Gold has been on a tear lately, despite a recent pause in its advance, and the precious commodity could be poised to extend its rally above $1,500 an ounce, on the back of ballooning global debt and monetary policy that has resulted in trillions in negative-yielding securities.
For Trey Reik, senior portfolio manager at Sprott Asset Management USA, current economic conditions bear the hallmarks of a so-called Minsky moment, in which over-leveraged investors are compelled to sell their investments, catalyzing a major market downturn — an ideal environment for gold.
Reik said in a recent research report that “global asset markets may finally have reached the point at which excessive debt levels are overwhelming longstanding relationships in normally functioning capital markets such as interest rates, time preferences and capital formation.”
Austrian economist Hyman Minsky, who died Oct. 24, 1996, espoused a view that a period of distortions in the financial system eventually ends very badly.
A biography of the Minsky by the Levy Economics Institute of Bard College where he was a distinguished scholar describes his seminal theory as follows:
“Minsky held that, over a prolonged period of prosperity, investors take on more and more risk, until lending exceeds what borrowers can pay off from their incoming revenues. When overindebted investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash — an event that has come to be known as a ‘Minsky moment.’”
Reik says that U.S. credit market debt stands at $73.1 trillion, up 33% since the first quarter of 2009 (see chart below, which shows the debt-to-gross-domestic-product ratio standing at around 347%):
The Sprott portfolio manager makes the case that the Federal Reserve’s recent interest-rate reduction in July and expectations that it will continue to cut rates, are a tacit acknowledgment that the central bank must keep interest rates low or risk a debt meltdown.
On top of that, about $15 trillion in global government debt now carries a negative interest rate, meaning debt holders will receive less than their original investment. And former Federal Reserve Chairman Alan Greenspan believes there is no reason why U.S. government bond yields couldn’t join much of the developed world in the subzero world.
That negative-yield dynamic has proliferated after more than a decade of monetary-policy unorthodoxy intended to juice stubbornly low inflation and anemic growth in Europe and parts of Asia.
“Boiling things down, we view gold’s prospects as inextricably linked to consensus recognition that global interest rates not only cannot rise, but must continue to decline to keep the ever-burgeoning debt pyramid from toppling,” he writes.
based on the most-active futures contracts, have risen 4.9% in August and 17.7% so far this year, while a gold-miner-focused exchange-traded fund, the VanEck Vectors Gold Miners ETF
has climbed 7.7% month to date and 35% so far this year.
By comparison, the Dow Jones Industrial Average
has slipped 2.3% in August and gained 12.5% over the past eight months, and the S&P 500 index
has shed 2% this month and climbed 16.5% in the year to date, while the Nasdaq Composite Index
has shed 2.4% in August and gained 20.3% this year.