Investing in Gold and Silver – RISKY or Safe – Why and How?

Rather than answer this question directly, let’s approach this question from another direction.

  • Is it risky to assume the US government will continue to spend $1-$2Trillion more each year than its income? (The current deficit is well in excess of $1Trillion.)
  • Is it risky to assume the US government will borrow the difference between expenses and revenues each year? (The government has been borrowing since WWII and has accumulated in excess of $15Trillion in national debt.)
  • Is it risky to assume that both debt and currency in circulation will increase rapidly, since all currency is created as debt? (More borrowing means more debt, and that means more currency in circulation.) Continue reading

Why Isn’t Gold Higher?

My colleague and erstwhile nemesis Gonzalo Lira posed the question above in a recent essay, and it is indeed a most puzzling one. Given that the world’s central banks — joined most recently by a shockingly reckless Switzerland — are waging all-out economic war by inflating their currencies, shouldn’t gold be soaring,? In fact, prices have continued to meander between $1500 and $1700 since September of 2011, when gold topped out at $1945 after a spectacular run-up from $728 in just three years.

Why Isn’t Gold Higher?

What could have caused the bull market to go lifeless since then, even as more and more countries appear hell-bent on devaluing their currencies to keep their exports competitive? The answer that Lira has offered is novel and engaging, but it did not persuade me, perhaps because the underlying conceit seems forced. For he has likened the current gold market to the one for credit default swaps (CDS) prior to the Great Financial Crash of 2008. Because swaps provided insurance against bond defaults, they rose in value as the crisis mounted. But then, suddenly, they ceased to appreciate, Lira says, because “the markets collectively realized that the counterparties to those CDS contracts might not be able to pay up.” This, Lira asserts, is exactly what is occurring in gold, as paper certificates have come to greatly exceed the supply of ingots held in vaults. The result, he says, is that “the global precious metals markets are essentially a game of musical chairs, with far fewer seats than players—far less gold than gold holders. And market participants collectively know this. Which is why they don’t trust their counterparties. Which is why gold isn’t rising like a shot.”

I think there’s a more convincing explanation for why gold isn’t rising, and I will get to it in a moment. But first let me say that my intention is not to assail Lira or his ideas. Even though we had a nasty spat on the Web a couple of years ago over the inflation vs. deflation conundrum, I’ve always found his essays insightful, original and well wrought. Putting aside our differences over whether the inevitable collapse of the financial system will be brought on by hyperinflation or deflation, we probably agree on 90% of the things we write about.

‘Vague’ Insurance

This time, however, his logic would seem to equate apples and oranges. To begin with, the swaps he would compare to gold are a contractual form of insurance against default risks in certain types of financial instruments. As such, it is at least theoretically possible to calculate exactly how much risk is insured, even in a market as large as mortgage securities. Gold, on the other hand, and relative to inflation, offers only a vague kind of insurance. Moreover, unlike swaps, gold does not give its owner a claim on anything.

Lira’s argument might have been more persuasive if he had simply asserted that an effectively unlimited supply of “paper gold” has been absorbing enough demand to suppress the price of physical. But if, as he evidently believes, ruinous inflation, never mind hyperinflation, were immediately in prospect, then we should have expected to see the demand for bullion soar, pushing up paper gold no matter how large the supply.

Physical vs. Paper Gold

Lira lumps paper and physical together to argue that “the current spot price of gold is reflecting market uncertainty as to who has actual gold, and who has worthless paper certificates of gold.” Again, if this were so, then we should have expected uncertainty itself to have spiked the preference of investors for physical over paper, overwhelming carry-traders and other feather merchants playing gold from the short side. And if investors were indeed worried about whether the insurance they hold is properly matched to the endgame, would they be buying the Treasury paper of a country that owes so much more than it will ever be able to repay? In fact, the risk of a U.S. default is the last thing on their minds at the moment, and it will likely remain so until the day when events no one can predict cause creditors or debtors – it will have to be one or the other – to get stiffed.

In the meantime, whither gold? My own theory as to why prices aren’t bounding above $2000 is simply this: the central banks have so far failed to produce any meaningful inflation. The untold trillions worth of stimulus they have shot at this goal have barely kept deflation at bay. Granted, prices for groceries, health care and some other necessities have gone through the roof. But the inflationary impact of all of these things together is inconsequential in comparison to the deflationary down force of a quadrillion dollar financial edifice that remains in a state of incipient collapse.

