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.
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