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Harvey, Irma, Gold and Bad Options

In the Previous Three Weeks:

  • Gold rose over $1,330.
  • Silver reached $18.00.
  • The DOW almost reached another all-time high.
  • Hurricane Harvey slammed into the Texas coast, flooded Houston, and caused massive damage.
  • Hurricane Irma crashed into Florida and created flooding and huge damage, although a late move west reduced potential destruction.
  • China is preparing a crude oil contract that will allow oil exporters to sell their crude on a Chinese exchange and be paid in yuan, which can be sold on a Chinese exchange for gold. This could be very important for the gold market.
  • The Federal Reserve met and … yada yada yada.
  • North Korea and President Trump exchanged pleasantries in their great distraction game.

 

GOLD:

  • Year 1913: Price of gold:  $20.67 per oz. U.S. national debt $3 billion.
  • Year 2017: Price of gold:  $1,300 per oz. U.S. national debt $20 trillion.

The national debt is over 6,000 times larger than in 1913, yet the gold price is just 62 times higher.

 

TOTAL DEBT SECURITIES:

The St. Louis Federal Reserve reports total debt securities, a number larger than official national debt.

  • 1952: Price of gold:  $35 per oz. Total debt securities:  $297 billion
  • 2017: Price of gold:  $1,300 per oz. Total debt securities:  $42 trillion

In 65 years, gold has increased in price by a factor of 37, while total debt securities have increased by a factor of 141.

The following graph shows that total debt rapidly increased every year. As more currency – debt – is created, every existing dollar is devalued. Consequently the prices for stocks, housing, books, beer, food, gold and silver increase. Devaluation of the dollar has been “the name of the game” since 1913.

debt gold

Debt increases and dollar devaluation will continue.

Total debt has increased more rapidly than gold prices. Take the price of gold and divide it by the total debt to obtain the ratio of the gold to debt.

The graph shows that over the past 60 years debt has increased more rapidly than gold with the exception of the “stagflationary” 1970s. Population increases account for some of the debt increase but out-of-control spending is the primary force. Many people believe that debt is excessive and exploding higher.

Debt is exponentially increasing and gold prices follow debt – more or less – then gold prices will exponentially increase.

 

WHEN ALL OPTIONS ARE BAD:

Not all problems can be solved with existing thinking, political structures, resources and technology. A few come to mind:

NORTH KOREA:  North Korea observed that countries without nuclear weapons are more likely to be invaded than countries with nuclear weapons. Hence North Korea has pursued a nuclear weapons program. But the U.S. has agreements with South Korea and Japan and does not want a nuclear armed North Korea. The solution is not obvious. A war will be costly.

NEGATIVE INTEREST RATES:  Are negative interest rates a sensible consequence of central bank policies?  Or are they confiscation of assets by banks and central banks? Per this article, 19 countries now “offer” negative interest rates, which result in a negative return on invested funds. Strange!

CENTRAL BANKING:  Supposedly central banking improves the financial and banking systems but many have observed that the beneficiaries are the political and financial elite. The middle and lower classes suffer negative consequences from central banking, QE, devaluations, consumer price inflation and market manipulations. Is there a solution?

MASSIVE UNPAYABLE DEBT:  The world owes in excess of $200 trillion in debt. Unless debt can exponentially increase forever (it can’t), a reset is coming. The debt must default or be paid in deeply depreciated fiat currency units. Both options are destructive. Perhaps there is no solution to the problem of unpayable debt given existing political and financial systems.

PENSIONS:  Many reports have demonstrated that federal, state, city, and corporate pension plans are currently underfunded and becoming more underfunded each year. Ask the Chicago Police! Given that bonds and stocks are at or near all-time highs the underfunding will worsen during the next recession/correction/crash. Perhaps the pension crisis is unsolvable with existing political and financial systems.

AFGHANISTAN: The war has persisted for a decade and a half. Afghanistan has been called the “graveyard of empires.” The war is costly and accomplishes what?  When is it appropriate to declare victory and go home?

GANGS IN CALIFORNIA:  Reports indicate that the City of Sacramento will pay gangs to remain peaceful. Are other options so bad that the City will subsidize gangs?

WHAT IF NO SOLUTIONS EXIST?

Problems with no easy solutions are always costly. More spending creates larger deficits, which means more borrowing and more debt. Each existing dollar (euro, yen, pound) is devalued and currencies purchase less as debt increases. Prices rise. Butter no longer costs $0.37 per pound as it did in the 1930s. Gasoline no longer costs $0.25 per gallon as it did in the 1960s. The DOW has exceeded 22,000, unlike its peak of 1,000 about 50 years ago.

  • Gold and silver will increase in price as debt grows, which it will.
  • Gold and silver will increase in price as dollars (euros, yen, pounds) are devalued, and they will be devalued.
  • Gold and silver will increase in price as people, corporations, and institutions realize that paper money – fiat dollars based on debt – is dangerous and unreliable. The perceived value of fiat dollars is decreasing so gold and silver will increase in price.
  • Gold and silver will increase in price as governments and central banks desperately throw devalued currency units at unsolvable problems. Governments want to spend more and central banks need to devalue each year, so those major forces confirm that currencies will decline in value and gold and silver will rise further.

 

CONCLUSIONS:  Unsolvable problems exist. They will be costly.

  •  Governments will spend more and increase debt.
  •  Central banks will do what they do – devalue currencies.
  •  Gold and silver will protect the purchasing power of your savings.
  •  Gold, silver and their stocks will move higher in the coming years. Don’t forget cryptocurrencies.

 

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Article written for Gold Stock Bull by Gary Christenson of The Deviant Investor

By | 2017-10-11T22:24:52+00:00 September 14th, 2017|Gold & Silver Commentary|

About the Author:

Gary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of several books, including “Fort Knox Down!” and “Gold Value and Gold Prices 1971 – 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy, and central banking.

Many years ago he did graduate work in physics (all but dissertation), so he strongly believes in analysis, objective facts, and rational decisions based on hard data.