Thursday , 13 June 2024

Gold: The Ultimate Insurance Against Economic Armageddon

With deflation the biggest threat to the economy these days investors are not buying gold as the usual inflation hedge but, instead, as currency crisis insurance. Words: 649

In further edited excerpts from his original article* Rolfe Winkler of Reuters goes on to say:

With the amount being spent by the public sector, with the huge amounts of leverage still in the system, there’s a palpable fear that America won’t be able to meet its obligations. Relative to GDP, the amount we’re borrowing to finance deficits makes us look irresponsible.

When such economies hit a wall, investors make a run on the currency, typically moving their assets to a stronger currency, like the dollar – but this time the problem is the dollar, along with other leading paper currencies, all of which are threatened by profligate fiscal and monetary policies. So some investors want out of the system entirely. Gold, is a way to do that.

The gold market is small enough that a decision by a handful of money managers to increase their asset allocation from zero to 5 percent, for example, can move the market. All the gold ever mined would fit aboard an oil tanker; its total weight of 125,000 tons amounts to a few hour’s output for the U.S. steel industry.

Economists tell us that:

1. inflation isn’t a risk now. Are they wrong? No and yes.

– The conventional way economists view inflation is to look at things like “output gaps.” When the economy falls below a level of output it previously achieved, it is said to have unemployed resources. If you think of inflation as workers demanding and getting higher wages, which leads to higher prices for the goods and services they produce, then inflation isn’t a threat.

2. more borrowing and money printing won’t be inflationary as long as people are unemployed.

– Their models ignore the fact that peak output was artificially inflated by a credit binge. Borrowing more to sustain an unsustainable level of spending borders on insanity, yet that’s precisely what such economic models tell us we need to do.

– Furthermore, their models don’t account for the Chinese and all major lenders to the United States who don’t much care if our employment rate is below desirable levels. At a certain point, they may recognize that the United States is acting like a banana republic and choose to stop lending. If, and when, that happens we might well see a “sudden stop” event – capital inflows to the private and public sector cease as everyone races to get out of dollars.

Eric Sprott tells us that:
Eric Sprott, CEO of Sprott Asset Management, who has $4.5 billion under management of which $2 billion is invested in physical silver and gold stored at banks in Canada plus another large chunk is invested in gold stocks, is of the opinion that:

1. gold as an insurance policy against both inflation and deflation. Central bank quantitative easing policies mean “we’re printing paper currency like crazy,” so he doubts the long-run value of fiat currencies.

2. on the flip side, however, if central banks pull back you could enter a deflationary spiral – essentially a banking collapse – in which case “your deposits wouldn’t be returned to you. Better to have physical gold in your control.”

Most economists and investors still labor under the illusion that there’s a way out of debt that doesn’t involve a drastic reduction in the paper value of wealth. Smart investors aren’t so sure and want at least a portion of their assets out of the financial system.

A dollar crisis isn’t necessarily coming tomorrow, so there’s no guarantee gold’s price will keep going higher. Still, gold is a decent insurance policy against economic Armageddon.


Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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