Yesterday and today (26th-27th), the Federal Reserve is having its monthly meeting to discuss, among other things, the interest-rate policy. I saw the financial media obsessed with the possibility of a rate hike, but the major topic the FED board of members is trying to figure out is how to handle the one thing that hasn’t happened since 1929 – the currency supply that the private sector generates is contracting.

Currency is created as debt, and there are two ways it’s done:

1. The Federal Government instructs the Treasury to sell bonds to the Federal Reserve in exchange for currency they can legally create. If the amount exceeds tax receipts, that’s called deficit spending, and the government has done that for decades, thus turning the U.S. into the most indebted nation in history. 7%-15% of our currency, on average, comes from this avenue.2. The banking institutions use depositors’ funds to generate loans to other individuals in the form of fractional reserve lending. Basically, the bank leverages every $1 we deposit to lend out money — even as much as $16 — with interest to other parties. 85%-93% of our currency comes from this avenue, which is far more dominant.

The currency supply expands when more loans are being generated than loans paid back – this is inflation. When more currency is paid back to the banks than is being created, the supply contracts – this is deflation. Since the Great Depression, the private sector (Americans) has been expanding the currency supply, and since 1971, the government has joined the party at full steam ahead.

This chart shows Monetary Base, which the government is solely responsible for. It is only a small part of the overall supply, and the government, along with the FED, is hyper-inflating it through the QE programs and bailouts of 2008. Though they have expanded the supply to an unprecedented amount, Americans are closing down debt levels. Baby Boomers are liquidating assets and spending less and Millennials are saving, instead of borrowing like previous generations have. This is causing a shortage of dollars in circulation for the first time since the Great Depression.

The red line contracting is debt levels falling for the first time since the end of the Great Depression, the natural ending to the world’s greatest credit bubble in history. The government has a different agenda, though. Apparently, high debt levels are their top priority as a way to entice us to borrow again, and this is a huge problem for uneducated Americans – but not for us; we are too smart to fall for the “cheap credit” trap. The extinguishing of dollars from the supply has caused the dollar index to climb rapidly. That will be poisonous to debt holders, as deflation strengthens, incomes subside and debt become unbearable. 

The U.S. dollar is gaining vs. a basket of major currencies, but it is falling sharply vs. gold. Every time we have seen this pattern, major changes in the monetary system followed. If you haven’t bought physical coins or bullion – you should. It is best to have at least 4%-7% of your net worth in precious metals.

This is a classic deflationary behavior. In 2008, the government did everything in its power to prevent deflation. It has since implemented, in conjure with the FED, policies that were thought impossible to comprehend until now. Deflation is an unsustainable economic condition for a fiat monetary system, and this causes panic at the high levels, though they try to keep a calm demeanor. The next round of stimulus is coming soon, and it will shock the world in its magnitude and will put the final nail in the dollar’s coffin.

In Europe banks are warning clients that negative interest rates might be charged on personal accounts effective immediately. This could lead to a global “Run on the banks” as savers and depositors decide to hoard cash and physical precious metals outside the banking system.

Another thing nobody is talking about is the fact that China is inflating its currency supply after 7 years of deflation and it is buying gold in an attempt to back their currency with as much real money as possible. When China deflates, gold plummets, and when it inflates, gold rises big. The red line is indicating that since mid 2015, China has begun stimulating again. Gold has started to rise higher a number of months later as the effects started to be noticed by the Chinese citizens. We are now witnessing China making her “gold move,” and the price is going much higher in order to cover the newly inflated currency supply.

Governments are inflating in order to stop deflation, and they are becoming very aggressive. I love the opportunity this creates for the mining sector. Make sure that as part of your portfolio, you keep cash at hand to seize big opportunities in the immediate future. The FED meeting could be a major catalyst, and unlike the masses, we have got a perfect game plan for deflation and inflation.
Best Regards,

Lior Gantz