The global economy may be facing its ‘Minsky moment’ of excessive debt — and that is great for gold prices

MarketWatch/Mark DeCambre

Image of Jon Exter's inverted credit pyramid with derivatives at the top and gold at the bottom and various other credit instruments in between“For Trey Reik, senior portfolio manager at Sprott Asset Management USA, current economic conditions bear the hallmarks of a so-called Minsky moment, in which over-leveraged investors are compelled to sell their investments, catalyzing a major market downturn — an ideal environment for gold. . .[He] makes the case that the Federal Reserve’s recent interest-rate reduction in July and expectations that it will continue to cut rates, are a tacit acknowledgment that the central bank must keep interest rates low or risk a debt meltdown.”

USAGOLD note:  Reik believes that interest rates must continue to decline “to keep the ever-burgeoning debt pyramid from toppling.”

“[Exter’s Inverted] Pyramid stands upon its apex of gold, which has no counter-party risk nor credit risk and is very liquid.  As you work higher into the pyramid, the assets get progressively less creditworthy and less liquid. . .[In a financial crisis] this bloated structure pancakes back down upon itself in a flight to safety.  The riskier, upper parts of the inverted pyramid become less liquid (harder to sell), and – if they can be sold at all – change hands at markedly lower prices as the once continuous flow of credit that had levitated those prices dries up.” – Lewis Johnson, Capital Wealth Advisor’s Lewis Johnson

In short, what Lewis Johnson outlines is the bottom-line rationale for diversifying one’s portfolio with gold. For a more detailed analysis of Exter’s Inverted Pyramid, we invite you to visit the May 2019 edition of News & Views, our monthly newsletter.

Repost from 8/22/2019

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