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It's (Still) Precious Metals Time

Gold Bars and Coins

Every saver needs an allocation to physical Precious Metals. It's that simple.

Our enormous national debt has to be cleared and will be cleared...one way or another. And the clearing will wreak havoc on our economy, the financial markets, and even our political and social norms. The two great questions are 1) what damage misguided government policies will do on the way to the inevitable, and 2) who will bear the brunt of the pain.

A crisis is guaranteed...but that doesn't mean it will come tomorrow. Or next week. Or even next year. But that which can't be sustained won't be, and when the crisis comes, the time to hedge financially will be long past.

The Gold Bugs had (and have) it right

I'm not a Gold Bug, but I sure sympathize with them. And, in hindsight, I wish I had been a Gold Bug back in 2001 when Gold was trudging along under $300 an ounce. Gold's % increase from its low in 2001 to the 2011 peak was over 700%. And even with the long consolidation since, Gold is still up over 350%. Not too shabby, especially with the S&P up only 95% in the same period.

So, why the big rise in Gold? It was recognition by the market of the nation's debt problem, which manifested as the subprime crisis. But since Gold has swooned since 2011, doesn't that mean that disaster has been averted and that all's well now?

Well, yes and no. In the same way that giving whiskey to an alcoholic stops their short term pain, so too has massive liquidity provision by the Fed suppressed the pain coursing through the financial system. But just as the alcoholic hasn't addressed the source of his problems, neither has the Fed and the banking system solved the root problem. And that problem is debt.

The only way out is Inflation

Our accumulated government debt is now $18 trillion, large enough that it will never be repaid, and large enough that any significant rise in interest rates will cause our annual deficit to explode far beyond the current $600 billion level. This debt overhang can only be dealt with in one - or more - of four ways:

  • Growth (Pay off the debt through increased revenues from a growing economy.)
  • Inflation (Pay off the debt in cheaper dollars. This is the debt monetization option - printing money will debase the currency and ultimately , eventually, cause inflation)
  • Default on obligations to internal populations (Renege on social security payments, pensions, etc.)
  • Hard default on the debt through restructuring

The first is a pipe dream - we're not growing our way out. Interest rates are at multi-century lows, with growth still low-to-non-existent; the economy is anything but robust. Neither will we default on our debt, because we don't have to - we can always meet debt obligations through printing the money to pay them. That leaves defaulting on payments to internal populations, and inflation, and I fully expect both....in spades.

The financial day of reckoning hasn't been averted...it's only been delayed. And it's postponement will make the ultimate resolution far worse once it finally does arrive.

Diversification should include physical precious metals

It is hard to project how the economic crisis will continue to unfold, so diversification is the only way to protect your savings. With that in mind, and with eventual calamity a near certainty, an allocation to physical Gold (or Silver) is prudent. The precise allocation you choose will depend on your personal situation and your read of the nearness of crisis. Think about it this way: if we knew that the Fed had magically fixed things, that an economic crisis was never coming, a 0% allocation to Gold would be the right call. And if we knew a currency crisis was coming next month, we'd opt for closer to 100% in Gold. But since we don't know, and since anything is possible, the allocation needs to be one that each of us is comfortable with...and that each of us can afford to get wrong.

When looking through the lens of history at world economies, it's my view that an economic crisis like no other we've faced is as close to a sure thing as it gets. The big question is timing. It might come this year, or next year, or the year after...we really can't know. But arrive it will, and when it does it will crush the plans and dreams of millions of Americans.

Will you be one of them?


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