Pro Perspectives 4/22/20

April 22, 2020

We've talked quite a bit about the explicit intent of policymakers (here and globally) to combat the global economic shutdown by flooding the world with money, which will ultimately inflate economies and deflate debt.

After all, sovereign debt is only measured as an absolute number by the media, because it's a big number, and eye-catching.  But GDP is a big number too.  And in terms of our ability to service debt at sustainable interest rates, what matters is the size of debt relative to the size of the economy.  In that respect, that ratio is ballooning, and will continue to get bigger, in the near term, as policymakers pump more money into the economy, to best insure against the worst-case scenario.  

But in the post-virus environment, as I said yesterday, our government debt will be inflated away — meaning we will also have inflated growth.  The value of our economic output will be measured with dollars that are easier to come by and less valuable (inflating the value of GDP). That will ultimately normalize the Debt-to-GDP levels.  Again, this doesn't work so well in a normal world where global economies perform unevenly (good and bad/ winners and losers).  But in a world where everyone is in the same boat, these policies become a global reset of prices (and ultimately wages). 

Again, this inflation brew is a recipe for much higher gold prices. 

Last week, billionaire Paul Singer, one of the best investors of the past 40+ years said he thinks gold can trade multiples higher than current levels.  Yesterday, Bank of America projected a move to $3,000 in gold.  Spot gold currently trades around $1,710.  

With that, remember we looked a leveraged way to play gold last week, in a gold miners ETF, GDX. 

Here's another look at this chart, which is just breaking out …  

As we discussed last week, a return to the 2011 highs in this ETF (the record highs in gold prices), would mean more than a double (relative to a 12% gain in the underlying).