Hyperinflation Scenario

Under the circumstances, I continue to believe that deflation, rather than hyperinflation, will wreck the global financial system. I did not, by the way, “switch sides” in this argument as Gary North asserted in an essay he wrote for It was when the debate turned unendurably ugly that I was impelled to take a closer look at what some of the hyperinflationists were saying. Peter Schiff, for one. In his scenario – which, along with the running debate at FOFOA blogspot is the most persuasive case for hyperinflation that I’ve come across — a run on the dollar would force the Fed to absorb the entire supply of Treasury paper at auction. An unintended result, says Schiff, is that ostensibly unsupported bond markets such as corporates and municipals would collapse, forcing the Fed to extend open-ended buying to all fixed-income securities.

This would most surely trigger a hyperinflation – would in fact be a hyperinflation. However, this scenario, and virtually every other hyperinflation scenario of which I am aware, envision hyperinflation occurring as a result of political decisions made, Fed actions taken and markets “rescued.” My gut feeling, however, is that the collapse of global markets will be so swift as to preclude intervention, let alone rescue. Pent-up forces will take their course, and the entire financial system will experience an instantaneous collapse for which the May 2010 Flash Crash will seem to have been just a warm-up.

Whatever we might predict about the outcome, one result that seems entirely likely is that banks in the U.S and elsewhere will not open for business the next day. Over the short-run — a few weeks, perhaps — this would be ruinously deflationary, since a hitherto inexhaustible supply of digital money will have become inaccessible via checks, ATMs or charge cards. The fragility of the clearing system that allows such money conduits to function will be tragically obvious by then, as will the distinction between cyber money and the real stuff. And you had better have some of the “real stuff” stashed away in your home, by the way, since, The Morning After, that’s the only kind of money Safeway cashiers and gas station attendants will understand. Nor should you expect them to be up to speed right away on the junk silver you’ve socked away, since, at the retail level, although perhaps not in barter circles, pre-1964 coins are likely to be treated the same as the pot-metal coins that have driven silver dimes, quarters, halfs and dollars into secure storage.

Gold Hoarders, Beware

A couple of caveats for gold hoarders. Don’t count on exchanging gold at $5000 an ounce for something with high intrinsic value, such as farmland. For all we know, supply-chain disruptions could be so severe that you’ll pay a Krugerrand just for a loaf of bread. And while it has always been possible in theory for short-squeeze pressures to push gold well above the $5000 level, this is most unlikely for reasons that Lira’s essay implicitly recognizes. Consider who is short all of that paper gold: carry-traders such as Morgan Stanley, J.P. Morgan, Goldman Sachs and other bullion bankers who have always been able to borrow gold for next to nothing. The likelihood of regulators forcing them to make good on their paper gold obligations can be dismissed in advance as negligible

Despite the seeming paradox of intrinsically worthless fiat money gaining traction in a post-apocalyptic economy, there will remain the possibility of a hyperinflationary spike. It could happen if, say, the Fed were to attempt a lump-sum pension payment to all government workers. For political reasons, this would have to be matched by similar windfall benefits to private-sector workers in the form of Social Security, welfare payments, unemployment compensation and food stamps. The Catch-22 of this approach is that any benefits in excess of what is needed to keep the economy functioning, if only barely, would touch off an inflationary spiral. Imagine how the world would react if someone in Congress merely mentioned that The Government was going to cover all of the obligations and liabilities of public and private pensions and health plans. If and when that day arrives, I will have no argument with Lira and the hyperinflationists about the likely outcome.

