Tuesday, 28 May 2024

By Brian Chu Editor, Gold Stock Pro and The Australian Gold Report

[8 min read]

Dear Reader,

In the Warring States Period (403BCE-221BCE) in Ancient China, the nation-state of Zhao occupied the central northern part of China.

To the south was the Yellow River and to its north and west were nomadic tribes.

The Chinese people at the time saw these nomadic tribes as uncouth and inferior.

However, these nomadic tribes had the upper hand against them in open battle, dealing punishing defeats and pillaging their land.

What held back the Chinese warriors was how they dressed for war. It was like in peacetime, except they wore armour.

Sadly, long-sleeve garments and flowing robes were a liability on the battlefield. Furthermore, Chinese armies used chariots, allowing the nomadic cavalry to outmanoeuvre them.

At the turn of the 3rd century, the ruler of Zhao State, Ji Yong (also known as King Wu Ling of Zhao) saw this problem and enacted reforms to turn the State around.

Dress up like a Hu barbarian and
fire arrows on horseback

King Wu Ling saw the Hu barbarians move freely on the battlefield; their mounted archers were formidable foes.

Therefore, he sought to cast aside social norms by having his army dress like the Hu barbarians. He also required the people to learn horseback riding and mounted archery.

It wasn’t an easy task. His most ardent dissenters were those closest to him. They thought it offensive to stoop to the level of the barbarians.

Eventually, though, his reform prevailed. Enhancing the State’s military capability.

During his reign, he expanded territory and elevated the State’s standing as a major powerbroker.

This change also revolutionised warfare and strategy for the Chinese civilisation.

The Zhao State could’ve been a match against the Qin State, which became the first to unite China under Qin Shi Huang some 60 years later.

When life as we know it changed

The story I recounted might seem antiquated.

I’m not saying to dress up like a nomad and learn mounted archery. Focus on the principle.

The key to success in life is having the right mindset. This includes seeing what works and identifying trends ahead of others.

Most of us have grown up in society believing that working hard, saving up and owning one’s home are the keys to prosperity.

Furthermore, many saw investing in the stock markets as gambling and avoided it.

I personally held that view for some time. While delivering classes in university in the early 2000s, I warned my students of the risk of succumbing to the lure of the financial markets as a ‘get rich quick’ scheme!

My reasoning was the conventional mindset on our livelihood worked for many generations.

But that all came to a screeching halt in 2009, after the subprime crisis.

The Zero-Interest-Rate era ended that.

Cutting the interest rate to zero removed the incentive to save, blurred the way markets priced risk and threw capital allocation into disarray.

While one could invest, many different modes of investing sprang up, including countless scams promising quick returns.

It became a free-for-all, but not the way free-market capitalists would like.

Some may argue that financial regulations would help rein in the scammers and keep the bastards honest.

But let’s get real about this one.

Remember how the subprime crisis came about?

Unscrupulous financial institutions flouted laws to create turmoil in the markets using debt and speculating in the markets using other people’s wealth.

Then, the markets threatened to come tumbling down. These institutions not only tried to cover their backs but even threatened the authorities to save them, or else everyone would suffer.

Even in the investigations after the event, very few people who were responsible had to bear the consequences of their actions and the damage they caused.

It was clear who ran the system. The criminals.

As for working to earn a living, the Zero-Interest-Rate era meant inflation would stealthily diminish the purchasing power of one’s salary or wages.

To show you what I mean, here’s the average salary for someone living in NSW relative to the price of gold and an average home:

These figures are daunting.

Fact is, most Australians, and people worldwide for that matter, feel the squeeze economically.

Doing what they used to isn’t going to get them to their goals. Rather, it might cause them to fall further behind.

Meanwhile, building your wealth remains the same:

Generate more income.

Earn more profits.

Accumulate more assets.

Buy low, sell high.

But it’s harder to accumulate when the means to help you achieve all those are increasingly out of reach.

Mindset to move ahead of the times

As I said earlier, things aren’t like what it used to be anymore.

To succeed, it’s necessary to shift your mindset and change your plans.

Recognise the purchasing power of fiat currencies (what we have in our wallet) is declining consistently.

Understand you’re unlikely to become wealthy by merely relying on your pay cheque.

See through the consumerist attitude and avoid the temptation to conform.

