Chris Martenson: The investment thesis for gold. Gold is one of the few investments that every investor should have in their portfolio. We are now at the dangerous end-game period of a very bold but very reckless & disappointing experiment with the world’s fiat (unbacked) currencies. If this experiment fails — and we observe it’s in the process of failing — gold will provide one of the best forms of wealth insurance. But like all insurance products, it only works if you buy it before you need to rely on it.
As the world’s central banks perform increasingly bizarre and desperate maneuvers to keep the financial system from falling apart, the most frequently asked question we receive is: What should I do?
Unfortunately, there’s no simple answer to that question. Even seasoned pros running gigantic funds are baffled by the unusual set of conditions created by 4 decades of excessive borrowing and 7 years of aggressive money printing by central banks. We expect market conditions to be even more perilous in 2016 as they are here in December 2015. Worse, we fear a major market correction — if not a financial/banking accident of historic proportions — could easily happen in the not too distant future.
In short: this is a dangerous time for investors. At a time like this, we believe it’s prudent to focus more on protecting one’s wealth rather than gambling for capital gains.
The Opportunity In These Strange Times
In 2001, as we witnessed the painful end of the long stock bull market, like many of you I imagine, I began to grow quite concerned about my traditionally-managed stock and bond holdings. Other than a house with 27 years left on a 30-year mortgage, these paper assets represented 100% of my investing portfolio.
So I dug into the economic data to discover what the future likely held. What I found shocked me. The insights are all in the Crash Course, in both video and book form, so I won’t go into all of that data here. But one key takeaway for me was: the US and many other governments around the world are spending far more than they are taking in, and are supporting that gap by printing a whole lot of new money.
By 2002, I had investigated enough about our monetary, economic, and political systems that I came to the conclusion that holding gold and silver would be a very good idea for protecting the purchasing power of my financial wealth from all this money printing. So took an extreme step: I poured 50% of my liquid net worth into precious metals at that time, and sat back and waited.
Despite the ups and downs in the years that followed — years of ups until 2011, years of down since — that move has still turned out to be a very sound investment for me. And I forecast the best is yet to come for precious metals holders like me.
But part of my is depressed by that conviction. Why? Because the forces that are going to drive the price of gold (and silver) higher are the very same trends that are going to leave most people on the planet financially much worse off than they are now.
Here at PeakProsperity.com, we admit that we initially were utterly baffled that the vicious secular decline in the price of gold began at almost the exact same time that the US Federal Reserve announced the largest and most aggressive money printing operation in all of history – known as QE3 – which pumped over $1.7 trillion into the financial system between 2012-2014, throwing an astonishing $85 billion dollars of newly created ‘thin air’ money into the financial system every month!
Such an unprecedented and excessive act of monetary desperation should have sent gold’s price to the moon; but in fact, the opposite happened. Strange times.
As we’ll soon explain, even as the price of gold futures were being relentlessly driven down in the US paper markets, the purchase of physical gold by China exploded. It’s as if the West suddenly decided gold wasn’t worth owning. Strange times, indeed.
As we’ll now explain in detail, we are witness to an incredibly aberrant moment in financial history — one where the price of gold is extremely undervalued relative to its true value. And similarly, many paper assets are overvalued well-above their intrinsic worth. The dichotomy of this moment in time is likely not to be repeated in our lifetimes; and those who understand the fundamentals accurately have the opportunity to position themselves now to benefit greatly (or at least, to not be impoverished) as this extreme imbalance corrects, as it must.
Why Own Gold?
The reasons to hold gold (and silver) — I mean physical bullion here — are pretty straightforward. Let’s begin with the primary ones:
- To protect against monetary recklessness
- As insurance against the possibility of a major calamity in the banking/financial system
- For the embedded ‘option value’ that will pay out handsomely if gold is re-monetized
Reason No. 1: To Protect Against Monetary Recklessness
By ‘monetary recklessness,’ we mean the creation of more money out of thin air than the productive economy actually needs or can use. The central banks of the world have been doing this for decades, but it has kicked into high gear ever since the onset of the 2008 financial crisis.
In our system money is created out of thin air. It is created when a bank lends you money for a mortgage and it is created when the Federal Reserve buys a trillion dollars’ worth of mortgages from the banks. If you didn’t know that money was ‘loaned into existence’ then you should really watch (or read) those parts of the Crash Course that explain the significance of this process.
Since 1970 the US has been compounding its total credit market debts at the astounding rate of nearly 8% per annum which gives us a chart that swoops into the air, and which reveals an astonishing 39-fold expansion since 1970 to nearly $60 trillion dollars:
Why is this astonishing? Isn’t it true that our economy has expanded tremendously since 1970, as well? After all, if our economy has expanded by the same amount, then the advance is not astonishing at all.
But sadly, the economy, as measure by Gross Domestic Product, or GDP, has grown by less than half as much over the same time frame:
Where credit zoomed from $1.5 trillion to $59 trillion, GDP only advanced from $1.1 trillion to $18 trillion. In other words, debt has been growing far faster than real things that have real value. (And to make things worse, as we explain in Chapter 18 of the Crash Course, GDP numbers are artificially overstated. The debt figures, sadly, are not.)
The crazy part of this story is that the financial and monetary system are so addicted to exponential expansion that they literally threaten to collapse violently if that growth ceases or even slows. Remember 2008 and 2009, back when the financial world seemed to be ending? Well, collapse was a very real possibility and here’s what almost caused that:
Anything other than smooth, continuous, exponential growth at a pace faster than GDP seems to be a death knell for our current over-indebted system of finance. If you are like us, you see the problem in that right away.
The short version is this: Nothing can grow exponentially forever. But our credit system not only wants to, but has to. Or else it will collapse.
This desperate drive for continuous compounding growth in money and credit is a principal piece of evidence that convinces us that hard assets — of which gold is perhaps the star representative for the average person — are an essential ingredient in a crash-proof portfolio.
Back to our main narrative: because all money is loaned into existence, the next thing we should be wondering is where’s all the money that was created when those loans were made? We’d expect it to mirror credit creation in shape.
What we find, unsurprisingly, is another exponential chart. This time of the money supply (of zero maturity, or MZM in banker parlance):
Money is a claim on real things, which you buy with it. Money is no good all by itself; it’s useful because you can buy a car with it, or land, or groceries, or medical services. Which is why we state that money is a claim ongoods and services.
Debt, on the other hand, is a claim on future money. Your mortgage is your debt, and you satisfy that debt by paying out money, in the future. That’s why we say that debt is a claim on future money.
By now you should be thinking about how important it is that money and debt grow at the same rate as goods and services. If they grow at a slower rate, then there won’t be enough money and credit to make purchases, and the economy would thus contract.
But it’s equally important that money and credit do not grow faster than goods and services. If they do, then there will be too much money chasing too few real things, which causes prices to rise. That’s inflation.
Here’s the punch-line: Since 1980, money and credit have been growing at more than twice the rate of real things. There’s far more money and debt in the economy than there is real “stuff” all that paper is laying claim to. Worse, the system seems addicted to forever growing its debts faster than its income (or GDP) — a mathematical impossibility any 4th grader can point out.
This is a dangerously unstable system. And it’s going to either crumble slowly for a long time — or violently explode at some point. This isn’t an opinion, it’s just math.
The Federal Reserve has created and nourished a monster. It simply does not know how to begin starving the beast without it turning on the hand that feeds it, and thus destroying huge swaths of so-called paper “wealth” along with the actual economy.
So the Fed and its central bank brethren just keep pumping more and more money into the syste, fueling ever-higher levels of debt while hoping for an outcome that is simply impossible.