Why Own Physical Gold
Monday, 4/07/2014 18:16
Here are some numbers...silly or perhaps not...
In 2001, as the painful end of the long stock bull market finally seeped into my consciousness, I began to grow quite concerned about my traditional stock and bond holdings, writes Chris Martenson at
Peak Prosperity.
Other than a house with 27 years left on a 30-year mortgage, these paper holdings represented 100% of my investing portfolio. So I dug into the economic data to discover what the future likely held. What I found shocked me.
It's all in my
Crash Course, in both video and book form, so I won't go into that data here; but a key takeaway is that the US is spending far more than it is earning, and supporting that gap by printing a whole lot of new money.
By 2002, I had investigated enough about our monetary, economic, and political systems that I came to the conclusion that holding gold and silver would be a very good idea. So I poured 50% of my liquid net worth into precious metals, and sat back and waited.
So far so good. But the best is yet to come...unfortunately. I say 'unfortunately' because the forces that are going to drive gold higher in current Dollar terms are the very same trends that are going to leave most people, and the planet, much worse off than they are now.
Why own gold? The reasons to hold gold (and silver), and I mean physical bullion, are pretty straightforward. So let's begin with the primary ones:
- To protect against monetary recklessness;
- As insulation against fiscal foolishness;
- As insurance against the possibility of a major calamity in the banking/financial system;
- For the embedded 'option value' that will pay out handsomely if gold is re-monetized.
By 'monetary recklessness,' I mean the creation of money out of thin air and the application of more liquidity than the productive economy actually needs. The central banks of the world have been doing this for decades, not just since the onset of the 2008 financial crisis. In gold terms, the supply of above-ground gold is growing at 1.7% per year, while the money supply has been growing at more than three times that yearly rate since 1960.
Over time, that more than 5% growth differential has created an enormous gap due to the exponential 'miracle' of compounding.
Now this is admittedly an unfair view, because the economy has been growing, too. But money and credit growth has still handily outpaced the growth of our artificially and upwardly-distorted GDP measurements by a wide margin. Even as the economy stagnates under this too-large debt load, the credit system continues to expand as if perpetual growth were possible. Given this dynamic, we continue to expect all the resulting extra Dollars, debts and other assorted claims on real wealth to eventually show up in prices of goods and services.
And since we live in a system where money is loaned into existence, we also have to look at the growth in credit, as well. Since 1970 the US has been compounding its total credit market debts at the astounding rate of nearly 8% per annum.
This desperate drive for continuous compounding growth in money and credit is a principal piece of evidence that convinces me that hard assets, of which gold is perhaps the star representative for the average person, are the place to be for a sizeable portion of your stored wealth.
Real interest rates are deeply negative (meaning that the rate of inflation is higher than Treasury bond yields). This is a forced, manipulated outcome courtesy of central banks that are buying bonds with thin-air money. Of course, the true rate of inflation is much higher than the officially reported statistics by at least a full percent or possibly two, and so I consider bond yields to be far more negative than your typical observer.
Historically, periods of negative real interest rates are nearly always associated with outsized returns for commodities, especially precious metals. If and when real interest rates turn positive, I will reconsider my holdings in gold and silver, but not until then. That's as close to an absolute requirement as I have in this business.
Monetary policies across the developed world remain as accommodating as they've ever been. Even Greenspan's 1% blow-out special in 2003 was not as steeply negative in real terms as what Bernanke engineered over his more recent tenure. But it is the highly aggressive and 'alternative' use of the Federal Reserve balance sheet to prop up insolvent banks and to sop up extra Treasury debt that really has me worried.
There seems to be no way to end these ever-expanding programs, and they seem to have become a permanent feature of the economic and financial landscape. In Europe, the equivalent is the sovereign debt now found on the European Central Bank (ECB) balance sheet. In Japan we have prime minister Abe's ultra-aggressive policy of doubling the monetary base in just two years. Suffice it to say that such grand experiments have never been tried before, and anyone that has the vast bulk of their wealth tied up in financial assets is making an explicit bet that these experiments will go exactly as planned.
Federal fiscal deficits are seemingly out of control and are now stuck in the $1 trillion range. Massive deficit spending has always been inflationary, and inflation is usually gold/silver friendly. Although not always, mind you, as the correlation is not strong, especially during mild inflation (less than 5%). Note, for example, that gold fell from its high in 1980 all the way to its low in 1998, an 18 year period with plenty of mild inflation along the way. Sooner or later I expect extraordinary budget deficits to translate into extraordinary inflation.
Reason #3, insurance against a major calamity in the banking system, is an important part of my rationale for holding gold. And let me clear: I'm not referring to "paper" gold, which includes the various tradable vehicles (like the "GLD" ETF) that you can buy like stocks through your broker. I'm talking about physical gold and silver because of their unusual ability to sit outside of the banking/monetary system and act as monetary assets.
Literally everything else financial, including our paper US money, is simultaneously somebody else's liability. But gold and silver bullion are not. They are simply, boringly, just assets. This is a highly desirable characteristic that is not easily replicated.
Should the banking system suffer a systemic breakdown, to which I ascribe a reasonably high probability of greater than 1-in-3 over the next 5 years, I expect banks to close for some period of time. Whether it's two weeks or six months is unimportant; no matter the length of time, I'd prefer to be holding gold than bank deposits.
During a banking holiday, your money will be frozen and left just sitting there, even as everything priced in money (especially imported items) rocket up in price. By the time your money is again available to you, you may find that a large portion of it has been looted by the effects of a collapsing currency. How do you avoid this? Easy; keep some 'money' out of the system to spend during an emergency. I always advocate three months of living expenses in cash, but you owe it to yourself to have gold and silver in your possession as well.
The test run for such a bank holiday was recently tried out in Cyprus where people woke up one day and discovered that their bank accounts were frozen. Those with large deposits had a very material percentage of those funds seized so that the bank's more senior creditors, the bondholders, could avoid the losses they were due.
Most people, at least those paying attention, learned two things from Cyprus:
- In a time of crisis those in power will do whatever it takes to assure that the losses are spread across the population rather than taken by the relatively few institutions and individuals that should take the losses.
- If you make a deposit with a bank, you are actually an unsecured creditor of that institution; which means you are legally last in line for repayment should that institution fail.
The final reason for holding gold, because it may be remonetized, is actually a very big draw for me. While the probability of this coming to pass may be low, the rewards would be very high for those holding gold should it occur.
Here are some numbers: The total amount of 'official gold,' or that held by central banks around the world, is 31,320 tonnes, or 1.01 billion troy ounces. In 2013 the total amount of money stock in the world was roughly $55 trillion. So if the world wanted 100% gold backing of all existing money, then the implied price for an ounce of gold is $54,455 per troy ounce.
Clearly that's a silly number (or is it?). But even a 10% partial backing of money yields $5,400 per ounce. The point here is not to bandy about outlandish numbers, but merely to point out that unless a great deal of the world's money stock is destroyed somehow, or a lot more official gold is bought from the market and placed into official hands, backing even a small fraction of the world's money supply by gold will result in a far higher number than today's $1300 per ounce.
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