By Zerohedge


By GE Christenson

Our financial system, as it currently operates, is unsustainable. Unproductive debt cannot exponentially increase forever. I assume this is obvious to almost everyone. Jim Sinclair says, “The financial system is simply FUBAR. It is that simple. The reason to own all things gold is that simple.FUBAR has several meanings, but my interpretation of FUBAR is: “Fiscally Unbalanced Beyond Any Reconciliation.”The U.S. government deficits are, on average, larger every year. This means that the total (official) national debt is not only increasing each year but also that the rate of increase is accelerating. Since 10/1/2000 the national debt has increased about 9.1% per year, but since 10/1/2007 it has increased 12.2% per year. Worse, this is only the official debt and does not even consider the net present value of unfunded Social Security, Medicare, Medicaid, and government employee pensions and liabilities. Depending on who is calculating the liabilities, the total unfunded liability is approximately $100 Trillion to $230 Trillion and the annual increase is perhaps $7 – $11 Trillion. (The entire U.S. GDP is about $15 Trillion per year – for comparison.) This will not end well.In essence, the above two facts are incompatible – hence an economic train wreck is in process. What could happen? Follow the logic here.When there is too much of something, it loses value. If we have too many eggs, the price drops. If too many autos are for sale, there will be lower prices for autos. Central banks around the world are currently producing amazing quantities of dollars, euros, yen, and most other unbacked paper currencies. Hence, their value will decrease against the commodities we need for survival – food, energy, and so forth.There is too much debt in our financial system, whether measured in nominal value or as a percentage of GDP. Hence the value of that debt will decline. Some debts will default, bonds will decline in value as interest rates inevitably rise, and other debt will drop in value and purchasing power.Politicians have made excessive guarantees for future benefits to Social Security recipients, Medicare recipients, government pensions, and others. Those guarantees cannot all be delivered as promised, hence they will decline in value and purchasing power, or the promises will not be fulfilled.

Why are the following ten steps necessary?

The best time to start preparing was about a decade ago. The second best time is today. Make a plan and act. Start by reducing living expenses and eliminating credit card debt.Expect sweeping changes! I hope the inevitable currency collapse is slow and gentle, not rapid and destructive, but history suggests rapid and painful are more likely.Phase out of paper assets and into something real. Gold, silver, diamonds, farm land, rental property, and buildings come to mind.Perspective – Perspective – Perspective! It is better to be early than late. It is better to trust yourself than to depend upon a government agency for your food and shelter. To whatever extent you can, take charge of your own financial affairs, savings, and retirement.Plan on huge inflation in consumer prices for food, energy, transportation, medical costs, and more.The middle class will be hurt the most. Those who plan and prepare will, as always, survive and prosper. Make a plan!Government control over the economy will increase. Surveillance on individuals will increase; there will be much less personal and financial privacy. Act accordingly!Social change will follow a currency collapse. It might be violent. The government is preparing in many ways for social violence. Are you?Currency induced cost-push inflation appears inevitable. When? As a guess, well before 2016. Gasoline costing $8.99 or more per gallon is a distinct possibility. Don’t discount this just because it sounds extreme. It might be a low estimate.Economic manipulations, mal-investments, and unsustainable policies will self-correct. Plan on corrections and adjustments that will bring painful consequences. The bigger the bubble, the more catastrophic the collapse and the larger the collateral damage. The sovereign debt and paper money bubbles appear VERY large and ready to pop.


Unproductive government debt cannot increase forever, but our financial system currently depends upon ever increasing expenditures and debt. There are far too many dollars in circulation, more debt than can be repaid, and massive unfunded liabilities have been created by the promises made by politicians. The purchasing power of the dollar must decline, many debts will not be repaid, and many promises for future benefits will be reduced in value or will simply disappear. Hence, the FUTURE income stream from debt-based assets is increasingly risky. A few to consider are:

Social Security benefits. The government must borrow or print to pay current benefits. The value (purchasing power) of future benefits will almost certainly decline.Municipal and state bonds and pension promises are increasingly risky. Will more cities and states default on their bonds? Why are their pension plans, on average, increasingly underfunded? Will your pension plan remain safe? Consider moving your IRA into physical gold and silver safely stored outside the banking system.US government 30 year bonds and 10 year notes will decline in price as interest rates rise, and will also decline in purchasing power as the dollar devalues. Why would you lend money (long-term) to an insolvent government at less than 3% interest per year when that government has assured you it will debase the currency and reduce the value of the debt you bought? Is this a financial train wreck in process?Mutual funds and money markets based on bonds and other debt are at risk. If the underlying debt defaults, the value of the mutual funds and money markets will decline. Counter-party risk is real.

Why is debt based future income increasingly risky? The payoff will be delayed, defaulted or executed in mini-dollars after inflation and counter-party defaults have ravaged the purchasing power of those paper debts. We have Been Warned!

Would you prefer hard assets with no counter-party risk? Reread the Ten Steps To Safety, and then take charge of your financial life to whatever extent you can.

GE Christenson
aka Deviant Investor