October 2, 2022

The Fundamental Reasons For Owning Gold and Silver Are Stronger Than Ever

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.

APMEX Reports Sales Spike on eBay Bullion Center

Last  Wednesday, with New York gold down over $40 per ounce, even long time gold bulls were advising caution before committing to further investment.  Some precious metals dealers reported a flood of panic selling by anxious investors who were unloading physical coin and bar.

With everyone fearful of lower prices, exactly who was buying all that gold and silver from panicked investors?

Michael Haynes, CEO of APMEX, one of the countries largest precious metals dealers, said “As gold and silver prices continue to drop, long-term investors immediately reacted to the market movement. Recognizing that the precious metals were on sale and at a discount relative to the expected future values, buyers of physical bullion increased purchasing at the APMEX Bullion Center on eBay.”

Michael Haynes explained further.

“This was the second largest selling day for the APMEX Bullion Center on eBay since inception about five months ago, beating the next highest selling day by more than 30%. As Gold and Silver prices fell, heavily influenced by the reaction of day traders to the minutes from the recent Federal Reserve Open Market Committee meeting, physical sales of both metals skyrocketed. Buyers of physical Gold and Silver have a moderate to long term view and concluded that with the price movements, the precious metals were on sale and at a discount relative to the expected future values. These investors in physical Gold and Silver apparently see the long term issues faced by the U.S. economy and seek some asset allocation into the non-correlated asset class of precious metals to protect and hedge their investments in paper assets like Stocks and Bonds.”

According to APMEX, the top sellers on the Bullion Center are the 1 oz Silver American Eagle, the 1 oz Gold American Eagle, the 5 gram Statue of Liberty Credit Suisse Gold Bar and the 100 oz Royal Canadian Mint Silver Bar.

Every bull market has corrections which offer long term investors the opportunity to add to positions at bargain prices.  The high volume of gold and silver purchases on the eBay Bullion Center indicates that mainstream buyers remain committed to precious metals as a method of wealth preservation.

Top Financial Advisors Negative On Gold As Perfect Contrarian Storm Brews

The outlook for gold has turned profoundly negative.  With prices down over 4% since the start of the year, gold is off to the worst start since 2001.  Billionaire investors George Soros and Louis Moore Bacon have dramatically slashed their gold holdings and Bloomberg reports that money managers have liquidated gold and precious metal holdings for six straight weeks, the longest stretch of outflows since the first quarter of 2011.

Further confirmation of the bearish outlook on gold investment was provided by Barron’s latest survey of America’s top financial advisors who manage money for the ultra wealthy.  According to Barron’s, the “one clear theme” of the advisors for 2013 is an increased commitment to stocks,  logically implying that most advisors see a better economy and rising corporate profits.  With bond yields reaching all time lows, stock dividends are also able to provide income starved investors with yields unattainable from government debt securities or gold.

Barron’s surveyed the best financial advisors in fifty states and the District of Columbia and listed their latest recommendations.  Out of the 51 financial advisors interviewed, only two gave a lukewarm recommendation for gold as a hedge.

With the investor outlook for gold about as negative as it can get, a contrarian opportunity is developing.  A negative consensus by itself is not sufficient to justify an overallocation to gold nor can it provide the timing for a reversal.  Negative sentiment and corresponding price declines provide the opportunity to assess the validity of the consensus and weigh the opportunity for out-sized gains when the consensus swings in the opposite direction.

The probability for a sentiment reversal on gold is not unreasonable.

Severely dysfunctional governments worldwide have abdicated responsibility for implementing policies that would lead to sound fundamental economic growth and fiscal restraint.  In their stead, responsibility for running world economies has been delegated to central banks which have virtually zero constraints on providing easy money as the solution for over indebtedness and slow growth.

The consensus belief is that the benefit of unlimited cheap money, which is clearly stimulating current asset inflation, will eventually benefit the real economy.  This beautiful theory of wealth creation by central banks becomes even more appealing as central bankers assure us that easy money policies will not cause high inflation since monetary policies could quickly be adjusted if inflation rises too high.  After putting the world on a path to permanent prosperity and ending poverty through unlimited money printing, perhaps the world’s central banks will also come up with a cure for cancer – we shall see.  In the meantime, the contrarian case for investing in gold grows with each passing day.

