How to prepare for the coming surge in inflation
Monday, 25 November 2019
By Bernd Struben
- Bitcoin bounce?
- Your kids…and the internet
- A Microcap Worth Watching
‘The feds are going to inflate. What that will do to the economy and asset prices is unknown. But it probably won’t be good for anything other than gold.’
Agora Founder, Bill Bonner
When sovereign nations ratchet their gold stockpiles to record levels, it pays to take notice.
We’ve examined the gold buying sprees underway by the central banks in Russia, China and Poland a few times here over the past months.
Now Serbia steps into the spotlight.
From Bloomberg (20 November):
‘Serbia needs to further increase its gold reserves even after recent purchases pushed its stash to a record, President Aleksandar Vucic said on Tuesday, saying the Balkan nation has to fortify itself against a looming economic crisis…
“I think we’ll continue doing that because of what we see in which direction the crisis in the world is moving,” Vucic told reporters in Belgrade...’
Serbia bought nine tons of gold in October. The nation shelled out US$434 million for the haul, according to central bank Governor Jorgovanka Tabakovic. Its gold stockpile now stands at 30 tons.
And as Vucic says, they’re not done yet.
The Serbian president appears to be channelling global strategist Jim Rickards.
You’re probably familiar with Jim. His CV would fill an entire instalment of the Insider. I’ll spare you that. But it’s worth noting that Jim has advised the White House on things like global currency crises and financial war-game scenarios.
He’s also the author of three New York Times best sellers. And his latest book, The New Case for Gold, could make that four NYT best sellers.
The book offers a wealth of information. Not just on how to buy gold and where to best store it. Jim also gives you insights into the wealth-protecting techniques and strategies he employs with his own family’s money.
If you do know Jim, you’ll know he’s a long time gold bug.
That’s because, like Serbia’s president Vucic, Jim sees gold as the best form of protection during times of crisis. And like Agora’s Bill Bonner, he sees gold as your go to asset when the US and other debt addled nations dial up inflation to ease their crushing burden in fiat currencies.
Historically, when inflation is running high, gold tends to be the clear winner.
Just look at what happened in Iceland following the 2008 financial crisis. A crisis that exposed the nation’s weak underbelly and saw the krona fall 53% by 2011:
Source: Fat Tail Media
Click to enlarge
The blue line above represents the krona. The red line is the price of gold in krona.
From 2008–11 the gold price in krona rocketed 299%.
It may not happen next year. But the same scenario could very well play out for gold in US and Aussie dollars, euros and yen. To name a few.
The New Case for Gold isn’t intended to stir your fears, though. Instead, it’s meant to properly prepare you for what Jim sees coming.
Now, while the limited Australian supplies last, you can pick up your own discounted copy. That’s courtesy of our sister company, Fat Tail Media (formerly Agora Financial Australia). They’re even picking up the shipping and handling costs.
And just in time for Christmas.
Now, to the markets…
All the major stock indices we track here finished — or are currently trading — well in the green.
These days there can be only two reasons for that. Either a major central bank dropped interest rates, cracking open the floodgate to more cheap money. Or there’s been some reported progress in the US–China trade negotiations.
Since no major interest rate decisions were made over the weekend, we turn to the latter explanation.
‘China said it will raise penalties on violations of intellectual property rights in an attempt to address one of the sticking points in trade talks with the U.S.
‘The country will also look into lowering the thresholds for criminal punishments for those who steal IP…’
It’s a step up from China’s customary mantra, where they deny the problem even exists. As far as real reform on China’s forced IP transfers for companies wanting to set up shop in the Middle Kingdom…I wouldn’t hold my breath.
Still, with China continuing to show restraint in Hong Kong and making the right noises on its intentions around the IP issues, phase one of the trade agreement may still be within reach.
And investors took note…
Over the weekend, the Dow Jones Industrial Average closed up 109.33 points, or 0.39%.
The S&P 500 closed up 6.75 points, or 0.22%.
In Europe the Euro Stoxx 50 index closed up 7.66 points, or 0.21%. Meanwhile, the FTSE 100 gained 1.22% and Germany’s DAX closed up 26.18 points, or 0.20%.
In Asian markets Japan’s Nikkei 225 is up 164.04 points, or 0.71%. China’s CSI 300 is up 0.29%.
The S&P/ASX 200 is up 25.42 points, or 0.38%.
West Texas Intermediate crude oil is US$57.96 per barrel. Brent crude is US$63.54 per barrel.
Turning to gold, the yellow metal is trading for US$1,461.05 (AU$2,150.82) per troy ounce. Silver is US$16.95 (AU$24.95) per troy ounce.
