September 26, 2013
Santiago, Chile
This morning I received a research note from a private bank I work with occasionally. Buried in the text was a call for lower gold prices, and the analysts listed five reasons why they think gold prices will decline. Here’s what they had to say:1) “We expect the scaling back of [the Fed’s] stimulus to happen this year at the December meeting. A reduction in monetary stimulus . . . shall reduce the attractiveness of gold as a zero-income asset.”
2) “Inflation pressures in the developed world should remain subdued, lowering demand for gold as an inflation-hedge.”
3) “We expect the US recovery to accelerate, reducing the attractiveness for gold as a safe-haven asset.”
4) “A subsequent improvement in investor sentiment shall also reduce demand for gold as safe-haven asset.”
5) “Physical demand from India should be discouraged by the gold import duty increases and other measures that aim to reduce the current account deficit.”
My analysis? These guys are completely missing the point.
The reality is that today’s financial markets are controlled and manipulated by central bankers who are destructively expanding their balance sheets to the point of insolvency. Many central banks are already insolvent. Most “rich” countries are bankrupt.
And the “richest” country in the world has entered yet another sad, farcical episode public fiscal humiliation.
The US government is so broke that they fail to collect enough tax revenue to cover mandatory entitlement spending (like Social Security) and interest on the debt. And that’s with interest rates at all-time lows.
The debt is growing by the day. The US government reached its statutory debt limit back in May, and as soon as they raise the debt ceiling, they’ll quickly reach the new limit again.
The US government cannot even afford the 1.968% average interest that it is currently paying. (This is compared to 6.620% back in January 2001, and 3.665% in September 2008 when Lehman collapsed…)
Politicians are seizing pension funds, raiding bank accounts, and raising taxes. They’ve imposed capital controls, and even restricted gold importation and ownership.
Investors are addicted to cheap money like meth junkies. Stock markets are at all-time highs. Bond markets are near all-time highs. Many other asset classes (US farmland) and commodities (cattle) are also near all-time highs.
There’s very little in this world that makes sense.
I own farmland in South America as the ultimate hedge against inflation, system disruptions, and economic decline. Plus it generates great cashflow.
But farmland isn’t terribly portable or liquid. And that’s why gold is such a great option.
Precious metals are like an insurance policy. It’s a policy you hope you’ll never need to cash in. But if the need ever arises, it’ll probably be because the financial system has collapsed, and the gold price has gone to the moon… potentially even tens of thousand of dollars.
(Jim Rickards, author of the excellent book Currency Wars, made a very compelling and rational case for this at our event in Chile six months ago…)
If that day ever comes, you’ll be thankful that you had the foresight to trade away some paper currency for real savings.