Expect $200 Silver As The Shift To Real Assets Accelerates

By: Deviant Investor

silver-coin-sm

    • Silver has no counter-party risk. It is not someone else’s liability. Silver Eagles or Canadian Silver Maple Leaf coins are recognized around the world and have intrinsic value everywhere. The same is NOT true for hundreds of paper currencies that have become worthless, usually because the government or central bank printed them to excess to pay the debts of governments that did not control spending.
    • The price of silver in US dollars since the year 2001 has been strongly correlated with the ever-increasing official national debt of the United States. Read $100 Silver! Yes, But When? I doubt that anyone believes the national debt will decrease or even remain constant over the next four years. We have every reason to believe that it will increase by well over $1,000,000,000,000 per year for many years. If the national debt is rapidly increasing and it correlates, on average, with the price of silver, then we can be reasonably certain that the HIGHLY VOLATILE price of silver will increase substantially over the next few years.

Click on image to enlarge.
    • Silver has been used as money (medium of exchange and a store of value) for over 3,000 years. In most cultures, silver has been used for daily transactions far more often than gold. I have read that the word for “money” is the same as the word for “silver” in many languages.
    • In the United States silver was used as money – coins – until the 1960s when inflation in the paper money supply caused the price of silver to rise sufficiently that silver coins were removed from circulation. Do you remember silver dollars? They contained approximately 0.77 ounces of silver. Currently the US Mint produces silver eagles which contain 1.0 ounce of silver – and cost approximately $35.

silver-coin

  • Argentina has devalued their currency several times and has dropped eight zeros off their unbacked paper money in the past 30 years. The United States has not dropped any zeros from dollars, but it took approximately one-half of one dollar to buy an ounce of silver 100 years ago, while it takes over 30 in today’s reduced value dollars. It took about 20 dollars to buy an ounce of gold 100 years ago and it takes over 1,600 dollars to buy that same ounce of gold today. There are many more dollars (paper and electronic) in circulation today compared to 100 years ago. Hence the prices, measured in declining value dollars, for silver, gold, wheat, crude oil, bread, coffee, and ammunition is MUCH larger.

 

  • Throughout history the prices of gold and silver have increased and decreased together, usually with gold costing 10 to 20 times as much as silver. A historical ratio of 15 or 16 is often quoted and that places the current ratio, which is in excess of 50, as relatively high. Since Nixon “closed the gold window” on August 15, 1971 and allowed the dollar to become an unbacked paper currency that could be created in nearly unlimited quantities, the gold to silver ratio has ranged from a high of approximately 100 to a low of approximately 17. There is room for silver prices to explode higher, narrowing the ratio to perhaps 20 to 1. When gold reaches $3,500 (Jim Sinclair) and subsequently much higher in the next few years, and assuming the ratio drops to approximately 20 to 1, the price of silver could approach $200 per ounce, on its way to a much higher number, depending on the extent of the QE-Infinity “money printing,” panic, hyperinflation, and investor demand.

 

  • If you think a silver price of $200 per ounce is outrageous, I suspect you would find near universal agreement among most Americans. But is a national debt in excess of $16,000,000,000,000 less outrageous? If unfunded liabilities are included the “fiscal gap” is, depending on who is calculating it, approximately $100,000,000,000,000 to $220,000,000,000,000. For perspective, that places the unfunded liabilities of the US government at approximately $700,000 per person in the United States. Is $700,000 unfunded liability (debt) per man, woman, and child more believable than a price for silver of $200?

It seems likely that the populace will eventually realize that:

  • Government spending is out of control and will not be voluntarily reduced.
  • “Printing money” or debt monetization (QE) is necessary and inevitable in order to continue funding the excess spending of the US government. More money in circulation means a declining purchasing power for the dollar. The decline is likely to accelerate at some time in the future.
  • The real value of our savings and retirement diminishes as the dollar declines in value.
  • People will panic and shift into real assets to preserve their purchasing power. (There is no fever like gold fever!)
  • That panic will cause gold, silver, and many other real assets to drastically increase in price, as measured in devalued dollars.
  • It is better to be early than late if a panic-moment is about to arrive.
  • Silver is less expensive per ounce than gold and more available for purchase than gold, particularly for middle-class westerners. An investment into silver is likely to appreciate more than a similar investment in gold.

What Do You Believe?

  • Do you believe that excessive spending and debt will be reduced?
  • Do you believe that the decline in purchasing power of the dollar over the last 100 years will suddenly
  • Do you believe that congressional promises for Social Security, Medicare, Medicaid, and government pensions will be broken?
  • Do you believe the Federal Reserve will continue to print the money to pay for those promises?
  • Do you believe your savings and retirement are totally safe in paper investments denominated in dollars?
  • Do you believe, as history indicates, that paper money eventually devalues to zero while gold and silver retain their value?
  • Do you believe that the world will suddenly stop using silver, instead of finding new uses for it every year?
  • Would you rather trust silver coins in a safe place or paper money and political promises?
    Most people will do nothing to protect their financial future. Will you?
    GE Christenson
    aka Deviant Investor

Explosive Gold Rally Is Imminent Based On Bearish Sentiment and Fundamentals

You know the world is changing when the head of the world’s biggest bond fund recommends gold as his first asset choice.

