Weekend Edition: The Last Time This Happened, Gold Tripled…Here's How to Profit
Editor's note: We're now entering an extremely important cycle of the economy that hasn't happened since the 1970s…
Back then, it caused the price of gold to triple. This time, as Casey Report editor E.B. Tucker explains, the cause of the cycle is different…but the results could be the same.
As you'll see, gold is set to skyrocket again…and there's a certain sector of the market that will perform even better…
If you’re less than 50 years old, you’ve never experienced “stagflation.”
Stagflation is the brutal combination of inflation and stagnant economic growth. In short, it means the price of things you buy—like food, fuel, and electricity—keeps going up. Meanwhile, the value of things you own—like stocks and your house—keeps falling.
The last time the U.S. dealt with stagflation was in the 1970s. From 1973 to 1975, gross domestic product—economic output—shrank for six quarters. Inflation, measured by the Consumer Price Index, rose from an annual rate of less than 3% to more than 12% by the end of 1974.
The price of oil, copper, and gold all tripled.
Economists blame that stagflation on the 1970s energy crisis, which caused oil prices to soar.
But the so-called energy crisis was due to the inflation of the U.S. dollar, which caused its collapse against other currencies. The oil-producing countries raised their prices in response to Nixon’s devaluation in 1971.
This time is different… The upcoming cycle of stagflation is going to be caused by an abundance of cheap credit.
Let me explain…
The chart below shows the interest rate, or yield, on the U.S. Treasury 10-year bond for the past 54 years.
As you can see, the stagnant growth and inflation of the 1970s caused interest rates to more than double. By 1982, a combination of sky-high interest rates, increased government spending, and lower taxes set off a multi-decade economic boom.
In August 1982, the S&P 500 hit a low of 102. It went on to rise more than 245% by the end of the decade. By the end of the ’90s, it was up 1,334% from that 1982 low.
That boom should have ended with the dot-com bubble, when many stocks in the sector become overvalued in early 2000… but it didn’t. The Fed stepped in and softened the blow by lowering interest rates. When the Fed lowers rates, it creates cheap credit—which makes it easier for people to buy things with borrowed money.
Or even borrow recklessly, living above their means… and making investments that cater to these artificially high standards of living.
The Fed went on to fight the 2008 financial crisis with an even bigger dose of easy money. It cut interest rates to effectively zero and bought around $3.5 trillion worth of government bonds and mortgage debt to prevent a depression. (Ironically… a depression would have purged malinvestment and waste from the system, making it healthy and ready for new growth.)
Recessions Are a Normal Part of the Capitalist Economic Cycle
They’re the small fires that burn back the underbrush of the forest. If you prevent or lessen them, dead wood piles up. And what would have been the next small fire turns into a catastrophic, deadly blaze.
But people now accept the Fed as a fixture of the cosmic firmament. In fact, it’s an unnecessary, but necessarily destructive, government agency.
The Fed’s interference caused many businesses and individuals to rack up unnecessary debt.
Cheap credit and money printing caused a massive investment boom. Look at what happened in the oil market, for example. Billions of dollars rushed in to fund new shale oil drilling technology in the U.S. This doubled production from 5 million barrels a day in 2008 to nearly 10 million today. Now, the world is swimming in oil. And oil prices crashed over 70% from 2014 to early 2016.
Cheap credit also caused assets like real estate and stocks to soar. Real estate prices are up across the board while stocks are up 217% from their 2009 lows. Now, these assets are overvalued and approaching bubble territory.
But while cheap credit caused massive inflation in asset prices, it hasn’t helped the “real” economy.
The U.S. economy is not growing in real terms (which takes inflation into account). It has become stagnant.
Last decade’s growth rates—at times over 7%—are a distant memory. Today, economists are happy with 2% growth.
Evidence of the weak “real” economy is everywhere. Take Apple Inc. (AAPL), the largest publicly traded company in the world. Earlier this year, the company announced first-quarter sales were less than last year for the first time since 2003. Sales declined again in the second quarter… and are expected to decline in the third, too, although at a slower pace. Apple had no debt in 2003. Today, it has $85 billion.
And it’s not just Apple.
Other well-known companies like Wal-Mart (WMT), Advance Auto Parts (AAP), and Best Buy (BBY) reported declining sales in their most recent year.
In total, 639 U.S.-listed public companies with market capitalizations of at least $1 billion had declining sales compared to one year prior. Last year, the number of companies was only 324.
That means the number of companies reporting declining sales doubled over the last year. And it’s going to get worse.
To grow sales, a company has two options. Sell more products or charge more for each product.
Unfortunately for most companies, selling more products just isn’t possible. Cash-strapped Americans don’t have the money to buy more iPhones, computers, or cars. Remember, the economy isn’t growing. Americans’ pay isn’t increasing. The real median U.S. household annual income is less than what it was in 1999.
Americans Are Angry
They haven’t gotten a raise in almost 20 years. Across the country, they’re clamoring for higher minimum wages. And politicians are listening. Earlier this year, the California legislature approved a plan to raise the state’s minimum wage to $15 per hour between now and 2022. And politicians in New York are grandstanding to raise the minimum wage to $15 per hour. The current Federal minimum wage is $7.25 an hour.
But a higher minimum wage is really price-fixing. It’s guaranteed inflation. A higher minimum wage will dramatically increase costs, forcing companies to raise prices.
You see, you can set the minimum wage at $100 per hour. But companies will merely push those extra labor costs through onto consumers in the form of higher prices.
This Is Only the Beginning
As I just showed you, the economy has become stagnant; meanwhile, inflation is rising. The cost for things we buy every day is about to go up.
This bout of stagflation will be very different from what we saw in the 1970s.
Companies like Wal-Mart and Best Buy will be using overpriced labor to try to sell goods to a strapped consumer.
As sales continue to fall, companies that binged on the Fed’s cheap credit will find they can’t pay their bills and debts. I expect a wave of defaults to clobber the stock market and real estate.
But there’s one segment of the market that will shine during this stagflation… gold-mining stocks.
Gold Stocks Have Massive Upside Potential
Gold held its value in the stagflation of the 1970s. In fact, it tripled in price from 1972 to 1974.
It tripled again at the end of the decade. Although the cause of the stagflation is different this time around, the result will be the same.
This year, gold has been on a tear. It’s up 20% since the start of the year. Gold mining stocks have performed even better… they’re up 75%.
But they could go much higher…
Even after the run-up, gold stocks are cheap. The Market Vectors Gold Miners ETF (GDX)—the popular gold-mining fund—is still down more than 60% from its September 2011 high.
Compared to gold itself, gold miners haven’t been this cheap and hated in three decades. As you can see in the chart below, the price of physical gold fell 45% from its peak in 2011.
However, the NYSE Arca Gold Miners Index, which measures the performance of gold-mining stocks, plunged 80%.
As I've shown you today, gold prices are poised to soar over the next few years. And gold-mining stocks will perform even better.
This is an incredible opportunity. Having the best gold-mining stocks in your portfolio during this time can set you up for once-in-a-lifetime profits.
Weekend Edition: The Last Time This Happened, Gold Tripled…Here's How to Profit
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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