money-printing joyride until you hit a tree. And yes, the markets and the economy will hit a tree. It will hit the biggest tree in our lifetime.
The 60/40 advisor model is no longer working
Stocks went up for a long time artificially due to monetary expansion through the clicking of a mouse. Interest rates were kept artificially low for decades, even negative rates in some cases. All of that is now coming home to roost. When managed money starts losing on both their stocks and their bonds where will they turn? Some of that money has to find its way to gold. Why else do you think the banking sector and government continue to suppress and manipulate the price of gold? Because once it starts accelerating higher, investors pile on but more importantly investors sell their stock and bonds and take money out of the banking system and away from their financial advisors. The whole fiat stock market bond market Ponzi scheme falls when that happens. The gold cycle will begin higher when big investors no longer want to comply with that type of rigged system and want to “control” some of their money in something tangible like gold. We are very close to that happening. Natural forces will ultimately take over and the manipulation won’t be able to continue.
The Third Gold Cycle
The next cycle in gold right now is a perfect storm. We are seeing severe debt problems similar to the 1940s. Inflationary figures of the 1970s are being revisited. The difference is that we didn’t have the debt situation in the 1970s that we have today. Our situation is much worse than it was then. Not to mention with all of this fake money sloshing around, we are seeing the biggest asset imbalances not seen since the 1920s and 1990s. We all remember what happened to the speculators in those periods. Many did not financially survive to tell about it. This time it will be worse. The problems are that much bigger. More fake money and more debt are not the solution.
Last week 6 more countries announced they are joining BRICS. Brazil, Russia, India, China, and South Africa are being joined by Iran, Egypt, Ethiopia, Saudi Arabia, the United Arab Emirates, and Argentina by the beginning of 2024. I see an alliance that will consist of 46% of the world’s population and 37% of the world’s GDP. I see the top 2 gold producers in the world: China and Russia. I see many of the leading oil producers in BRICS. I see more deals in local currencies between the BRICS and outside of the US dollar. The new BRICS Alliance will be a big boost to their commodity-backed currencies and more bad news for the debt-ridden US Federal Reserve Note. The world reserve currency is headed in the wrong direction with an inevitable collision with that same huge tree that we mentioned above. De-dollarization will continue and accelerate.
I agree wholeheartedly with Tavi Costa and the reasons that gold is entering a huge cycle that will result in higher prices in the yellow metal, but I would have added one more very important factor. The fact of the matter is that the banking system has already collapsed. When the banking system ultimately physically implodes and people are locked out of their money, what are they going to do? How do we get our money out of this inevitable digital banking and financial system that is around the corner? The answer is that you have to make those moves now and then just watch the show. Physical gold and silver will provide a safety net so that you can financially survive the biggest destruction of paper wealth in your lifetime. And yes, it can start at any moment.
Depositors have pulled out nearly one trillion in deposits from the 25 largest banks over the past year. How will the fractional banking system survive if depositors want their money but in all actuality, their money does not exist? Their money has been lent out or invested. Banks and central banks are sitting on billions and trillions in losses that someday will have to be realized or refinanced. Fake money doesn’t last forever only real money is a store of value. A system based on fake money never lasts forever. A fake system supported by fake money and manipulation eventually disintegrates. You don’t have to see all of your wealth disintegrate. That’s where physical gold and silver come into play and they always have.
