The US Dollar Is Becoming Cheaper In Gold Terms

After the release of the “In Gold we Trust” report, Incrementum Liechtenstein surpises gold bulls with a compendium of some of the most compelling charts in the form of a Chartbook.

Some of the key takeaways of the Chartbook:

  • The FED is NOT out of bullets, it is just very reluctant to use them before we are at least close to a full fledged crisis; currency swaps, QE and negative interest rates are all on the table.
  • We therefore expect increasing market turmoil before the FED reverses course!
  • Traditional protection for equities (puts) by now are somewhat expensive, especially in comparison to some short term interest rates (eurodollar). In our opinion it is quite a safe assumption, that the FED would reverse course if US equities sold off further 10-15%.
  • Shorting equities is a tricky business in an increasing volatility environment but could prove to be an interesting macro play until the FED gives in.
  • A major deflationary event and (potentially internationally coordinated) reaction of central banks could finally be the trigger for the transition from deflation to stagflation!

As far as gold’s outlook is concerned, the authors of the report repeat that things look very much in line with their “Scenario 1“, as described in Chapter 10 “Valuations, Scenarios and Price Targets” (page 118 of the report).

Must read chart #1: Governments and corporations have increased their debt levels significantly
Global debt levels have increased by USD 57 trillion since 2007. This amount is around three timesannual US economic output!  New government borrowing has recorded the highest growth momentum!Difficult for us to spot the infamous deleveraging!

debt_levels_2000_2015

Must read chart #2: there is not enough nominal growth, which is why all central banks are aboard
The days of restrained monetary policy appear to be over. Several major central banks haveexpanded their balance sheets many times over since 2007. The ECB has pursued a comparativelyrestrictive monetary policy since 2008 –  however, with the implementation of “Euro QE”, things are changing radically. The FED moving back to “normality”* before the next crisis? No chance!

central_banks_2007_2015

Must read chart #3: The USD is becoming cheaper in gold terms

Given its high stock-to-flow ratio, gold is far more stable than paper currencies. Hence, let’s look at the dollar from a stable point of view: one US dollar costs 27 milligrams of gold!

gram_gold_per_dollar_1968_2015

Conclusions

  1. Deflationary forces have had the upper hand since 2011.
  2. Today ideas like a “self sustaining recovery” and “escape velocity” are pure fantasies as the debt induced growth model of the past decades is very close to its limits.
  3. In an over indebted world with insufficient real growth aggressive re-flation (i.e. higher nominalgrowth) seems to be the only feasible way out for policy makers. NOTE: Reflation in the currentglobal USD-centric monetary order means a weaker USD – especially vs. oil/commodities.
  4. The Problem is, deflationary forces have been massively increasing during the past 12 months, ourInflation Signal once again has been signaling major deflation to us since the beginning of July!
  5. Strong USD, weak oil, slowing growth (China!) could trigger debt defaults and send shockwavesthroughout the financial system which again would trigger another (deflationary) financial crisis.
  6. The FED is NOT out of bullets, for now it is still reluctant to use them before we are at least close toa full fledged crisis; currency swaps, QE and negative interest rates are all on the table.
  7. We expect increasing market turmoil before the FED reverses course!
  8. Shorting equities is a tricky business in an increasing volatility environment but could prove to be aninteresting macro play until the FED gives in. Also watch out for a USD selloff when that materializes!
  9. Traditional protection for equities (puts) by now are somewhat expensive, especially in comparison tosome short term interest rates (eurodollar). In our opinion it is quite a safe assumption, that the FEDwould reverse course if US equities sold off further 10-15%.
  10. A major deflationary event and (potentially internationally coordinated) reaction of central banks couldfinally be the trigger for the transition from deflation to stagflation!

Read the chartbook

Chartbook – In Gold We Trust 2015 & Status Quo

from http://ift.tt/1ENlKH5

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