Understanding Our Systemic Crisis

The chart is this article illustrates the historic importance of where credit markets stand. That has huge implications for financial markets and the economy, and that certainly is not an understatement, on the contrary even.

It is remarkable how many market participants are questioning the sustainability of current economic and monetary policy measures behind closed doors. It is also worth noting that the group of sceptics has in our assessment gradually grown in recent years and has in the meantime quite likely become the largest group.

We believe the sceptics could play a particularly important role as marginal buyers in driving the future gold price trend: Many of them have not yet invested in gold, but are keeping an eye on it from the sidelines. As soon as the narrative of the slow recovery of the economy no longer holds up, they will be among the first to implement shifts in portfolio allocations in favor of gold.

Members of this group are convinced that the monetary architecture is systematically flawed. Criticism of the system can be formulated on the basis of several schools of thought, or at times even based on common sense. In our opinion, the most consistent critical assessment of the status quo can be performed by employing the analytical methods of the Austrian School of Economics. Austrian theory is able to explain systematically why the current economic recovery is neither sustainable nor self-supporting.

People who have come to adopt this critical stance have one thing in common: It is almost impossible for them to regain faith in the system. Thus there is a one-way street into this camp, i.e., this is a group that is consistently growing.

We are making no secret of the fact that we belong to the third group. The instability of growth induced by credit expansion, which we routinely criticize, is impressively illustrated by the following chart. Since 1959, “total credit market debt” – the broadest debt aggregate in the US – has increased by 9,100%, its annualized growth rate amounts to 8.26%. In every decade, outstanding debt has at least doubled. In order to get credit-induced GDP growth to restart again after the volume of total outstanding debt dipped slightly for the first time in 2009, the Fed implemented a series of never before seen monetary policy measures.


There is no reverse gear that can be engaged in this monetary system – the money supply has to be increased incessantly, which in turn means that the amount of credit in the system continually rises as well.

The fact that the steady expansion of the volume of outstanding debt has run into snags in recent years characterizes the current critical phase in the monetary system’s evolution. Over the medium-term, the record level of debt will either be dealt with by defaults or a forceful reflation, possibly in the form of “helicopter money”.

Due to this critical assessment of the situation, we continue to argue in favor of a strategic allocation to physical gold for long-term oriented investment portfolios.

“Where things stand”

We went far out on a limb last year by projecting a price target of USD 2,300/ oz. for June 2018 amidst a pronounced bear market. The first step in this direction appears to have been taken. The commodity sector, as well as gold, seems to have formed a bottom. Early this year gold celebrated an impressive comeback, exhibiting strong vital signs.

We are nevertheless still a long way from our USD 2,300 price target. In order to reach it, currently prevailing perceptions of the global economic situation will have to change. Moreover, the feasibility of interventionist monetary and fiscal policy will have to be fundamentally questioned.

There are more and more signs that scepticism is rising. Something quite telling happened at Ms. Yellen’s press conference after the March FOMC meeting. The first question that CBNC journalist Steve Liesman asked her was: “Does the Fed have a credibility problem […]?”

With respect to future rate hikes, the verbal dance on eggshells commonly known as the Fed’s communication policy doesn’t exactly inspire confidence, as no clear monetary policy strategy is discernible. A significant downturn in economic growth, followed by a renewed stimulus program including even more extreme measures would increase uncertainty further. In this case it would have to be expected that the gold price, commodity prices and also price inflation, would rise.

In our opinion, this or similar scenarios have a high probability of eventuating within the coming 24 months, and we are therefore sticking with our price target of USD 2,300 by June 2018. The current combination of obvious over-indebtedness, expansive fiscal and monetary policy and the unrelenting determination of central banks to generate price inflation, continue to represent a stable foundation for further advances in the gold price.

Source: In Gold We Trust 2016 released by Incrementum Liechtenstein

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