Short and Sweet

For gold . . .
‘It is not a question of if, but when’

The lesson is one as old as the gold market itself: The best time to buy is when the market is quiet – a strategy that requires both discipline and conviction. As an old friend and client used to say (he passed away years ago): “It is not a question of if, but when.” He accumulated a large hoard of the metal in the 1990s and early 2000s between $300 and $600 per ounce and lived to see his prediction come true. His estate though was the ultimate beneficiary of his wisdom. He was not one to sell gold once he had acquired it. We chatted regularly on the phone back then and I told him that I had used the story just told in one of my newsletters.  He was in his late 80s at the time. “Tell them,” he said resolutely, “that I bought my first ounce of gold at $35.”

photo of pile of $20 St. Gaudens gold pieces

The possession of gold has ruined fewer men than the lack of it.”
– Thomas Bailey Aldrich –


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Short and Sweet

1970s redux?
“Policymakers did not see it coming.’

overlay chart showing real return on the 10-year treasury and gold 2004 to present

Sources: St. Louis Federal Reserve, Federal Reserve Board of Governors, ICE Benchmark Administration

In the days ahead, the markets will be looking to the Fed to reassert itself as the bond buyer of last resort and keep a lid on the real rate of return, as shown in the chart above. If it fails in that respect, we might end up with a full extension of late February’s bond market panic. No one is more aware of what that could mean for the economy and financial markets than the Federal Reserve’s board of governors. As for gold, the chart clearly demonstrates that it has a propensity to rise when the real rate of return is in decline and decline when real rates are on the rise. Should inflation suddenly surge, or the Fed indeed become a more aggressive buyer of Treasuries (more QE), the current uptrend in the real rate could turn abruptly.  As it is, the much-ballyhooed upward turn in real rates looks like a minor blip in a major overall downtrend.

At the moment, it does not appear that Fed liquidity operations are keeping up with an onslaught of bond selling that is pushing yields aggressively higher.  That could change overnight. We should keep in mind that the Fed moved quickly and convincingly in money markets last March at the first signs of bond market weakness. Meanwhile, the central bank’s bond portfolio continues to expand at a record pace, and we haven’t even gotten around to fully distributing the $1.9 trillion stimulus package and the $2.4 trillion infrastructure project.

In the final analysis, it rising inflation that will be the most culprit in accelerating the negative real rate of return and sustaining physical demand in the gold and silver markets. “If you look at the inflation of the 1960s and 70s,” says Paul Singer in a recent interview with Grant Williams and Bill Fleckenstein, “inflation came in the mid to late 1960s, from basically very low levels, they didn’t see it coming. They, meaning the policymakers, the central bankers, and when it came, they thought it was temporary and one-off, and one thing leads to another. So we know about the oil embargo of 1973, which took oil prices up three or four times. So wages, prices, guns and butter, the Great Society, the Vietnam War, and increases in the money supply, all combined. But once inflation lifted off, it just kept on going.”

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Short and Sweet

Worry about the return ‘of’ your money, not just the return ‘on’ it

photograph of a bag of gold coins
There is an old saying among veteran investors to worry not just about the return on your money, but the return of your money. In the wealth game, emphasize defense when you need to, offense when it makes sense. At all times, remain diversified. And by that, we mean real diversification in the form of physical gold and silver coins and/or bullion outside the current fiat money system – not just an assortment of stocks and bonds denominated in the domestic currency. Keep in mind – if the currency erodes in value, the underlying value of those assets erodes along with it. A proper, genuine diversification addresses that problem now and in the future.


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Short and Sweet

How to hedge electronic circuitry run amok

With respect to the growing dominance of machines on Wall Street, I recall the old Star Trek episode that involves a visit to a planet where the inhabitants seem to be living in a state of perfect bliss. Captain Kirk knows that this cannot be right. There is no such thing as perfect happiness. As it turns out, the population is controlled not by a loathsome dictator who has drugged the population into compliance, but by a computer that has evolved sufficiently to somehow gain control of their minds. Something must be done, concludes Kirk, to break its hold. Spock comes up with the solution by instructing the computer “to resolve the value of pi” – an impossibility because its resolution, as we all remember from high school math class, is infinite. The computer spends all of its time and devotes all of its resources trying to achieve the impossible and the dictatorial hold it has on the population is released – a trick we might want to keep in mind for the day computers complete their mastery of Wall Street.

