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Metallicity - One Eyed Deer Blog 28th November 2023

Gold is threatening to break to new ground. It is doing so despite the significant shift in the interest rate environment. Why is a non-yielding fiat substitute performing so resiliently in the face of increasing rates?

For many months we at OED have been noting that there is one major dynamic underlying all markets, and that is the coming disorderly unwind of four decades of monetary mismanagement. Precious metals have a message for us. Rates are capped and monetisation is the way forward.

Things are breaking at 5%. We all know the globe is awash with $306 trillion of debt, and that in terms of GDP it almost triple what it was in 1980. It's no stretch to realise that with triple the debt we are going to get nowhere near the 1980 ten year rate of 14% before things implode. Perhaps 5-6% now does what 14% did then.

Nothing is getting paid back.

Debt as a percentage of GDP has never gone down. And now, interest costs are exploding.

This is end game, pure and simple. It's getting a bit silly to argue that there is a way out. US debt will either default or be monetised. As fewer and fewer treasuries are being owned by foreign nationals, I would go with monetised. Defaulting on domestic pension funds is not a good look. Thus endeth the USD experiment. Own hard assets.

So gold is again flirting with the break to $2100.

Evermore constructive price action is making the breakout inevitable. There are a number of technical devices that project major upside. If you are a fan of classic continuation patterns..

This inverse head and shoulders with sloping neckline on the weekly looks incredible. As does a Fibonacci projection..

This shows a fairly high quality midrange work area over a period of three years, with near term target in the high 2Ks.

And the simplest weekly moving average behaviour remains just the best I have ever seen on anything. This looks better than the 2005 setup.

For a supercharged entry into this space, here is a basket of Aussie gold stocks compared to the AUD gold price. They are very cheap.

OED core idea number two, gloriously on display..

Our other big theme is that with crippling rates comes the closure of access to the debt markets and the requirement for corporates to issue equity. We have been pushing this theme for months.

Exhibit A: Healius Ltd (ASX: HLS)

Healius is a pathology and diagnostic imaging rollup that exploited the previously perverse interest rate environment to expand aggressively. What does the OED model predict will happen to such undertakings?.. Debt will become cripplingly expensive (impossible) to roll, and said undertaking will be forced to issue equity (probably at a deep discount) in order to simply survive.

During the past week HLS came to market, cap in hand, to raise $200M in equity, at a deep discount, because their access to debt had been closed and they were unable to roll their cripplingly expensive debt.

It's hard to see their latest price action down there in the bottom right of the chart. What a mighty force it was in the era of free money. When your only idea is to expand forever using seemingly infinite cheap debt, then if the cheap debt is removed, well, you are ended, simple as that.

Further, HLS had joined the buyback brigade as recently as 2022, buying it's own stock between $4.57 and $2.88 as it slid throughout the year. I wonder what they were trying to do?

And now, they need to issue equity at $1.20 to keep the doors open.

This is not just one story of hubris and mismanagement. It is a THEME. Prepare for much, much more of this, from bigger and bigger names. There is a tsunami of equity issuance over the horizon. Candidates among US listings are HOG, CP and RIVN.

Core positions..

Gold/silver ratio pushes in a bit more this week..

You could keep putting it on here, but you've had weeks of me telling you to do it at 85, so don't chase it.

Bond/equity spread is double bottoming nicely..

This is still very early-stage. Double down on this spread at these levels. Another view of the attractiveness of bonds over equity is the following..

Investment grade yields are NEVER higher then SPX earning yields. We are facing once in a lifetime opportunities.

Wrapping up.

More and more end-game type effects are popping up. They are going to increase and the stories are going to get worse. We are not end-of-the-world type guys at OED. We are optimistic by nature. Many participants are on the right side of things and bon chance to them. The vast majority of course are wrong footed and wondering what to do. Anyone under fifty really has no experience of the cost of money causing friction. The brakes are on hard here, and unrestrained children are going through the windscreen. The brakes will come off, monetisation will send hard assets skyward and that will be another story.

One-eyed deer: Buy TLT / Sell QQQ.

Runner up: Buy gold/gold stocks.

Consider: Short HOG, CP.

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