Why Precious Metals and Crypto Currencies Are My Investments of Choice these Next Few Years.

With the major central banks of the world looking to turn off the fiat money tap in 2018 I expect the US 10 year treasury yield to continue its move higher from an all-time low of 1.35% in July of 2016. At present we are fast approaching 2.5%. The bond bull market lasted 35 years as treasury yields dropped from close to 16% in 1981 to the low in 2016. What the bull market in bonds and decreasing interest rates meant was 35 years of easy money, ever increasing debt and ever bigger financial bubbles that had to be inflated with ever increasing monetary stimulus by the Federal Reserve and the other major central banks of the world. .

One could argue that the Federal Reserve could always revert back to money printing or quantitative easing if their quantitative tightening or unwinding of their balance sheet creates havoc in the financial markets as bond yields start spiking. The only problem with that way of thinking is that investors have gone along with the Fed's game that all the money printing they have resorted to since the GFC of 2008 would eventually be unwound as the US economy's strength would be able to withstand higher interest rates and tighter monetary policy.

So if the Fed were to back track on its plans to unwind its balance sheet it would lose all the remaining credibility it has with investors. We will have to see if the unwinding of the Fed's balance sheet, which basically means selling US government debt securities and mortgage backed securities into the market, will be "like watching paint dry" as some Fed officials have been saying. Don't forget that it was Fed chairman Ben Bernanke who said, at the height of the subprime mortgage crisis in 2007, that the problem was contained and that he rest of the economy was doing well!

What President Trump and the Republicans in congress are betting on is that their tax reform will boost the American economy enough to sustain the receding tide of easy money. They better be right because David Stockman, President Reagan's Director of the Office of Management and Budget (1981-1985) warned recently that the tax plan could contribute almost $1.5 trillion to the budget deficit! So even thought I believe in small government and low taxes what we are getting with the Trump tax reform is lower taxes but not a corresponding shrinking of government spending and reduction of government debt.

So it looks like all the financial stars are aligning themselves for possibly rapidly rising interest rates as the Fed starts selling treasuries and uncle Sam also has to sell even more treasuries to finance an increasing debt burden. The dollar is already pointing to such a scenario as it dropped against the other major fiat currencies last year is should help create the opposite environment that we have seen since 1981 of ever increasing and cheaper credit and fairly contained consumer prices. The environment we should see is similar to what was experienced in the 1970s. Economic stagnation, higher consumer prices, a falling dollar and a big correction downwards in the value of financial assets like stocks and bonds that have been the beneficiary of the era of easy money.

So that's how I arrive at my investments of choice for the next few years. Precious metals and the mining stocks related to gold and silver performed very well in the 1970s even as interest rates rose from around 6% to 16% in 1981. Gold and silver are the anti dollar so if the dollar is losing value versus had assets it is natural that gold and silver should perform well. The other reason why I expect precious metal to do well and paper assets not to is that after over 36 years of easy money and inflated paper asset prices I expect the Dow/Gold ration to bottom another time and that will signify the rebalancing of things.

What about crypto currencies? Why should they do well in such an environment? The first is that even though they are not hard assets they are created by the free market and unless they start getting inflated like the fiat dollar I expect them to perform similarly to gold and silver as anti dollar currencies. The second reason why I expect cryptos to do well is because of the blockchain technology which, in my opinion and in the opinion of many, is just as revolutionary as the internet. I think it is up to each individual who is involved in cryptos to decide where he or she wants to put their money in that space. One needs to tread carefully as many of the new tokens will probably end up going to zero just like some of the dot.com stocks during the bust of 2000/2001. The same could be said for the junior gold and silver explorer and that's why one needs to his or her homework.