Why Buy Gold? The case in favor

December 1, 2020

Nickel Pincher

Whether you like it or not, you are always invested in something. 

Even if you take all your money out of the bank and put it under the mattress … what currency are you stuffing under that mattress? 

Whichever currency that is, likely U.S. dollars, you are “invested” in it and you are taking the risks that come along with it. 

What risks are there in a currency? 

Every fiat currency that has ever been created has eventually ended up worthless.  A fiat currency is a paper currency that is not backed by any tangible asset or precious metals like gold or silver. 

The U.S. is a fiat currency. Despite losing 99% of its value over the past century, people still argue that the U.S. dollar is a great place to store your money.  

The U.S. dollar is a currency managed by human beings and humans make mistakes — especially politicians. 

Federal Reserve And The Increase In Money Supply

Our current system allows the Federal Reserve to create an unlimited money supply without any accountability or restraint.  Below is a chart taken from the website of the St. Louis Federal Reserve Bank. 

You can see what has happened to the monetary base since the 2008 crisis and then the 2020 pandemic.

source: https://fred.stlouisfed.org/series/BOGMBASE

The increase in the monetary base starting in 2008 is unprecedented and it has continued and then exploded in 2020.  Reading the financial articles online you will see a lot of talk about “Quantitative Easing”. 

Quantitative Easing or “QE” is a way for the Federal Reserve to increase the monetary base without directly printing the money.

The way it works is the Fed buys U.S. bonds and other assets from banks in exchange for money.  The money is then put into the accounts of the banks that hold their money at the federal reserve

The balance sheet of the Fed grows larger with these securities and the money in circulation increases with each transaction.

Expanding Public Debt Leads To Inflation Of The Currency

You may wonder how the interest rate on U.S. treasury bills is so low given the fiscal situation of the U.S. is so bad.  The reason for this is that the Fed is buying treasury bills to keep the price high and the yield low. 

This is the policy of the Fed to keep U.S. interest rates low and the economy “stimulated”.  In 2011, the federal reserve purchased 80% of new debt issued by the U.S. government according to the Peter G. Peterson Foundation. 

One thing that could alleviate this picture is for the U.S. government to balance its budget and start paying off some of its debt.  This is not likely to happen. 

We have already seen what happens when congress tries to cut spending or raise taxes.  There is a lot of hot air and hand-wringing, but in the end, they increase the debt and make the problem bigger for the future.

Depending on when you are reading this, the U.S. federal debt is around $27 trillion.  This is a big figure considering the GDP of the U.S. is about $21 trillion dollars

That means that if the government collected 100% of the income of all individuals and corporations for 1 full year, they still could not pay off the debt in full.  However, this scenario is purely hypothetical because no one would bother going to work if they had to pay all of their earnings in taxes.

Unfunded Liabilities Will Lead To Further Inflation

Even if the federal government were able to balance its budget this year or next, the bigger problem is what’s coming down the road. 

The $27 trillion figure above is only for outstanding debt, it does not take into account unfunded liabilities, specifically, Medicare and Social Security.  When factoring in these liabilities, the federal debt is conservatively estimated at $70 trillion. 

If you believe Boston University economics professor, Laurence Kotlikoff, the estimate is closer to $200 trillion.  This number of course does not include debts that state and local governments carry.

As scary as these figures are, the more concerning problem is the direction that these programs are headed.  David Walker was the U.S. Comptroller General from 1998 to 2008.  Arguably no single person understands the U.S. fiscal picture better than him. 

In 2008 he resigned from his position to begin an awareness campaign to alert Americans to the danger they face.  He estimates that based on historical average tax revenue rates (not the low rates we have experienced the last 30 years. Remember: the rate for the top income tax bracket was around 70% before Reagan. In 2040 all of federal tax revenues will be spent on interest and medicare.

That means no money for social security; no money for defense; no funds for welfare or anything else. 

Again, if you think that taxes are low now and this problem could be easily solved by increasing tax rates … you’re wrong. This projection by Walker is based on historical tax rates including times when the tax rates were very high (over 70% for the top tax bracket).

Something’s Gotta Give …

Obviously this is a hypothetical scenario and something will have to give in the next 20 years before we reach that point.  That is exactly what should scare you and the reason you should be buying gold now. 

Something’s “gotta give” and gold is the best place to be when it does.  The federal government will continue to pay for these deficits by having the Federal Reserve buy the debt issued from the treasury since congress can’t balance the budget. 

As the money supply continues to increase, so will the value of gold which has a limited supply and thousands of years of proof that it is a safe haven when things go badly.

But here is the biggest reason why you should put some of your savings in gold: 

Why not? 

What is the bigger risk?  Putting 10-15% of your savings in gold or continuing only in dollars when the Fed is growing the money supply like it is? 

I would rather put some of my savings in gold and rest easier.

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