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“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.”
-Norm Franz, Money and Wealth in the New Millennium

“Will gold crash again, like it did after peaking in 1980?” More people ask me what I think about the possibility of the price of gold crashing back than about any other topic.  It’s natural that people worry about this, because the media is always there reminding us “gold bugs” that gold fell 70% from its high.  That is a pretty scary number!  An even scarier number is the 97% that the US Dollar has lost to inflation since the inception of the Fed in 1913.  But that’s just me talking.  Most of my friends and relatives have no idea that the dollar has performed so poorly, but most of them know that gold was a lousy investment.  I guess they haven’t paid too much attention to what’s been going on with gold for the last 10 years.

For nearly a decade now, Jim Sinclair has hammered home two important points for his readers.  First, he has insisted that gold will hit $1650 and higher and that seemed quite a stretch when he put forth such an unlikely “target” seven years ago with gold in the $400 range.  Many people will judge him to be “full of it” if his target date of mid-February comes and goes and gold is below $1650.  With only a month left, that will be an unlikely event.  I say, if gold hits $1650 by this fall it will be one of the great calls of all-time.  He will have hit his “magic number” to the YEAR, seven years in advance.  He may be off six months in a prediction that goes back some 85-90 months and by my count, that’s over 90% accurate.  Who do you know who has done better?

The second point he makes, and he is one of the few to make it, is that this time, when gold peaks, it won’t take a 1980 flop. To put it in his own words, In time a virtual world currency, as an average of many currencies tied to gold via a large measure of world M3, will occur. It will not be convertible, however it will be accepted as an alarm set in a monetary concept.That has been lacking since August 15, 1971 when all currencies were allowed to float in the marketplace against each other.  Sinclair says, “Gold will trade as a pendulum around the price of gold at the inception of this monetary plan.” The dollar will remain as a reserve in many countries primarily because they are sitting on so many dollars, they are simply stuck.

The dollar will not disappear as a currency but it will no longer have the monopoly of being the world’s only reserve currency.”  The new “virtual world currency” will take that role and it will be composed of several currencies, most likely the Yen, Euro (if it still exists), Renminbi, Ruble and perhaps some form of a yet-to-be-decided Petro Currency, plus the US Dollar AND gold.  Oil may be a part of the formula too.  In any case, gold will be part of the mix and its HIGH price will be an important anchor for the virtual currency.  The price will have to be high, since there is so little gold in the world it won’t work as a reserve at a low price.  A high price will suit the interests of the bankers and world leaders.

The higher the price of gold, the lower the value of the dollar, since they are the inverse of each other.  In a loose relationship, both gold and oil are tied to the dollar and the weaker the dollar the higher the cost of both gold and oil.

Rather than to think of gold as an “inflation hedge,” you should think of gold as a hedge against the fall of the dollar.  Since we are committed to borrowing into existence a large percentage of the $1.5 trillion deficit this year, it is hard to build a solid case that the dollar will not continue to lose value.  Really, people, the dollar is being watered-down right before your eyes and if you can’t yet see that simple event taking place then you will have little or no protection and one day soon, you will wake up and find out that all of your dollar-denominated assets are not worth very much anymore.

When I started in the gold industry in 1983, if you told me that someday I would have one million dollars I would have probably said “no way” or I certainly would have believed that it was a big enough number that I could sail off into the sunset on that amount, with no financial worries.  My comment today is “a million ain’t what it used to be.”  Many of you are old enough to remember the hit TV show of the 50s “The $64,000 Question.”  That was A LOT of money.  And there was another popular program where an elderly man gave away $1,000,000 every week.  That was a big WOW!  Compare that to today’s lotteries where the prize is $10 million or $50 million or even hundreds of millions.  A million is no longer a big deal.  What is worse is that even if you have a million dollars, if you want to invest it “safely” in Treasury 10-year bonds, where hopefully the principal is safe, it will only throw off $35,000 in yearly interest.  I could live like a king in 1971 for $35,000.  I know that for a fact, because that is what I earned in 1970.  Susan didn’t have to work, we had a lovely four bedroom home in the suburbs, two fancy cars (including a Mercedes 250SL roadster) and a rather lavish life style.  Today, $35,000 is the equivalent of earning $17 an hour.  Not such a big deal!

The only way one can make it on an all-dollar portfolio is for the portfolio to rise a lot every year.  That, or else start with a huge pile of dollars, certainly more than a million, and live off of the principal – for a while, until it’s all gone.

What you really need these days is INCOME.  Even if you are sitting on a pile of cash, it will disappear very quickly unless it is being replaced and for most of my readers, a Social Security check won’t cut it.  Thanks to the Fed, interest rates are at record lows and savvy investors who have recently retired with a million or two are unable to earn enough interest on their wealth to avoid draining their nest egg.  That’s one of the reasons you must own gold and silver so at least a portion of your dollar-denominated wealth is positioned to increase in value as you live off of the rest.

Here is a hypothetical example of how it could work.  I believe that gold will (at least) double from its current price.  If you have a net worth of $1 million and you put half in gold (or silver, which I believe will do even better than gold), you can draw down the $500,000 in cash at the rate of $50,000 a year for the next 10 years.  In that time frame, gold should be worth at least $3,000 so the value of your portfolio will still be $1 million.  The cash portion is gone but gold doubled so you are back to where you started.  It really does work like that.  That’s like a bond – get interest for 10 years and get your full purchase price back.  The difference is the bond is only paying you 3.5% per year and gold will have averaged a return (assuming it doubled in 10 years) of 10% per year.

