Gold’s poor performance in the past week has triggered a flood of commentaries declaring that gold peaked back in 2011 and that prices may plummet next year. Don’t be fooled – there is plenty of evidence that gold still has a bright future. Tim Iacono published an interesting article on Seeking Alpha yesterday debunking the naysayers:
“Since the gold price failed to advance after the Federal Reserve’s latest stimulus measure last week, that is, the one where the central bank raised its open-ended money printing effort to a cool $1 trillion per year, an increasing number of calls have been heard with the same refrain – the secular gold bull market is over.
Earlier in the month, it was investment bank Goldman Sachs who said that prices may rise back up above $1,800 an ounce next year but that last year’s high at just over $1,900 an ounce or a similar high next year will go down in the history books as the end of the long-running bull market.”
As expected, today the Fed announced it will expand its balance sheet by continuing to purchase long-term Treasuries after Operation Twist expires. The Fed remains committed to buying government debt and keeping interest rates near zero until unemployment drops to 6.5%, which it admits probably won’t happen until 2015. Surprise, surprise, gold prices rose on the news, and the dollar fell.
Metals Analyst Kira Brecht published an incisive commentary on Kitco yesterday on the long-term gold trend, examining the relationship between gold and the quantitative easing of central banks:
“But, what will it take to kill the long-term bull market in gold? Listen up folks and listen good. There is nothing on the near or medium term horizon that could kill the long-term bull market in gold.
Why? The answer is quite simple and lies in the hands of global central banks, with their pedals still pressed to the floor with unusual and historic monetary policy accommodation and easing.”
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By Jeff Clark from Casey Research
Have you ever wondered what the typical Chinese gold investor thinks about our Western ideas of gold? We read month-after-month about demand hitting record-after-record in their country – so how do they view our buying habits?
Since 2007, China’s demand for gold has risen 27% per year. Its share of global demand doubled in the same time frame, from 10% to 21%. And this occurred while prices were rising.
Americans are buying precious metals, no doubt. Gold and silver ETF holdings just hit record levels. The US Mint believes that 2012 sales volumes will surpass those of 2011.
But let’s put the differences into perspective. This chart shows how much gold various countries are buying relative to their respective GDPs:
(Click to enlarge)
It’s widely believed that the majority of the gold flowing into Hong Kong ends up in China, so its total is probably close to double what the chart reflects. Even if none of it went to China, coin and jewelry demand is 35 times greater than the US, based on GDP.
The contrast between how our two nations can buy bullion is striking…
- In China, you can buy gold and silver at the bank. My teller looked at me oddly when I asked.
- Bullion is available for purchase at Chinese post offices. I wonder how my local postman would respond if I asked for a tube of silver Eagles.
- Mints are readily accessible to retail customers. Here, I can only order proof and commemorative products from the US Mint and am forced to go to an independent dealer.
- A new product design is manufactured every year. This being the Year of the Dragon, many bullion products are emblazoned with dragons. You can still buy last year’s rabbit, and next year it will be a snake. The US has two designs, the Eagle and Buffalo; the latter was introduced in 2006 and is available only in gold (if you see a silver Buffalo, it is a “round” manufactured by a private mint, not the US Mint).
Some will point to cultural affinity to account for the differences. There’s some truth to that, though this is a much greater factor in India. Even there, gold jewelry is not viewed as a decoration or an adornment; it’s a store of value. It is financial insurance in a pretty bow. In India, gold can be used as collateral, regardless of its form. It’s not just an investment that they’re trying to make money from; it’s more important than that.
But certainly the differences can’t all be attributed to culture…
You’ve likely heard how government leaders in Beijing have been encouraging citizens to buy gold and silver. This would be akin to seeing your local Congressman or President Obama appearing on TV and imploring you to buy some gold and silver. (Utah made gold legal tender, but it was mostly a symbolic move.)
Chinese radio and TV spots, along with newspaper ads, talk about “safeguarding your wealth” and putting “at least 5% of your savings” in precious metals. I haven’t seen this here except from bullion dealers themselves. Can you imagine Ben Bernanke appearing in a commercial during American Idol, encouraging you to buy gold Eagles?
No, what I hear from politicians about precious metals is nothing but the sound of crickets chirping – save Ron Paul. And the mainstream continues to claim gold is in a bubble. We’ve pointed it out before, but in case any of them are reading, there are two criteria for a bubble: first, a massive price increase, such as the gold price doubling in less than 7 weeks like it did in 1979-’80… which, of course, hasn’t occurred in this bull market.
