7 SAGES HOSTEL, XI’AN – Since I started writing this e-letter in May, I’ve been watching the repo (repurchase agreement) market and making a simple argument:
There’s a shortage of dollars in the banking system. The U.S. government’s gigantic appetite for borrowing dollars is causing this shortage. And the Federal Reserve will do whatever it takes to keep the banking system lubricated, including funding the government deficit.
Funding markets have been acting weird all year… but in the last four weeks, this happened:
1) On September 17, liquidity dried up altogether, and the overnight repo rate spiked to 10%.
2) Less than 24 hours later, the Fed began injecting billions of dollars into the repo and Treasury markets. Then, last Friday, it announced it was beginning quantitative easing again…
3) Also last Friday, Dallas Fed President Robert Kaplan, who is in charge of 1,200 employees at the Dallas Fed and is an official representative of the Federal Reserve System, told an audience: “The dramatic increase in Treasury issuance takes liquidity out of the system.”
Now that you understand my argument, the next essential message you must understand is this…
I’ve been bullish on the dollar since 2013. In 2016, I stood on stage at the Stansberry Conference in Las Vegas and told 2,000 people at the ARIA Resort that the dollar would keep rising.
And now, in 2019, I’m telling you – because of what just happened in the repo markets – this trend is finished.
A rising dollar inhibits the federal government’s ability to fund itself and the Fed’s ability to keep the credit markets lubricated. The Fed will not let this happen. It will not let the dollar rise any further.
The corollary to this – and the real reason I’m telling you all this stuff – is this puts a floor under the gold market. It’s almost a “can’t-lose” situation…
Diving Back Into the Markets
Greetings from China! Two years ago, I fell into a deep hole. I lost my family, my house, and my business, and I spiraled into a deep depression. I tried everything to fix myself, but nothing worked. In the end, Kate asked me if I wanted to go traveling with her.
We were in Rwanda, about a year ago, when I received a buyout for my stake in a business.
I couldn’t just leave the money sitting in the bank. So I dove back into the financial markets, and I started studying economics again.
I hadn’t looked at a research report or a stock chart in two years, but I had a lot of spare time in Rwanda to bring myself up to speed and a lot of long bus rides to think about things. I filled several notebooks with my thoughts.
I came to the conclusion that the Dow-to-Gold ratio was beginning a long slide, and Kate and I needed to convert all our assets to gold, silver, and mining stocks.
This is the second time in my life I’ve had a strong premonition that gold was about to make a major move higher.
The first was in 2002. Tech stocks had crashed. The economy was in recession. Bush had invaded Afghanistan. And a war was starting in Iraq. The Greenspan Fed would do whatever it took to prop up the economy.
Meanwhile, gold had been falling for 20 years. No one was paying attention to it. Even the central banks were dumping it.
I put all my money into gold futures, and I persuaded some friends to do the same.
Then, I quit my job, said goodbye to my friends, and went to Mexico City without any money or credit cards. I traveled from Mexico City to San Diego to Chicago to Atlanta and back to Mexico City by sleeping outside, eating scraps, and bumming rides. I sent email newsletters about my adventures back to my friends. I called them the Dysman Diaries. (I’ve recently reposted some of the stories from that trip.)
Seven years later, gold had risen 400%. (Unfortunately, I sold the futures much too early, and we made only a small profit.)
Once again, we’ve got almost the perfect setup for a big move higher in gold… a trillion-dollar budget deficit, a collection of hyper-activist central banks, a too-strong dollar, potential currency wars, a possible recession on the horizon.
Meanwhile, I’m back on the road, living like a hobo, all in with gold, and sending zany e-letters to my friends. And gold is up about 20% over the year…
Everything’s in place for a big rise.
But if I’m wrong, oh well. I don’t think Kate and I will lose much. The Fed will make sure of that.
Gold is down $50 an ounce in the last six weeks… about 4%. If you have been considering buying it, but you haven’t bought yet, NOW is the time to buy.
This time, I won’t make the same mistake and sell too early. We’re holding until the Dow-to-Gold ratio hits 5 and not a moment sooner.
– Tom Dyson
P.S. Continuing my hitchhiking story from Friday… First time I hit the road, in 2004, I put Addison Wiggin, managing editor at The Daily Reckoning, on my Dysman Diaries email list. He replied to one of my emails when I was in Birmingham, Alabama. He told me a position had opened at The Daily Reckoning. He invited me to Paris for an interview.
So I walked onto Interstate 10 westbound and stuck out my thumb to hitchhike.
First, I got picked up by a man drinking whiskey from a big Styrofoam cup. He was towing a big boat. We swerved all the way to Tuscaloosa.
Then, I got picked up by a long-haul trucker in an 18-wheeler. He spent 24 hours – all the way from Tuscaloosa, Alabama, to Brownsville, Texas – trying to seduce me. Oh… and somewhere in Louisiana, he confessed to me he’d murdered his second wife.
I doubt I will ever hitchhike again after those two rides. But I did make it to Paris. And that’s the story of how I met Bill and came to work for Agora.
Reader question: Gold does not seem useful other than holding it. One can’t just use it without paying the selling commissions. Thus, it seems quite costly to ever “get out of gold.” What say you?
Tom’s response: I get this question a lot. I don’t plan on ever “using” my gold. When the Dow-to-Gold ratio goes below 5, I’m going to convert the whole lot into great-dividend-paying stocks. My hope is gold will be the most popular investment on Wall Street by then, and I’ll be selling it into a buyer’s market.
Reader question: Thank you for your daily emails, which I really look forward to. With the machinations of the Fed you’ve been mentioning, how do you feel about the prospects for TIPS, or Treasury Inflation-Protected Securities, in this environment?
Tom’s response: No one expects inflation. Businessweek even asked the question “Is Inflation Dead?” on one of its magazine covers earlier this year. So inflation must be one of the most underpriced bets in finance at the moment. That said, I much prefer gold.
As always, keep sending us your questions and comments at [email protected]. Kate and I read every one of them, even if we can’t publish them all.