How’s this for a 2018 surprise? The road to $15,000 – $20,000 gold…
The Road To $15,000 – $20,000 Gold
December 18 (King World News) – Dr. Stephen Leeb: “Last weekend China ran practice sessions on its prospective oil benchmark. So far, there are no reports on whether the authorities were satisfied with how they went. But I have no doubt that China will make the benchmark work and that in the near future the country will initiate an Eastern oil benchmark traded in yuan.
If that trading is successful, as it surely will be, China will start to allow oil exporters, including Russia and Saudi Arabia, to export gold from China, something that currently is forbidden. That is a necessary step to having gold backing for the yuan used to trade gold…
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The new Eastern benchmark will quickly become more important than Brent crude or West Texas Intermediate. That’s because the East’s economy is both larger and faster growing than the West’s. Moreover, oil is a bigger component of the East’s GDP than the West’s. This will make it natural for trading in yuan to expand from oil to other commodities and eventually to all trade in the East.
Look For Truly Explosive Gains In Gold
As this process unfolds, gold will become a central cog in the trading of the world’s most vital commodity, then a central cog in all commodity trading, and finally a central cog in all trade. In the final shape of the new order, I expect that trading will be conducted in a basket of currencies, such as the SDR, to which gold has been added as a component. And that’s when I’d look for the truly explosive gains in gold to begin – though the uptrend is likely to start sooner as investors anticipate these changes and their impact on the metal.
Some quick back-of-the-envelope calculations show gold’s potential. A reasonable estimate is that around 50,000 tonnes of gold are available for monetary purposes. The bulk of gold, about 120,000 tonnes, is held as jewelry or private investments. At current prices the value of potential monetary gold is about $2 trillion. The value of world trade is about $20 trillion (the average of exports and imports). If monetary gold is used to back up trade, that would drive gold up 10-fold. If some countries chose to use gold internally, the rise would be substantially more. And as world trade continues to grow, gold’s price will keep rising after the initial reset. If you are betting on gold reaching $15,000 to $20,000 an ounce within the next decade, you’d get no quarrel from me.
I expect the markets will anticipate much of the reset and rally in advance. By the time gold passes its all-time nominal highs of roughly $1,900, it will be evident the metal is assuming a much more important role in world trade. All in all, I think gold likely made a major bottom toward the end of 2015 in the $1,050 area and that risk today is limited while rewards are lion-sized.
China In Better Shape Than People Think
One big reason for my confidence that the process will play out as outlined above is that hard data keeps rolling in showing China is in far better shape than most commentators seem to think. In fact, recent data has been truly startling – and equally startling is that no one seems to have noticed. Bloomberg recently did an exhaustive study on China’s corporate leverage. It looked at debt levels of 4,000 publicly traded Chinese companies, comprising a major chunk of corporate China. (Financial companies were excluded, which made sense since their strength depends on the strength of the companies that borrow from them.)
To define leverage, Bloomberg looked at the ratio of total debt to EBITDA (earning before interest expenses, taxes, depreciation and amortization). A simple example shows why this ratio makes sense as a measure of indebtedness. If the ratio is 1, then the cash you net before taxes and interest equals your entire debt load. It is nearly impossible for a company to go bankrupt with a debt to EBITDA ratio of 1. In the years between 2007 and 2016, the ratio for corporate China ranged from about 1.5 (in 2011) to a bit more than 2.6 (in 2007). In 2014, the ratio was about 2.4. Most recently, in 2017, the ratio was – astoundingly – 1.
This tells you one thing: if anyone – whether the IMF, a talking head on a cable financial news show, or your plain vanilla China bear – warns you that China is close to debt catastrophe, you should nod your head and quickly walk away so that you can call your broker to add some gold miners or gold ETFs to your portfolio on your way to visiting your local coin dealer to buy gold coins.
There is, however, reason to worry about some debt – just not China’s. Using data supplied by Bloomberg, I did a comparable analysis of debt for companies in the S&P 500, again excluding financial companies. The results – and again the word “startling” comes to mind – show the ratio is 3.06 for the S&P 500 on an unweighted-average basis. Using a weighted average (in which stocks count based on their capitalization) the number drops to 2.56, not a whole lot better. These results are stunning. They suggest – no, shout – that China is far less vulnerable in terms of debt than the U.S.
How Can This Be?
But how can this be? After all, all the official record keepers, from BIS (Bank for International Settlements) to the IMF, tell you otherwise. Based on different measures that use GDP rather than earnings as the yardstick, they have issued reports assessing China’s ratio of corporate debt to GDP at about 160 percent, compared to less than 100 percent for the United States. Clearly you can debate whether it makes more sense to measure debt against earnings, as Bloomberg did, or against GDP. I think the earnings comparison is more meaningful. After all, companies don’t pay off debt with GDP but with earnings.
But there’s likely another reason for the discrepancy. Realize that in bringing in China’s GDP as a measuring stick, the record keepers relied on figures supplied by China itself. And there’s good reason to believe that those figures understated China’s economy. China has an inherent tendency, rooted in history and culture, to understate its strengths. Sun Tzu’s The Art of War, written in the 5th century B.C., still resonates, and China continues to follow its dictums, including “disguise your strengths” and “bide your time.”
The conventional wisdom in the West is that China likely overstates its GDP, and that its economy is weaker than it wants the world to think. Studies, though, suggest just the opposite: that China in fact probably understates the size of its economy.
One of Xi’s primary messages in his three-and-a-half hour marathon address at the Communist Party congress in November was that China wouldn’t focus on growth for the sake of growth. Instead, it would focus on the quality of growth. The clear implication was that no official would be rewarded for overestimating growth. The latest examples of how China misleads on growth on the downside come from a paper published by the National Bureau of Economic Analysis. The three authors, two from the New York Fed and one from Columbia University, argued that careful analysis shows that China could be understating its growth and possibly by a lot.
They looked, for example, at 2015’s fourth quarter, a time when much of the West believed China was at risk of economic collapse. China was reporting growth that was a shade under 7 percent. The West took that as an overstated figure that represented a blatant effort to project a falsely rosy picture. The authors’ conclusion? That the low end of China’s growth for the quarter was 7 percent – and that growth could have been as high as almost 11 percent. China has made such understatements for years. This makes it a near certainty that its GDP today is higher than it has stated. That throws light on why when you compare debt to GDP, the ratio for China comes out on the higher end. I.e., debt is being matched against a smaller economy than the one that really exists, which would misleadingly inflate the ratio.
China To Establish New Gold-Based Monetary System
Coming back to where I started, there is more reason than ever to believe China is ready to move forward with its long-planned goal of establishing a new monetary system centered on gold and downplaying the dollar. The point of inflection is at hand. Gold has made a bottom, and as China pursues its petro/yuan/gold plans, gold will start to fly. I would give odds on new highs by 2020 and on five digits before 2030.”
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