Will History Repeat in 2022?

So the fact that you are able to skate through today and tomorrow and the day after on other people’s money means that ultimately, when society itself has to pay the bill, the bill is much, much, much larger.

Rick Rule of Sprott USA

Holding physical Gold is like putting your money on black on a roulette table with only black numbers. You know that you will win every time, as history proves with 100% certainty that governments will continue to destroy the currency and thus the Economy.

Egon von Greyerz of Matterhorn Asset Management

The Federal Reserve recently conceded that inflation is in fact no longer just transitory and is now a legitimate concern, and the recent Fed minutes revealed a plan to start easing up on “Quantitative Easing”, which includes raising interest rates over the next few years.

Number One, a lot of smart people believe the Fed has only two choices to combat the runaway debt: maintain a period of sustained inflation to inflate away the debt or default on the debt altogether. Cleary higher inflation is the lesser of two evils. (Plus, the smart money believes the Fed will ultimately try to keep rates low when the markets turn over).

Number Two, however, interest rates will ultimately rise as inflation rages on. But contrary to some opinion, gold will also rise dramatically, like in the 1970’s, as inflation outpaces interest rates. (In the 1970’s, interest rates rose approximately from 4% to 20%, while gold rose from $35oz to $875oz). Also, for those investors impatient that gold has gone sideways to lower over the last 16 months, keep in mind that gold in the mid 70’s went from $200oz to $100oz while inflation was rising. Then, gold rallied to $875oz over the next four years.

So, imagine sitting on a beach and it’s warm and sunny and comfortable. The kids are building sandcastles, money is abundant, and life is great. At the same time, the Fed, which decided years ago that the tide coming in did not serve their purpose, has feverishly been building a dam to keep the water away. And each year the Fed is forced to keep building a bigger dam. While some sun bathers are clueless and have no idea a growing dam exists, other sun bathers are fully aware, but not concerned because they believe the almighty Fed has their back. Of course, eventually the force of the water becomes too great, and Mother Nature wins the day as a tidal wave wipes out everything in its way.

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The point is that certain cycles exist and will always do so. As per Ray Dalio of Bridgewater Associates, if you understand the relationships of cause and effect, you know the same things will happen over and over again. (For those not aware, Dalio has long been a legend on Wall St and is well known for his long-term insight. In fact, Ray strongly recommended gold many years ago when the price was under $1300oz, which is well documented in my emails going back …).

Specifically, Dalio says history shows there are six stages to the economic cycle. In the current bubble phase, everybody extrapolates the past, and because assets were up yesterday and today, they will continue to rise tomorrow. More money is borrowed, and leverage is expanded. Then, it becomes clear the level of debt growth cannot be sustained, leading to central banks putting on the breaks, leading to the markets topping out, which Dalio says this time is approaching – a time in which there is not much capacity left to squeeze out of the economy and that assets are fully priced at the current level of interest rates.

And at this stage of the economic cycle, it is typical to have political strife, as well as a growing wealth gap between the rich and everyone else. Then, throw in the stress of COVID along with the issue of the vaccine controversy, and the world is ripe for revolution. And lastly, Dalio understands it is very difficult for people to step away from the crowd (which is why understanding recurring historical patterns is critical). But, once you realize his insight is on the money, leave market timing to the pros and get diversified as quickly as possible. Afterall, when the tidal wave hits, you are either prepared or not.