The Safety of Gold Beckons…
Between quantitative easing and zero interest rates, both contrivances of the Federal Reserve, the central bank has added another bubble to its list as the Dow, Nasdaq, and S&P500 hit record highs. File this “everything bubble” along with the dot-com bubble and the housing bubble.
The chief characteristic of those bubbles – and this one – is the belief that you get to make money just for showing up.
Maybe you remember names from the dot-com bubble: Pets.com… InfoSpace… eToys.com…. WorldCom… Drugstore.com… DrKoop.com….
Some of the companies were not much more than business plans scrawled on a cocktail napkin. Others with no revenue somehow became hot IPOs. Internet companies were being valued for their “eyeballs,” or how many people would supposedly visit their web page. But it didn’t matter because it was a “new economy.”
If everything reverts to the mean, an expression that insists valuations will return to their average over time, one should note the current price/earnings ratio of the S&P500 is 39.72.
The mean ratio is 15.88.
Danger, Will Robinson!
Gold and silver offer tangible, reality-based havens for capital during the radical distortion of other markets by interest rate manipulation, rampant state cronyism, rivers of fiscal red ink, and endless money-printing sprees.
Foreigners investors have a huge presence in the US stock market. The Tax Policy Center reports that in 2019 foreign investors owned 40 percent of US corporate stocks. (Retirement accounts own 30 percent.)
Some of that 40 percent is no doubt American money operating from tax havens like the Cayman Islands. But the rest of it, genuine foreign investment in the US markets, has substantial currency risk. Foreign holders of US stocks are not just exposed to stock prices artificially inflated by the Fed’s liquidity gusher. When the dollar falls, they suffer a foreign exchange loss as well. Our regular friends and readers are aware of the risks ahead for the dollar this year. For those who aren’t, we recommend our Gold Watch commentary, What to Own When the Dollar Collapses?
The US dollar fell sharply last year.
As foreign investors begin to question their currency risk in addition to inflated market values, the exit from US stocks can become crowded fast.
Speaking of everyone heading for the door at once reminds us of GameStop. It is a useful metaphor for the broader market. It was a lot of fun for gamers and Reddit users to jump into the GME mania three weeks ago at $100 a share and watch it climb to $483.
But it was not as much fun at all to ride it back down to $50. But such is the nature of bubbles.
The GameStop saga is a microcosm of the stock market as a whole. It showed how over-exposed and over-leveraged monster funds can be. It revealed something of the manipulation and risk involved in today’s stock markets, with prices that say less about real economic value, than they do the activities of the Deep State Money Manipulators.
It is all out in the open for everyone to see. It makes a powerful case for moving to the safety of gold and silver.