December 3, 2022

Americans Remain Tragically Underinvested In Gold And Silver

As predicted many times in this blog, the over indebted and over leveraged world financial system is starting to unravel at warp speed.   Massive amounts of  borrowing by governments during the financial meltdown of 2008 has effectively put many sovereign states at the limits of their borrowing ability.

A rapidly contracting economy and job losses will result in a flood of defaults in the private sector by both businesses and individuals.  A vicious self reinforcing cycle of defaults will cause major banking failures that a bankrupt FDIC will be unable to contain.  Banking holidays will become routine, the jobless rate will triple, the middle class will face financial destruction and social unrest will explode across the country.

Crushing levels of debt will be the trigger that causes an economic depression that will make the 1930’s look like a minor recession.  Eventually, the creative destruction of capitalism (as described by economist Joseph Schumpeter) will extinguish debt burdens through defaults, allow for economic recovery and the creation of new wealth.  The downside to recovery through creative destruction, however, is that existing wealth is mercilessly devalued as paper based asset wealth is destroyed.  At this point, which would you prefer to own – a pile of paper dollars or a stack of American Gold Eagles?

The ultimate restructuring of a fiat based monetary system to one backed by more than promises is inevitable.  The timing of the event is the only open question since governments will use every power, legal or otherwise, to prevent the scenario described above.  Unfortunately, for holders of paper financial assets, the only viable option available for governments at this point are the printing presses.  The ocean of paper currencies that will be printed to “save the system” will debase paper financial assets, reducing their purchasing power to virtually nothing.

Gold, the only enduring currency, has been forecasting a financial crisis for the past decade and especially since 2008.  As economic Armageddon looms, however, most Americans remain tragically under invested in gold and silver.  Conventional financial planners and investment advisers recommend a zero or minor position in precious metals even as gold steadily outperforms stocks, bank savings and other financial assets.

 

S&P vs Gold - courtesy yahoo finance

Making matters worse, many Americans are selling the little amount of gold and silver that they do own as the conventional press publishes “gold bubble” articles every time gold hits a new high.  As reported in coinupdate.com, one major dealer reports that:

As for the general public, they have been selling jewelry by the droves this past week.  On Tuesday, my companies set a record going back more than 30 years for the most number of purchases from the public in a single day.  We broke that record Wednesday and weren’t that far from another all-time record on Thursday.  The main pieces that customers have brought to us have been gold jewelry.  The amount of silver and platinum jewelry has remained steady.

We talk with dozens of coin dealers around Michigan and the country every day.  They are reporting the exact same pattern of activity as we are experiencing.

Perhaps many of these sellers are dumping their gold jewelry due to economic duress, but if they were expecting gold to continue to soar higher, they would not be selling.  The bull market in gold and silver is just beginning and those who hold significant positions will preserve and expand their wealth.

Gold Soars Past $1,700 As Debt Crisis Spirals Out Of Control

Gold soared to a new all time high over $1,700 in Asian trading after the credit downgrade of  the United States by Standard & Poors and news that the ECB would conduct large scale purchases of Italian and Spanish bonds. These two event have escalated the debt crisis in Europe and the United States to a new dangerous level.  Investor confidence has been shattered in both equity and bond markets as events seem on the verge of spiraling out of control.

The European Central Bank has been unable to form a coherent strategy to deal with the debt crisis and the Federal Reserve seems to be running out of policy options.  The governments that “saved the world in 2008” through massive fiscal and monetary stimulus now need to be saved themselves.

The relentless rise of gold since the financial crisis began reflects the increasing risk of sovereign defaults and  the rampant debasement of paper money.  The gold market is effectively a report card on the failed policies of governments and the grade is an F.

Gold - courtesy kitco.com

The response by U.S. policy makers to the S&P downgrade reflects a dangerous disconnect from reality and political posturing.  In a shoot the messenger response, Treasury Secretary Geithner said that S&P used “terrible judgment” and have “shown a stunning lack of knowledge about the basic US fiscal budget math”.  A more realistic assessment of the US debt downgrade came from investor Jimmy Rogers who said two months ago that “America should already be downgraded. It should have been downgraded years ago. These people, the rating agencies, have got it wrong for 10-15 years now. America is bankrupt”.

The Federal Reserve, which could not recognize the housing bubble, has also been at a loss to deal effectively with the debt crisis.  Consider Bernanke Models Prove Faulty:

“We haven’t had any historical event that really would allow us to reliably statistically calibrate an event like the one we’ve had,” David Stockton, director of the Fed’s Division of Research and Statistics, who has overseen forecasting for a decade, said in an interview at the end of June. “There isn’t going to be a simple story here.”

Stockton calls the 2007-2009 period “an unprecedented financial crisis in the lives of almost every economic agent.”

