SEP 4, 2013
As I have said many times before, the economic crisis of 2008 was only a speed bump on the way to the main event. I believe that before the end of this decade there will be an economic crisis so historic that it will eclipse the crash of 29 and the subsequent great depression. I also believe it is both unavoidable and inevitable, because it is merely the free market releasing the stored up energy from decades of economic manipulation. Yes… bad things are going to happen, but it could be the best thing that ever happened to you.
This guide started out as “The Top Ten Reasons TO Buy Gold and Silver” and was originally drafted by some good and well-intentioned employees, but when I read it something just didn’t feel right. It contained all the usual reasons that any precious metals dealer would point out as to why people should own gold and silver… they’re the ultimate insurance policy, they’re private, they’re a hedge against inflation, they’re a timeless investment, and so on. I spent lots of time trying to rewrite them but there was still something wrong. And then it dawned on me… though they were all good reasons to own gold and silver; they weren’t the reasons that “ I “ buy gold and silver.
So here you go… a countdown of “The Top Ten Reasons That I Buy Gold And Silver.”
99.9% of the world’s population is unaware that we no longer use money… we use “fiat” national currencies. What is a fiat currency? Fiat currencies are faith based. They are national currencies that are not backed by anything of value like gold, instead the government just declares that they have value and, as long as the people keep believing, they accept it… for a while. But here’s the thing, there have been thousands upon thousands of fiat currencies throughout history, and they have all failed… 100%... no exceptions.
But there is a vast difference this time around. Since 1971, for the very first time in history, all of the world’s currencies are fiat currencies simultaneously.
Remember this as we progress through the Top Ten…
ALL FIAT CURRENCIES FAIL.
In my book, Guide to Investing in Gold and Silver, and in Hidden Secrets of Money, I show how societies have swung back and forth from quality money to quantity currency. Originally, quantity currency took the form of debased coinage (gold or silver money that has been diluted by adding cheap and abundant base metals such as copper). Then it took the deceptive form of national currencies that were initially backed by money, IE: claim checks on gold and/or silver. Once these were established, governments then could change the laws, basically making fraud legal, so they could print claim checks on gold that didn’t exist. The next step was to sever the connection between money and currencies entirely.
Back when we used real money gold would automatically balance all economies. When one country experienced an economic boom they would import cheap goods from countries with depressed economies and lower wage rates. The outflows of gold from the boom country would cause a deflation, cooling the economy, while the countries experiencing gold inflows would boom, causing their labor rates to increase, which in turn would cause the prices of their goods to rise. This meant that trade imbalances would always automatically rebalance. Government spending was also constrained. If a government wanted to spend more than its income (deficit spending) it had to borrow gold from the private sector. If the government borrowed too much it would cause interest rates to rise, which in turn would slow the economy, which in turn would cause tax revenues to fall, which meant less income for the government, which in turn would cause the government to cut spending.
But the debt based global monetary system has allowed deficit spending, trade imbalances, and bubbles to persist and balloon to levels unprecedented in all of history. We are in completely uncharted territory. The credit/debt bubble and the derivatives bubble threaten to take down the world economy. The only comparison you could make is to take every great bubble in history times one million and have it burst everywhere on the planet simultaneously… It threatens to be a global financial nuclear holocaust the only financial survivors of which will be the owners of gold and silver.
I am a firm believer that everything happens in waves and cycles. So when I started writing my book back in 2005 I entered every financial crisis that I could identify into a spreadsheet, starting from the beginning of the USA, looking for a cycle, and something very dramatic stuck out at me. I had discovered that every 30-40 years the world has an entirely new monetary system.
From that day till now I have been telling as many people as I could that before the end of this decade (before 2020) there will be an emergency meeting of the G-20 finance ministers (or something like that) to hash out a new world monetary system. It’s normal. No man made monetary system can possibly account for all of the forces in the free market. They get old… they develop stress cracks… then they implode.
We have had four different monetary systems in the past 100-years. The system we are on today is the U.S. dollar standard. It is an ageing system that is way overdue for its own demise. It is now developing stress cracks, and will one day implode. Like I said, it’s normal.
But what is different this time around is that the last three transitions were baby-steps from full gold backing, to partial gold backing, to less gold backing, to no gold backing. In each of these transitions the system we were transitioning from had a component that could never fail… gold. This time we will be transitioning from a system based on something that always fails… fiat currencies. The key component to this transition from the U.S. dollar standard to some new standard is of course the U.S. dollar. By the time the emergency meeting takes place the U.S. dollar will be in the final stages of the terminal condition known as fiat failure.
But the U.S. dollar represents more than half of the value of all the world’s currency. A dollar crisis would cast doubts on all fiat currencies, and the cascading effect of loss of faith could cause the rest of them to fall like dominos. The central bankers will try everything they can think of to keep the fiat game going, but when everything they try fails they’ll look around and say, “What worked before.” And once again the pendulum will swing back to quality money.
The only beneficiaries of this event will be gold and silver, and those who own them.
