Ever since the gold standard was removed, central banks have been selling off gold from their treasuries. They thought gold was not valuable enough to justify storage costs; they thought that gold was a dead asset. Many investors, financial planners and stockbrokers, who are now in their 30s and 40s, still think of gold as a dead asset. This is hardly a surprise, considering that all they have ever known were boom years fuelled by unprecedented credit expansion.
But then came the crash of 2008, precipitated by the subprime mortgage and credit bubbles bursting in August 2007. What came out of it was the credit and financial crisis of 2008/2009, when the world economies were thrown into a whirlwind of recession that has forced governments around the globe to spend trillions of dollars trying to prevent a total meltdown of the global monetary systems. While the rescue operation may have been successful, it has only been successful to an extent. You see, in the end, someone, somehow, will have to pay for this monetary expansion.
At the same time, that also means that lean times are likely ahead, probably years. More than ever, it is of paramount importance to protect one’s wealth. The only way to do that today is to buy gold. Shape or form matters little; gold bars, jewelry, futures contracts, gold stocks, anything, as long as it is gold or gold’s proxy.
Some will argue that there is safety in government debt, too, particularly the U.S. Treasuries. On the face value, that is true, too; debt issued and guaranteed by U.S. government is indeed a safe place. However, most Treasury bonds today are issued in the environment of interest rates at record lows, which is pushing prices up and yields down. For example, the 30-year Treasury bond now has a yield of 3.77%, while the 10-year T-bond barely produces a yield of 2.63%.
At the same time, the U.S. national debt is closing in on $14.0 trillion, while government debt-to-GDP ratio is likely to pass the 100% mark. According to IMF, in 2009, gross U.S. government debt was at 85% of GDP. In 2014, it is expected to hit 108%. Things are not any better in the U.K. In 2009, the country’s gross government debt versus GDP was 69%, while it is expected to hit 98% by 2013.
U.S. GDP growth is bound to be slow in the next few years, while unemployment is likely to remain high. This will mean less money in tax revenues and, thus, less money to either maintain or pay off debt. As a consequence, the money supply will have to keep on increasing, debasing the value of fiat currencies even further, and causing the value of gold to rise. To put things into perspective, as already mentioned, since 2001, the U.S. dollar has lost over 30% of its value. During the same period, the price of gold futures has increased more than four times.
Global sovereign debt problems, little to no economic growth, stagnating corporate earnings, high unemployment rates, interest rates that are low, devaluation of major currencies, and less and less gold held in government treasuries could mean only one thing — another disaster of global proportions in the making.
While the total collapse of the U.S. dollar beyond salvation is not likely, the current economic landscape and the dollar’s role in it is truly frightening. I would not recommend ignoring it. The way I see it, the only way to protect your portfolios is to hold at least some real assets, including commodity monies, such as gold and silver.