One of the best methods for protecting wealth against a constantly depreciating paper currency is to own precious metals.
The bull case for precious metals remains intact as central bankers worldwide have become the lenders of last resort for nations that have exhausted their borrowing capacities. Very little has changed since 2008 when the world financial system stood at the abyss of collapse. Unsustainable debt levels continue to increase even as the capacity to service the debt diminishes.
As discussed in Why There is No Upside Limit For Gold and Silver Prices, the U.S. has reached a tipping point on the road to insolvency. Despite trillions in stimulus spending, both job creation and economic growth have been extremely weak and are likely to remain so.
Economists Kenneth Rogoff and Carmen Reinhart, authors of This Time Is Different: Eight Centuries of Financial Folly, offer comprehensive statistical evidence of the dangers of excessive public debt. As documented in their book, once public sector debt reaches 90% (which the U.S. is very close to) a country has only three options, all of them bad.
According to Rogoff and Reinhart, the only way out for overleveraged nations is a restructuring through default, austerity or allowing inflation to increase while repressing interest rates at a very low level.
Default is the most drastic and least likely remedy to be used by a country such as the United States which issues its own currency and can create an unlimited number of dollars to service debt payments.
Austerity, the second option, is a highly unlikely scenario under our current democratic system. Any politician voting for austerity measures would quickly be voted out of office and replaced by another politician promising continued funding of the social welfare state. Since over half the country’s population currently depends on entitlement programs to survive, the power of the majority vote guarantees that austerity will not become a policy for putting the country back on a fiscally sound economic path. The inability to reduce unsustainable spending or impose confiscatory rates of taxation leaves the government with one bad option – print more money.
The United States is currently locked into policy options that guarantee a long term rise in gold and silver prices. The current weakness in precious metals represents a buying opportunity for those seeking to accumulate and protect their wealth over the long term.
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