Skip to comments.The One Reason You MUST Own Gold and Silver (the impending sovereign debt default of the west)
Posted on 12/15/2010 8:59:36 AM PST by SeekAndFind
Analysts and pundits provide various reasons for the bull market in Gold. This includes emerging market demand, low interest rates, money printing, central bank accumulation, central bank policies and falling gold production. These are all good reason but there is one reason which stands apart and will drive precious metals to amazing heights. It is the impending sovereign debt default of the west, led by the great USA.
Government finances have reached a point where default and/or bankruptcy is unavoidable. After all, weve already started to monetize the debt. The inflection point is when total debt reaches a point where the interest on the debt accumulates in an exponential fashion, engulfing the governments budget. When this occurs at a time when the economy is already weak and running deficits, there essentially is no way out.
Significant runaway inflation and currency depreciation result from a government that essentially can no longer fund itself. It starts when the market sees the problem and moves rates higher. The government then has to monetize its debts to prevent interest rates from rising. Let me explain where we are and why severe inflation is unavoidable and likely coming in the next two to three years.
In FY2010, the government paid $414 Billion in interest expenses which equates to 17% of revenue. When you account for the $14 Trillion in total debt, that works out to be 2.96% in interest. In FY2007, total debt was $8.95 Trillion, but the interest expense was $430 Billion and 17% of revenue. That accounts for an interest rate of 4.80%. Luckily, rates have stayed low for the past two years.
However, in the next 24 months the situation could grow dire. At least $2 Trillion will be added to the national debt. At an interest rate of only 4.0%, the interest expense would be $600 Billion. Even if we assume 7% growth in tax revenue, the interest expense would total 22% of the budget. An interest rate of 4.5% would equate to 26% of the budget.
As far as what level of interest expense is the threshold for pain, Russ Winter writes:
Once interest payments take 30% of tax revenues, a country has an out of control debt trap issue. When you think clearly about it, this just makes sense, as the ability to dodge, weave and defer is pretty much removed, as is the logic that it will be repaid in a low-risk manner. The world is going to be a different place when the US is perceived to be in a debt trap.
Is there anyway out of this? Either the economy needs to start growing very fast or interest rates need to stay below 3% until the economy can recover. Clearly, neither is likely. As you can tell from the calculations, interest rates are now the most important variable. If rates stay above 4% or 4.5% for an extended period of time, then there is no turning back.
Judging from the chart below, the secular decline in interest rates is likely over. It is hard to argue with a double bottom, one of the most reliable reversal patterns.
In 2011 and 2012, the Fed will have two new problems on its hands. First, the Federal Reserve will be fighting a new bear market in bonds. They will be fighting the trend. They didnt have that problem in 2008-2010. Furthermore, the interest on the debt will exceed 20% of revenue, so the Fed will have to monetize more as it is. Ironically, the greater monetization will only put more upward pressure on interest rates, the very thing Captain Ben and company will be fighting against.
As you can see, there is really no way out of this mess, which also includes the states, Europe and Japan. This is why Gold and Silver are acting stronger than at any other point in this bull market. Theyve performed great when rates were low but are likely to perform even better when rates start to rise. This is why we implore you to at least consider Gold and Silver.
How are precious metals any different from food storage? In a crash or total chaos, people will find out who has it and come get it. Or the Govt will confiscate it.
God sounds like a better investment.
God sounds like a better investment
So would a good supply of ammo and several guns.
Go ahead and load up on Gold and Silver....When the prices drop, as they will soon, then try to unload it....
For the time being, copper jacketed lead will have to do.
I have a serious question.
If the market seriously goes south, with unemployment into the 20’s and 30’s, and there is extreme civil unrest, will having gold or silver really do anything?
I mean this is the situation the progressives dream of, and numerous “for the safety of the people” laws will be passed, I would assume that owning precious metals would be one of those “safety” issues that would become immediately illegal. Or at least, it would be illegal to buy/sell it.
Am I missing something, because the only thing I believe that would help in an extreme situation is a lot of firepower. Even then, how long could you defend yourself against the military targeting you for the new “weapon’s hoarding laws”.
Exactly....Bullets are a better investment.
Ditto....It’s back to the strongor who has the biggest gunsurvives...
Why would the prices of Gold and Silver drop?
Fiat currencies are going the way of the Hungarian Pengo.
True, Obama would love to take your gold off you.
But if the worst comes to the worst, which would you rather have? A pile of illegal gold, or a valueless pile of firelighters?
When they come for your gold, make it as expensive as if they had come for your freedom. Because in 2011 those will be one and the same thing.
If you don't have the latter when the Big Bust happens, you might meet the former a lot quicker than thought.
Gold or silver are just convenient tokens that people *may* use to buy and sell stuff. They are not goods that you inherently need and must have.
If we see another great depression (or worse) the dollar loses its value first. A bag of bread will cost not $3.50 but $350. But can you buy it with gold? No, and here is why.
