Posts Categorized: Bill Holter
The world is awash in debt while interest rates are extremely low and at unprecedented levels. Interest rates have been engineered lower by central banks out of necessity. This “necessity” is not so much to spur the real economies on (as they say), rather, rates have been crushed to facilitate the payment of debt service. Bluntly, there would be no financial markets left if rates were at a historical norm of say 7%. The danger of course is that rates do go higher…! What if interest rates do go up? This is a question no one even asks anymore.
This is not to say central banks will ever willingly raise rates around the world. They will not, they cannot! However, there are scenarios where market rates go up all over the world in the face of and in spite of central banks. This could occur for a myriad of reasons but I believe the prime possibilities to be a currency crisis where a major currency or currencies begin to lose purchasing power rapidly, or a major default or a domino of defaults.
Thinking this through, were a major currency to collapse versus other fiats, interest rates would need to rise in that particular region to “risk adjust”. Additionally, were ALL currencies collectively lose purchasing power (think versus gold/silver “going up”), interest rates would also need to rise to risk adjust. You might want to read the previous sentence a couple of times because THIS is exactly why gold and silver have been sat on all these years, to prevent the perceived need for rates to go higher to adjust for currency risk.
Looking at the default issue, as bonds go through the process of defaulting, their prices drop. Lower bond prices mean higher yields, simple related math. If a sector or even sovereign region threaten to or actually default, rates associated will go higher. Should a default begin and turn into a global domino series, rates everywhere will go higher unless central banks buy everything sold and hold in their portfolio defaulted credits (as they did in 2008). In reality, this is exactly what caused the problem in the first place, central banks buying up everything in sight…including stocks!
Interesting day today, the Fed is backed into a corner. We will see how they attempt to get out of this self made corner. By now you should know there are some VERY serious overnight funding problems. Overnight funding has been taken for granted for years, only back in 2008-2009 did serious problems arise. Now 10 years later (while the Fed is easing) it is becoming a problem again. What started as a synthetic short of dollars has become systemically threatening. In fact, one could now call overnight funding the actual foundation to all credit markets.
Bottom line, the Fed will be forced to expand their balance sheet to fund the illiquidity. As reserve currency holding up all things financial, this situation should never have happened …but it has. Markets are now taking on the Fed and forcing them to do exactly what we said they would, namely, forcing the Fed to restart QE! They can call it whatever they want, QE, QE lite or even Spaghetti O’s, the fact is the Fed is now forced in to expanding their balance sheet. I remind you the Fed is operating on very thin equity …soon to become even thinner versus holdings.
“Don’t fight the Fed” has been the saying forever but times are changing. It seems to me markets are finally taking the Fed on. As it stands, they appear to have lost control of short term funding rates. All bets are off from here and I believe it will not be long before markets rebel even with QE, more rate cuts etc. Their greatest nightmare will be when markets panic in RESPONSE to “Fed help”. At that point, we will see true and very real fear because if “Daddy” cannot bail out the banks/financial markets, who will? Re set in 3…2…1?
I have written and spoken of the Gold to Silver ratio many times in the past. It currently stands at just under 82-1, a little more than a month ago it peaked out just over 92-1 which is close to an all time high (low price for silver vs. gold). For perspective, the natural gold to silver ratio is just under 10-1 as that is the ratio the two metals exist and are mined from the Earth’s crust.
For hundreds of years, the GSR was 16-1 and in fact this ratio was pegged by our founding fathers at just under 16-1. The discount from 10-1 to 16 came about simply due to “weight”. If one carried wealth (metal) with them, silver was more cumbersome. To compensate for the inconvenience of additional weight, silver was discounted to the 16-1 level.
Silver has always been more volatile than gold. During bull markets silver greatly outperforms to the upside, conversely during bear markets silver will drop faster than gold. We are undoubtedly in a metals bull market (fiat FOREX bear market), there are fireworks ahead for all metals, silver will lead the pack!
I write this because we have already assed the inflection point and already see silver vastly outperforming. I have for the last several years suggested metals investors to position more heavily and even entirely in silver based on this ratio. If you are overweight (more than 50%) in gold versus silver, you should consider swapping some (or even all?) of your gold (platinum/palladium) in to silver. The inflection point I speak of does not occur many times in one’s lifetime…NOW is one of those opportunities. The idea is to hold silver now and in the future begin to swap in tranches back in to gold. In this manner for example, you can acquire twice as much gold were the ratio to drop to 40-1. Were the ratio to drop to the historical 16-1 ratio, you would be able to expand your gold position better than 5 fold!
As I have suggested in the past, “junk” silver is in my opinion THE best form of silver ownership for several reasons . The train is leaving the station right now and the ratio is beginning to shrink. Jim has said many times that “silver is gold on steroids” and for very good reason, he has seen the outsized volatility through many cycles. If you do decide to position more heavily in silver, do not get married to it. Owning silver at bear market bottoms should be done with an eye to gaining gold ounces as the bull market matures.
If this is something that makes sense to you or you would like to explore, please contact your precious metals broker or contact me a firstname.lastname@example.org, I will be glad to help you. Hi Ho Silver!