The second criterion is widespread participation on the part of the public. I don’t hear celebrities and TV anchors bubbling on about the latest gold stocks. Most people I know outside Casey Research aren’t talking about the great price they got on a silver Maple Leaf. Most investors I talk to say their friends, family, or co-workers aren’t scrambling to snatch up gold Eagles. And the #1 reason we’re not in a bubble is because Eva Longoria still hasn’t asked me out on date – something she’d only do because I’m a gold analyst.
And with apologies to those of you who do know history, I think the Chinese have studied history a little better than many of us. The lessons are right in front of us, though I don’t hear this kind of data very much on CNBC…
- Morgan Stanley reports there is “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Total debt (public and private) in the US is 300%+ of GDP.
- Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt is approaching 100% of GDP this year.
- Peter Bernholz, a leading expert on hyperinflation, states emphatically that “hyperinflation is caused by government budget deficits.” This year’s US budget deficit will be about $1.3 trillion. It’s expected to total $6 trillion during Obama’s first four years in office.
What do we hear instead? That the country will drop into recession if current amounts of spending and outlay of benefits are reduced. I think it is quite the opposite; it will be worse if our leaders continue down this path of debt, deficit spending, and printing money.
What I’d love to see on CNBC is a spot with Doug Casey saying this: “Anyone who thinks they have any measure of financial security without owning any gold – especially in the post-2008 world – is either ignorant, naÃ¯ve, foolish, or all three.” I bet that’d get the airwaves buzzing.
It must seem strange to many Chinese that we continue to believe in our dollars, Treasuries, and bonds more than gold and silver. And it’s not just China that would view our investing habits as peculiar. Indeed, as the above tables implies, our views on precious metals are in the minority.
My fear is that regardless of what form the fallout takes, many of my friends will be caught off-guard. Probably many of yours, too. As the value of dollars continues to decay and inflation creeps closer and closer and then higher and higher, many investors will feel blindsided. Many Chinese citizens will not.
Given China’s aggressive buying habits, my suspicion is that many of them will probably wonder why we didn’t see what was happening all around us, why we didn’t learn from history, and why we didn’t better prepare.
Part of the reason why American dollars are losing value can be traced to Chinese actions as well: Realizing that the US government was not going to rein in its profligate spending, the Chinese have stopped investing in the US economy and are now dumping dollars. This, of course, simply adds to the US government’s problems… but it provides ways for you to turn a tidy profit.
The media has stirred up a lot of fear about the possibility of actually going over the fiscal cliff in the new year. However, Peter Schiff maintains that the cliff is an essential step in repairing the economy. He also continues to stress how much safer gold is than dollar-denominated assets, especially Treasuries:
By Jeff Clark from Casey Research
While I don’t like making price predictions, and certainly ones accompanied by a specific date, it’s hard to ignore the correlation between the US monetary base and the gold price.
That correlation says we’ll see $2,300 gold by January 2014.
There are plenty of long-term charts that show a connection between gold and various other forms of money (and credit). Most show that one outperforms until the other catches up. But let’s zero in on our current circumstances, namely the expansion of the US monetary base since the financial crisis hit in 2008.
Here’s the performance of gold compared to the expansion of the monetary base since January 2008:
(Click to enlarge)
You can see the trends are very similar. In fact, the correlation coefficient is an incredible +0.94.
Since the Fed has declared “QEternity,” it’s logical to conclude that this expansion of the monetary base will continue. If it grows at the same pace through January 2014, there is a high likelihood the gold price will reach $2,300 at that point. That’s roughly a 30% rise within 15 months.
And by year-end 2014, gold could easily be averaging $2,500 an ounce. That’s 41% above current prices.
Some may argue that there’s no law saying this correlation must continue. That’s true. And maybe the Fed doesn’t print till 2014. That’s possible.
But it’s not just the US central bank that’s printing money…
- European Central Bank (ECB) President Mario Draghi has declared that it will buy unlimited quantities of European sovereign debt.
- Japan’s central bank is expanding its current purchase program by around 10 trillion yen ($126 billion) to 80 trillion yen.
- The Chinese, British, and Swiss are all adding to their balance sheets.
The largest economies of the world are all grossly devaluing their currencies. This will not be consequence-free. Gold and silver will be direct beneficiaries.
There are other consequences, both good and bad, of gold hitting $2,000 and not stopping there. We think investors should be prepared for the following:
- Tight supply. As the price climbs and attracts more investors, getting your hands on bullion may become increasingly difficult. Delivery delays may become commonplace. Those who haven’t purchased a sufficient amount will have to wait in line, either figuratively or literally.
