GOLD IS A FINANCIAL INSTABILITY HEDGE: STABILITY VS INSTABILITY

 

For Five thousand years of global history gold was money.  Written language is only about 5000 years old so it's hard to know much beyond that.  In 1971 Richard Nixon ended that system  and replaced gold with paper backed by the force of the US Military and the faith in US Financial Stability.

Paper gave way a few years later to Electronic accounting, where it currently resides.  The electronic global money system, however is still backed by the might of US Military the faith in the stability of US Financial System.

By extension the Global Financial system is a Financial alliance between the US the European Union, Britain and Japan.  But the US is still by far the largest and deepest market   So the stability of the US Financial System is paramount.

How stable is the US Financial System?

The answer is twofold.  First you must consider the stability of the US Political System, which came close to being toppled on January 6th of this year.  Perhaps not perilously close.  But the violence, anger, hatred  the fueled that insurrection is alive and stronger today then it was a few months ago.  That same anger is also alive in Europe.  And it is fueled by the massive disparity in global wealth.  

The richest 1 percent own half of the world's wealth while the bottom 50 percent own 1 percent of the world's wealth.   

How stable is that?

The next question is how stable is balance sheet of the United States?  And How stable are the US financial markets?

That's an incredibly hard question to answer.  

The US national debt is about 29 trillion dollars and growing at about 5 trillion dollars a year.  While US GDP is about 21 trillion.  That sounds like it is moving away from stability

Meanwhle

• When state and local debt as well as unfunded liabilities are taken into account, the $27 trillion public debt rises to around $80 trillion.
• Social security is expected to run out of money in 2032 and Medicare in only six years (2025-2026).
• Total public debt (including off balance sheet) per working adult in the U.S stands around $500,000.
• There are an additional $100,000 per person in household debt and $23 trillion in corporate debt (not counting unfunded pensions).
• That brings the total debt in the system up to about 130 Trillion dollars.

But that doesn't count the 10 trillion dollars the Fed took onto its balance sheet to bailout the Covid Liquidity crisis. And it doesn't count the Over the Counter debt derivatives market which is in the QUADRILLIONS OF DOLLARS.

Our system is a system of debt.  And the those who can access debt at very low rates, say around Zero - can use that debt to buy up all the assets, simultaneously pushing up the price of those assets.  So Real Things like Houses and Food and Gas (and hard assets like art and coins and cultural heritage items) become ever more expensive for those who can only access the debt markets at very high rates or not at all.

How stable is that?

Hard to say.  It doesn't sound very stable.

But right now Faith in that system is still relatively strong.

But that is all that is holding it together.  Faith. 

And the might of the US military.

How stable is that?

How you answer that question is how you value gold.

WHY CAN"T GOLD TAKE OFF?

 

With stagflation taking hold of the global economy; with a global pandemic, with domestic terror becoming part of the platform of one of Amerca's two major political parties, with Democracy threatened across the globe, with  wildfire, drought and hurricanes threatening the global food supply, Gold is still languishing in a trading range betweeon $1600 and $2000.  

WHY?

Has there ever been this much uncertainty built into the fabric of everyday life?

The reason, though is simple.  Despite all the massive suspicion and in many quarters hatred of government, of the press, of our political institutions (often fomented by officials of the same government,)  there is still a thorough respect for the Central Banking System.

There is a certainty that the Fed and ECB will coordinate in all circumstances in a way that will protect the financial markets so that they will ever and always continue to rise.

The stock market will go up forever.  The bond markets will continue to be liquid forever.  The wealthy will always get richer and richer.

So who needs the portfolio protection that is gold?

Nobody,

As long as the Central Banking system is secure.

They bailed out the Long Term Capital Management crisis with a trillion dollars.

They bailed out the sub prime crisis with 3 trillion dollars.

They bailed out the Covid Liquidity Crisis with 10 trillion dollars.

How much will they throw at the next crisis?  30 trillion dollars?  50 trillion dollars?

HERE IS THE QUESTION: At what point will the creation of bailout money create its own instability that will rival the crisis it is baling out?

That's the point at which gold and silver will take off.  And at that point it will become impossible to get gold and silver except at ever higher prices.  When it takes off it will move very quickly and very high.  Might be better to have some now.