In this week’s Barron’s Roundtable, Bond King Bill Gross affirms his bullish view on gold due to his assessment that central banks will continue to suppress interest rates by purchasing vast amounts of government debt with printed money.  Gross notes that the financial system is now longer operating under free-market capitalism when the Fed is buying a “remarkable” 80% of debt issued by the U.S. Treasury.  Massive deficits are being funded with printed currency on a global scale never attempted in the past and sooner or later, according to Bill Gross, inflation will blow past the central bank’s targeted rate of 2.5%.

The really big risk comes when huge holders of U.S. debt such as China and Japan become disgusted with U.S. fiscal and monetary policies and decide to dump their treasuries as inflation decimates the value of their holdings.  Bill Gross tells Barron’s exactly what could go wrong and which gold investment he likes the best.

The big risk is that the Chinese would rather own something else. Investors can choose between artificially priced financial assets or real assets like oil and gold or, to be really safe, cash. The real risk to the financial markets is the marginal proclivity of investors to put their money in real assets, or under the mattress. Thus, my first recommendation is GLD — the SPDR Gold Trust exchange-traded fund. It has a fee, but it is an easy way for investors to buy a real asset.

Lots of things go into pricing gold, but real interest rates [adjusted for inflation] and expected inflation are two dominant considerations. Gold probably won’t move much from current levels unless real rates decline more or inflationary expectations rise from the current 2.5% to 3%, or higher. That’s what gets gold off the dime. It is a decent hedge. It doesn’t earn anything, but not much else earns anything either.

Pounding the table even harder than Gross, Fred Hickey, editor of the High-Tech Strategist, tells Barron’s that an explosive rally in gold seems imminent based on the massive bearish sentiment towards gold.  Long term, Hickey sees gold hitting at least $5,000 per ounce, a target that Gold and Silver Blog also sees as a very reasonable future price target.

Hickey: I am recommending gold, as I have done for many years. I will continue to do so until the gold price hits the blow-off stage, which is nowhere in sight. I am excited about gold because sentiment is so negative. Gold could have a sharp rally at any time. The Hulbert Gold Newsletter Sentiment Index went deeply negative last week, indicating that gold-newsletter writers are recommending net short positions. When that happens, gold almost always rallies. The daily sentiment index for gold is at a 12-year low. Short positions by large speculators have doubled in the past few months. Sales of American Eagle coins hit a five-year low in 2012. Yet, the environment for gold couldn’t be better. We talked today about massive money-printing by all the major central banks. Real interest rates are negative. These are the best possible conditions for a gold rally.

Felix said gold could rally to the $1,800-an-ounce level, and I agree. If it breaks that, it will go to $2,000 or more. As long as we have unlimited quantitative easing, we have the potential for unlimited gains in the gold price. Gold could go to $5,000 or even $10,000. You can buy gold through the GLD or IAU, as we discussed. This year I recommend physical gold. You can buy American Eagle coins, or gold bars. Everyone should have some physical gold, and almost no one in the U.S. does.

Hickey also says that the price of gold is nowhere near a “blow off stage”, despite constant mainstream press reports of gold’s imminent collapse.  For further discussion on this see The Gold Bubble Myth and Why There Is No Upside Limit For Gold and Silver Prices.

Nine Reasons Why You Must Own Gold

By: Deviant Investor

american-gold-eagle-coins

    • Gold has been real money (medium of exchange and a store of value) for over 3,000 years. It is still real money.
    • Gold has no counter-party risk. It is not someone else’s liability. It has intrinsic value that is recognized around the world.
    • ALL paper money systems have eventually failed. The intrinsic value of paper money is effectively zero; and all paper money has, throughout history, eventually devalued to zero.
    • Paper money is a liability of a central bank or a government that may be insolvent. The money issued by a central bank or government has value based NOT on its intrinsic value, but only upon people’s faith, trust, and confidence in that money. Occasionally that faith and confidence is misplaced. For example:

zimbabwe

    • The price of gold in US dollars since the year 2001 has been strongly correlated with the ever-increasing official national debt of the United States. Read $4,000 Gold! Yes, But When? Does anyone believe that the national debt will decrease or even remain constant over the next several years? NO! The national debt will increase even more rapidly over the next four years and so will the price of gold. Skeptical? Then look at the chart of national debt and the nearly parallel price of gold. Still skeptical? Do you remember gasoline selling for less than $.20 per gallon and gold selling for about $40? They have increased in price because there are currently many more dollars in circulation than in the 1960s – hence, it takes more dollars to buy an ounce of gold, a gallon of gasoline, a loaf of bread, a cup of coffee, or a fighter jet.