- Rising premiums. A natural consequence of tight supply is higher commissions. They won’t stay at current levels indefinitely. Premiums doubled and more in early 2009, and mark-ups for silver Eagles and Maple Leafs neared a whopping 100%.
- Tipping point for a mania. There will be an inflection point where the masses enter this market. The average investor won’t want to be left behind. Will that happen when gold hits $2,000? $2,500?
The message from these likely outcomes is to continue accumulating gold – or to start without delay. Waiting will have consequences of its own.
People say that there’s nothing certain in life except death and taxes. In my view, $2,300 gold is a close second.
By Jeff Clark from Casey Research
In early July, Japan set a premium price for solar energy that was three times the rate of conventional power. This meant utility companies would be paid three times more for electricity sourced from solar. It’s widely expected that the premium will ignite the use of solar power – and solar uses a lot of silver.
Silver Demand from Solar Panels
As you may know, silver is used in photovoltaic (PV) technology to generate solar power. A typical solar panel uses a fair amount of the metal – roughly two-thirds of an ounce (20 grams). To put that in perspective, a cell phone contains around 200 to 300 milligrams (a milligram weighs about as much as a grain of sand). A laptop contains 750 milligrams to 1.25 grams.
Photovoltaic technology is relatively young, but each year its use is growing rapidly. Just since 2000, the amount of silver consumed by solar-panel makers has risen an average of 50% per year. Demand grew from one million ounces in 2002 to 60 million ounces in 2011. Last year, demand from the PV industry represented almost 11% of total industrial demand for the metal (excluding jewelry). According to statistics from CPM Group, demand grew by 11.2 million ounces, the strongest volume growth of all major sources. And this was before the Japanese announcement was made.
(Click to enlarge)
The largest end-user of solar panels is Germany, though that’s changing. Last year, Germany accounted for 27.3% of global installations, but due to subsidy cuts, solar-panel installation capacity dropped from 7.7 gigawatts to 7.5. But in the big picture, that decline was offset by increases in China, France, Italy, the UK, Japan, and the US.
In their 2012 Yearbook, CPM projected a slight decline in silver demand from solar panels due to a reduction of new installation in Europe and oversupply from excess production in China. But with the initiative from Japan, that estimate is almost certainly low.
Japan Gives New Life to the PV Industry
After the Fukushima disaster, Japanese authorities wanted to cut the nation’s dependence on nuclear energy. Approximately 30% of Japan’s power was generated by nuclear before the catastrophe; now the focus has shifted to other green energy alternatives, including solar.
The new tariffs might work. The suggested rate of ¥42([Article].53) per kilowatt hour (expected to be maintained for 20 years) is more than twice the rate in Germany (€0.17 – or [Article].246). Bloomberg estimates that this generous increase will create $9.6 billion of investments in Japan alone.
Here’s what that amount of money would do to the sector: there were approximately 1.3 gigawatts of solar capacity installed in 2011, but experts anticipate that number to nearly double to 2.3-2.5GW for 2012, and hit 3.0GW in 2013. According to SolarBuzz, Japan could see 28GW of solar capacity installed by 2020 and 50GW by 2030.
That’s a lot of solar panels, and – even assuming improved efficiency – it’ll take a lot of silver.
During recent years, solar panels have become significantly less expensive and more end-user friendly. However, the fact that each panel contains a lot of silver can make it susceptible to large price fluctuations. If the silver price gets too high, manufacturers might seek alternatives, of course, but they can’t easily eliminate use of the metal. And if the product gets too expensive, demand could fall. Companies are already looking for ways to reduce the amount of silver used in PV panels or to replace it with another element.
At the moment, there are two main solar panel technologies on the market. The traditional one is “thick film,” where silver is the main component. The other one is a less-expensive “thin-film” method which replaces silver with another material, cadmium telluride. The development of thin-film solar panels has picked up due to its lower price, but the technology is less effective. Thick film is more efficient in gathering energy from the sun, and this type of panel still prevails on the market. CPM reports that it accounted for roughly 91% of total installations last year, and analysts expect thick-film panels to maintain their dominance for at least the next several years. Further, both panel types use silver outside of the cell for reflectivity and other functions, so the odds of silver being eliminated from solar panels entirely are very low at this time.
For investors, this means that at least in the near term, the solar industry will continue to use silver-intensive technology, thus supporting growing industrial demand for the metal.
But that’s not all, folks…
New Era for Silver Usage
For a long time, silver industrial demand was dependent almost entirely on one industry: photography. Silver-based camera film dramatically changed the structure of silver demand at the beginning of the 20th century. By that time, silver had primarily been used in silverware, jewelry, and as money. At its peak, photographic demand accounted for about 50% of the market.
