Fundamentally, there are two kinds of money. There’s real money, which is gold. And there’s fiat money, which is what the central banks create and essentially becomes a huge tower of debt.
Twenty years ago in 1995, there was $40 trillion of debt in the world. Today, there’s $225 trillion. In other words, there’s been this massive expansion of debt, all of it fueled by the central banks. That’s what passes for money.
My belief is that as the whole con game of the world’s central banks finally begins to fall apart, we will enter this great deflation that I think is happening globally. As the Ponzi in China crashes, as the Fed proves that all this money printing didn’t cause escape velocity and a new boom in America, people are going to lose confidence in the central banks. As that accumulates, and as that compounds over a period of time, I believe the gold price is going to go up.
I don’t recommend that people put all their savings, all of their nest egg in gold, but I do believe that every portfolio should have it. I don’t think you need to have the physical commodity in a vault somewhere. I don’t think the world is going to completely turn into anarchy, but the SPDR Gold Shares (GLD: NYSE), which is the gold ETF, obviously is a bear market investment. Gold is going to soar as the financial markets unravel and the central banks lose credibility, lose efficacy, and ultimately lose face.
Gold will go up but it may take a while. Gold is volatile, and there are all kinds of games that are played in the trading pits every day in the derivatives. If you’re going to invest in gold — and I do — it’s for the long haul. I think if you believe in the bear market scenario for the future, then you want to buy gold.
Many observers try to compare a potential move much higher in gold, to what happened in the mid 1970’s when gold went from $210 to $850. But I believe that historic rise in the price of gold and today are very different periods. And the reasons gold will rise today are different than at any point in history. Although at the bottom it’s central bank errors that underlie each. But remember that in the 1970s we had just finally exited a semi-stable Bretton Woods Gold Exchange Standard system. There still was, at the end of the day, an anchor on the central banks that was thrown overboard by Nixon in 1971….
“So the first go-round was a rip-roaring price inflation because there had not yet been enough time under the fiat money and balance sheet expansion by the central banks to create excess capacity in the world industrial system. So as the boom in demand took off, commodity prices soared. That fed into domestic costs and labor wages in particular.
There weren’t a million cheap workers coming out of the rice paddies in China yet because it was still in the Dark Ages of Mao and not part of the world economy. And so you had a classic inflation blowoff and flight to gold in the 1970s as a result of that initial money printing cycle.
Now, I think 40 years later central banks are erring to much greater extent but the cycle is different. We have now created massive excess industrial shipping, mining and manufacturing capacity in the world. Therefore we don’t have a short-run consumer price blowoff. We still have massive cheap labor in the world and so therefore we don’t have a wage price spiral.
The result is that all of the massive stimulus from the central banks has gone into the financial inflation, not goods and services. The financial inflation is obviously the great bubble that afflicts the entire financial system of the world. It’s becoming increasingly unstable and it will eventually collapse. And when it does I think it will mark the complete failure of a monetary system that has basically been metastasizing since 1971.
This means one thing —- namely, that the world will panic into gold and the price will go parabolic. When a monetary system finally fails, there’s a flight to the only money that’s left in the system and that’s gold. That will be the hour in which the next great surge in the gold price occurs. You can’t predict the exact moment, but you can certainly have a pretty confident view of the direction.
The central banks are clearly destroying the monetary system that emerged after Nixon went to Camp David in August, 1971. So here we are 45 years later and we are nearing the end of an unstable fiat central bank driven system and the alternative is fairly obvious — at some point going back to real money.
I don’t think governments will do that voluntarily, but certainly people trying to protect their wealth will. When that happens it will trigger a huge political crisis and hopefully an opportunity to change the regime and get back to some kind of viable and sound financial and monetary system.
So, while previous run-ups in the price of gold are relevant benchmarks, they were just warmups. What happened in each of those episodes was a short-run break in the system, collapse of confidence and flight to gold.
What I think we are facing now is a terminal phase of a monetary system that isn’t viable, stable or sustainable. Therefore gold has but one characteristic — massive upside in the years ahead.
A good choice for any portfolio’s allocation to gold is the Sprott Physical Gold Trust (PHYS). The closest thing to owning physical gold in your brokerage account is holding shares of the Sprott Physical Gold Trust (PHYS: NYSE, TSX). Sprott provides a secure, liquid alternative for investors interested in holding physical gold bullion without the inconvenience of storage.
The Trust’s physical gold bullion is fully allocated and segregated in a secure third party storage location in Canada.
If conditions get bad enough, and there is a run on physical gold, we could see a default in the gold futures markets; futures contracts would get settled in cash U.S. dollars, even as the physical gold price keeps rising. In such a scenario, it would not be surprising if the largest gold ETF (GLD) will continue to track whatever “paper” gold price prevails in the futures market. For exposure to allocated physical gold in your brokerage account, PHYS is the way to go.
Either way – whether you choose GLD or PHYS, I want to make sure that this recommendation is an exception to my point about ETFs that I made in our Investor’s ETF Module. Inverse ETFs are a good idea, but I select gold ETF’s like GLD, even though it’s not technically an inverse ETF, is a way to bet against the markets.
