September 12, 2016
With many investors worried about the economic turmoil that has engulfed the globe, the coming crash will create an economic tsunami, skyrocketing gold, and usher in a whole new world.
Gold Will Anchor New Monetary System
Stephen Leeb: “All roads lead to Rome, which is to say there are many ways the Chinese have of effecting a new monetary system that will include gold as an anchor. The new system may evolve gradually, but it is growing more likely that it will be created out of chaos. In the last interview with you, Eric, I spoke of SDR’s as a route. And that is still a high probability. Recall, the SDR route requires the inclusion of the Renminbi in the SDR basket along with the Dollar, Euro, Pound, and Yen…
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A basket of paper currencies is still paper currencies, which means that the dollar can still rule as a substitute with one critical caveat. The Chinese have the dominant market share in cyber finance, which include virtual currencies such as the bitcoin and blockchains, which are distributed data sets associated with transactions. Just the use of a cyber financial network which only the Chinese can provide will give the SDR a major edge over the dollar. And with a sixth component added to the SDR, namely gold, it’s game over.
Gold To Soar 9 or 10 Fold In Price!
All currencies, even the Renminbi, will likely pale in relation to gold. Meaning gold will become the world’s dominant currency. You can actually see how this might work just by looking at the chart of gold vs the SDR over the past 40 years. Gold’s nine-fold rise would mean that whatever the metal’s initial weight in the SDR, it would come to dominate the composite currency. And it won’t take two generations for it to happen, as this time around gold will be an anointed part of the global currency. And that will mean wide-eyed demand from the start. At some point limits will have to be set but a nine- or ten-fold gain in a fairly short period of time is not a crazy projection.
That is a template for the (relatively) slow road to new money – a road that still ends in the greatest bull market you will ever see in a major asset. One reason the road could be slow is that while China has the technology and other areas of domination to effect the changes almost immediately, they still may want to accumulate more gold before letting things fly. I will go into more detail on China’s multiple areas of domination including – technology, and trade, along with guesstimates on how much gold they have already accumulated – in my next interview.
The Key To A New Monetary System
The chaotic road to a new monetary system is also under – no surprise – China’s control. Two major assets are wildly mispriced in today’s world, bonds and oil. Moreover, a sudden change in one will likely translate into a sudden change in the other. It is hard to say which of the markets are more mispriced, but one thing is certain, if rational pricing returns quickly it will lead to total chaos with the dollar and other paper currencies collapsing.
Every major oil producer is pricing their commodity below all-in costs, which range from about $70 a barrel to well over $150 a barrel. This means every major producer is piling up debt and/or drawing down reserves. This situation is clearly unsustainable. At some point oil is going to rise again and – what we have to fear – is that it will rise rapidly. How about bonds? Well, consider this: Suppose you are living in Denmark and have a mortgage on your home. Instead of reaching into your pocket twice each month to pay off both interest and principal, you only have to reach in once for the principal payment. That is because interest is negative, which means the bank pays you each month. Such is the nature of negative interest rates – the borrower, in this case the homeowner, receives rather than pays interest.
There are trillions of dollars of bonds bearing negative interest floating around in the Western world. You might ask why would anyone buy such a bond. It would make more sense to take stacks of money and put it into a safe and infinitely more sense to buy gold instead. Buying a bond with negative interest is a prime example of the greater fool theory. The only problem in this case is trying to figure out who is the greater fool, the buyer or seller of the bond.
It is clear the only rationale for buying such a bond is a bet on negative rates getting more negative resulting in appreciation. It might be a little different in the case of the negative yielding mortgage. Still, if the money you set aside for mortgage payments is based on negative yields, you are likely playing craps with your future. And the governments who issue the bonds while budgeting for interest payments today could, with a sudden turn in events, find that they are staring at a lot of bankrupt bondholders.
The Coming Crash Will Resemble An Economic Tsunami
The argument is only a little weaker when you consider very low as opposed to outright negative bond yields. In other words, the entire Western bond market is in a massive bubble, but timing the crash is hazardous in that it will likely take a catalyst other than one or two tepid rate hikes by the Fed. Still, there is little doubt that some time in the not-too-distant future the bond bubble will burst, and with over $15 trillion in bonds outstanding, the crash will be the equivalent of an economic tsunami.
There could be any number of catalysts that would burst the bubble, but the most likely is oil. Rising and especially sharply rising oil prices could turn the entire world on its head. Take a look at the chart of oil and bond yields (below).
Major Spike In Oil Leads To Stock Market Meltdowns
While the correlation is not perfect, there is little doubt a big jump in oil prices will lead to an enormous jump in yields, shredding the entire bond market and leaving much of the world’s economic foundation in its wake. It is also worth mentioning that every major market crash since the early 70’s – from the ’73-’74 meltdown to the ’87 crash to the tech bubble to the ’08-’09 crash – was preceded by a major rise in oil.
My strong guess is that the country which holds the winning hand in this one is not Saudi Arabia, not Russia, not America, but you guessed it, China. By the end of this year China will likely be the largest refiner of oil in the world. In effect, by allowing its teapot refiners to buy oil directly from foreign countries rather than from large state companies, refining capacity in the country has sharply increased. For the last several years China has been preparing to launch its own benchmark for oil, which by virtue of the country’s refining capacity and massive stocks of oil will quickly serve as the benchmark for the entire East. China will – by a wide margin – be the largest market for oil for generations to come.
Calamity For The West
A firm decision on what oil and in what proportion will constitute the benchmark will free up those competing for percentages in the benchmark, which range from Saudi Arabia, to Russia, to Iran, to virtually all Middle Eastern producers. This will also halt the battle for Chinese market share and allow countries to cut back production, which would mean a stunning rise in oil prices and an utter calamity for the West. Already weak growth would be hit by the deflationary and inflationary effects of high oil and a calamitous collapse in the bond market.
In this chaos, the United States might not be able to create dollars fast enough to keep banks and the economic foundation in place. The dollar would collapse, gold would go crazy, and we might even call on China to help create a new currency – one likely centered around the SDR and gold to hold the world together.
Fortunately, this chaotic road to a new currency and a many-fold gain in gold is probably not the road China will take. This involves too many risks for a country whose ethos is based on long-term planning. Instead, China will likely aim for slow and steady rises in oil and commodity prices that will put the West on the defensive and strengthen the many commodity exporters, which is a boon for the East and China’s power bloc.
A Whole New World
But as they say, accidents can happen. The oil producers could miscalculate and take too much production off the market and you could wake one day to a whole new world. Whether it is a slower process or an accidental rupture in the economic foundation, gold and gold miners are your best friends.”