But this is the 21st century, and in spite of substantial declines in film use, the modern world has developed many other important uses from silver’s unique properties. Probably the most important shift is that industrial demand for silver no longer comes from a single field, but from numerous applications – almost too many to count – virtually none of which show any signs of slowing. This fact makes the forecast for silver demand more positive and stable; when one industry drops, others may offset the decline.
Here’s a smattering of uses, many of which are still in their infancy:
- Solid-state lighting (SSL), which uses semiconductors to produce light with either light-emitting diodes (LED) or organic light-emitting diodes (OLED), rather than the more traditional electrical filaments. SSL is used in traffic lights and some car headlamps.
- Radio frequency identification (RFID) uses printed silver ink made from silver nitrate. RFID chips have become so ubiquitous, it’s hard to find any new product that doesn’t have at least one – even if that’s only in the security tag affixed to the package.
- Supercapacitors and superconductors, autocatalysts, and new types of more effective batteries.
- Medical applications like aseptic coverings for surgery, traumatic wounds, antibacterial bandages and fabrics, dental amalgam, and silver salts that help prevent infections in newborns. It’s also used as a cure for dermatological problems and certain types of cancer.
- Water purification systems, washing machines, air conditioners, and refrigeration. NASA used silver to sterilize recycled water aboard the space shuttle.
- Food packaging and preservation. Manufacturers of commercial ice machines are using silver-embedded hoses, clamps, pipe fittings, and other places where gunk can build up and harbor bacteria. Meat processors use silver-embedded tables, grinders, tools, and hooks. Silver is used to keep fruit, vegetables, and cut flowers fresh while in transit.
- Public hygiene, such as antimicrobial protection of telephone receivers, door handles, bed rails, toilet seats, counter tops, children’s toys, socks, underwear, bed linen, towels, etc.
- Other wide-ranging consumer products used every day: makeup, antibacterial soaps and kitchenware, hand and air sanitizers, and facial creams and masks.
Though the total contribution from these new silver uses is relatively modest, the Silver Institute rather dryly forecasts that “there is a potential for a number of these segments to boost their silver consumption.” As you can see in the chart below, its forecast for silver demand for new industrial uses projects that the biggest increases will be in batteries, SSL, and RFID.
(Click to enlarge)
The primary uses for silver are growing, too. For example, the automobile industry is increasing consumption, due to both increases in the number of vehicles manufactured and the expanded use of electrical contacts. As the number of improvements in vehicles increase, so does the amount of silver used. For example, silver is used to control seat and mirror adjustments, windshield wipers, and manage navigation systems.
Based on their research, the Silver Institute forecasts that industrial usage will rise to 665.9 million troy ounces by 2015 and account for more than 60% of total fabrication demand.
(Click to enlarge)
What It Means for Investors
The bottom line on the above is that the growing number of industrial applications for silver represents a long-term shift in this market. Increasingly diverse usage is not only here to stay but will continue to grow, supporting the price and having an impact on the balance of supply and demand.
For investors, the thing to keep in mind is that while long-term prospects for silver prices are extremely bullish, to the degree prices are driven by this increased industrial demand, they are vulnerable to economic correction/contraction in the short term.
By Jeff Clark from Casey Research
The cheek of it! They raised the price of my favorite ice cream.
Actually, they didn’t increase the price; they reduced the container size.
I can now only get three servings for the same amount of money that used to give me four, so I’m buying ice cream more often.
Raising prices is one thing. I understand raw-ingredient price rises will be passed on.
But underhandedly reducing the amount they give you… that’s another thing entirely. It just doesn’t feel… honest.
You’ve noticed, I’m sure, how much gasoline is going up.
Food costs too are edging up.
My kids’ college expenses, up.
Car prices, insurance premiums, household items – a list of necessities I can’t go without. Regardless of one’s income level or how tough life might get at times, one has to keep spending money on the basics. (This includes ice cream for only some people.)
According to the government, we’re supposedly in a low-inflation environment. What happens if price inflation really takes off, reaching high levels – or worse, spirals out of control?
That’s not a rhetorical question. Have you considered how you’ll deal with rising costs? Are you sure your future income will even keep up with rising inflation?
Be honest: will you have enough savings to rely on? What’s your plan?
If price inflation someday takes off – an outcome we honestly see no way around – nobody’s current standard of living can be maintained without an extremely effective plan for keeping up with inflation.
It’s not that people won’t get raises or cost of living adjustments at work, nor that they will all neglect to accumulate savings.
It’s that the value of the dollars those things are in will be losing purchasing power at increasingly rapid rates. It will take more and more currency units to buy the same amount of gas and groceries and tuition. And ice cream.
