I recently asked, “Will the Next Bank Bailout Bankrupt America?”. The casino banks risky derivative bets are much higher than the last bailout a decade ago. The risks will come home to roost and they will expect taxpayers to bail them out again. I concluded:
“Keep and increase your gold holdings. True reform would take us back to the gold standard, while our US dollar holdings would become nearly worthless.”
How do citizens protect themselves? We need a sound dollar, honest and safe banking system, and stop out of control government spending.
Dumping the Fed and reinstating the Glass-Steagall act might solve a portion of the problem.
How many times have we seen Argentina and others “revalue” their currency via high inflation? Argentinians saw the buying power of their currency drop by 90% or more.
Fixing the banking system is a start, however, without corralling government debt, things will not improve over the long haul.
Add the unfunded US liabilities ($127 trillion+) to the current debt ($23 trillion) and you realize the obligations are impossible to pay without severely devaluing the currency.
Herman Cain wrote, “We Need a Dollar as Good as Gold.” He concluded:
“However imperfect a gold standard may be, it remains the best among all alternatives…
Since the 2008 bailout, many have predicted high inflation. A government creating money out of thin air eventually causes high inflation. The rest of the world no longer wants their dollars, pesos, etc.
In the last decade, government debt doubled and the Fed monetized over $4 trillion; yet the dollar is still considered a “safe haven” currency. Why? The rest of the world’s central bankers also created money out of thin air and there is still some relative parity among major currencies.
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What will topple the house of cards?
No one knows when; however, the hundreds of trillions in derivative risk held by the casino banks will eventually collapse. Will the public stand for another unpopular bailout? What will it take to force congress to take some meaningful action?
Our go-to gold expert is Jeff Clark, Senior Analyst at Goldsilver.com. Jeff is a solid guy and a straight shooter. I asked for his insights.
DENNIS: Jeff, on behalf of our readers, thanks for your time.
Let’s get to it. We have heard “buy gold” for over a decade now. If my daily reading stack is a guide, the drumbeats are getting louder. Why the increased interest in gold?
JEFF: Dennis, thanks for inviting me.
An increasing number of investors are getting more uncertain about the future, whether that be recession fears, conflict with Iran, a bubble in stocks or real estate, runaway debt levels, and perhaps most important the lack of viable Fed options to deal with any kind of downturn or recession.
The Fed’s two primary tools are to lower interest rates and print currency. They have little room left to lower rates, and they’re already printing money via repo lending. We’re in a time of economic growth and rising stock prices-what happens when those things reverse?
Former Fed chair Janet Yellen publicly admitted that “monetary policy will not be enough to fight the next recession.” We should consider that a direct warning.
There are many reasons to hold gold today. When any or all of these risks materialize, the real value of holding gold will kick in.
DENNIS: Herman Cain’s kryptonite analogy really nails it. It would take a lot for our country to go back on the gold standard.
Our mutual friend Chuck Butler recently wrote:
|“Judy Shelton has made a number of “radical” statements on economic policy, including her embrace as recently as 2012 of the gold standard as a better path to the price stability and full employment that are the Fed’s mandates.” – Senator Elizabeth Warren|
“President Trump has just nominated Dr. Judy Shelton to fill a vacancy on the Fed Board of Governors. Shelton is a longstanding Fed critic and an advocate for using Gold as a reference point in setting monetary policy. …. That’s central bank parlance for: A new Gold Standard!”
Jeff, could the government peg our currency back to gold? Senator Warren, who is advocating trillions more in spending, is obviously opposed to it.
JEFF: They could, but in my opinion, it would take a fairly severe crisis for that to actually occur. We may very well get that, but a gold standard has lots of critics. Many government economists, central bankers, and elected officials would fight it-which, of course, tells us that Herman Cain is probably correct with his remarks.
As I’m fond of saying, the worse the crisis, the more likely some type of gold standard becomes.
DENNIS: Chuck continues:
“I keep reading about how the next recession will be the “mother of all recessions”…. With Gold being the central figure in this reset…
…. It could get very ugly, but…once…the parameters of the “reset” begin to leak out, I don’t think Gold Bugs would be too upset with the price…bandied about for Gold….”
I’ve read where gold could be valued over $10,000 an ounce. How would the government do this?
JEFF: The idea of a gold standard is that you back your currency or your debt with an equal amount of gold, the result of which limits spending and keeps your currency strong.
They could do it several ways. One method would be to take all the gold in Fort Knox and divide it into the amount of government debt and arrive at the reset price. They could even raise it higher to give them some wiggle room. Or they could back just part of the debt with gold.
It has happened before; Roosevelt devalued the dollar by roughly 75% when he reset the price of gold.
I’ve also seen numbers over $10,000/oz. What’s clear is the gold price would be much higher than it is today to make a gold standard effective. Whatever it turns out to be, those holding gold will be well rewarded, probably wishing they own more.
DENNIS: Russia and China would love to knock the US dollar off the world reserve currency perch. A couple years ago they were selling US dollars and buying gold. Is that still happening?
JEFF: Yes, though China’s pace has slowed over the past few months. Russia is buying as much as ever. We may soon learn Russia was the world’s second-largest gold producer last year. China is already the top producer. Understand that neither exports any metal.
It’s more than just China and Russia, central banks as a group bought more gold last year since the Nixon administration. The World Gold Council predicts this trend will continue.
De-dollarization is underway. The president of the Dallas Fed recently stated, “Don’t rely on the US dollar to remain the world’s reserve currency.” Wow, what a warning from a Fed official!
He’s not alone. Ray Dalio at Bridgewater, the world’s largest hedge fund, says “a monetary policy endgame is coming.” And Mike Maloney has made a strong case that a monetary regime change is inevitable, one of his core reasons for owning gold.
Knocking the US dollar off its perch will cause significant turmoil. I don’t like making strong statements, but anyone that doesn’t own a meaningful amount of physical gold when this process takes center stage will regret it.
DENNIS: Let’s put this in perspective. Suppose a couple accumulated $1 million in their 401k program. When they retire, they need income. Currently, 10-year CDs are not paying 2%. Their $1 million might safely garner $20,000 income.
Physical gold does not have any yield. Realistically how much gold do you recommend they hold, and how should they hold it?
JEFF: Many investors don’t realize gold has outperformed all major stock indexes in this century. Gold has handily beaten the Dow, S&P, and Nasdaq over the past 20 years. The point being, gold can play defense and at other times play offense.
It’s not just the sheer number of risks present in global economies, markets, and currencies today; it’s how disruptive and destructive they could be. There are few times in history that one can point to that are more likely to ignite the gold price than now.
To answer your question, as your prior article aptly showed, the gold price rose more than the inflation rate in the 1970s. But if you didn’t own enough, then you still lost some buying power to inflation. You need enough to make a material difference in your portfolio. Anything less than 10% won’t cut it. The worse the crisis, the more gold you likely need.
I personally hold only real gold, not a paper product like a bullion ETF. That’s because the reasons that could send gold skyrocketing are some of the same reasons that could make a paper fund vulnerable. If things get bad, I don’t want to have to worry about my gold.
DENNIS: Jeff, thank you for your time.
JEFF: My pleasure.
Dennis here. This is like the old, “damifido – damifidon’t”. How much current income are we willing to forgo to insure against losing the buying power of our life savings?
I’m holding on to my kryptonite and hoping our country never experiences “the mother of all recessions”. I sleep better knowing I have insurance if/when the crisis occurs.FREE: 10 Easy Steps To The Ultimate Worry-Free Retirement Plan
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