A Gold Bull, Bond Bear & Commodity Supercycle

Today 40-year veteran Don Coxe told King World News, “... when that bond bear market comes under way, it will be the next phase of the commodity supercycle.”  Coxe, who is Global Strategy Advisor to BMO ($538 billion in assets), also added, “What’s fascinating to me is we’ve had this tremendous bull market in gold, against a bond bull market.”

Here is what Coxe had to say:  “As of August 12th, 1981, the constant dollar Dow Jones Average, which was deflated by inflation, was back to where it was after ‘Black Monday’ in 1929.  Think about that.  What that meant was in real terms from 1929, in the next 52 years you had a negative return on stocks.”

“That was really bad, and that’s the wealth destruction you are talking about (which occurred in the 1970s).  So if you had your money in stocks, as opposed to having your money in gold and oil stocks, then you were a pauper.

If you had your money in gold and oil stocks and then sold them....

“What we did was we sold our entire position.  Once we were satisfied Reagan was going to win the election and support Volcker, we knew from my conversation with Margaret Thatcher in 1978, where she had predicted all of this, that she was going to bring monetarism to Great Britain to destroy inflation.

She had already done that so I could see how it was unfolding.  So we sold our entire positions (with gold over $700 an ounce in 1980).  I was managing the investment portfolio for the pension and investment division of Mutual Life of Canada at that time.  We sold our entire position in gold, and nearly all of our oil positions, and bought Treasury Zeros.

We had a duration of 19.5 years, and we kept them.  I went on to go to Bay Street and then to Wall Street, but the firm I left was the number one bond manager anywhere for the next seven years just by keeping the long duration (bonds).  So (at the top in 1980) you had to do the exact opposite of what worked for you during the 70s, and you did it thereafter.  That was one of the great turning points of all-time.

The only reason this is relevant now is to realize that Stein’s Law still applies.  Something cannot go on forever, it will stop.  We’ve had a 31-year bond bull market, there will be a bond bear market.  We don’t know when.  But when that bond bear market comes under way, it will be the next phase of the commodity supercycle.  There’s no question, in my experience, that bonds and commodities are inversely correlated to each other.”

Coxe had this to say regarding gold: “What’s fascinating to me is we’ve had this tremendous bull market in gold, against a bond bull market.  Now I told you the two things are inversely correlated.  So you can immediately say, ‘Well, how is this possible because since the year 2000 there has been nothing but a bond bull market, and yet we’ve taken gold from $250 all the way to $1,720 now?’

The reason for that is back then we just looked at inflation as being the factor.  What’s happening now is that gold is being treated as a quasi-monetary asset, and what we have is this incredible expansion of money supplies.  And even more importantly, of financial assets that are pinned to monetary assets in some way, so that the amount of liabilities in the world is growing incredibly faster than the amount of global GDP.  So something has gone wrong with all of this.

Now we had the first crash of the banking system because the banks were levered up 30, 40, 50-to-one, which was insanity.  So now we are deleveraging this, but when you are levered up 40-to-one, the deleveraging takes a long, long time, and a lot of discipline.

I don’t see that we are going to have all of that time, and I don’t see that the bankers have that sustained discipline because as soon as things start to look good for them, they tell them everything is OK and they should be given big bonuses.  (This is) the same crowd that gave us the crash, outrageous.

So what we are seeing is these economies that are growing many times faster than we are, have a wealthy class in them who are buying gold and they are a big part of the gold bull market.  That, plus the fact that the central banks of the world, which were selling gold for 20 years, have switched to the buy side.

So when you have the central banks, and those people who are part of the only fast-growing GDP countries, all buying gold, what you know is you’ve got the beginnings of something that should last for quite a while, even if we don’t get inflation coming back.”

The information above was just a small portion Don Coxe’s extraordinary interview.  Coxe covers the gold market in great detail, as well as what to expect going forward in the US, Europe, and Asia.  The interview with Don Coxe is available now and you can listen to it by CLICKING HERE.