Similarly, Financial Times once told the story of the textbook, The Making of a Fly: The Genetics of Animal Design. It started out selling for $113 per copy at Amazon – that is, until the governing algorithm misfired between two third-party sellers. The price then skyrocketed to $23 million before someone took note and fixed the problem. We forget that computer software, and this applies to Wall Street’s trading apparatus as readily as it does the Amazon pricing platform, is only as reliable and intelligent as the code by which it is instructed to operate. The practical equivalent to Mr. Spock’s solution in the financial realm is to store sufficient capital in the form of gold and silver coins detached from electronic circuitry that might run amok. 


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photos of stack of gold bars

Bloomberg study

The remarkable post-World War II stability is coming to an end

The only certainty in a world being turned upside down, in fact, is uncertainty

We would like to bring to your attention the results of an intriguing study posted at Bloomberg under the title, An Economist’s Guide to the World in 2050. In it, economists Tom Orlik and Bjorn van Roye offer a close look at the ongoing transition of wealth and power from West to East and assess what it might mean for the United States and American investors. Their statistical study maps “some of the key geographic and political shifts in store for the world economy” in the years to come. “The results,” they say, “suggest that a remarkable period of stability, stretching from the end of World War II through to the early 21st century, is coming to an end.” We would add that just as wealth and power have moved West to East, so has a large portion of the world’s physical gold, particularly since the beginnings of the global financial crisis in 2008. (Please see chart below on Chinese gold accumulation.)

Orlik and van Roye begin with a question: “Who won the Cold War?” And answer immediately: “Maybe China.” They say that rather than being at the end of history as some thought following the end of the Cold War, we are really nearer the beginning. The world, they say, “is in the midst of a messy transition as the balance of economic and political power shifts from West to East, from free markets to the state and from democracies to authoritarianism and populism. … The transition is already upending global politics, economics and markets.”

We recommend spending a few minutes to read this article. If you come away, as we did, with the impression that the study’s findings serve as a wake-up call, then you might want to make certain that your portfolio is sufficiently hedged to weather the possible uncertainties ahead. The only certainty in a world being turned upside down, in fact, is uncertainty.  As we have been so rudely reminded over the course of the past year, we are all being carried on the long wave of history – destination unknown. 

overlay line and bar chart showing China's accumulation of gold since 1980
Chart courtesy of GoldChartsRUs • • • Click to enlarge

Tom Orlik is the chief economist at Bloomberg Economics. Bjorn van Roye is the Senior Global Economist at Bloomberg.


This article appeared in the December edition of our newsletter. If you would like to be included in our monthly mailings, please enter your email address in the form below.

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Short and Sweet

Thinking in big numbers

Big numbers do not register with most people. Thinking in millions is difficult. Billions are a major challenge, trillions nearly impossible. The reason for this, says Wall Street Journal columnist Jo Craven McGinty, is that big numbers are usually offered in isolation without the benefit of comparison – numbers without an appropriate anchor, so to speak. People need some sort of measuring stick to give the numbers meaning. She recently offered some interesting tactics for making big numbers meaningful. Here is one of them:

“[T]hink of it [big numbers],” she says, “in terms of time, like Richard Panek, a professor at Goddard College in Vermont and a Guggenheim fellow in science writing. There are 1 million seconds in roughly 11½ days. There are 1 billion seconds in around 31 years. And there are 1 trillion seconds in around 31,000 years.”

Now the new Secretary of the Treasury is telling us that we need to ‘act big’ and worry about the $28,081,128,042,930.95 (as of April 1, 2021) national debt later.


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Short and Sweet

The Exter Inverted Pyramid of Global Liquidity

Exter's inverted debt pyramid with derivatives at top and gold on the bottom

“[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


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Short and Sweet

Blowing up the “Everything Bubble”

graphic image of a harried investor watching the blow-up of the financial bubble

“What the average person fails to understand,” writes Lance Roberts in an analysis posted at the Real Investment Advice website, “is that the next ‘financial crisis’ will not just be a stock market crash, a housing bust, or a collapse in bond prices.  It could be the simultaneous implosion of all three. Whatever causes that change in sentiment is unknown to me or anyone else.  I am not saying with certainty it will happen, as I hope sanity prevails and actions are taken to mitigate the consequences. Unfortunately, history suggests such is unlikely to be the case.”