But what happens if gold doesn’t double – doesn’t rise any further or even falls in price?  In order for that to happen, the Fed (and all of the central banks) will have to stop inflating.  No more QE 3,4,5, etc.  The government will have to stop borrowing and will have to balance the budget.  Can’t happen – won’t happen.

In addition to all the taxes collected, the government is borrowing an additional $4000 for every man, women and child in the US this year just to stay afloat and that amount doesn’t pay down a single cent of our $14 trillion debt.  We are all living beyond our means and no one wants to sacrifice their life style.  Our elected officials are very aware that if they can’t turn the economy around, their time in Washington DC will be very limited.  The politicians must continue to borrow to keep the voters happy.

This will all get very ugly when interest rates on the 10-year Treasury Bonds rise above 4%.  It’s coming.

Each 1% rise in interest adds $140 billion per year to the National Debt.  Obama is struggling to try and save $100 million and a 1% rise in interest rates adds another $140 billion to our debt EVERY year.  There are approximately 140 million tax payers in the US.  That means it will cost every tax payer another $1000 per year for just the added interest this year.  If the deficits stay at the current $1.5 trillion (and the projections are that they will for the rest of the decade) then every year adds ANOTHER $1000 on top of the previous $1000 and so on.  By 2020 the number will be over $9000 per year and growing.  Remember, that’s just for the increased interest cost and has nothing to do with running the country or paying Social Security or Medicare benefits.

At zero interest, at the rate the government is over-spending, our national debt will double in nine years.  Most of our government debt is short-term, one year or less.  That means that in addition to the added yearly deficit ($1.5 trillion this year) they have to “roll-over” all of the existing debt that is coming due every year.  Either our taxes will have to increase dramatically every year or the dollar will have to be debased every year by an equal amount.  When you add in the “interest” it will double in less than nine years.  A $28 trillion debt at 4% interest will require over $1.1 trillion each year in just interest payments.

The numbers can make you crazy, but the thing to take from this is we are screwed.  There simply is no way to pay off the debt.  It will continue to spiral out of control and the government will either have to default on the debt (which rarely ever happens) or they will have to continue, with the Fed’s help, inflate away the value of the dollar to keep the game going.  This is exactly what they have been doing for many years now.  Trust me, you can’t come through this with your wealth intact if your wealth is all in US dollars.

Here’s the 1-year dollar chart to put this week’s dollar price action in some sort of perspective…and it ain’t pretty.

There Is No Getting Around Gold
Money has lacked a golden anchor for 40 years. It has proved a stupendous failure.
Jeffrey Bell and Rich Danker, 01.10.11, 12:00 PM EST

Earlier this week Thomas Hoenig, president of the Kansas City Federal Reserve, went out of his way to call the gold standard a “very legitimate monetary system.” In November, World Bank President Robert Zoellick and Indiana Republican Congressman Mike Pence both called for a serious look at using gold as the centerpiece of international monetary reform.

The fact that a Fed leader, the highest-ranking American official in international economics, and a potential presidential candidate are talking up the gold standard indicates that floating money is running out of political cover, and that the obstacles to gold replacing it are narrowing.

The first confirmation of this was the reaction of certain economic elites who, instead of responding with a straightforward defense of the status quo, lobbed ad hominem attacks on those who dared to mention gold. “I think [Zoellick] is living in the past,” Edwin Truman of the Peterson Institute for International Economics told the Financial Times. Gold is “minor and really irrelevant,” echoed Peterson Institute Director Fred Bergsten in the same article.

The most common practical objection to the international gold standard is political: that the slight deflationary bias it gives off would not be tolerated by people today. Yet this conclusion overlooks the serial price crashes that the economy has endured since gold was demonetized in 1971.

At different times and most recently all at once, the values of homes, stocks and other investment assets have collapsed and traumatized the lives of ordinary Americans. Think upheaval over monetary policy was a thing of the 19th century? In 1982 a mob of tractor-driving farmers blockaded the Fed headquarters in Washington in protest over high interest rates, leading Chairman Paul Volcker to hold public forums around the country to try and explain his prolonged and painful effort to squeeze inflation out of the economy.


Porter Stansberry wrote —

It’s no secret that our national monetary system — and our normal way of life in America — is on the brink of a major, catastrophic collapse.

I can’t say this enough. Our government has been borrowing so much money (often using short-term loans), that very soon, we will no longer be able to afford even the interest on these loans.

For this reason alone, I believe it’s imperative to own “real assets,” things like oil, silver, gold, and natural gas… ASAP.

You see, the U.S. government has only one way out of the giant mess they’ve put themselves (and us in)… and that’s to print trillions of dollars (it’s already started to happen).

This will likely cause the prices of real assets – things like gold, silver, and oil – to skyrocket even higher over the next few years (some currency analysts I respect believe gold, for one, could hit $5,000 an ounce before it’s all done… some are predicting silver to hit $200 an ounce).

David Schectman
Miles Franklin