Click on image to enlarge.
  • Because governments and central banks issue paper money backed by nothing but faith and credit, they are in competition with gold which is real money. Should we be surprised when they discount the importance of gold and discourage ownership? Should we be surprised when the “Oracle of Omaha” denigrates gold ownership? (Berkshire Hathaway holds huge positions in banking stocks and Goldman Sachs stock.) Should we be surprised when news stories are heavily slanted against gold ownership?
  • Groucho Marx once said, “Who are you going to believe, me or your own eyes?” Who are you going to believe – the history of gold as valuable money while paper money failed, or the pronouncements of politicians, central banks, and the owners of bank stocks?
  • Who and what do you believe? It will be important to your financial well-being if (when) paper money accelerates its journey toward an intrinsic value of zero.
  • Are you going to believe history and current facts or less reliable information from politicians, central banks, and the owners of bank stocks?

GE Christenson
aka Deviant Investor

Gold At $10,000 – Silver At $400 – Here’s How It Will Happen

By GE Christenson:

This is not a prediction of future prices of gold and silver; it is an indication of what could happen in a speculative bubble environment based on the history of previous bubbles.

I’ll summarize a simple analysis of past bubbles.

Definitions

    • Bubble: A speculative mania in a market that is priced well beyond what the fundamentals and intrinsic value indicate.
    • Phase 1: The first phase of the bubble begins with the price bottoming and initiating a long rally. It is often indicated by a triggering event such as Nixon closing the “gold window” on August 15, 1971 – the beginning of the gold and silver bubbles that terminated in 1980. The market rallies for some years, hits a new “all-time” high, and then corrects.

When the market proceeds into a bubble phase, it rallies beyond that new high and continues much higher. The end of phase 1 and the beginning of phase 2 are the point at which the market rallies from its correction low and exceeds its previous high. See the graph of the silver market with the indicated beginning and end points for phase 1 and phase 2.

  • Phase 2: The final phase of the bubble starts when the price exceeds the “new high” and then rallies to a much higher and unsustainable level.

Click on image to enlarge.

I looked at the time and price data for the South Sea Bubble in England from 1719 -1720, the silver bubble from August 1971 to January 1980, the NASDAQ bubble from August 1982 to March 2000, the Japanese Real Estate bubble from 1965 to 1991, the gold bubble from August 1971 to January 1980, and the S&P mini-bubble from August 1982 to March of 2000. A spreadsheet will not display well, so I’ll list my results. Please realize that all prices and dates are approximate – this is “big picture” analysis.

The conclusion is that bubbles start slowly and then accelerate to unsustainable highs (on large volume) that are largely created by greed and fear but not fundamental evaluations. Bubbles generally follow the “Pareto Principle” where approximately 80% of the price move occurs in the LAST 20% of the time. Consider:

South Sea Bubble: (Extreme price bubble)

  • Phase 1: January 1719 to March 1720. Price from $120 to $180.
  • Phase 2: March 1720 to July 1720. Price from $180 to $900.
  • Time: Phase 1 – 75%, phase 2 – 25%.
  • Price: Phase 1 – 8%, phase 2 – 92%. Phase 2 price ratio: 5

Silver Bubble: (Extreme price bubble)

    • Phase 1: August 1971 to March 1978. Price from $1.50 to $6.40.
    • Phase 2: March 1978 to January 1980. Price from $6.40 to $50.
    • Time: Phase 1 – 78%, phase 2 – 22%.
    • Price: Phase 1 – 10%, phase 2 – 90%. Phase 2 price ratio: 7.8

 

NASDAQ Bubble: (Extreme price bubble)

    • Phase 1: August 1982 to February 1995. Price from $168 to $780.
    • Phase 2: February 1995 to March 2000. Price from $780 to $4,880.
    • Time: Phase 1 – 71%, phase 2 – 29%.
    • Price: Phase 1 – 13%, phase 2 – 87%. Phase 2 price ratio: 6.3

 

Japanese Real Estate Bubble: (approximate numbers)

    • Phase 1: 1960 to 1979. Price Index from 4 to 50.
    • Phase 2: 1979 to 1991. Price Index from 50 to 225.
    • Time: Phase 1 – 61%, phase 2 – 39%.
    • Price: Phase 1 – 21%, phase 2 – 79%. Phase 2 price ratio: 4.5

 

Gold Bubble:

    • Phase 1: August 1971 to July 1978. Price from $40 to $200.
    • Phase 2: July 1978 to January 1980. Price from $200 to $870.
    • Time: Phase 1 – 82%, phase 2 – 18%.
    • Price: Phase 1 – 19%, phase 2 – 81%. Phase 2 price ratio: 4.4

 

S&P Bubble: (Mini-bubble)

    • Phase 1: August 1982 to February 1995. Price from $100 to $483.
    • Phase 2: February 1995 to March 2000. Price from $483 to $1,574.
    • Time: Phase 1 – 71%, phase 2 – 29%.
    • Price: Phase 1 – 26%, phase 2 – 74%. Phase 2 price ratio: 3.3

 

Summary

Bubbles tend to follow the 80/20 ratio indicated in the Pareto Principle. Phase 1 takes approximately 70-80% of the time and covers approximately 10-20% of the total price change. Phase 2 accelerates so that it takes only 20-30% of the time but covers 80-90% of the price change. Extreme bubbles such as the South Sea Bubble and the Silver bubble experience approximately 90% of the price change in the 2nd phase. The ratio of the phase 2 ending price to beginning price is typically 4 to 8 – a huge price move. Such bubbles are rare; the subsequent crash is usually devastating.

Future Bubbles

In the opinion of many analysts, sovereign debt is an ongoing bubble that could burst with world-wide consequences. Should deficit spending and bond monetization (Quantitative Easing) accelerate in the next several years, as seems likely, that sovereign debt bubble will inflate further. Because of the massive printing of dollars, the value of the dollar must fall, particularly against commodities such as oil, gold, and silver. As the purchasing power of the dollar falls, an increasing number of people will realize their dollars are losing value, and those people will seek safety for their savings and retirement. Gold and silver will benefit from an increasingly desperate search for safety as a result of the decline of the dollar. Assuming the 80/20 “rule” and the phase 2 price change ratio of approximately 5, what could happen if gold and silver rise into another speculative bubble?

Assume that silver began its uptrend in November 2001 at $4.01 and that gold began its move in April 2001 at $255. Silver rallied to nearly $50 in 2011, and gold also rallied to a new high of about $1,900 in 2011. Assume that both surpass those highs about mid-2013 and accelerate into phase 2 thereafter. Using these assumptions, phase 1 for silver would measure 12.5 years and phase 2 could last until approximately late 2016 – early 2017. If we assume that phase 1 was a move from $4 to $50 and that represents 19% of the total move, the high could be around $250. The ratio of phase 2 ending price to beginning price would be 5:1 – reasonable.

Indications for gold suggest a similar end date and a phase 2 bubble price of perhaps $9,000 per ounce. The ratio of phase 2 ending price to beginning price would be 4.7:1 at $9,000.

The gold to silver ratio at these bubble prices would be approximately 36, much higher than the ratio from 1980. Perhaps silver would “blow-off” higher, like it did in 1980, and force the gold to silver ratio lower or perhaps gold might not rally so high. Time will tell.

Outrageous?

Well, yes, at first glance, those prices do seem outrageous. But consider for perspective:

  • Apple stock rose from about $4 in 1997 to over $700 in 2012.
  • Silver rose from $1.50 to $50.00 in less than 10 years.
  • Gold rose from about $40 to over $850 in less than 10 years.
  • Crude oil rose from less than $11 in 1998 to almost $150 in 2008.
  • The official US national debt is larger than $16,000,000,000,000. The unfunded liabilities, depending on who is counting, are approximately $100,000,000,000,000 to $230,000,000,000,000. Divide $200 Trillion by approximately 300,000,000 people and the unfunded debt per capita of the United States is approximately $700,000. That is outrageous!
  • The official national debt increases in excess of $3,000,000,000 per day, each and every day. The unfunded liabilities increase by perhaps five – ten times that amount. Outrageous!
  • We still pretend the national debt is not a problem and that it will be “rolled over” forever. That is outrageous.
  • Argentina has revalued their currency several times in the last 30 years – they have dropped 8 zeros off their currency since 1980. Savings accounts and the middle class were devastated several times. It can happen again.

Given the above for perspective, is gold at $5,000 to $10,000 per ounce unreasonable or impossible? Is silver at $200 to $400 per ounce unreasonable or impossible? Past bubbles have had an ending price 4 – 8 times higher than the phase 2 beginning price, so history has shown that such prices for gold and silver are indeed possible. Possible is not the same as certain – but these bubble price indications are certainly worth your consideration.

Would you prefer your savings in gold, silver, or a savings account? Read Ten Steps to Safety.
GE Christenson
aka Deviant Investor

Gold and Silver Will Protect You From The Looming Financial Hurricane

By: GE Christenson

What Storm?

