Free Markets, Free People


For Informational Purposes Only

I am not an investment advisor.  I’m not a guru.  I’m not qualified to give you any investment advice at all.  I’m just looking around and seeing things, and telling you what I see.  And, in this case, I’ll even tell you what I’m doing.

I do so, however, with the strong warning that you should not, under any circumstances, use me for an example, or follow my example.  What I do may not be suitable for you at all.  I just want to make that clear.

First let me recap some data points I’ve made in several previous posts:

The Fed has more than doubled the monetary base over the past year. The amount of money that is just sitting there in the economy is incomprehensible.  But, it’s not making any trouble for us in inflationary terms, because it is just sitting there.  It’s what will happen when it does stop just sitting there that is worrisome.

The Federal Budget has spiraled out of control, with the TARP, stimulus, and recession bringing additional massive amounts of debt to bear, and future deficits signifigantly larger than any in recent memory–on top of which, there is now talk of “Stimulus II”.

Despite the happy talk about the economy’s recovery, the fact is that it is still in decline–just a slower rate of decline.  If a recovery doesn’t occur soon, we will run into another leg down in the economy, as households and businesses draw down their cash reserves, hit their credit limits, and slash their spending.  The longer the recession continues, the more people and business that will be forced into bankruptcies, the more foreclosures will rise, etc.  We call things like this “black swan” events.

On the other hand, even if there is a recovery, the Fed will be faced with the task of trying to wring the extra money back out of the economy.  If they are unsuccessful, inflation will rise.  If they are successful, they may spark another recession through tightening, much as they did to cause the second leg of the back-to-back recessions in 1981-1982. A second leg of a recession will undoubtedly result in greater debt and more money funneled into the economy as the government re-imposes monetary and fiscal stimulus again to re-inflate economic activity.  This will both deepen the debt and increase the money supply, making the next round of interest rate tightenings more difficult, unless the economy comes back strongly.

Social Security is now estimated to begin having a negative cash flow in 2019.  In other words, Social Security expenditures will exceed the payroll tax receipts.  We have, until now, been running surpluses in Social Security receipts, but, of course, the government spent that money in the general fund.  There is, therefore, no pot of money saved to make up for the deficit in receipts in 2016.  Benefits will be cut.  Taxes will be increased.  Economic growth will be affected.

I discount the Robert Fisk story that Bruce linked to earlier today as implausible.  As Fabius Maximus points out:

1. Some of these nations have no reason to risk destabilizing the USA.  Esp the Saudi Princes.

2. Some of these nations have no reason to risk destabilizing the global financial system. Esp.  Japan.

3. Many of these nation have leaders who are some combination of cautious, slow, reactive, and incrementalists.

4. Something of this scale would be almost impossible to keep secret 2 days after the first discussions.

5. If multiple Hong Kong banking sources knew it, their fingerprints would be all over the US dollar – as they shorted it to the max.

Having said that, while I believe this particular story is implausible,  it is obvious that a number of countries, China and Russia chief among them, are urging that the dollar be replaced as the world’s reserve currency, or, at the very least, allow some other currency or basket of currencies to be used in addition to the dollar.  If this happens, billions of dollars will be repatriated to the US, drastically lowering the dollar’s foriegn exchange value.  China is already denominating regional trade deals in yuan, and the use of gold has been on the rise as an instrument for international settlements in Asia and Europe.

There are many more data points, but it would be both tedious and depressing to continue.

The bottom line is that the trends outlined above will, in all probability, necessitate dealing with our foreign creditors.  Such dealings may require us to reschedule our debt payments, which will devastate the bond market, make future borrowing far more difficult, and end the notion that treasury notes are “risk-free” investments. If so, we will have become a financial banana republic in which future investment will be given the gimlet eye.  We may also be required to those foreign debts off in some currency or basket of currencies other than dollars, in order to prevent the government from inflating the debt away.

These trends will also probably require devaluing the US dollar by a substantial amount, so that our imports become expensive, while our exports become cheap.  This will allow us to earn the money to pay off our foreign debts, although it will, of course, result in a lower standard of living in the USA.

This the inevitable result of allowing the government–and the voters–to loot the system for 70 years.

So here is what I have done–and this is purely for informational purposes.  I do not recommend it for you, and I urge you to consider that I may be entirely wrong.