When the consequences of runaway debt, out-of-control deficit spending, and money-printing schemes come home to roost, it’s not exactly a stretch to believe that high inflation will result.
We need a way to diffuse the impact this will have on our purchasing power. We need a strategy to protect our standard of living.
How will we accomplish this?
I suspect you know my answer, but here’s a good example. You’ve undoubtedly heard about the drought in the Midwest and how it’s impacted the corn crop. The price of corn has surged 50% in the past two months alone.
Commodity analysts say the price could rise another 20% or more as the drought continues.
(Click to enlarge)
While the price of gold constantly fluctuates, you would have experienced, on average, no inflation over the last 30 years if you’d used gold to purchase corn. Actually, right now, it’d be on the cheap side.
When you extrapolate this to other food items – and virtually everything else you buy – it’s very liberating. Think about it: gold continues its safe-haven role as a reliable hedge against rising inflation.
I believe that those who save in gold will experience, on average, no cost increases in the things they buy and the services they use.
Their standard of living will not be impacted.
I think this kind of thinking is especially critical to adopt when you consider that gas and food prices will likely rise for a long time, and perhaps dramatically.
So how much will you need to make it through the upcoming inflation storm and come out unscathed?
Like all projections, assumptions abound. Here are mine for the following table. I’m assuming that:
- The price of gold, on average and at a minimum, tracks the loss in purchasing power of whatever currency you use, and that it does so from current prices. Given gold’s history, this is an easy assumption to make.
- Gold sales, over time, capture the gain in gold and silver so that your purchasing power is preserved. (This doesn’t mean I expect to sell at the top of the market; I expect we’ll be selling gold as needed – if gold has not itself become a widely accepted currency again.)
- We pay taxes on the gain. This will decrease our net gain, but there should still be gains. In the famous Weimar Germany hyperinflation, gold rose faster than the rate of hyperinflation.
To calculate how much we’ll need, I looked at two components, the first being average monthly expenses. What would we use our gold and silver for? From corn to a house payment, it could be used for any good or service. After all, virtually nothing will escape rising inflation. Here are some of my items: groceries, gas, oil changes and other car maintenance, household items, eating out, pool service, pest service, groceries and gas again, eating out again, vitamins, movie tickets, doctor appointments, haircuts, pet grooming, kids who need some cash, gifts, and groceries and gas yet again. Groceries include ice cream, in my case. How many ounces of gold would cover these monthly expenses today?
And don’t forget the big expenses – broken air conditioner, new vehicle, vacation… and I really don’t think my daughter will want to get married at the county rec hall. How many ounces of gold would I need to cover such likely events in the future?
The point here is that you’re probably going to need more ounces than you think. Look at your bank statement and assess how much you spend each month – and do it honestly.
The other part of the equation is how long we’ll need to use gold and silver to cover those expenses. The potential duration of high inflation will dictate how much physical bullion we need stashed away. This is also probably longer than you think; in Weimar Germany, high inflation lasted two years – and then hyperinflation hit and lasted another two. Four years of high inflation. That’s not kindling – that’s a wildfire roaring through your back yard.
So here’s how much gold you’ll need, depending on your monthly expenses and how long high inflation lasts:
(Click to enlarge)
If my monthly expenses are about $3,000/month, I need 45 ounces to cover two years of high inflation, and 90 if it lasts four years. Those already well off or who want to live like Doug Casey should use the bottom rows of the table.
How much will you need?
Of course many of us own silver, too. Here’s how many ounces we’d need, if we saved in silver:
(Click to enlarge)
A $3,000 monthly budget needs 1,285 ounces to get through one year, or 3,857 ounces for three years.
I know these amounts probably sound like a lot. But here’s the thing: if you don’t save now in gold and silver, you’re going to spend a whole lot more later.
What I’ve outlined here is exactly what gold and silver are for: to protect your purchasing power, your standard of living.
It’s like having your own personal financial bomb shelter; the dollar will be blowing up all around you, but your finances are protected.
And the truth is, the amounts in the table are probably not enough. Unexpected expenses always come up. Or you may want a higher standard of living. And do you hope to leave some bullion to your heirs?
It’s sobering to realize, but it deserves emphasis: if we’re right about high inflation someday hitting our economy…
Most people don’t own enough gold and silver.
If you think the amount of precious metals you’ve accumulated might be lacking, I strongly encourage you to put a plan in motion to save enough to meet your family’s needs.