And, we might add, it is not likely the damage will be restricted to the United States. All the largest and most advanced economies are engaged in rate suppression and quantitative easing schemes. In fact, an implosion in one location could cause corresponding meltdowns in multiple locations. Easy money and heavy leverage have greatly influenced price levels in all markets heightening rollover risks. And then there’s the derivative problem with notional exposure estimated at more than $1 quadrillion, according to Investopedia (4/28/2020)


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Short and Sweet

Of wheelbarrows and runaway inflation

graphic image of a gold money machine

As Crescat Capital’s Kevin Smith and Tavi Costa point out in a recent client alert, the U.S. government issued $4.4 trillion of debt in 2020, and $2.4 trillion, or 54%, was purchased by the Federal Reserve. They believe that $300 billion per month in quantitative easing will be needed to cover the upcoming tab as opposed to the current $120 billion per month. “Global central bank money printing is one of the primary drivers of the gold price,” they say. “Our current valuation target for gold based on the level of central bank assets and the inelastic supply of above-ground gold is $3,200/oz. Note, this is a rising target.”

“Really smart investors,” says Morning Porridge’s Bill Blain, the London-based commentator, “are increasingly hedging their wealth created from financial assets (stocks and shares) by putting much of their allocations into Alternatives: outright real assets or cash flow driven assets, assets that are likely to retain value while still paying attractive returns. (The cost is lower liquidity). The idea is that if crisis ever comes, then owning the wheelbarrow might be better than owning the mountains of worthless cash it’s carrying (to cite the classic example of inflationary danger from Weimar Germany…)” If runaway inflation truly does materialize, a wheelbarrow full of gold and silver might be an even better option ……


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Short and Sweet

What if pension funds put 5%of their total asset value into gold?

Last August the Ohio Police and Fire Pension Fund (OP&F) announced it would allocate 5% of its nearly $16 billion investment portfolio to gold as a “strong diversifier” and “effective hedge against inflation.” A 5% allocation to gold for the fund, if achieved, would amount to roughly $800 million at $2,000 per ounce – about 400,000 troy ounces or 12.5 metric tonnes. Even though that commitment amounts to a formidable boost for the annual demand table, OP&F is just a small slice of the $22.4 trillion U.S. pension fund universe.

Pension fund total assets
(United States, 2002-2018)

bar chart showing pension fund assets in the United StatesChart courtesy of Statista.com • • • Click to enlarge

If by some stretch of the financial imagination, U.S.-based pension funds were to follow the OP&F’s example and allocate 5% to gold across the boards, over $1.12 trillion would suddenly enter the gold market – the equivalent of almost 17,500 metric tonnes at current prices and an amount equal to half central banks’ total gold reserves. That is not a likely outcome but we throw the number out there just to offer an idea of pension funds’ purchasing power. Globally, pension funds have roughly $35 trillion under management. If only 1% were allocated, it would translate to almost 5,5oo tonnes – still a significant number.


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Short and Sweet

Gold’s relativity
Do not take your eye off the prize

blindfolded seeker can't see lighted room

Gold’s value is relative. It doesn’t really matter how many digits it takes to express the price. Its true value lies in what those digits represent in terms of purchasing power. During the post-World War I hyperinflation in Germany, for example, a 20-mark gold coin in 1918 purchased the equivalent of twenty marks worth of goods and services in the marketplace. By 1924 that same 20-mark gold coin (weighing roughly one-quarter troy ounces) provided the purchasing power of nearly 25 billion paper marks.

By pointing out this example of gold’s constancy, we do not intend to imply that the United States is headed the way of the Weimar Republic.  What we do mean to say, though, is that those who track the nominal value of gold by itself without taking into account the current and future value of the currency in which it is measured take their eye off the prize.

What are the intentions of the central bank and federal government, we should ask ourselves, and what will be the likely effect on the currency?

__________________________________________________________________________________________________

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Short and Sweet
‘Wannabes’ and ‘Gonnabes’  not the real thing

photograph of gold bullion coins and historic gold coins USAGOLD

‘Put differently, as long as humans remain tangible, it is likely that they maintain a desire to hold real and tangible assets. Very few companies on the US stock exchange, for example, are older than 50 years. By comparison, gold has existed for thousands of years and any gold coin or gold bar will most likely outlive any company and their stocks and bonds. Put together, it is unlikely that a company that sells claims on gold, such as a gold ETF, will beat physical gold’s longevity.” – Dick Baur, Professor of Finance, University of Western Australia (Why ‘digital gold’ won’t ever kill off the real thing)

Wannabe and gonnabe paper gold and silver will never pass for history’s time-honored store of value – nor will it be mistaken for actual gold coins or bars stored nearby should the cold wind blow. By the way, adding the word, blockchain, to a paper gold product might enhance its marketing appeal, but it changes nothing in terms of its usefulness to the investor.  The instrument is still paper gold and little more than a price bet.

