Almost every day we are told the economy is improving. Whether it’s the government or Goldman Sachs, the message is the same: things are getting better.
If you look at headline measures like declining unemployment and a rebound in GDP, one might nod along in agreement.
And with the gold price stuck in a range, and not even all that responsive to the teases of World War III, there seems to be little to worry about.
So is that all there is to it? Print a bunch of money, run up your debt, and suppress interest rates—and all the problems are better?
Probably the best description I’ve heard of that “solution” is: Governments can be counted on to do not just the wrong thing, but the exact opposite of the right thing.
The problem for us is that waiting around for them to do the right thing could be very hazardous to our wealth. Since much of the “recovery” is the Biblical equivalent of a house built on sand, our economic, fiscal, and monetary structures remain fragile and vulnerable to further crises. Indeed, political efforts to “fix” the 2008 financial crisis have opened us up to all kinds of other disasters, some of which you’d have to not believe in math for us to escape.
That’s not just my opinion. There are numerous trends that clearly indicate structural problems remain. Here are three of them.
#1: If Obama and Bernanke saved the world, then why do…
Russia, Mexico, Kazakhstan, Kyrgyzstan, Tajikistan, Serbia, Greece, and Ecuador all reported higher gold reserves for June.Contrary to mainstream expectations, almost no central bank liquidated their gold holdings—just the opposite, in fact.
Take a look at the recent buying habits of central banks:
In the first quarter of this year, central banks bought 122.4 tonnes (3.9 million ounces), a pace that that puts them on track to surpass the record 2013 purchases of 409 tonnes (13.1 million ounces).
In dollar terms, central banks invested $22.2 billion in gold from January 2013 through March 2014. And this excludes all Chinese data.
By the end of 2013, central banks around the world were estimated to hold 30,500 tonnes of gold, just under a billion ounces. This is a new record and represents about one-fifth of all the gold ever mined.
If the global economy had truly recovered, why are central bankers stockpiling gold bars at a record pace? They may put on a happy face when speaking to the public, but their actions suggest they are not so optimistic—and in fact are preparing for some type of crisis.
#2: If Obama and Bernanke saved the world, then why are…
You’ve likely read reports of countries diversifying out of the greenback. We listed some of these efforts in the June issue, and the trend has since gained steam…
China signed a bilateral currency swap agreement worth 150 billion yuan ($24.17 billion) with the Swiss central bank, which can invest up to 15 billion yuan in China’s bond market. The three-year swap will “provide liquidity support for bilateral economic and trade exchanges and help maintain financial stability,” the People’s Bank of China said in a statement. The swap deal will provide liquidity support fordevelopment of the offshore yuan market in Switzerland.
“US and European Union sanctions against Russia threaten to hasten a move away from the dollar that’s been stirring since the global financial crisis,” reports Bloomberg.“The crisis created a rethink of the dollar-denominated world that we live in,” said Joseph Quinlan, chief market strategist at Bank of America. “This nasty turn between Russia and the West related to sanctionscan be an accelerator toward a more multicurrency world.”
At the end of the BRICS (Brazil, Russia, India, China, and South Africa) summit last month, leaders announced the “Fortaleza Action Plan,” which included, among other things, the announcement of a new financial architecture to counter the international tensions (read: inflation) caused by the Fed’s quantitative easing program. The headquarters of the New Development Bank will be in Shanghai, China.
Russian Radio reports that draft documents on the procedure of admission for new members to the Shanghai Cooperation Organization (SCO) have been adopted, which will green-light admission for India, Pakistan, Iran, and Mongolia. This new world organization purposely excludes the US, along with the use of US dollars.“The SCO is strengthening because American policy towards Asia has been excessively tough and is aimed at suppressing their interests,” says Alexei Maslov, an expert at the Higher School of Economics.
President Vladimir Putin said last week that Russia should sell its oil and gas for roubles, because the dollar monopoly in the energy trade was damaging Russia’s economy. “At the moment we are trying to agree with some countries to trade in national currencies.”
Clearly, US dollar dominance is on the way out. And as the dollar grows less and less crucial for trade, its value will fall.
Take a look at the projected* trend for the greenback’s share of global reserves.
Renminbi usage as reserve currency is not tracked and reported by the IMF, and falls in the “unallocated reserves category.”
*Projected by Bud Conrad, Casey Research Chief Economist
Most believe the process of the dollar losing its reserve currency status will take years. But with every new anti-US agreement, combined with the fact that most trade is now done in computerized bits, we could easily see this trend accelerate.
While the dollar moves higher as a “safe haven” in the short term, non-US individuals and countries are increasingly looking for other ways to preserve wealth. This is clearly gold bullish, especially if you’re a US investor or consumer.
#3: If Obama and Bernanke saved the world, then why are…
Notice I didn’t say “war.” Even though we seem to be closer to it every day, we don’t buy gold because of the possibility of war; that would be a speculation. Unless you live in Israel or Gaza or on the border between Russia and Ukraine, war is a headline, not a personal event.
We buy gold due to the causes of war. We buy because of geopolitical conflict.
Geopolitical clashes are usually the result of government mismanagement, greed, and/or stupidity. This can cause shifts in economies, currencies, and boundaries. Gold is a form of protection against these politically caused distortions, one of which is armed conflict.
These distortions can impact the gold market. For example, most investors don’t realize the Middle East accounted for 20% of global gold demand last year. As armed conflict ratchets up, demand jumps not just with retail investors but with central bankers, too.
Why would a central bank buy gold when war comes to their doorstep, instead of pushing all their available funds toward military operations? One of the first casualties of war is the local currency. Since gold is a hedge against a failing currency, it’s one way to keep your currency—and thus your economy—afloat. In fact, it’s the prime reason most countries denominate some of their reserves in gold in the first place.
The gold price hasn’t responded much to the current conflicts, and it may not unless there’s a major development or escalation. But geopolitical conflicts are growing. We hold gold as a hedge against all political missteps, regardless of how they may manifest themselves, including war.
While roughly half of US citizens receive some sort of financial remuneration from the government, the mistake many of these recipients make is not just in believing the government owes them—the entitlement mentality—but that the government can provide for them.
Philosophically, free individuals will never be satisfied as dependents. Historically, government has an abysmal track record of being a reliable provider. Practically, our current government doesn’t have the money—and never will until our fiscal state is much more sound.
Central banks are hoarding gold. Numerous countries are fleeing the US dollar. Geopolitical conflicts are numerous, growing, and teeter on the edge of war. Obama and Bernanke have not saved the world but set us up for further certain crises. The message is the same: buy gold. And through the Hard Assets Alliance, doing so has never been more safe, secure or simple.
It’s up to you to protect your family’s financial future. Join me in creating your own little hoard of precious metals.
Jeff Clark is editor of BIG GOLD, and a regular contributor to the Hard Assets Alliance.
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