17 January 2023
Happy New Year!
We hope that this newsletter finds you well after a Christmas break of joy and time spent with family and friends. We hope your New Year resolutions are still intact and the year of the Rabbit will bring you great tidings.
December’s Price Action
December was overall a relatively quiet month in the markets. SCF remained relatively steady and was aided by an increase in the value of XAG which rose in value ~10%. BTC dropped ~3.8% and the S&P dropped ~7%. Perhaps most notable for the markets is the continued slide of the USD which fell ~2.3%.
Our Fiat Thesis
We remain convinced that the debt based fiat currency experiment will eventually fail and that the USD will be the last of the dominoes to fall.
The new era of the Federal Reserve rapidly raising rates from 0% to 4.5% has added a new level of pressure on the monetary system. Central banks are now posting losses. The Swiss National Bank lost CHF 132bn ($143bn) for 2022, the biggest loss in its 115 year history. In Japan, the BOJ made the surprise announcement that they would raise the cap of the 10 Year JGB to 0.5% in order to save the Yen. Last week it was forced to purchase $5T Yen’s worth of JGBs in a single day. The BOJ can now only leap from the frying pan to the fire. Simply put, the world’s monetary system cannot tolerate positive interest rates. And the Federal Reserve is determined to keep them high.
Future possible monetary scenarios?
If the fiat debt based system fails at some point in the future, there appears to be three most likely scenarios. The first and most historically credible would be a return to a gold standard and the movements of the BRICS central banks would suggest that this is what they have in mind. Second would be a triumph of Bitcoin as the world’s central ledger. Lastly, is a Great Reset scenario in which the financial system is taken down for a few weeks, a CBDC introduced which requires a digital bio ID and a social credit score system – similar to what they have in China.
The Great Reset
The World Economic Forum is currently in Davos Switzerland planning the last scenario. As Klaus Schwab tells us: “You will own nothing and be happy.” This year, Klaus has hired 5000 Swiss troops for the event’s security. He seems increasingly certain that there will soon be a cyber attack on the financial system. Given his superb ability to predict these types of crises we are inclined to believe him.
The Great Reset scenario is uninvestable and one is therefore left with either Bullion or Bitcoin as investing options. We should therefore focus on how to spread our investments.
We remain bullish about crypto currencies and see a realistic chance of a bottom for BTC this year. To reiterate, BTC seems able to preempt the actions of central bankers faster than other larger asset classes. However, we still believe that there is likely to be more crypto infrastructure damage ahead of us. Namely, we believe that Genesis, Gemini, Grayscale, Binance, Huobi and Tether might not exist a year from now. Liquidity is being drained from the crypto industry and we should therefore expect continued volatility. We believe there to be a good short term buying opportunity for BTC at approximately $12,000.
Silver and the Hunt Brothers
In the late 1970’s, the Hunt Brothers attempted to corner the silver market. Their thesis was based on the global inflation that had started with the forming of OPEC. Their strategy was to buy up future contracts on the COMEX and hoped that a conglomerate of Saudi royals would join them and demand delivery of the silver. Although silver blasted to $49.50 in early 1980, the strategy ultimately failed. The Federal Reserve raised interest rates to 15%, the COMEX changed the rules and banned further silver purchases, the Saudis bailed and the price of silver collapsed and took the Hunt brothers with them. The price of silver would not reach $49.50 again until 2011.
A bull market for Gold and Silver?
There is much reason to be optimistic about bullion. BRICS central banks are accumulating gold at an ever faster rate and appear to be making arrangements surrounding commodity flows outside of the Western alliance. Secondly, the London Bullion Metals Association is getting drained of silver at a rather alarming rate – its inventory was redeemed from 1.2 bn Oz to 0.8 bn Oz in 2022. Both metals have produced an upward trend now and seem impervious to the interest rate hikes. Unlike the Hunt brother’s scenario, this appears to be the result of thousands of smaller actors, each trying to defend against counter party risk. At $24, silver is only half its 1980 price and should the LMBA falter, there could be a non linear event in the silver market.
SCF intends to increase its bullion allocation on the next pull back in gold and silver prices. Whilst we believe the S&P will see new lows this year, we believe that a significant new bull run in bullion is likely to take place.