Precious Metals 101 with One Obvious Assumption
Bill Holter
It has occurred to me that there have been so many technical and fundamental pieces written, some very good yet complicated pieces written, far out (in reality not so far out) conspiratorial pieces written and even mathematically and logically correct yet difficult to understand pieces written regarding the precious metals. Without being complicated or technical, I’ll try to write a most basic “primer”…with just one preexisting assumption. This one “assumption” is that the U.S. government is broke. Even the average person today knows that this true, if you do not believe or agree with this assumption then there is no point to you reading any further. I could show you this from multiple angles financial, mathematical and plain old common sense but I won’t because I will assume that this point you already understand.
OK, so what does a financially broke government mean? Normally it means that a big change in the standard of living is on its way because the United States issues the world’s reserve currency there are other more “global” ramifications. I will touch on these ramifications but I want to focus “internally” and write from a U.S. centric point of view first.
What does a bankrupt Treasury and central bank really mean? First, it means that since the Treasury does not have the ability to “pay,” the central bank must issue more currency and thus diluting the exiting currency’s value. Without a long winded explanation, this is your basic and garden variety monetization that results in “hyperinflation.” You see in the old days when money was backed by gold we might have seen an actual deflation where the currency value went up today, since currency can and is issued at will with no backing, the end result will be hyperinflation.
Let me just briefly touch on our “money.” Dollars (Federal Reserve notes) are backed by the “full faith and credit” of the U.S. government. Let’s examine this for a moment “full faith and credit,” what does this really mean if the issuer is broke? Exactly how much “faith” would you have lending money to someone who is in the process of bankruptcy and cannot pay their bills? And “credit,” how much credit is available to a bankrupt entity? In case you were not aware of this yet, the Federal Reserve has been purchasing 70% of U.S. Treasury issuance for going on 2 full years now. Why is this you ask? Because the rest of the world has and is losing “faith” and no longer extending us “credit.” In simple terms, the rest of the world has stopped buying U.S. Treasuries. By default (yes, a pun intended) the Federal Reserve has been forced to purchase the bonds that the rest of the world is refusing to buy.
This is a problem, a very big problem because the Treasury absolutely MUST sell new bonds to rollover previous bonds that are coming due for maturity and also to pay the interest on the total outstanding. Without the Federal Reserve purchases, the U.S. Treasury would have already been forced into a “technical” yet very real default several years ago.
OK, so the above spoke about our “money,” dollars which are issued and backed by a bankrupt entity. Simply put, a broke government means a broke and broken currency. What else does a broke government mean? Let’s look at the banking system. If the government is broke then what does this say about the banks? First, you must understand that the banks are “built” upon a foundation of U.S. Treasury bonds. If these bonds are impaired in value or worth "less” then what does it say about the banks themselves? “Don’t worry the FDIC is there to save the day” you say? Really? The FDIC does not have enough funds to save just one single major bank should they fail, where will they get more capital from? From Congress authorizing more funds from an empty Treasury? Do you see? Everything works because of one assumption…that government is NOT broke. What if this basic assumption is wrong?
I would be remiss if I didn’t mention that gold is currently trading at the price of production meaning that very few companies can make a profit at these prices. Silver’s price is at least $5 an ounce under the cost of production so the more silver that is produced the greater the losses to the mines. This cannot continue for very long, not to mention that “ore” is being chewed up that does not get replaced because it doesn’t “grow on trees” like money apparently does from central banks. Please understand that as more “money” is created, inflation will continue to increase which will only increase the cost of production further. I mention this because of the laws of supply and demand. Higher production costs without higher bullion prices will only restrict supply from current levels. While on the topic of “supply and demand,” global supply has been 2,700 tons per year and demand has been well over 4,000 tons for over 15 years now. This supply “deficit” had to have come from somewhere. This “somewhere” can ONLY have been the central banks themselves as they are the only ones with a “spare” 1,500 tons or so per year to supply.
I want to connect the dots in this piece with the obvious. If you know that the government is broke then you know that the currency that they issue is also broke or worth "less.” You can also divine that if the government is broke then their bonds are also, these bonds are core foundational capital to the banking system. Knowing this, you can then make the leap that there is not only a problem with the currency itself but also a problem with where it is you are keeping this “money.”
With the above paragraph in mind, it follows that you should do two things A. get a “better” money and B. keep it in a safer place. I would also like to address “timing.” Everyone knows that you want to buy low and sell high but I am going to tell you that this will not work with the precious metals, the “selling” part at least. If you know that the issuer of a currency is broke, why would you ever “sell” your precious metals at a “profit” to receive more of the broke currency that you dumped in the first place? If you know what the end game boils down to, meaning that the currency of the broke entity will eventually go to zero or be converted to another currency at a lower value, why would you ever want to play that game? If you sell your precious metals for dollars (more of them at a “profit” so to speak), are you not reentering “the game” that you already know will end badly? The idea of purchasing precious metals in the first place is to leave the game, selling an ounce of gold for $1 million very well may be ridiculously cheap and far less than a week’s worth of labor after a hyperinflation. This is not grandstanding as we have no idea how much more “money” will be printed and we certainly do not know how much (if any) gold is left in Ft. Knox or the other depositories since there has been no audit of our gold since the 1950′s.
To wrap this up, assuming that you understand that the U.S. government is broke then why stay in a game where you know how it ends? Every government since the beginning of time that overspent “paid” for this overspending by first selling their gold and then overprinting their money. This combination has always and without exception led to their currency loosing value “slowly at first and then all of a sudden” to the point of having no value at all. This is the current situation of the U.S. dollar with one nasty caveat; the dollar is the foundation for much of what the world calls “wealth.” Ask yourself what this “wealth” is really worth if it all derives value from a currency that is issued by a bankrupt entity?
I know that this realism is not pleasant to read…but it is real and it is true. History has shown us that the absolute best investment to own when a country goes broke is gold, only this time it will not just be one country it is system wide. The entire global financial system relies on the dollar for “value” as central banks use dollars as the primary reserve. Is this “sound finance?”
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