History does not exactly repeat, but it often rhymes. The art and science of macro investing is comparing past business cycles with the present across a mosaic of different indicators and time frames to determine the most probable path forward for markets. Throughout time, financial markets and the economy have been intimately linked to cycles of expansion and contraction of money and credit. The Federal Reserve was created by bankers and enacted by Congress in 1913 to provide a more flexible and stable monetary and financial system, but by no means did the Fed repeal the business cycle. In fact, the central bank has often played a role in amplifying booms and busts. For example, after introducing large-scale purchases of government securities to stem the recession of 1923, the Fed continued to expand the money supply and suppress interest rates through the remainder of the 1920s. Such monetary policy fanned the flames of historic stock market speculation which culminated in the stock market crash of 1929 to 1932 and the Great Depression. The macro set-up today is eerily similar as we will explain below.
Policy makers have no choice but to continue diluting the value of fiat currencies to enable a levered financial system to withstand such extreme macro imbalances. If past is prologue, large central bank interventionism leads to the appreciation of monetary assets and, in our view, precious metals will be the real beneficiaries of a global synchronized debasement trend that now seems irreversible. Therewith, gold and silver mining companies should be the largest beneficiaries of this environment. They look fundamentally stronger than any other industry in equity markets today. In fact, free cash flow among the top 20 miners have grown by 132% year over year in their latest report.
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