First, most gold offers today are pure paper. You buy gold "in a Swiss vault" and get a certificate. It is not worth the paper that is printed on. In case of a global crash these banks will mysteriously crash and burn first (maybe even literally, if the bankers don't want to leave any loose ends; explosives are cheap.) Holders of paper have a chance of getting the physical metal only in fair economic weather - exactly when they aren't likely to do so. There is every reason to believe that those banks who sell you certificates don't even have a vault, let alone gold. If a rare customer asks for the goods, they will buy gold for him; most customers just pay money and get a piece of paper in return. Nice racket, isn't it?
Now let's look at the other strategy - you have the physical metal in your possession (coins, bars, jewelry.) Now what? Can you take those coins to Safeway? Likely not. Can you sell them at the corner store that today screams "we buy gold?" - yes, you can, but at what price? They have you over the barrel on that one. They can offer you *any* price and you will have to take it because what are you going to do if you don't like the price? Are you going to eat your gold?
I agree with many other posters. The primary currency in case of a Mad Max scenario in the USA will be ammo and weapons. This is because this is something you MUST HAVE at any cost. Supplies of that stuff are already limited, as we saw a few years ago, and if there is a mass demand on ammo there isn't enough manufacturing capacity to satisfy everyone. And since ammo will be such a desired product, you can exchange it for anything you need. Gold pales in comparison to ammo. Besides, you can stockpile gold or food or water or gasoline or anything else only if you can protect it, which brings us back to the square one. Survival is the need number one; if you are dead then you can't use anything else, and you can't provide for your family.
Seriously, anybody who doesn't have Gold after the crash will be clamoring to swap their fiat paper for hard assets. Any hard assets. In Wiemar Germany unmarried men used to buy baby clothes if those were the only things left in the shops - anything to get rid of fiat currency.
After the crash a guy with gold rather than ObamaBucks will get a private room to sit in - and a string quintet to entertain him - while he decides on his purchases.
Things will not get to the point where there is uniform hell on earth. There will always be people who see value in the gold and plan long-term in spite of temporary difficulties. A small supply might be helpful to provide actionable options at some point.
How come the sellers of gold accept fiat currency. Why aren’t they demanding payment in gold?
Seriously people, get yourself ready to live Amish. If you got any greenbacks after that, then buy gold or silver.
It may be a barter economy for ahwhile. Gold and silver aren’t going to do you much good if no one wants it and you don’t have the means of production to provide food, water, and heat for yourself.
Headlines from June 2011 - Economy Up, Gold Takes a $500 Haircut....
RE: Headlines from June 2011 - Economy Up,
Maybe you can give us the reason for your optimism...
It’s simple turnover.
The sellers of gold charge a 2% markup and buy more Gold with it. At the far end of the supply chain is a guy in Canada digging more Gold up.
Let me finish that headline for you.
Economy Up, Gold Takes a $500 Haircut. Now only $4500 an ounce.
“If the market seriously goes south, with unemployment into the 20s and 30s, and there is extreme civil unrest, will having gold or silver really do anything?”
What are you planning for???
What little gold and silver we do have, it is not for making a quick profit, or even to use in a barter economy.
Gold and silver are for long term, as in YEARS, for maintaining wealth. Anyone who thinks that chaos is a good time to use the gold they have stored is NUTS!!
It is for extreme emergencies, for your children or grandchildren. Period.
$4500? Not very likely.
Gold and silver will be useful on the other side of the crash, after a new order of money is established the gold and silver can be exchanged for the currency of the realm.
The physical things needed for the time of the crisis are water, food, shelter, guns, and ammo. Along with the ability to produce/procure more of these things.
Let's say I want to buy gold today, but I don't like the current price ($1,200 per ounce or something.) Where can I go to buy at a better price? (No, I'm not willing to travel to Africa or Siberia and mine it myself.)
It is also important that in the disaster scenario people won't be able to casually go somewhere as we do today. Gas will be very valuable, some stores will be closed, and it will be plain unsafe to drive around the town; there will be plenty of people interested in your car and your gold and in anything else that you might have that they like.
I don't say, of course, that paper money will be of any value. The comparison is all about various "hard" currencies - including barter items (which are consumed directly, as opposed to being only used for exchange.) Cans of chili (or some other food) will be more valuable than gold certificates or even the gold itself. Not only because you can eat chili; it's also because it takes some effort to verify that your gold is really gold, and not gold-plated lead. (All PCB houses have gold-plating technologies, so this is not something unique.)
With regard to the possibility that the catastrophe is not uniform and some people will be gathering gold in exchange for food, I can't reject that - it certainly can be. People bought and sold for money throughout the history, including some tough times.
But to see what that buys you you don't need to go farther than the fantasy section of your local library. Grab some typical "road adventure" and see what the protagonist pays with at taverns. He often pays with copper, seldom with silver, and never with gold. Gold is reserved for a banker, or for some trusted moneychanger.
