Commodities and The Deal of The Century

From Crush the Street, by Colin Bennett

Real assets are the most overlooked and undervalued assets in the history of the world. Since the debt expansion programs of the 1970s and beyond, these assets have been neglected while every other asset class has risen to exorbitant levels. Money printing (QE programs) has pushed real estate, stocks, bonds, and anything with a paper component into a mega-bubble. Commodities are so depressed that if you look at the CRB index (which measures commodities), the prices are the same as they were in 1973.

Global debt to GDP is over 300%, and as this ratio increases, the strain on governments will show in the bond market. Governments will break out all the stops and print more money to get the inflation that they need. The beginning stages will be inflation, followed by hyperinflation until currencies collapse. This turmoil will put tremendous pressure on sovereign bonds, and will ultimately push them to their intrinsic value of zero. Governments around the world will have to issue a debt moratoria. For perspective, the XAU (Gold and Silver Index) is below its inception level in 1983. This metric shows that commodities are setting up for a tremendous move upward.

 

In 1980, real assets represented about 50% of total assets, and this ratio is currently about 10%. If you exclude real estate, real assets (such as commodities, like gold and silver) make up a miniscule portion of total assets owned. Real estate is in another bubble, as the average house price is higher than the 2008 financial crash. Gold, as a percentage of total assets, is a mere .4%, compared to 5% in 1960 and 2.7% in 1980. If gold were to move to just half of the 1980 total, the price would need to move up by 7x to keep up with the physical demand. Gold is 90% below the 1960 level as a percentage of financial assets, and I see precious metal ownership increasing rapidly in the next few years. For the first time in the history of the CME, circuit breakers have been installed to control substantial moves higher in the gold price. These circuit breakers will pause the markets for 5 minutes to allow the exchange to position themselves properly. Since this was done a few years ago I believe the exchanges are preparing for the inevitable.  Fracturing between the synthetic market and the physical market continues day by day.

“Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.”-David Ricardo



Categories: Economy, REAL Money

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