Full article link


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Short and Sweet

When the United States owned most of the gold on Earth

bar chart showing U.S. gold reserves 1870 to present

Chart courtesy of GoldChartsRUs

Few Americans know that just after World War II the United States owned most of the official sector gold bullion on earth – about 22,000 metric tonnes or 80% of the world total.  As part of the 1944 Bretton Woods Agreement, though, the United States allowed unrestricted redemptions from its reserves at the benchmark rate of $35 per ounce. In the 1960s, a group of European countries, led by Germany and France, got the idea that U.S. trade and fiscal deficits had undermined the dollar, making gold a bargain at the $35 benchmark price. Steadily over the next decade, they exchanged dollars for gold at the U.S. Treasury’s gold window. By the early 1970s, 14,000 tonnes of gold – or 64% of the stockpile – had departed the U.S. Treasury never to return (See the chart above).

The transfer of gold finally ended in 1971 when President Nixon halted redemptions, devalued the dollar and freed the greenback to float against other currencies. The era of global fiat money with the dollar as its centerpiece had begun. Gold transformed from its official role as backing the dollar to serving as a hedge against its depreciation. Since that role reversal, gold has risen in fits and starts from the $35 official benchmark in 1971 to a peak of over $1900 in 2011. It is trading now in the $1700-$1800 range. For the central banks and private investors who redeemed their dollars for gold at $35 per ounce, the gains have been extraordinary – over 5000% at current prices or 8.2% annually compounded over the 49-year period.  Simultaneously, the 1971 dollar has lost more than 84% of its purchasing power.


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Short and Sweet

The coronavirus pandemic will forever alter the world order

photo of Henry Kissinger making a point

In a Wall Street Journal editorial from this past April, former Secretary of State Henry Kissinger said that the pandemic has created “political and economic upheaval that could last for generations” and that this crisis is even more complex than the one that began in 2008. “When the Covid-19 pandemic is over,” he says, “many countries’ institutions will be perceived as having failed. Whether this judgment is objectively fair is irrelevant. The reality is the world will never be the same after the coronavirus.” If global authorities – governments and, in this case, central banks – will be perceived as having failed, then what will be the knock-on effect in financial markets that have leaned heavily on their largesse since 2008? The new normal may be in the process of being replaced by a new abnormal that every investment portfolio should take into account.

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Short and Sweet

– One for the history buffs  –

730 years of a strong British pound ends in 1931 with gold standard exit

ovelay chart showing price of gold and UK CPI over 730 years

Sources: Bank of England, ICE Benchmark Administration,
St. Louis Federal Reserve [FRED] •  • • Click to enlarge

This telling chart from the St. Louis Federal Reserve chronicles the history of consumer prices in the United Kingdom from 1209 to present. We added the price of gold to show the direct relationship between declining purchasing power in the British pound and the sterling price of gold after 1931, the year Britain departed the gold standard. Prior to 1931, there was an occasional minor bump higher in the price of gold, but for the most part, it followed along the same flat line as consumer prices. It was only after Britain separated the pound from gold in 1931 that the price began to move radically higher in terms of the currency. It gained significant momentum after 1971 when the Bretton Woods agreement was abolished. Currencies and gold were then allowed to move freely in international markets. Though interesting from a historical perspective, the real lesson in this chart is that when a nation-state goes from gold-backed to fiat money, gold coins and bullion become a logical and worthwhile alternative for citizen-investors – even after 730 years of relative price stability.


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Short and Sweet

Gold, vanadium, europium reveal
the existence of a mysterious particle

graphic image of gold nanopartilce wire“To observe the Majorana fermions, the team of physicists from the Massachusetts Institute of Technology, the Institute of Technology at Delhi, the University of California at Riverside, and the Hong Kong University of Science and Technology, designed and built a material system that consists of nanowires of gold grown atop a superconducting material, vanadium, and dotted with small, ferromagnetic ‘islands’ of europium sulfide, which is a ferromagnetic material that is able to provide the needed internal magnetic fields to create the Majorana fermions.” – Valentina Ruiz Leotaud, Mining.com/

USAGOLD note: This must have been what Ben Bernanke was talking about years ago when he said he didn’t understand gold. [Smile] Gold’s allure, to be sure, is a mystery to some, but for those who understand the ever-present dangers imposed by the money printing press, the only mystery is why so few own it.