And recognise that working hard to earn an income is the first yet critical step to let you invest to build your wealth.

Money and commodities to build
your wealth

Which comes to the next big question.

What to invest to grow your wealth and retain purchasing power?

Start by recognising what real money is and accumulating it.

If you don’t know what I’m talking about, it’s gold and silver. Currency is credit.

You can learn more about this via my precious metals investment newsletter, The Australian Gold Report.

Not only will you learn about the hidden secrets of money, but I’ll guide you to build a precious metals portfolio from bullion to precious metals ETFs and three gold producers to consider now.

Also, I encourage you to consider commodities as another option to build your wealth.

This might be an unusual proposal as commodities can be volatile assets and mining stocks are highly speculative.

That’s another aspect of changing your mindset.

The diminishing value of our currency means mineral wealth is relatively more attractive.

With governments desperately keeping this system hobbling along, they’ll no doubt implement massive building and spending programs.

This will spur the demand for commodities.

But you don’t want to go alone in this space.

My colleague, James Cooper, is an experienced geologist who closely monitors which commodities could be the next flavour.

You can find out more about his work in Diggers and Drillers.

You may not be early in changing your mindset to deal with the changing times. But you’re certainly not too late to act.

Let us take you on this journey.

God bless,

Brian Chu,
Editor, Gold Stock Pro and The Australian Gold Report

Brian Chu is one of Australia’s foremost independent authorities on gold and gold stocks, with a unique strategy for valuing big producers and highly speculative explorers. He established a private family fund that only invests in ASX-listed gold mining companies, possibly the only such fund in Australia, putting his strategy and research skills to the test under public scrutiny. He currently writes two gold-focused investment advisories.

In his Australian Gold Report, Brian shows you a strategy for building long-term wealth in physical gold, along with a select portfolio of hand-picked stocks, mainly producers with proven revenue streams, chosen for their balance of risk and reward.

In his more specialised Gold Stock Pro service, Brian helps readers trade some of the most exciting, speculative gold mining plays on the ASX. He uses his proprietary system — based on the famous Lassonde Curve model, which tracks the life cycle of mining stocks. His aim is to help you get ready to trade the next phase of gold and silver’s anticipated longer-term bull market for opportunities to benefit.

By Bill Bonner Editor, Fat Tail Daily

[4 min read]

Dear Reader,

Today is Memorial Day in America. It’s a holiday established during the Civil War to honour those who have died in military service to their country. We’ve written an entire book honouring The Idea of America.  But today, we’ll leave that idea aside.  

For the benefit of new readers, and ourselves, we reveal our creed…as succinctly as possible. There are dots to connect, between politics and markets. And while our beat is money, we live in a political age. We can’t ignore it. 

The best we can do is try and see the big picture. That’s what we do in these musings every day.

Hidden Patterns

We believe there are patterns to just about everything. There is a deep and powerful Gulf Stream, for example, it takes warm water from the Gulf of Mexico, carries it across the North Atlantic, and makes Northern Europe habitable. But looking only at the surface waves, you wouldn’t see it. 

Likewise, you can’t tell much from the day-to-day market action. But there are still hidden trends.  The most important of them is what we call the Primary Trend. It marks the basic direction of prices, often for many decades. 

We also think that stories have ‘morals’ – lessons, distilled from generations of experience – that are found in popular sayings, novels, the Bible, and ‘old wives’ tales’. Rarely are they revealed by economic theory or financial analysis. 

Wealth is created by people who produce goods and services for each other. Anything the government does to interfere with this commerce reduces the total material satisfaction of the public. But wait! 

We recognise that material satisfaction – as in, having more wealth – is not the only motivation driving humans. Sometimes, they seem to want nothing more than to make damn fools of themselves. (The Salem Witch Trials, Napoleon’s March on Moscow, WWI, Mao’s Cultural Revolution, War on Terror etc.) 

From an economic perspective, government is fundamentally a win-lose, coercive enterprise.  Its many rules, regulations, taxes, debt, spending, and unnecessary wars reduce the output of goods and services that we regard as ‘prosperity.’  That’s why dynamic, productive capitalism and Big Government are largely incompatible.  It takes a small government to produce big economic gains. 