By Doug Casey from Casey Research
I think there are only two good reasons for having a significant amount of money: to maintain a high standard of living and to ensure your personal freedom. There are lesser reasons, of course, including: to prove you can do it, to compensate for failings in other things, to impress others, to leave a legacy, to help perpetuate your genes, or maybe because you just can’t think of something better to do with your time.
But I’ll put aside those lesser motives, which I tend to view as psychological foibles. Basically, money gives you the freedom to do what you’d like – when, how, and with whom. Money allows you to have things and do things and can even assist you to be something you want to be. Unfortunately, money is a chimera in today’s world and will wind up savaging billions in the years to come.
As you know, I believe we’re into at least the fourth year of what I call The Greater Depression. A lot of people believe we’re in a recovery now; I think, from a long-term point of view, that is total nonsense. We’re just in the eye of the hurricane and will soon be moving into the other side of the storm. But it will be far more severe than what we saw in 2008 and 2009 and will last quite a while – perhaps for many years, depending on how stupidly the government acts.
Real Reasons for Optimism
There are reasons for optimism, of course, and at least two of them make sense.
The first is that every individual wants to improve his economic status. Many (but by no means all) of them will intuit that the surest way to do so is to produce more than they consume and save the difference. That creates capital, which can be invested in or loaned to productive enterprise. But what if outside forces make that impossible, or at least much harder than it should be?
The second reason for optimism is the development of technology – which is the ability to manipulate the material world to suit our desires. Scientists and engineers develop technology, and that also adds to the supply of capital. The more complex technology becomes, the more outside capital is required. But what if sufficient capital isn’t generated by individuals and businesses to fund further technological advances?
There are no guarantees in life. Throughout the first several hundred thousand years of human existence, very little capital was accumulated – perhaps a few skins or arrowheads passed on to the next generation. And there was very little improvement in technology – it was many millennia between the taming of fire and, say, the invention of the bow. Things very gradually accelerated and improved, in a start-stop-start kind of way – the classical world, followed by the Dark Ages, followed by the medieval world.
Finally, as we entered the industrial world 200 years ago, it looked like we were on an accelerating path to the stars. All of a sudden, life was no longer necessarily so solitary, poor, nasty, brutish, or short. I’m reasonably confident things will continue improving, possibly at an accelerating rate. But only if individuals create more capital than they consume and if enough of that capital is directed towards productive technology.
Real Reasons for Pessimism
Those are the two mainsprings of human progress: capital accumulation and technology. Unfortunately, however, that reality has become obscured by a morass of false and destructive theories, abetted by a world that’s become so complex that it’s too difficult for most people to sort out cause and effect. Furthermore, most people in the developed world have become so accustomed to good times since the end of World War II that they think prosperity is automatic and a permanent feature of the cosmic firmament. So although I’m very optimistic, progress – certainly over the near term – isn’t guaranteed.
These are the main reasons why the standard of living has been artificially high in the advanced world, but don’t confuse them with the two reasons for long-term prosperity.
The first is debt. There’s nothing wrong with debt in itself; lending is one way for the owner of capital to deploy it. But if a society is going to advance, debt should be largely for productive purposes, so that it’s self-liquidating; and most of it would necessarily be short term.
But most of the scores of trillions of debt in the world today are for consumption, not production. And the debt is not only not self-liquidating, it’s compounding. And most of it is long term, with no relation to any specific asset. A lender can reasonably predict the value of a short-term loan, but debt payable in 30 years is impossible to value realistically. All government debt, mortgage debt and consumer debt and almost all student loan debt does nothing but allow borrowers to live off the capital others have accumulated. It turns the debtors into indentured servants for the indefinite future. The entire world has basically overlooked this, along with most other tenets of sound economics.
The second is inflation. Like debt, inflation induces people to live above their means, but its consequences are even worse, because they’re indirect and delayed. If the central bank deposited $10,000 in everyone’s bank account next Monday, everyone would think they were wealthier and start consuming more. This would start a business cycle. The business cycle is always the result of currency inflation, no matter how subtle or mild. And it always results in a depression. The longer an inflation goes on, the more ingrained the distortions and misallocations of capital become, and the worse the resulting depression. We’ve had a number of inflationary cycles since the end of the last depression in 1948. I believe we’re now at the end of what might be called a super-cycle, resulting in a super-depression.
The third is the export of dollars. This is unique to the US and is the reason the depression in the US will in some ways be worse than most other places. Since the early ’70s, the dollar has been used the way gold once was – it’s the world’s currency. The problem is that the US has exported about $7 trillion in exchange for good things from around the world. It was a great trade for a while. The foreigners get paper created at essentially zero cost, while Americans live high on the hog with the goodies those dollars buy.
