Sprott Precious Metals Watch
By GCRU Gold News on Saturday, September 24 2016, 00:14 - Permalink
The most powerful litmus test for gold’s ongoing relevance is an assessment of whether the U.S. financial system could endure normalization of interest rate structures. Should the Fed raise fed funds to 3%-to-4%, or should 10-year Treasury yields trade back to 6%-to-8%, without significant negative impact to the U.S. financial system, we would concede constructive progress might have been achieved in rebalancing U.S. financial markets. We view prospects for either of these developments as quite remote. In such an environment, gold remains a mandatory portfolio asset.
Second, gold will remain a productive portfolio-diversifying asset until the process of debt rationalization is allowed to proceed in the United States. Since 2000, the Fed has now interceded to forestall this rebalancing process on at least three prominent occasions. To us, eventual normalization of the relationship between claims on future output and productive output itself will return ratios such as debt-to-GDP and HHNW-to-GDP to historically sustainable levels, say below 200% and 350% respectively. Because these ratios at prevailing GDP levels would imply (respectively) $20 trillion and $30 trillion in either debt defaults or depreciation of financial asset prices, we are quite certain the Fed will do everything in its power to postpone this rebalancing. Given implications for declining intrinsic value of U.S. financial assets, as well as ongoing Fed efforts to debase outstanding obligations, gold remains a mandatory portfolio asset.
Third, should the U.S. economy ever be able to resume GDP growth between 3%-to-4%, with a net national savings rate in the 8%-to-10% range (now roughly 1%), there would no longer be a need for the $2.0 trillion-or-so in annual U.S. nonfinancial credit growth now necessary to service debt and drive consumption. In such an environment, U.S. securities markets would be replete with opportunities for true capital formation, and gold would hold limited investment utility.