Jeff Clark, Senior Precious Metals Analyst, GoldSilver
OCT 27, 2016
Why do you own gold and silver?
We’d all cite our own specific reasons, but I’d be willing to bet the basis of those reasons mostly center around one thing.
To give you a hint, what do all of the following items have in common?
Quantitative easing (money printing)
Government debt (inability to spend within your means)
Government deficits (inability to balance a budget)
Negative interest rates (bonds that are guaranteed to lose money)
Excessive credit (another form of money creation)
I’m sure you got it: government leadership. Politicians and central bankers are at the center of all these issues. They’ve miscalculated, manipulated, and mismanaged virtually every key part of our economy and monetary system. Would the stock market otherwise be as high as it is? Would bonds be in a super bubble?
Worse is to consider the fallout from their actions. For example, would the real estate and stock markets have crashed so hard if our leaders hadn’t pushed rates unnaturally low? There are dozens of questions like this we could ask.
It’s maddening to realize this sober fact:
Our personal net worth has been directly impacted by the actions of politicians and central bankers.
You might think they have done some good things—maybe you think they headed off a depression in 2008—but is there really such a thing as a free lunch? Any honest assessment of our fiscal, economic, and monetary state has to acknowledge that their “solutions” have set us up for a potentially bigger crisis.
To give you a sense for just how out of control these interventions and manipulations have gotten, I compared the dollar value of each to gold. And not just new gold supply, but all the gold ever mined by mankind. Take a look:
Every strategy employed by global leaders—most of which has occurred just since 2008—dwarfs the entire value of all above ground gold.
And this isn’t even a fair comparison. Only roughly 45% of “all the gold ever mined” is actually in investable form (bars and coins). That yellow bar in the chart would be barely visible if we used just investment gold. It’s equally unfair that I’m comparing all the gold ever dug up to actions that have mostly occurred in just the past eight years.
Look at the facts about these government interventions and ask yourself if you might need an overweight allocation to gold and silver at this point in history…
US Bailouts: The Federal Reserve isn’t currently printing money, but in the roughly 4-year span it did, the currency creation was more than double the value of all the gold ever dug up. It didn’t lead to immediate inflation, but neither did it go away. Be careful assuming it won’t circulate.
US MZM: MZM is one of the preferred measures of “money supply” because it represents currency readily available within an economy for spending and consumption. (For you technical types, MZM is all money in M2 less time deposits, plus all money market funds.)
The amount of US currency floating around is almost three times bigger than the value of all the gold ever mined from all sources. It is six times bigger than all the investable form of gold that exists. If we compared the value of all existing currencies to gold, its figure would be above your head and gold’s at your feet.
Gold can’t be debased or created out of thin air. Its value is timeless, while currency continually erodes. When the next crisis hits, some of this massive amount of currency will naturally flock to gold.
US Debt: Debt in America has soared in recent years, and will hit an unfathomable $20 trillion by year end. It’s approaching four times the size of all the gold ever dug up.
The thing to understand about this level of debt is that mathematically, it can never be repaid (at least in current dollars). So what happens—do we just keep adding to our debt indefinitely, with no ramifications whatsoever? That would seem a rather foolhardy conclusion to draw. I rather think this carefree train ride politicians are conducting will sooner or later run out of track.
Negative Interest Rates: Savers are supposed to be compensated when they loan money. But in much of the developed world, it is the lender paying for the privilege of letting governments borrow their cash. Let’s just say it: this is Grade-A stupidity.
And the above chart isn’t even a fair comparison. More accurate would be the value of the last two years of negative rate bonds (which is when most of them have been created) vs. the last two years of gold supply:
The more concerning issue about negative rates is this: they’ve never happened before in recorded history! Professor Richard Sylla and Sidney Homer studied this in their book, “The History of Interest Rates.” Mr. Sylla stated that in their book there are “precious few minus signs before any rates.” The only ones he knows of were on US Treasury bills around 1941, just before Pearl Harbor. However, “later research showed that anomaly might be explained by an option value embedded in bills then, so the negative yields may have been an artifact.”
That means, as Mr. Sylla puts it, “there were no negative bond yields in 5,000 years of recorded history.”
The natural question then becomes, what’s the end game to all these negative rate bonds? We don’t know—and that’s the point. There is no historical precedence we can point to. The ramifications are unknown. Would it be reasonable to assume we escape any negative fallout? Or would it be more reasonable to assume that this poses an unknown and heightened risk that we should protect against?
Total Worldwide Bailouts: Europe and Japan are printing so much money right now that it exceeds what was printed by all central bankers in 2009! Again I ask: is this a free lunch? No ramifications, no fallout—only colorful rainbows and smiling unicorns?
Global Debt: Many people know that government debt is too high. But it’s worse than many understand: global debt is now growing at a faster pace than it did from 2008 to 2010! The 10 biggest central banks now have $21.4 trillion on their balance sheets, already 10% more than the end of last year… their combined holdings grew by 3% or less in both 2015 and 2014.
Add it all up and ask yourself…
Would you own as much gold and silver as you do if there were no money printing… no budget deficits… no negative rate bonds… if debt levels were falling instead of rising? These actions are the core reason I own gold and silver today. They represent an ever-growing risk of a debilitating fallout.
Will Your Net Worth Fall in the Next Crisis—or Climb?
It isn’t just that we’re at high risk of another crisis. It’s how government will respond to that crisis.
Unfortunately, when the next crisis hits—whether it’s a mild recession or a full-blown deflation as Mike predicts—politicians and central bankers will react in the only way they know how: spend, borrow, print, and debase. This is what they’ve done for centuries.
This is why I don’t worry about where the gold price is headed. The next set of crises will send it higher—and then higher still when central bankers impose their inflationary strategies. We don’t know when it’ll happen nor how high it’ll go, but we know the direction it’s headed. It’s predictable.
I bought another gold Buffalo last week. We may or may not be at a price bottom, but I’m looking to insure against government-caused distortions, disruptions, and derelictions. I’m less worried about today’s price and more worried about whether I own enough ounces.
Do you have a sufficient number of ounces to withstand the next crisis and the “solutions” government leaders will pursue? If not, I hope you’ll join all of us here at GoldSilver by continuing to accumulate more physical gold and silver.