  • A hurricane of digital money created by central banks to purchase government debt and other dodgy assets from banks.
  • A tidal wave of deficit spending by governments around the world. It continues, regardless of whether you call it business as usual, stimulus, payoffs, or bailouts.
  • A perfect storm of derivatives – the weapons of mass financial destruction that continue to plague our financial system – but make $Billions (Maybe $Trillions) in profits for the huge banks.
  • A tornado of bailouts, giveaways, loans, and currency swaps from the Federal Reserve to backstop banks, politically connected individuals and corporations, European governments and others.
  • An approaching thunderstorm of new and higher taxes – perhaps a carbon tax, a VAT, and a wealth tax. We hope most of these will be downgraded to a hot air disturbance.
  • A tsunami of Japanese Yen based on the election of Prime Minister Abe and his avowed intention to weaken the Yen.

Why Do We Need Shelter?

  • Derivatives involve huge counter-party risk. The international financial system seems increasingly shaky. Those derivatives might be triggered by a Greek government default, another Lehman-like implosion, or a “black-swan” event that causes derivative contracts be paid. Will the counter-parties be able and willing to pay as required? Was sufficient margin set aside to protect all those derivative contracts? Doubtful!
  • It seems that the $700 Trillion in derivatives is largely based on $70 Trillion of sovereign debt, much of which is of marginal quality. When the collateral is worth less than face value, the derivative is worth considerably less than face value, or perhaps nothing.
  • Medicare and Social Security costs to the US government are huge and increasing. More deficits and accelerating national debt will be the result.
  • Will the dollar weaken against other currencies? Will the bond bubble finally burst?
  • Consumer price inflation is here and increasing.

Where Is The Shelter?

The problems are unbacked paper assets, excess debt, too much government spending, massive government deficits, derivatives that could implode, and lack of political will to correct the problems. We need a shelter that will minimize these risks.

One shelter is to divest out of paper assets and into gold and silver bullion and coins, land, farms, hobby farms, diamonds, and other physical assets. If you must stay in paper, consider using ETFs for crude, grains, sugar, gold, silver and other commodities. Read Ten Steps to Safety.

Conclusions

The investment world is increasingly dangerous. Few understood in late 1999 that an epic crash in the NASDAQ was about to occur. Housing crashed despite a wide-spread belief that real estate always goes up. There are several candidates for another crash – sovereign debt, derivatives, and the dollar.

We can depend less upon the safety of paper assets. We can depend less upon 1′s and 0′s on a financial server that claim we have assets in a brokerage account. When your government is seeking revenue, your assets are less safe. As Doug Casey says, your government currently sees you as a milk cow but may eventually view you as a beef cow.

Give your savings and retirement a chance to preserve their purchasing power. Minimize currency risk, find an alternative to a CD that pays 1% per year or a 30 year bond that pays about 3% per year for 30 years and is guaranteed to be repaid with increasingly depreciated dollars. Gold from 1/1/2000 to 1/1/2013 (13 years – from $282 to $1,655) has increased at a compounded rate of 14% per year. You have choices!

Doug Casey believes we are currently exiting the eye of the financial hurricane that started with the financial crisis of 2008 and that the next phase of the financial storm is imminent. Assets could be “blown away,” and supposedly safe structures might collapse in the financial winds of change.

If the financial hurricane is downgraded to a minor storm, you will still be sheltered in gold, silver, and other physical assets and have lost nothing. However, if the hurricane destroys many paper assets, then gold and silver will shelter you until the storm wreckage is cleared and financial life begins anew.

GE Christenson
aka Deviant Investor

Gold Is The Only Asset With No Counterparty Risk

By: Axel Merk

While the introduction of a trillion-dollar coin has been shrugged off as nonsense, there are plenty of nonsensical concepts employed in our monetary system. Here we’ll shed light on a few of them.

Governments – or their central banks – can print a $100 bill. The value of such a piece of paper is worth exactly as much as the supply and demand of a currency dictates. Dollar bills are legal tender for payment of debt, but if someone does not like that the $100 bill is not backed by anything, then anyone is free to decline a $100 bill in exchange for services, and barter instead.

The problem arises when the government decrees that something is worth a certain amount, unless it becomes the basis of the government’s entire framework of reference, as in a gold standard. In my humble opinion, no one, let alone a government can precisely value anything. The value of goods, services, even debt, is in the eye of the beholder, and varies based on supply and demand:

  • Consumers buy goods or services because they believe they are “good value;” in other words, they only exchange money for goods in a deal where they see themselves benefiting. Consumers should not blame companies for “over-priced” goods or services; they should blame themselves for paying such prices.
  • The perception of what is good value varies from person to person. What may be a must-have $80 a month cable TV subscription, may be a waste to others. It also varies over time, as some may deem a vacation well worth the money during good times, but rather stay at homes when times are tough.
  • When monopolies or governments impose prices, distortions, such as supply disruptions can occur. Or conversely, when the government keeps the price of fuel artificially low, it can significantly erode the government’s ability to provide other services, possibly even bankrupt it.