One bitcoin is worth US$7,045.89. That’s down 7.4% since I wrote to you on Friday. (More on bitcoin below…)
The Aussie dollar is worth 67.93 US cents.
Getting back to bitcoin…
The past six months haven’t been kind to the world’s largest crypto by market cap. In fact, as you can see in the chart below, the past days’ losses have driven it down to six month lows:
Click to enlarge
If you bought at the recent 10 July high of US$12,575, you’ll be sitting on a 44% paper loss. Or should I say digital loss. No fun that.
But, if we step back another six months, you can see the one-year chart paints a very different picture:
Click to enlarge
Even after the recent selloff, bitcoin is still up 120% from 10 December last year. In the lead up to the 2018 holiday season, you could have picked up a whole bitcoin for US$3,194. Not a bad little virtual stocking stuffer.
Could bitcoin fall back to those bargain basement levels?
But the recent massive investment to build the world’s largest bitcoin mining centre tells me there are a lot of deep pockets out there who believe in bitcoin’s long term outlook.
The bitcoin mine is being developed in Rockdale Texas, by Whinstone US and Japan’s GMO Internet. (Earlier this month, Whinstone agreed to be acquired by Germany’s Northern Bitcoin.)
As CoinDesk reports on the new mega mine:
‘The data center will cost $150 million to build and furnish, Whinstone estimated when it unveiled the jobs-ready project to much locale fanfare on Nov. 1.
‘The mine would ramp up to full capacity through 2020, with 300 megawatts of power slated to come online in the first quarter and the full 1 gigawatt scheduled for the fourth quarter.’
A US$150 million (AU$221 million) bitcoin mining centre. A far cry from what it would have cost you to hook together a few home computers to mine early bitcoins back in 2013.
And a heck of a lot more energy.
One gigawatt equals a billion watts. Quora.com tells me that’s enough juice to power 725,000 homes.
With that kind of money and energy going into mining the world’s remaining bitcoins, these true believers are either going to make out like bandits…or get burned.
If you’re thinking about investing in this highly volatile market, be sure to read Sam Volkering’s crypto investing bible first.
Your kids…and the internet
As part of our regular Monday feature, below veteran stock trader Murray Dawes share’s his latest tips and insights.
In his premium advisory service, Alpha Wave Trader, Murray uses his proprietary ‘slingshot method’ to hunt down rapid fire profits from stocks while minimising risk.
Today he looks into a company called Family Zone Cyber Safety Ltd. The company creates internet filters for families and schools. And the growth prospects in the US are looking strong.
You can scroll down and click on the image below to watch Murray’s latest video now.
For more details on the Alpha Wave Trader advisory service, click here.
A Microcap Worth Watching
[Click on the picture to watch Murray analyse a microcap stock that is kicking goals in the US with their cyber safety products.]
Family Zone Cyber Safety Ltd [ASX:FZO] is a microcap stock ($44 million market cap) focussed on providing internet filters for families and schools. They are gaining traction in the US with 550 schools in 65 school districts signing up over the past year.
The US market is huge with 135,000 schools in 14,000 school districts, so they have barely scratched the surface.
They have around 450 schools in Australia and New Zealand, so their total count of schools is now above 1,000.
They have 150,000 paying subscribers but the revenue generated per user is quite small so they need much more scale before they will be cash flow positive.
They currently have about $3 million a quarter in costs and their revenue run rate per quarter is steadily approaching $2 million.
There is no doubt that this is a high-risk business that will probably need to raise funds from the market again before it hits cash flow positive.
But the numbers are going in the right direction and the opportunity is a large one, especially in the US where it is a legal requirement that schools filter students access to the internet.
Their strategy is to give parents exposure to their products through their affiliation with schools and they expect to convert parents into paying subscribers.
Their stock price has been in the doldrums for the past few years after flying from 14 cents to $1.00 in 2017. The stock is currently trading at 19 cents after hitting an all-time low of 11 cents in June.
The reason I am analysing this company for you in my ‘Week Ahead’ video above, is because the technical analysis set up is a great example of what I look for before entering a stock.
I like to see a long-term downtrend that has shaken a lot of early investors out of a stock. Once I get signs that the momentum is shifting back to the upside via monthly or quarterly buy pivots, my ears prick up and I start looking for an entry point.
There is a clear line in the sand where I will be proven wrong, so I know exactly where I want to place my stop-loss and the company’s growth is gaining pace in a sector that is growing strongly.
All of the above increases my chances that I will reach my initial target before I am stopped out and that is all I am focused on achieving when I trade.
This is not a recommendation to buy the stock right now, but is instead a good case study for us to follow into the future.
Editor, Alpha Wave Trader