Curiously, government also tends to exaggerate the Primary Trend – though not intentionally.  It manipulates interest rates down, for example, and makes the upswing of asset prices more powerful than ever (1980-2021). And/or it hampers needed market adjustments, thereby making the downswing worse (the Great Depression.) 

The Knowledge Problem

A fundamental part of our analysis is that the world of money doesn’t work the way you think it does. The Fed cannot actually know what interest rates America needs, for example. Nor can it know what ‘full employment’ or ‘full capacity’ for the US economy is.  We also think that Wall Street seriously and episodically misprices assets as investors get caught up in fads and the ‘madness of crowds’.

We further believe that the switch to a gold-free dollar in 1971 was a mistake. It made it much easier to diddle the value of the world’s reserve currency and thereby allowed and promoted large distortions throughout the global financial system.   

Today, for example, great swings in stock prices occur following comments by Fed officials, even though they are unlikely to affect the real value of the underlying companies. 

In short, most of what you hear from economists, Wall Street or the government is likely to be BS. And generally, the more economists, Big Banks, or politicians are involved, the less productive the economy. For example, the Soviet Union had so much government control that its economy was extremely inefficient, causing its elite to abandon it entirely. 

Get the Big Trend Right

The trick to successful wealth-building is to get on the right side of the major trend…and stay there. 

For investors, every study shows that asset allocation (being in the right place at the right time) is more effective than specific investment selection.

What the Primary Trend says Now

The place to be for the last Primary Trend was in the US stock market.  The Dow rose from under 1,000 in 1980 to over 36,000 in 2021.   

That Primary Trend came to an end as two tops were hit. First, bond prices topped out in July 2020 with the US benchmark 10-year note yielding 0.59% (bond prices vary inversely with yields). 

Then, in December 2021, when US stocks hit a high of 36,388, the ‘top was in’, as they say on Wall Street. Note that while the Dow has subsequently gone up, it has still not surpassed its high – in real, inflation-adjusted terms. Nor has it gone up when priced in gold, which is how we prefer to measure gains. Gold doesn’t lie.     

If we are right about the new Primary Trend, the simplest thing for an investor to do now is simply take cover. We are in ‘maximum safety mode’.

A Mountain of Debt

The effect of the government’s ultra-low interest rate policy prior to 2022 was to create a mountain of debt. Worldwide, that debt has reached beyond $300 trillion. US government debt alone is nearly $35 trillion, while total US debt – government, business and household – now approaches $100 trillion, or nearly four times GDP.   

This is more debt than can be carried or managed in a high interest rate environment. Paul Volcker pushed the fed funds rate to 20% to stifle inflation in the 1970s.  That is no longer possible. Even a 10% rate would fall upon the financial markets like a hammer on an egg.   

But the government has only two choices.  Inflate or Die.  Either it continues to inflate (with low real rates and high deficits).  Or, it radically cuts spending – triggering major bankruptcies, defaults and a depression…effectively killing the bubble economy that its ultra-low rates created. 

What Next?

We think we know which direction it will go. You see, great empires follow patterns too. They rise. They fall. Every one of them.   

In 1992, the US had the chance of a lifetime. The Soviet Union disbanded. Oligarchs took over and began selling raw materials, in bulk, at low prices.  

The Chinese, meanwhile, had already decided to take the ‘capitalist road’. By the 1990s, they were lowering costs on finished products.   

Its enemies out of the way…its consumer costs falling…the US could have cut it military budget (a ‘peace dividend’) and used the money to shore up its domestic industries and infrastructure. 

Instead, it invaded Iraq. And went to war in Afghanistan. And then, supported wars in the Ukraine and Gaza. Its military budget exploded to the upside. Its reputation slid to the downside. And its debt soared – adding $25 trillion, so far, in the 21st century. 

We believe this failure will prove fatal to the empire.  It will exaggerate the now-in-motion Primary Trend and send asset prices to shockingly low levels (in real terms.) 

This financial failure, combined with the social and political chaos it brings, risks creating a major debacle. With elections in both the UK and the US coming up, you might think things will change. Unlikely. 

Instead, we advise you to buckle up. Learn to look at market prices in real terms, not fake terms. And surround yourself with friends who will see the world for what it is...and figure out how to navigate it together.  

Regards,

Bill Bonner,
For Fat Tail Daily