In other words, there must be an established monetary system based on gold. You can't pay for a meal with a gold bar; the tavern owner doesn't earn that much in a year; what will happen is that he gets greedy, and doesn't charge for the food. But you will meet his "friends" soon enough, in some dark corner. So a functional society must offer ways to exchange gold for silver, silver for copper, and those must be all good coins - because money has to be accepted on sight, without lab scales and cups of water. So you may have gold, and you may have a moneychanger ... but what will you get from him for your gold bar? Most importantly, what can he give you, besides a sack of paper money that you can't probably lift and can't probably find anyone willing to take. There isn't enough of silver coinage (hardly any!) to change the gold with.
So all in all, there is only a handful of universal barter items that anyone will gladly take and give - canned, non-perishable food items or gasoline or just aspirin. Ammo is also in this category. They are durable, they are immensely useful, and they can change many hands without any decrease in value. Most importantly, when you use these items for trade you don't need to count on a future expected value of an item (like in case of gold) - you get an item that already has a well known value and can be instantly traded for other items.
There is one very relevant literary example - the fate of Baron Danglars:
While leaving Rome, he is kidnapped by the Count's agent Luigi Vampa and is imprisoned the same way that Dantès was. Forced to pay exorbitant prices for food, Danglars eventually signs away all but 50,000 francs of the stolen five million (which Dantès anonymously returns to the hospitals).
The dialog there is very simple: "I want to eat" - "Sure, this chicken costs $1,000,000 francs." Danglars at first was rejecting the offer, but in a few days he had no other options. You can have your gold for a while, but the other guy will have his food for a while too, and when you are ready to trade he will take you to the cleaners. He has an advantage - his product is of inflexible demand (people need to eat) but your product is not only of a flexible demand (optional use,) it actually has no direct use at all. The best the farmer can hope for is to find someone else who sells him diesel fuel and takes gold in exchange. In a good economy that's exactly what happens; but in a bad economy barter is preferred. The stability and consistency of the value of gold is the difference between "good" and "bad" economies.
Aren’t those who are pushing people to own gold really only trying to drive up the price of their own gold?
If things get as bad as some claim, I’m going to trade in my brass and lead for someone else’s gold. ;-)
That is highly likely. The price of a good depends only on how much the buyer is willing to pay. It has little in common with the amount of labor that is needed to produce the good. These numbers get close to each other only when the product is a commodity, available from many different vendors who all try to offer a good price, or else they can't sell. A market of Chinese TV sets is one such example. A market of diamonds, on the other hand, is under control by one company. The rule of thumb is simple: if there are only few sellers they can dictate the price.
Let's see how many gallons of gas one ounce of gold buys you in the year 2000 and today.
Year 2000: gas=$1.30/gal, gold=$300/oz. One ounce of gold buys you 300/1.30 = 231 gallon. Great.
Year 2010: gas=$3.50/gal, gold=$1380/oz. One ounce of gold buys you 1380/3.50 = 394 gallons.
What do we see here? We see that oil increases in price faster than the gasoline. And gasoline is a finite natural product, in high demand, and with the world production going down.
There goes the argument of gold bugs that an ounce of gold could buy you a suit 100 years ago and today. This is not true. A fair price of gold (assuming year 2000 as a reference) would be $3.50/gal * 231 gal/oz = $800/oz. This is because the gasoline price increased by 269%, so the gold price should also increase the same - from $300 to $807. But in reality gold increased 170% on top of that - nearly twice as much! Either the world is awash in free, unwanted oil, with poor Arabs selling it for a song, or something fishy is happening in bullion markets.
The relative stability of ancient, precious metals based monetary system largely depended on the fact that all those metals were hard to obtain (really impossible for a peasant; mines were owned by aristocracy.) Even a King [of France] couldn't make money out of thin air if his gold supplies are gone.
If the disaster strikes tomorrow we cannot anymore depend on coins that are hard to manufacture - modern technology can easily do that, and counterfeiting factories may be the only ones that can afford to run. It will take not more than a week to flood the market with counterfeit gold and silver bars and coins, not even mentioning copper or nickel - those can be made by anyone, anywhere, on a benchtop arbor press. And there is no King (or the government) to chop your head off if you get caught; if you know "the right people" then you are safe.
G-d, Guns and Gold...
You’re missing about 5000 years of human history.
Most times and places owning some gold and or silver has been a plus in times of trouble. There is a large range of conditions between “ the economy is booming” and, “TEOTWAWKI, Road Warrior, Zombie Apocalypse complete societal collapse” that the “Guns guns guns” people are fixated on, nad gold and silver a solid plus in 99% of those. Me? I own some gold, silver, plenty of weapons and ammo food, some trade goods and have a skill that will always be in demand. I’ve done what I can, and only need something I can’t supply which is some luck to get my family through any trouble...