Currency Wars, Corruption, and Volatility Will (Eventually) Cause the Next Big Bull Market

Written by Gerardo Del Real
Posted April 2, 2016

Impeachments, currency wars, and volatility are now the new normal... and they will eventually usher in a new bull market in gold.

Take, for example, Brazil — the world’s fifth most populous country and eighth-largest economy. Its second-largest city, Rio de Janeiro, is the host of this year’s Summer Olympics.

Brazil is also suffering its worst economic crisis in decades. In addition, multiple corruption scandals — in the public, private, and state-owned sectors — the Zika crisis, and the likely impeachment of Brazilian President Dilma Rousseff look to provide a challenge to the already-fragile social stability of the country.

In Europe, the attacks in Paris last November and Brussels last week have re-ignited passions on the issue of immigration. The "Brexit" vote will be a very important vote to decide whether Britain should remain in the European Union. The referendum will be held on June 23.

Those in favor of Britain leaving the EU believe that the EU imposes restrictive rules on business and that the billions of pounds a year charged in membership dues are not worth the benefits the EU claims to provide. A second, and very important motivator for Britain wanting out is Britain’s desire to take back full control of its borders. It fears imported terrorism and is unhappy about British taxpayer money funding other countries

Those who want Britain to remain in the EU argue that trade is facilitated by the open border policy and that immigration fuels economic growth. Many argue that an isolated Britain is not as safe and that leaving is a quick path to further economic deterioration.

Here at home, I’ve touched on the circus this election cycle has turned into. I won’t go into detail this week about the shenanigans, because we could be here for a while, but it is worth noting that for the first time during the campaign the candidates on the right have refused to commit to supporting whoever the eventual Republican nominee is.

The party conventions here in the United States — between July 18-21 for the Republican Party and July 25 for the Democrats — could provide volatility that hasn’t been seen politically since the 1960s.

I highlight the instability in Brazil, the political landscape here in the U.S., and the “Brexit” vote in Europe because whether or not Britain decides to stay or leave the EU, there will be lots of catalysts for volatility within the next few quarters that will have an important effect on where capital goes to find a safe home. Which brings us to our next point, the Fed and Janet Yellen.

Fed: To Raise or Not to Raise? Does it Matter?

On March 29, Federal Reserve Chair Janet Yellen said what we’ve known for a while, that raising interest rates and not raising interest rates both present heightened risks.

I sympathize with Yellen more than most because the utter lack of support from our lawmakers has really backed her into a very uncomfortable situation that breaks down to pain now or pain later.

There is a good argument to be made that Fed policy has enabled the stupidity and complacency of lawmakers but the structural problems here and abroad are not only of her doing.

Growth is anemic, a tax overhaul is necessary, but there isn’t the political cooperation necessary to get it done, there haven’t been any substantial improvements to address wealth inequality. You get the picture.

Meanwhile, negative interest rates in Europe, Japan, and Sweden among others are placing increased stress on managers of large pools of capital.

More than $26 trillion — trillion with a ’T’ — of government bonds now trade at yields of below 1%, with around $7 trillion currently yielding less than 0%. Government bonds in Germany with a maturity of seven years are trading at negative yields, while Swiss and Japanese government bonds out to 10 years trade at negative yields.

I mentioned before that a few weeks back, Ray Dalio, founder of the world’s largest hedge fund — Bridgewater — is advising that every portfolio should have 5-10% of their holdings in gold.

This week, Richard Turnill, BlackRock’s global chief investment strategist, wrote on the company’s website: “We like inflation-linked bonds and gold as diversifiers.” New York-based BlackRock manages $4.6 trillion — again with a ’T’.

Political chaos abroad and at home, corruption, slow growth, and currency wars will all contribute to a very volatile time. A volatile time that will become the new normal because the factors contributing to the volatility are structural and don’t offer the opportunity for quick fixes.

The average investor doesn’t know about the Fed, currency wars, fiscal and monetary policy here and abroad, the ECB, the BOJ, ZIRP, NIRP, inflation figures, or any of the multiple reasons many believe will cause the next big gold bull market. If they did, the price would be higher by now.

The people in charge — the BlackRocks and Bridgewaters of the world — of managing big money are all it takes to drive the gold market and the related equities much, much higher. They recognize the cycles, they have the capital to make a difference, and slowly but surely they’re beginning to position themselves in a way that will lead to big moves in the gold price.

In the meantime, gold just closed out its biggest quarterly gain in 30 years as the dollar had its biggest quarterly drop in five years.

I still expect a significant but brief pullback based on overseas volatility that drives money into the U.S. and runs the dollar back up.

I do believe, however, this is a great time to very selectively begin to average-in to the best junior gold names.

I plan on bringing those names to you very soon via Resource Stock Digest Premium.

To your wealth, 

gerardo-sig
Gerardo Del Real
Editor, Resource Stock Digest Premium

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