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Short and Sweet

Gold coins, hoofs found in 2,000 year old Chinese tomb

Image of Confucius, old, black and white“Chinese archaeologists. . . discovered 75 gold coins and hoof-shaped ingots in an aristocrat’s tomb that dates back to the Western Han Dynasty (206 BC – 24 AD). The gold objects — 25 gold hoofs and 50 very large gold coins — are the largest single batch of gold items ever found in a Han Dynasty tomb. They were unearthed from the tomb of the first ‘Haihunhou’ (Marquis of Haihun) in east China’s Jiangxi Province. The coins weigh about 250 grams each, while the hoofs’ weights vary from 40 to 250 grams, said Yang Jun, who leads the excavation team.” – Xinhuanet/11-17-2015

USAGOLD note: These gold artifacts were found along with a portrait of Confucius, perhaps the oldest known. Wisdom and gold make easy company. Confucius once said something that has current applicability:  “In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of.”  Or at the very least, well-hedged ………


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Short and Sweet

“Bear markets are sneaky beasts. . .”

photo of a bear peaking out from behind a tree“Bear markets are sneaky beasts and they like to do their damage as secretly and as unobtrusively as possible. I hate to say it but somewhere ahead, the bears going to get it all together and the innocent little stream is going to turn into a waterfall. What can you do about it? Stay out of the market? Protect yourself by remaining in pure wealth, gold. For thousands of years, silver and gold have been treated as pure wealth. As the standard measures of wealth (stocks and bonds) have deteriorated, veteran investors have forgone profits and moved their assets into pure wealth.” – Richard Russell, King World News, 2016

USAGOLD note: King World News called the late, great Richard Russell – who regaled us with his wisdom in the Dow Theory Letter for nearly half a century – “the greatest financial writer in history.” We can only guess what Russell would have had to say about the current state of affairs, but the quote above provides a clue.  Never predictable in his opinions, he was rock solid on one axiom throughout his career – the necessity and transcendence of gold as a permanent component of the well-balanced investment portfolio. As he said, so often, it helped him sleep at night.


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Short and Sweet

The next great monetary experiment

Uncle Sam poster with quote bubble saying 'I need vast sums of money!'

Daily Reckoning’s Brian Maher warns of the potential consequences of modern monetary theory. “This MMT sounds like a recipe for immense inflation, even hyperinflation,” he says. “You are spending all this money directly into the economy. It will drive consumer prices through the attic roof, you say. This is crackpot. A witch’s sabbath of inflation would surely result. Yes, but here the MMT crowd meets you head on… They agree with you. They agree MMT could cause a general inflation, possibly even a hyperinflation.” [Link to full article]

Modern Monetary Theory (MMT), we would add to Maher’s observation, is neither modern nor a theory. John Law, the Scottish financier, tried a version of it almost exactly 300 years ago (1717-18) in France.* He did so with the blessing of the French monarchy and with a rationale very similar to MMT’s proponents today.  MMT entails, simply put, a federal government fiscal policy without spending limits coupled with the power to print whatever money is required to finance any deficits. In the end, Law’s theories (to his surprise if we are to believe the historical account) bankrupted the French people and the government, reduced the economy to ashes, and created such a distaste for paper scrip among the citizenry that it took 80 years for France to reintroduce paper money as a circulating medium.

In The Story of the Greatest Nations (1900), Edward S Ellis and Charles F. Home tell of the public mania that engulfed the French people and led to ultimate financial ruin for thousands:

“The shrewder speculators* became alarmed. They began to sell their shares of stock, and hoard in gold the enormous wealth they had acquired. This resulted in a demand on the government for metal in exchange for its paper, and soon the government had no metal to give. Then the crash came. Those who had the government paper could buy nothing with it. Those who held the Mississippi stock could scarce give it away. It was worthless. The government itself refused to accept its own paper for taxes. A few lucky speculators had made vast fortunes; but thousands of families, especially among the wealthier classes, were ruined.”

That snippet provides a hint as to the steps taken by those who survived Law’s version of modern monetary theory. For those to whom all of this has a distinct ring of familiarity, perhaps a judicious hedge makes some sense. A number of analysts have made the argument that we do not have to wait for the formal launch of modern monetary theory.  It is already here.

* Please see this link for a summary of  Law’s Mississippi Company land scheme.


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Short and Sweet

Why the U.S. needs to encourage Americans to hold gold

graphic image of gold eagle and the stars and stripes

We have always believed that citizen ownership of physical gold is in the national best interest, not just the best interest of its accumulators. In the event of a worldwide economic breakdown or a realignment of the global monetary system, it would be good for the country to have a storehouse of gold held by the populace. China encourages citizen gold ownership for precisely that reason.

“With a growing number of countries encouraging their central banks and citizens to acquire gold,” writes The Federalists Sean Fieler, “it is increasingly reasonable to assume that gold will be part of the world’s monetary future, not just its past. The U.S. Treasury should embrace policies that will attract more of the world’s gold to America and better position our citizens and our nation for whatever the monetary future may hold.”


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