The market currently prices platinum at over $1,600 a troy ounce. If the Treasury were to decree that a specially minted coin is worth $1,000,000,000,000 instead, no rational person would want to buy it. The argument is that the Federal Reserve could be coerced into accepting it at face value, crediting the Treasury’s account at the Fed with $1 trillion for it to spend. In our view, such a move, if it were upheld in the courts, would:

  • Highlight the not so well known fact that the Federal Reserve (Fed) does not mark its holdings to market. The lack of mark-to-market accounting leading up to the financial crisis is a key reason why the financial system was brought to its knees in 2008. A major loss at the Federal Reserve, such as writing down a $1 trillion coin to $1,600 may not be too worrisome for those that know that even a negative net worth won’t render a central bank inoperative. However, losses at the Fed would deprive the Treasury of what has become an annual transfer of almost $90 billion in “profits” (see MerkInsight Hidden Treasury Risks?).
  • Dilute the value of the dollar. If the Treasury whips up an additional trillion to spend through trickery, odds are that a trillion would no longer be worth what it used to be.

But wait, $1 trillion is already not worth what it used to be, and a $1 trillion coin has not even been minted. And I’m not talking about our grandparents: who had ever heard of trillion dollar deficits before the financial crisis? The Federal Reserve holds just under $3 trillion in assets, up by over $2 trillion since early 2008. When the Federal Reserve engages in “quantitative easing”, QE, QE1, QE2, QE3, QEn or however one wants to call it, the Fed buys securities (mortgage-backed securities, government bonds) from large banks, then credits such banks’ accounts at the Fed. Such credit is done through the use of a keyboard, creating money literally out of thin air. Even Fed Chair Bernanke refers to this process as printing money, even if banks have not deployed most of the money they have received to extend loans. However, the more money the Fed prints, the more debt securities it buys, the greater its income; it’s that argument that has allowed Bernanke to claim that his operations have been “profitable,” neglecting to state that such money printing may pose significant risks to the purchasing power of the dollar.

Note that we don’t need the Fed. Amongst others:

  • If the Treasury wants to issue debt, it can do so without the Fed.
  • If the Treasury wants to manage the maturity of the outstanding government debt portfolio, it can do so without the Fed’s
  • Operation Twist.

Congress and the Administration love the Fed because it is an off-balance sheet entity for the government with special features; the Fed has ‘unlimited resources’ (it can print its own money); and the Fed can have a negative net worth without defaulting.

The way a trillion dollar coin could work is if not just one, but all platinum coins of the same fine ounce content (say one troy ounce) were decreed to be worth $1 trillion. It would be the re-introduction of a gold, well, platinum standard, as it would link the value of a precious metal to the value of the currency. The government would quite likely want to punish any speculators that are front-running the idea of valuing platinum at $1 trillion, possibly even outlawing private ownership. But it would put the value into context and anyone could buy a substitute. Pricing of all goods and services would adjust to reflect the new value of $1 trillion for a troy ounce of platinum. In plain English, such a move would substantially move up the price level.

We deem the re-introduction of a precious metals standard to be rather unlikely, precisely because it takes away the power of Congress to spend: it could only spend money if it got hold of more platinum. Unless, of course, Congress realizes that it may get away with not backing all of the currency with platinum or resets the price of a platinum coin yet again. Soon enough, the “platinum window” would be closed again, just as Richard Nixon closed the gold window in 1971. Let’s call it a coincidence Nixon would have turned 100 years old this year, just as the Federal Reserve is celebrating its 100th anniversary.

While most agree that a $1 trillion platinum coin is a silly idea, few think that a $100 bill is also absurd. There are indeed key differences:

  • $100 bills are all one and the same. Well, almost. In some developing countries, newer bills are worth more than older ones (because of counterfeit bills in circulation).
  • A platinum coin has intrinsic value: its fine ounce content of platinum. In contrast, the $100 bill is worth the paper it is printed on.

To be precise, a $100 bill is a Federal Reserve Note:

  • The holder of a $100 bill may deposit such bill into his or her account.
  • The bank can deposit the $100 bill at the Fed. In turn, the Fed will credit the bank with $100 in checking account.
  • The bank can withdraw the deposit of $100 from the Fed.
  • The bank account holder can withdraw $100 from the bank yet again.