But at some point quite soon, dollars won’t be readily accepted, and smart foreigners will start dumping their dollars, passing the Old Maid card. Ultimately, most of the dollars will come back to the US, to be traded for the title to land and businesses. Americans will find that they traded their birthright for a storage unit full of TVs and assorted tchotchkes. But many foreigners will also be stuck with dollars and suffer a huge loss. It’s actually a game with no winner.
These last three factors have enabled essentially the whole world to live above its means for decades. The process has been actively facilitated by governments everywhere. People like living above their means, and governments prefer to see the masses sated.
The debt and inflation have also financed the growth of the welfare state, making a large percentage of the masses dependent, even while they’ve also resulted in an immense expansion in the size and power of the state over the last 60-odd years. The masses have come to think government is a magical entity that can do almost anything, including kiss the economy and make it better when the going gets tough. The type of people who are drawn to the government are eager to make the state a panacea. So they’ll redouble their efforts in the fiscal and monetary areas I’ve described above, albeit with increasingly disastrous results.
They’ll also become quite aggressive with regulations (on what you can do and say, and where your money can go) and taxes (much higher existing taxes and lots of new ones, like a national VAT and a wealth tax). And since nobody wants to take the blame for problems, they’ll blame things on foreigners. Fortunately, (the US will think) they have a huge military and will employ it promiscuously. So the already bankrupt nations of NATO will dig the hole deeper with some serious – but distracting – new wars.
It’s most unfortunate, but the US and its allies will turn into authoritarian police states. Even more than they are today. Much more, actually. They’ll all be perfectly fascist – private ownership of both consumer goods and the means of production topped by state control of both. Fascism operates free of underlying principles or philosophy; it’s totally the whim of the people in control, and they’ll prove ever more ruthless.
So where does that leave us, as far as accumulating more wealth than the average guy is concerned? I’d say it puts us in a rather troubling position. The general standard of living is going to collapse, as will your personal freedom. And if you’re an upper-middle-class person (I suspect that includes most who are now reading this), you will be considered among the rich who are somehow (this is actually a complex subject worthy of discussion) responsible for the bad times and therefore liable to be eaten. The bottom line is that if you value your money and your freedom, you’ll take action.
There’s much, much more to be said on all this. I’ve said a lot on the topic over the past few years, at some length. But I thought it best to be brief here, for the purpose of emphasis. Essentially, act now, because the world’s combined economic, financial, political, social, and military situation is as good as it will be for many years… and a lot better than it has any right to be.
What To Do
No new advice here, at least as far as veteran readers are concerned. But my suspicion is that very few of you have acted, even if you understand why you should act. Peer pressure (I’m confident that you have few, if any, friends, relatives, or associates who think along these lines) and inertia are powerful forces.
That said, you should do the following.
1. Maintain significant bank and brokerage accounts outside your home country. Consider setting up an offshore asset protection trust. These things aren’t as easy to do as they used to be. But they’ll likely be much less easy in the future.
2. Make sure you have a significant portion of your wealth in precious metals and a significant part of that offshore.
3. Buy some nice foreign real estate, ideally in a place where you wouldn’t mind spending some time.
4. Work on getting official residency in another country, as well as a second citizenship/passport. There’s every advantage to doing so, and no disadvantages. That’s true of all these things.
One more thing: Don’t worry too much. All countries seem to go through nasty phases. Within the lifetime of most people today, we’ve seen it in big countries such as Russia, Germany and China. And in scores of smaller ones – the list is too long to recount here. The good news is that things almost always get better… eventually.
By Jeff Nielson
While watching a little television the other night, I was once again confronted by my biggest pet peeve: investment professionals who confuse risk and volatility.
In this case, the offender was a TV commercial heralding the supposed virtues of an annuity with a “guaranteed rate of return.” The suggestion is that such an arrangement removes risk from the table. The investor is led to think, “If I pay monthly payments of $X now, I am guaranteed future payments of $Y in the future.” But every investment carries risk, and a fixed payout structure doesn’t obviate that risk.
These companies have a financial interest in confusing investors, but the unfortunate byproduct of decades of this sort of marketing is that very few people, and not even most financial journalists, know the difference between risk and volatility. As always, logical analysis starts with definition of terms. Indeed, once we simply note the nature of volatility and risk in explicit terms, the flaws to which I alluded should begin to become self-evident to readers.
While it can be very difficult to quantify risk, defining it is simple. Risk, in the context of investment, is the probability that something you purchased will end up being worth less than what you paid for it when you decide to sell it. We can get more technical by adding in the concept of opportunity costs, but it’s important for everyone to have at least an elementary understanding of risk first.