Several months ago, I completely pulled all of my investments out of equities, and into some select bond funds with a mix of government and private bonds.  As of today, I have ceased placing any more money in to either equities or bonds.

For the forseeable future, I will be buying gold bullion.  Not gold stocks.  Not Krugerrands.  Not gold depository accounts.  I mean direct bullion purchases of gold bars or rounds.  My personal preference is for APMEX or Pamp Suisse 10g bars, or Scotia Bank 1/4 oz. rounds, since they have the lowest premiums over the spot price, and are small enough to conveniently convert at local jewelry stores, pawn shops, or gold dealers at need.

Trying to convert a 1kg bar on short notice would be…inconvenient.  Even 1oz. Krugerrands might be hard to convert as the value of each single coin is now over $1000.

I have no interest in paying a premium for “collectible” coins.  I have no interest in purchasing a depository account, where my gold holdings have to be reported to the government. In fact, prior to this month, I had no real interest in gold either.  Indeed, if you bought gold at any time from 1979 to 2001, by march of 2001, you would have lost money–perhaps quite a lot of money, depending on when you bought it.   However, in the current circumstances, let’s just say that my interest is now…heightened substantially.

Whether your interest should be heightened…well, I couldn’t say.

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27 Responses to For Informational Purposes Only

  • You’re behind the curve. I haven’t gone that far into gold but I have gone into real estate.

  • I am with you on your analysis and actually started buying gold 1Q of this year – but only as a part of my portfolio. You can lower dollar exposure by investing in companies that have a global reach, buying foreign currencies and other investment strategies. Gold is definitly needed in-hand for a complete economic breakdown, but assuming that the global economy functions in some way there are other ways to short the dollar or U.S. economy.

    For my gold I went with “non-numismatic” gold coins – Kugerrands, Canadian Maples, etc. My reasoning for this was that with a minted coin there is no doubt to what is in them or the amount, and they are widely recognized. For your rounds, is their smaller size their main interest for you? I would be concerned that their acceptance rate could be smaller, especially in private person-to-person transactions.

    • Actually, both the rounds and the bars come sealed with assay card identifying the weight and purity of the gold.

      And you can sell the smaller pure gold bars to lots of different establishments, like jewelry companies.

  • Same here I have converted about one quarter of my modest savings into gold, but am aiming at one third. My IRA is actually in a fund that did not lose too much value during the crash because they where quick to sell stocks and convert to money funds. It has since recovered almost all it lost, so I am counting on that. At any rate I can’t think about retirement for another dozen years or so.

  • “These trends will also probably require devaluing the US dollar by a substantial amount, so that our imports become expensive, while our exports become cheap. This will allow us to earn the money to pay off our foreign debts, although it will, of course, result in a lower standard of living in the USA”

    If we did become the invasive low cost supplier, brick wall won’t even start to describe what will happen to our exports. But that aside, it will be a while before we could export significantly.

    In the meantime, more personal income will go outside leaving less income to be spent domestically. This could lead to less demand, more unemployment and taxes, and an even worse ability to pay back our debts.

    • In short, forces may eventually bring some equilibrium, but they will be far from immediate. And I actually see the potential for the opposite to occur at first as our economy tanks and our ability to pay back debts gets harder. And that’s not to mention the political desire to dig the hole even deeper will be even greater.

  • But, it’s not making any trouble for us in inflationary terms, because it is just sitting there. It’s what will happen when it does stop just sitting there that is worrisome.

    Let me throw out one alternate possibility – that all the excess money will quietly go to money heaven when the government forces banks to realize their losses. The whole thing (roughly) nets out even and life goes back to normal.

    No, I don’t believe it either. But wouldn’t it be nice?

  • Iv thought about gold, but as im not exactly rolling in disposable income, being a young person. Its hard to decide. The thing about buying gold is that, in a real sense its truly worthless. what can you do with it? isnt it only truly valuable when the economy completely recovers? If im sitting on 10000000kg of gold and the economy is in the tank, whose going to buy it so i can feed myself? I might as well eat the gold.

    • I’m in a similar situation, so I’m investing in big bags of wheat (and other foods). Much cheaper than gold, and you can feed small hungry children with them. I also have stockpiled spices; after a few months of everyone eating nothing but wheat, they’ll be valuable trade goods.

      I would advise everyone else to do the same; if you’ve got enough money to invest in gold, take a tiny bit of that and invest in some food too, and garden seeds, to make sure that you and yours are taken care of and your household runs smoothly.