Importantly, the $100 is always an obligation: an obligation of the bank, the government (through FDIC insurance in case of default of the bank) and the Fed (currency in circulation appears on the liability side of the Fed’s balance sheet). Most currency is not issued in paper, but in electronic form. Banks receiving a $100 electronic credit can, through the rules of fractional reserve banking, lend out a multiple of such deposits. Because of this, currency always carries counter-party risk. By regulation, if the counter-party is the Federal Reserve or the Treasury, it is considered to be risk-free. But it’s still a debt security. Moreover, the rating agency Standard & Poor’s does not consider US debt risk-free, having downgraded it because of the dysfunctional political process in addressing the long-term sustainability of U.S. deficits.

In contrast, a coin in itself does not have counter-party risk. It’s a coin with intrinsic value. If a government decreed a value onto that coin, there’s a risk that such decree may change or be undermined.

Precious metals coins may be considered barbarous relics, but at least they do not carry counterparty risk. Indeed, we like the fact that gold in particular has comparatively little industrial application, making it a pure play on monetary policy.

So what is an investor to do? In our opinion, investors must gauge for themselves what something is worth, rather than rely on a government. That applies to the dollar as much as it does to a platinum coin or any security. Notably, forget about the notion that something is risk-free. Those trusting their governments to preserve the purchasing power of their savings will be the losers. Those throwing out the risk free component in their asset allocation models may well come out with fewer bruises.

And while the gold standard has some admirable features, democracies tend to favor spending over balancing books. Over the past 100 years, we have moved further and further away from the gold standard. While a collapse of the fiat monetary system might temporarily get us back on a gold standard, don’t trust a government to take care of you. In practice, this means that investors need to create their personal frame of reference as to how to deploy investments; rational investors are unlikely to mint a personal $1 trillion coin, realizing that no one would pay $1 trillion for it. It also means there is no single safe haven during times of crisis. The fact that precious metals have no counter-party risk is an attractive feature, but don’t kid yourself: if your daily expenses are in U.S. dollar, the value of your purchasing power will fluctuate. Investors must be able to sleep at night with their investments; if not, consider reducing your exposure.

Is volatility with regard to the U.S. dollar an argument against owning precious metals? No, but one needs to be keenly aware of the risks of any investment, including perceived safe havens. To manage the risk to the U.S. Dollar, investors may also want to consider actively managing dollar risk. Please join our Webinar this Tuesday, January 15, 2013, that focuses on our outlook for the dollar, gold and currencies for 2013. Please also sign up for our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies.

Axel Merk

Axel Merk is President and Chief Investment Officer, Merk Investments.

Merk Investments, Manager of the Merk Funds.

Non-Predictions For Gold and Silver

 

Non-Predictions for 2013 and 2014

A train wreck is in process. We have been warned. Protect your finances, investments, and retirement. The official numbers may not represent reality.

By: GE Christenson

More of the Same

  • More money printing by central banks. A trillion here and a trillion there, printed money everywhere.
  • More deficit spending. $3 Billion per day, but who cares?
  • More useless commentary about controlling spending, but the result will be increased spending and more useless commentary.
  • More and higher taxes. More consumer price inflation.
  • More QE. Printing money props up the stock market, but for how long?
  • More debt. More student loans, more credit card debt, more mortgages, more sovereign debt, and eventually some nasty defaults.

Less of the Same

  • Less Congressional credibility – low and going lower.
  • Less belief in a better future. It is difficult to believe in a brighter future when the food stamps and welfare payments just don’t buy what they used to.
  • Less employment. People continue to drop out of the employment statistics because they have given up hope of finding work. This is called “structural unemployment.”
  • Less purchasing power for the dollar. The more the central banks print, the higher the cost of food, fuel, beer, and wine.
  • Lower standard of living. With much higher costs, the standard of living for most Americans will continue to decline.

About the Same

  • The media will continue to assure us that gold is in a bubble – a decade of nonsense – wrong then and wrong now.
  • The media will assure us that silver prices are volatile. That and $2.11 will buy a grande coffee.
  • Inflation and unemployment will continue to be under-reported, even in non-election years.
  • Congressional accomplishments will continue to be over-reported.
  • SNAFU: System Non-functional, All Funding Unlimited.
  • TBTF banks will remain Too Big To Fail.
  • European financial troubles will continue. Ditto for Japan, the UK, and the US.
  • The Federal Reserve will bail out banks and fund much of the government deficit. They will claim this benefits both employment and the economy. That benefit plus $2.11 will buy a grande coffee.

GE Christenson
aka Deviant Investor