Volatility, on the other hand, is a concept that is as easy to recognize in the real world as it is to define. Volatility is a purely mathematical concept that refers exclusively to “deviations from the mean.”
If we establish a trend line for the price of any good/investment (often referred to as a “moving average”), volatility refers to the average size of the bounces in price on either side of the trend line. Most importantly, to the long-term investor, volatility is a small factor in assessing risk.
Here we can only point to the gross failure of all of the “experts” (and most of the financial advisors) in the investment community, who regularly and thoroughly confuse these two concepts to the point where the terms are treated as being virtually synonymous. This has resulted in the flawed investment principle that reducing volatility will (and must) reduce risk. Such thinking is deeply misguided, and following it has dire consequences for investors.
Recalling our definition of volatility, we should immediately note why it provides us little insight about risk: because it implies absolutely nothing about the direction of the trend for any particular investment, i.e. up or down. A particular investment can have a volatility of effectively zero, while marching steadily down to a valuation of zero.
The closest and most obvious example of a relentless downward trend with minimal volatility would be the US dollar. This example is useful for many reasons. First, the Federal Reserve has a statutory mandate to “protect the dollar” from risk, i.e. avoid a loss in value. However, in practice, the Federal Reserve has never followed that mandate; instead, it has sought to only minimize volatility.
The result? In the 98 years of the Fed’s existence, the US dollar has steadily lost 98% of its value. The Fed has succeeded in minimizing volatility throughout this long plunge in value; however, it has failed utterly in protecting dollar-holders from risk, or economic losses caused by holding dollars.
Many dollar-holders may still be yawning over this analysis. While no one likes the idea of a 98% loss, when spread over the very long-term, this may not seem like much of a risk. However, when we note that 75% of this decline has occurred just in the last 40 years, this should get their attention. When we further note that this alarming rate of currency-dilution has accelerated significantly just in the last five years, this should be enough to cause all rational dollar-holders to break into a cold sweat.
Meanwhile, clueless media drones still point to the dollar as a “safe haven,” basing this suicidal advice entirely on the fact that the dollar represents (relatively) low volatility – while totally ignoring the absolute risk represented by an accelerating, century-long trend toward zero.
Living in an era of “competitive devaluation,” where all of our governments have promised to race each other in driving the value of their currencies to zero, we finally see the truth about the world of fixed-income investments. Because the banker-paper in which they are denominated is plummeting in value at an unprecedented rate, these investments don’t provide “guaranteed income,” but rather only guaranteed losses.
It is the perfect illustration of the clichÃ© of “the lobster in the pot.” The lobsters (bond-holders) may be entirely comfortable thanks to the slowly rising temperature of the water; however, they’re still going to end up boiled alive!
It is widely reported that real interest rates have never been so negative at any time in history. To translate this, the gap between what we earn in interest and what we lose in currency-dilution (i.e. inflation) has never been this large at any time in the history of modern markets.
Precisely how do the largest guaranteed losses in history on fixed-income investments represent a “safe haven”? This is something that the “experts” conveniently omit in dispensing their foolhardy advice.
Readers must realize, however, that there are viable options. Once we correctly define the problem, namely protecting ourselves from risk, we can begin to understand the solution to our problem: looking for investment products and opportunities which minimize risk rather than merely minimizing volatility.
The obvious starting point is to swap all of our bonds for bullion: a real safe haven. In the case of gold and silver, we have an asset class with a 2,000+ year track record for preserving wealth, combined with a 10+ year up-trend in this recent bull market. That is safety.
In comparison, we have US Treasuries. The starting point here is that with US interest rates are currently at 0%, leaving investors with no return and virtually no hope for price appreciation. On top of that, they are denominated in US dollars, which have already lost 98% of their value – and are losing value even faster every day.
Fiat currencies also have their own track record: a 1,000+ year history of always going to zero. We immediately see how utterly irrelevant it is that US Treasuries are a relatively low-volatility asset. There is no less-volatile number than zero!
In proclaiming buy-and-hold investing to be dead, the pseudo-experts masquerading as financial advisors have abandoned the fundamental principle of investing: buying undervalued assets – and then giving those assets the time necessary to mature. Instead, these charlatans have forced their clients to become short-term gamblers. Worse still, they are now consistently steering their clients toward the worst possible asset-classes rather than the best ones.
Most of the recent mass-market movements can be directly attributed to the failure by most investors to understand the fundamental conceptual difference between risk and volatility. In a market populated by panicked lemmings, we cannot avoid volatility. However, we can and must reduce risk – which begins by building an allocation of history’s true safe haven asset, precious metals.