My book was written from 2005 through 2007. In it I said there would first be the threat of deflation (this came true in the crisis of 2008) to which Ben Bernanke would overreact with a helicopter drop (this came true with the bailouts and QEs) which would cause an inflation (this came true when the stock markets and real estate reflated.) Next there will be a real deflation… a contraction of the currency supply. This will happen when the credit/debt/bond/fiat currency bubble and the derivatives bubble begin to implode. The reaction of the world’s central banks will be to print until deflation gives way. I believe this will cause a hyperinflation. A hyperinflation doesn’t require a nation to print its currency into oblivion… it only requires a loss of faith.
But never fear, because, periodically, throughout history, gold has revalued itself as it is bid up in price by the free market as people rush back to it for safety. This is when gold does an accounting of all of the currency that had been created since the last time gold revalued itself. In doing so its purchasing power rises exponentially.
It’s always done this… and I believe it always will.
By any realistic measure stocks have been in a super-bubble for more than a decade now with valuations and yields in the danger zone, while bonds are in the later stages of a 30-year bull market and real estate is still deflating from the biggest bubble in history.
Dr. Robert Shiller, of Yale University, has compiled data on the stock market going all the way back to the year 1880. His research concludes that by one measure the stock market has been in a bubble since 1998 and by his other measure the bubble is far bigger and more extreme than any prior bubble, including the stock market bubble of the Roaring `20s that led to the crash of `29. Further research shows that the only reason the markets have been levitated to these levels is due to Federal Reserve stimulus. What will happen if they take away the training wheels? I wouldn’t want to be invested in stocks when it finally implodes.
U.S. Treasury bonds have been a great investment for more than 30-years, but no bull market lasts forever. In fact, for the 37 years after WII, bonds were such a bad investment that by the end of the `70s they had earned the nickname “certificates of confiscation”, because they confiscated your wealth. But that was back when countries were financially responsible. Now most countries on the planet run their finances like Greece, and the United States of America is leading the way. And as the world’s central banks keep interest rates low it has caused bond investors to take extraordinary risks in search of a reasonable return. We are now in a global bond bubble, and I believe that this has made the bond market one of the most dangerous places to invest right now.
When the stock market crashed in 2000 it caused a recession in 2001. Alan Greenspan’s response was to cut interest rates dramatically. Then along came 9/11, making the stock market crash even worse, and his response was to take the Federal Funds Rate to lows for a duration last seen in the Great Depression. Greenspan’s goal was to reflate the stock market… his achievement was to accidentally create the greatest real estate bubble in history.
Since the popping of the bubble in 2007 real estate values have come back down to fair value and then bounced back into a small bubble. Dr. Shiller, also the creator of the Case-Shiller Home Price Index, agrees. This is typical price action of any super-bubble that’s in the process of popping… it’s called a “dead cat bounce.” The public always chases yesterday’s news. As prices reverted near fair value, investors rushed in to scoop up deals causing prices to rise once again. But then, just as in the crash of `29 and the NASDAQ crash of 2000, the dead cat bounce will roll over and the crash will continue until the opposite extreme of severe undervaluation is reached. This is natural and is what is required to clear out the excesses left over from the bubble days. Too many jobs were created in that sector and too many homes were built. Undervaluation is required to clear out the excess inventory and cause workers to move on.
But what worries Dr. Shiller is that institutional investment firms have bought up as much as 30% of the homes that were foreclosed on since the crash of 2008. This has the potential of making real estate as volatile as the stock market. If these firms ever decide to sell they can dump thousands of homes all at once, causing the 2008 real estate crash to look like the calm before the storm.
Personally… the thought of investing in real estate right now is down right scary.
So the stock market, bonds, and real estate are either in a bubble or have been in a bubble in the last decade. Gold and silver, however, haven’t been in a bubble for more than 30-years, and from my measurements still appear to be less than half way through their bull market.
The next great bubble will someday be in gold and silver… It‘s just their turn.
I’ve often said that the markets and the economy are both psychological and cycle-logical. Nobody can really understand the markets or the economy, but you can get an inkling of what they’re about if you understand what drives them… greed and fear. And the most entertaining part of monetary history is the study of their byproducts; manias, panics, bubbles, and crashes. When you study these you quickly learn the meaning of the old saying “The bull climbs the stairs, but the bear jumps out the window.” What it means is that it can take years to create a bubble, but only days or weeks for it to burst. This is because, when it comes to greed and fear… fear is by far the more powerful emotion.
Gold and silver are sometimes the exceptions to this rule because they can rise as fast as lightning in a panic. In the golden bull market of the 70s, it took nine years for gold to rise from $35 to $400, but once a panic out of dollars to the safe haven of gold began to develop, it took only 33 trading days to more than double, rocketing to $850.
But actually, it was only a very small percentage of the population that was panicking out of dollars in the 70s. This time I think it will be everyone. Where do you think gold and silver will be headed if my reasons ten through six come to pass?