“That had profound effects on people’s balance sheets, on their spending, and their impetus to deleverage,” he said in the interview. “Something beyond transitory factors are at work.”

Suite of Models

The suite of models used by Fed staff to forecast changes in consumption and investment rely to some extent on past relationships between interest rates, income, and profits. Most also assume credit will be supplied and demanded at a given price or interest rate. Without adjustments, they revert to the mean — after a period of slump they begin to point upward, in line with previous recoveries.

All of those tendencies have made the models less trusty guideposts for what is happening in the current recovery. The staff has to venture judgments and explore new analyses.

“Something new and different is going on,” said Allen Sinai, chief global economist at Decision Economics Inc. in New York. “Neither monetary nor fiscal policy is giving us the kind of bang we have traditionally got. The household sector is simply not spending as it has in the past.”

Ordinarily, monetary policy works by making borrowing cheaper so households and businesses can access credit and keep their consumption stable through an economic slump. Now, that channel is less effective.

Banks have raised lending standards, and the private sector’s expectations about consumption may be shifting to a lower path, said Julia Coronado, chief economist for North America for BNP Paribas in New York, who worked for Stockton from 1997 to 2005.

“This is a standard-of-living shock,” Coronado said. “What we thought we could afford, and what we leveraged to, is much more than we can afford at present and in the future.”

In other words, the problem is too much debt, and the Fed’s response has been to encourage more debt by dropping interest rates to zero and printing money.  As long as the Fed continues its failed policies, the price of gold will continue to soar.

 

 

Gold Hits New Record High As U.S. Spirals Towards Default

Gold reached all time record highs in Asian trading as legislators in Washington reached an impasse on raising the U.S. debt limit.  Immediate delivery gold soared to $1,624 before pulling back to $1,617.90, up $16.60.

The ongoing fiasco in Washington over increasing the U.S. debt limit has brought into focus the extent to which the United States has become addicted to deficit financing.  Increasing the debt limit to avoid default has become a side issue to worries over the long term ability of the United States to honor its obligations without debasing its currency.

The White House request to increase the debt limit by an astronomical $2.4 trillion, to tide us over for another year and a half, has convinced many investors that a debt downgrade is imminent.

Standard and Poors has already warned that the credit rating of the US might be downgraded regardless of whether a default is averted.  The head of the world’s largest bond fund also predicts that the US will lose its triple AAA rating regardless of how the debt limit issue is resolved.  According to Bloomberg,

“In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,’’ El-Erian, the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco, wrote in an e-mail.

The highly polarized negotiations going on in Washington reflect the ultimately self destructive nature of democracies.  Voters have collectively elected a political class who have promised benefits that are financially impossible to honor.  The tipping point has been reached and the political will to fix the problem is overridden by numerous special interest groups who demand that their benefits be preserved and increased.  In a collective pact of economic suicide, voters are demanding benefits from a wealth redistribution scheme that will eventually make all of us equally poor.

Writing in the Wall Street Journal, Arthur Brooks discusses whether the welfare state in the US has reached the tipping point.

The Bureau of Economic Analysis tells us that total government spending at all levels has risen to 37% of gross domestic product today from 27% in 1960—and is set to reach 50% by 2038. The Tax Foundation reports that between 1986 and 2008, the share of federal income taxes paid by the top 5% of earners has risen to 59% from 43%. Between 1986 and 2009, the percentage of Americans who pay zero or negative federal income taxes has increased to 51% from 18.5%. And all this is accompanied by an increase in our national debt to 100% of GDP today from 42% in 1980.

In the other scenario, our welfare state slowly collapses under its weight, and we get some kind of permanent austerity after the rest of the world finally comprehends the depth of our national spending disorder and stops lending us money at low interest rates. (Think Greece.)

John Sununu, writing in this week’s Time Magazine, makes a similar point.

We all know the nation’s budget is huge, but nothing drives the point home like the number of Americans receiving financial support. Add Medicaid, farm payments, housing subsidies and others to the list, and roughly 47% of all Americans are receiving at least one federal benefit. Tax preferences, like the deductions for mortgage interest, retirement savings and health care, bring the number closer to 75%. The dirty little secret about America is that being on the dole is no longer an exception but the rule.

Voters are characterized according to the programs from which they benefit.  Instead of Americans, we are retires, veterans, farmers, teachers, investors and students.  We have become a nation of spending constituencies.

The entire developed world has taken on financial obligations that are impossible to meet and no longer possible to finance, as we have seen in Greece, Portugal and Ireland.  The relentless rise in the price of gold reflects the desperate efforts of social welfare states to meet their obligations through currency debasement and ballooning deficits.

Jim Rogers, in a Bloomberg podcast, said it best – “I have not sold any gold, I have bought more gold.  If gold goes down I’ll buy more. The price of gold is going to go much, much higher over the next decade.”