The once and future Fourth Turning
Neil Howe predicted the financial crisis and pandemic.
What does he see coming next?

‘Gold is a good hedge against inflation, it is the ultimate store of value.’ 

“It was a long-term national and economic policy strategy decision to increase the size of our gold holdings,” says Robert Rekasi, who heads up foreign exchange reserves management for the Central Bank of Hungary, In a Central Banking magazine interview. “The decision was driven by stability objectives; there were no investment considerations behind holding gold reserves. In normal circumstances, gold has a confidence-building feature, so it may play a stabilizing role and act as a major line of defense under extreme market conditions, in times of structural changes in the international financial system, or during deep geopolitical crises. The central bank also decided to repatriate overseas gold holdings. Holding precious metals within the country is consistent with international trends, enhances financial stability, and may strengthen market confidence in the Hungarian economy.”

Central banks, in short, hold gold for the very same reasons that private individuals do. Rekasi says central banks do not buy gold through ETFs but via over-the-counter transactions or through purchases from domestic producers. In other words, they buy the metal itself (not paper representations) for strategic safe-haven purposes and are not making a price bet. In the interview linked above, Rekasi skillfully outlines the rationale for gold ownership in the contemporary financial environment for individuals, funds and institutions alike. He ends the interview by saying that “Gold is a good hedge against inflation; it is the ultimate store of value. Even if economic fundamentals evolve, and requirements can vary from advanced to emerging economies, gold’s strengths remain.” In other words, as we often point out in this monthly newsletter:  It is the investment for all seasons.

Bloomberg study finds the remarkable post World War II
stability is coming to an end.

In keeping with this month’s lead article on the Fourth Turning, we also 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 and 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. 

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.)

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Gold ranks in the top five holdings among U.S. investors

“Potential investors are put off,” says the World Gold Council in a recent report, “by the feeling that they don’t know enough about buying gold. In both countries {the U.S. and Canada], 7 in 10 of those investors who have never bought gold but are now open to it said they lacked the necessary know-how.”

That said, gold still ranks in the top five commonly-owned investments among Americans. At USAGOLD, we have always prided ourselves in educating first-time investors – taking the time and providing the means for would-be owners to learn about the investment and find their comfort level. This newsletter (published consistently since the mid-1980s) and the USAGOLD website (since 1997) are testaments to that commitment. You will find us just as dedicated to that standard should you contact us to discuss your needs concerns. We have thousands of clients – some stretching back to the 1970s – and a long history of efficiently and economically serving their investment needs. We invite you to become a client of the firm.

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‘In the best of all worlds, you don’t need gold.’

Throughout the pandemic’s advance, economists warned that it exposed some deep-rooted, pre-existing weaknesses in the economy that would have taken their toll at some point no matter what. Now that the election is decided and we have both a treatment and a vaccine in the offing, markets will begin the difficult process of sorting out just how much of the damage is reversible and how much is not. Investors will also begin to sort out just how a Biden presidency might play out in terms of government involvement in the economy. The Federal Reserve warned in mid-November that the United States still faces the possibility of debt defaults and “significant declines” in asset prices, according to a Reuters report. Commerzbank analyst Daniel Briesemann, quoted in another Reuters’ article, offered a few words of wisdom in that regard. “If you think that you’re living in the best of all worlds, then you don’t need gold,” he said. “However, this assessment seems to be premature.”  

Cartoon courtesy of MichaelPRamirez.com

Final Thought
The debt trap as Groundhog Day

It is difficult to read William H. White’s account of the central banks’ current dilemma without thinking of Bill Murray’s classic movie, Groundhog Day. It is the story, if you might recall, of a driven, somewhat overbearing fellow who lives the same day over and over again until he finally gets it right. White, in a recent interview with TheMarketNZZZ, tells a similar tale of central banks, including the U.S. Federal Reserve, imprisoned in a kind of monetary deja vu from which there is no escape. He calls it the debt trap.

“Central banks,” he says,” know they can’t leave interest rates as low as they are because they are inducing still more bad debt and bad behavior. But they can’t raise rates, because then they would trigger the very crisis they are trying to avoid. There is no way out but to keep doing what you are doing, but by doing that, you are making it worse. Pretty uncomfortable, right?” White makes the point that “they keep shooting themselves in the foot.” 

Perhaps, we should say they keep shooting themselves in the same foot. White’s debt trap – in which the markets wake up each turn of the cycle to a new and deeper version of the same crisis – amounts to a monetary version of Groundhog Day and a solid argument for gold ownership. (White does mention gold at one point as one of the places where capital might flee.)

We might take heart in knowing that Phil Connors, the character Bill Murray plays in the movie, finally does find redemption in Punxatawney, Pennsylvania. White, though, sees little of the same humility that bought Connors that reprieve among today’s central bankers. “We know much less than we think we do,” concludes White, “which is something that both Hayek and Keynes, commonly described as being at odds, totally understood. Central bankers, indeed all macroeconomists, should be much more humble than they are.”

(The full interview at the link above is a must-read for serious current and would-be precious metals  investors.)

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