What Could Go Wrong? And How Gold Will Benefit!

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(January 2013)

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The United States, Greece, France, Japan, and most other countries spend much more than they collect in revenue as calculated on a cash basis without accounting for the much larger unfunded liabilities promised to Social Security, Medicare, and Pension recipients. This means the official national debt increases rapidly – by about 12% per year for the last five years in the United States. Revenues are flat or slowly increasing, and debt is rapidly increasing! Congress acts as if this can continue forever. What could go wrong?

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The government borrows more money each year to fund the excess of spending over revenue. Because the borrowing need is so large, the Federal Reserve “prints” (monetizes the debt) money each month to buy most of the bonds (debt) of the government. If the Fed did not print money to purchase that debt, interest rates would be much higher. Eventually the bond holders will assess the risk of dollar devaluation as larger than the safety and yield from those bonds. The result will be that bond holders will sell bonds (causing interest rates to rise) and/or will demand higher interest rates to compensate for the devaluation risk.

Either way, interest rates must eventually rise from their current “all-time” lows. Higher interest rates on $16,000,000,000,000 of debt will substantially increase the annual interest costs, the deficit, and the required borrowing/printing. More deficits, more borrowing, more printing, and higher interest rates will cause a larger deficit and more borrowing and the cycle will repeat. What could go wrong?

The money printing (injecting liquidity into the financial system) produces consumer price inflation. The official inflation numbers are benign, but look at the price increases for crude oil, gasoline, soybeans, wheat, corn, gold, and silver in the past decade. Consider grocery prices, medical costs, gasoline, and educational expenses and think about your actual cost of living. Has it increased substantially in the last decade? If the money printing accelerates (it must) in the next four years, how much higher will your cost of living be in four years? Will salary increases match the increases in cost of living? When you experience much higher costs and minimal salary increases, what could go wrong?

It will not work out well for most individuals whose income and net worth are NOT in the top 5% of the nation.

What can you do?

  • Reduce your living expenses and credit card debt. I understand this is difficult, but it will be easier today than next year. Make a plan and execute the plan.
  • Invest disposable income and savings in gold, silver, land, diamonds, or anything that will preserve your purchasing power as the dollar declines in value. You have choices.
  • Start now. If your funds are limited, buy a few silver Eagles each month or put whatever you can into a periodic online silver purchase plan.
  • The highest probability scenario is to assume that we will see more of the same – more deficits, more money printing, more inflation, and much higher gold and silver prices. Exponential increases in national debt correlate closely with the exponential price increases in gold and silver.
  • The price of silver is approximately $30 per ounce – expect three digit prices in several years.
  • Gold is currently below $1,700. Expect prices in excess of $3,500 per Jim Sinclair. My next two targets are $2,660 and $4,300, with higher targets thereafter. Read $4,000 Gold.
  • Expect accelerating changes in our financial world. Some of them will be painful.
  • Be careful, be safe, and preserve your purchasing power.

Don’t trust me? Then listen to one of the premier financial intellects of our time – Jim Sinclair. He expects the price of gold will trade much higher than $3,500 per ounce. Read his thoughts at Jim Sinclair’s MineSet.

Are higher gold prices inevitable? Of course not! Fiscal sanity could return tomorrow to our world, but the best bet is a continuation of the conditions and policies of the past five years. In that case, holding gold and silver will be rewarding, simple, and easy. Gold and silver have been a store of value for over 3,000 years. Paper money systems have all eventually failed.

You have a choice!

GE Christenson
aka Deviant Investor

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4 Responses to “What Could Go Wrong? And How Gold Will Benefit!”

  1. Marcus West says:

    Nice post GEC.It’s good to have the world debt bubble broken down into plain English.

    When Bond Holders sell their bonds, who do they sell them to?

    What will trigger the awakening to the lack of value in bonds? If people don’t realize already that inflation is out of the corral, when will they?

    Why will selling bonds raise interest rates?

    • Thank you. Trying my best….

      1) Who will bond holders sell to? Whoever will buy them. The problem is there might be few buyers – and that is when the Fed will be “forced” to buy all bonds. As they say, the Fed will hit every bid.

      2) What will trigger the awakening? I don’t know. There are many possibilities. In a chaotic world apparently insignificant events can become very important if they happen at the right time and place. So far the financial elite have been able to contain the problem, but history suggests that will not last forever.

      3) Why will selling bonds raise interest rates? In a more or less free market interest rates move opposite to the price of bonds. For example, if a bond is sold with a rate of 5% for 30 years, and then interest rates decline to say 3%, the bond become more valuable, because it pays interest at higher than the current (3%) rate. Hence the bond goes up in price. Similarly, if interest rates spike higher (such as in the late 1970s) then bonds drop in value since they have a smaller yield than currently is available in the open market.

      But if the Fed (or other Central Bank) buys every bond offered for sale (the buyer of last resort) the price can stay high and the interest rates low for a long time. I don’t know how long.

      GE Christenson
      aka Deviant Investor

  2. Bob says:

    “Reduce your living expenses and credit card debt.”

    I don’t have any credit card debt – I don’t use them. But, I am curious – if a person has credit card debt, which is unsecured debt, would they not be better off to use the money for silver/gold or to pay off a secured loan (mortgage for example). I am just trying to understand the concept of paying off unsecured debt first? Thanks for your time and your thoughts.

    • There are several issues here. Generally speaking, credit card interest rates are much higher than the rates on secured debt. So if you have both kinds of debt, pay off the credit card debt first because it is the most expensive to carry. I suspect the average credit card rate is in the 12% to 18% per year range, with some as high as 24% or more. Pay that debt off as soon as possible.

      The secured vs unsecured issue is important, as I see it, primarily if you are preparing to declare bankruptcy or are worried that your house or car will be repossessed.

      Pay off your high interest rate debt, and invest in gold, silver, whatever that will retain its value as our financial system pumps out $Trillions of new dollars.

      GE Christenson
      aka Deviant Investor

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