    • You could invest in p*rn. People always seem to want that. Supposedly, monkeys will even starve to death when given the choice between food and 0rg*sm, so it must be more valuable than Hermit’s food stockpile.

    • The point here isn’t about disposable income but your saving, holding or wealth. The dollar is in trouble .. and stuffing them into your mattress is now probably the worse idea you can do.
      Right now tangibles, like land, gold, and other commodities that don’t have an expiration date, are the best long term (2 year +) investment.

      • I don’t disagree that saving is futile. I just don’t see gold as really all that useful unless you have the optimism that things will recover in a modest amount of time, or the income to diversify and hold out for as long as needed. Basically, putting the few eggs i have into the gold basket is useless. I might as well but chickens like my father did lol.

        I’m not stupid with my money, just haven’t had 40 or 50 years like the older guys around here to build up any kind of savings to even think about running away from the dollar into an investment that has no intrinsic value during a time of crisis.

        • We’ve got 5 chickens and a rooster at the moment. Trying to figure out what to do with the rooster as we don’t want chicks, but don’t want to slaughter the rooster.

    • alcohol, ammo, toilet paper, spices, non-perishable food (rice, wheat, oats, beans)

      I would certainly trade for gold though. Wouldn’t know how much to value it, so it would be subjective to local market conditions, ie whatever I could get away with.

  • Josh raises a good point. I wonder if anyone will attempt to answer him.

    • What point is that? That gold is worthless? When in the last 5,000 years has that ever been the case?

  • Automatic weapons and ammunition.

  • I have considered “junk coins” since they are pre-1966 and contain the silver content that is well known. I wouldn’t know a gold round from Adam and most American’s wouldn’t either. If things get that bad will there be any place to cash in gold anyway.

    One horrible consideration that popped into my mind is that Obama might outlaw gold ownership as was done by FDR to force trading in dollars. http://www.the-privateer.com/1933-gold-confiscation.html “The Gold Confiscation Of April 5, 1933″ Boy that would be a lose, lose proposition for all Americans as confidence would plummet as would the market. But this a$$ seemly wants to destroy America to remake it, so that would fit into his plans.

    Well on to another anti-spending/ObamaCare demonstration Saturday after our protest last night as the Corner Club, for what that’s worth. At least if the crap hits the fan, I can tell the crying liberals before I am send to the reeducation camp run by Kommandant Ayers, that at least I tried to save them from their Messiah.

  • Josh: If it ever gets to that point, you won’t be selling gold or silver for dollars to purchase food or goods. You will be directly trading gold or silver for food or goods at whatever the agreed-upon rate might be. It is not always convenient or possible to trade good or services for goods or services, so something must be used as an exchange medium. Gold and silver have historically been those mediums.

    I’m in about the same boat as you, pretty young and without any savings to speak of. A few months ago I started picking up a few silver dollars every paycheck. Each one is 1ozt of .999 silver, and I’ve found a coin shop that offers pretty good prices. Right now, I consider silver (and gold, when I can afford it) to be much safer than a savings or investment account, whether we ever have a SHTF scenario or not.

  • How well will Gold hold up?

    If the dump is primarily local to the US, gold will retain its value. If the economy takes a moderate dump, gold will still retain its value.

    But I can understand the concern if the economy took a megalithic dump, would you work or trade for gold if really needed food?

    They answer is still quite possibly yes. Its not practical to function exclusively on barter. That will force a currency into existence. Precious metals are often the form currencies first take. The reason is that they have value in that they look pretty. But at the same time, they don’t get permanent consumed, expended or deteriorate like other items of value. They usually can be recycled. Gold epitomizes this because its one of the most non-reactive elements available preventing corrosion while being easily recycled because of its malleability and relatively low boiling point.

    Precious metals got turned into coins, the beginning of currency as we now know it because of standardization.

    So I think its natural to gravitate towards a form of currency. And since Gold is the de facto primitive currency, there’s no reason we fall back to it.

    There may be a short time where gold loses its value if there’s complete collapse, but it will bounce back as the need for currency bounces back.

    • “there’s no reason we fall back to it. ”

      Should read

      “there’s no reason we wouldn’t fall back to it. “

    • What about bottle caps?

      You make a good point that you cant always barter easily. I rethink my position. It does have this primordial ability to be seen as valuable, its kind of odd that way.