I outlined some of the potential risks we face in last month’s issue, and since then some of those risks have surfaced, and others have inched closer.
Here’s an update on a few of those risks, which reinforces the idea that we should prepare for some type of monetary fallout—and higher gold prices…
Risk: Belief in Central Bank Proclamations
Did you know that just two days before the SNB announced they would no longer peg their currency to the euro, SNB VP Jean-Pierre Danthine stated the following to Swiss broadcaster RTS?
We’re convinced that the cap on the franc must remain the pillar of our monetary policy.
They changed their mind in 48 hours? Far more likely is that they didn’t want to telegraph the move in advance.
What about the massive QE effort undertaken by the ECB—should we be confident this will solve their problems? No, because according to French bank Société Générale, it isn’t big enough!
The potential amount of QE needed is €2-€3 trillion. Hence, for inflation to reach close to a 2.0% threshold medium term, the potential amount of asset purchases needed is €2-€3 trillion, not a mere €1 trillion.
That is ludicrous and what we should expect from those that view the world through an economic model. The fact that many investors also see this insanity for what it is partially accounts for gold’s positive response…
“The belief in central banks as the providers of market stability suffered a serious blow last week.” (Chief commodity strategist Ole Hansen at Danish bank Saxo)
“But to think the ECB has a magic wand and will change all the situation in Europe by its magic wand, in my opinion is not the appropriate reasoning.” (Jean-Claude Trichet, Mario Draghi’s predecessor at the ECB, who can now speak freely about central bank actions)
What about the US Fed balance sheet?
“The Fed’s balance sheet is a pile of tinder, but it hasn’t been lit… inflation will eventually have to rise.” (Former US Federal Reserve Chairman Alan Greenspan, who can now also speak freely)
By the way, he added this in the same interview:
Question: “Where will the price of gold be in five years?”
Question: “How much?”
What all this means to us is that it’s dangerous to your wealth to believe central banker proclamations (at least while they’re in office). Gold, in spite of its volatility, is more trustworthy—it answers to no one, can’t be created with the click of a button, and has never required the credit guarantee of a third party.
Risk: Belief That Central Bank Methods Work
It’s painfully clear that Swiss monetary policy failed to work as planned—they pegged their currency to the euro just three years earlier and were unable to sustain it. On top of that, the SNB now charges commercial depositors 0.75% for the privilege of holding their money! Even some retail and private banks have begun to apply the negative rates on large customer deposits.
And yet they’re not the only country with negative interest rates: Two-year government bonds are also negative in…
According to the Financial Times, there is now $3.6 trillion of government debt around the world with negative interest rates!
Meanwhile, Japan continues to inject $700 billion a year into their financial system, which equals 12% of their GDP. Their debt now exceeds 250% of GDP, and the government uses more than 25% of tax revenue just to pay the interest on that debt!
Then the ECB unveiled an expanded program where it will increase asset purchases to €60 billion a month through at least September 2016, its biggest push yet, to fend off deflation and revive the economy. So, why are they expanding the program when the prior money-printing efforts didn’t work? What will they do if bigger isn’t better and the program continues to fail?
Central bankers are taking the easy way out, because printing money (QE) reduces the incentive for governments to make structural reforms. This tells us that the ongoing experiments by central bankers—the largest such experiments ever conducted in history—will not accomplish what they had hoped and will hand us some very unpleasant consequences.
We live in a central bank-controlled world more than ever before, yet the odds of central planners steering us out of the corner they’ve painted us all into are remote. The gold you hold will offer a measure of protection against the fallout when it becomes obvious to the mainstream that failure is likely.
Risk: Belief That Stock Markets Will Rise Indefinitely
Another risk is a significant stock market correction (or crash).
This chart from Frank Holmes at US Global Investors points out that the S&P 500 is at an extreme.
The longest consecutive annual rise in US equities is six years. And since 1874, it’s happened only twice—from 1898 to 1903, and the six years through 2014. If the market ends higher this year, we will have entered uncharted territory—and increased the risk of a more serious correction or crash.
When the inevitable occurs, how will investors respond? Will they remember the scare in 2008 and sell? How will the Fed and global central bankers respond to a falling stock market? Whatever happens, the odds are high that gold will be sought by investors in that scenario.
Risk: Belief in the Gold Bears
Remember last year’s calls for $800 gold? Some projections were even lower (Hello, Harry Dent). None came true. And the likelihood of them coming to pass now is about the same as winning the lottery. Twice.
Those bearish calls were too extreme (and some, profit-motivated) and are frequently based on a “bandwagon” mentality. Don’t believe every bear article you read on gold, especially if the author has a vested interest in seeing a lower price. There will always be someone with a negative view on gold—even when it climbs $1,000 or more in the not-so-distant future.
Meanwhile, I’ll point out that the JPMorgan Natural Resources fund—whose parent company hasn’t always been positive on gold—plans to increase its position in gold.
“We have increased our gold position from a low of 13% to close to 20% of the fund….” (Portfolio Manager James Sutton)
Risk: Belief That Gold Will Fall When the Dollar Climbs
Gold and the US dollar typically exhibit an inverse relationship—when one climbs, the other tends to fall. But that relationship disappeared over three months ago.
Why the new romance between gold and the dollar? Primarily because what has been supportive for the dollar has also been good for gold.
This trend should continue. I’m not the only one to think so:
“The resilience of gold in the face of a surging dollar and collapsing oil price supports our view that the precious metal will recover further this year and next.” (Capital Economics head of research Julian Jessop)
Do you believe there is greater or lesser risk in the financial markets? Will there be more or less fear in the world in 2015?
If you suspect that ever-optimistic government figures are masking far uglier truths… if you understand that the US economy depends on the global economy for far more than exports… if you believe the truly historic amount of money printing in the US and around the world must eventually result in inflation… or if for any reason you doubt that 2015 will be rosy, then the best investment strategy is one that includes a meaningful amount of gold bullion.
Remember: The issue is not inflation vs. deflation, the USD vs. euro, or even supply vs. demand. It’s fear and chaos vs. confidence and stability. Whichever of these you see as the stronger trend in the years ahead should drive your action plan.
In our view, the response we’ve seen thus far in gold has been a small foretaste of the major move we can expect when the wheels come off the global financial system, whatever form that may take.
My friends, buffer your investments and way of life against a growing level of financial risk. I urge you to continue adding low-cost bullion to your Hard Assets Alliance account.
Jeff Clark is editor of BIG GOLD, and a regular contributor to the Hard Assets Alliance.