Go for the Gold?

Here in Maine, one of the more conservative states in this part of the country, not only are guns and gun ownership popular but so is talk about gold as a monetary hedge when the economy collapses and the dollar becomes worthless. The so-called 'gold bugs' point to German hyperinflation in the 1920s as a warning of what could happen when governments overspend and pay their bills by running the printing presses full tilt.

These days our very own Federal Reserve Bank is printing money with a vengeance, pouring into the economy an astounding $40-billion a month in an effort to stimulate a sluggish economy. Is it working? Some very knowledgeable people don't think so...and they are not contributors on Fox News.

One of them is Bill Gross, who along with Mohammed El-Erian, runs Pimco, the largest bond fund on this planet. This pair heads a company that manages two trillion dollars of other people's money.

Now you would think that they would be pushing bonds as an investment over say, gold, or stocks, or real estate. Bonds are normally a nice safe investment. They pay a fixed rate of interest over a period of years, unlike stocks which can shoot up in value one week and crash the next. Or gold which pays nothing. Sure it may be a hedge against inflation but you're not actually making money. You're just protecting against a lost in the value of paper currency.

The reason you should pay attention to Bill Gross and Mohammed El-Erian is that they speak the truth, even when it won't benefit them or their company. These days it's tough to find people like that, who both speak the truth and who know what they're talking about.

Bill Gross is warning, on the Pimco Company website of all places, that the US economy is on its way to extinction. It the 1980s it took four dollars of economic stimulus to produce a dollar of real gross domestic product.

Today it takes twenty dollars to produce the same result. Gross compares it to a supernova when a star shoots out a huge amount of energy for a brief instant, and then when the energy is gone it quickly vanishes into oblivion. The credit markets, he says, are headed in the same direction. When inflation starts to take off the credit markets will disappear and investors will flee to cash, commodities, hard assets like gold, and real estate. Countries to invest in are those with low debts such as Australia, Brazil, and Canada.

That is about as stark a warning as I can think of. Unfortunately most of us don't have a lot of loose cash to invest in gold or real estate in Australia. But lets go back to Germany for a moment because the Germans seem to have learned their lesson about money printing.

In an earlier post you may recall that I reported that Germany stores hundreds of tons of gold in a high-security vault deep under New York City. They chose to put it there during the Cold War so if the Russians ever invaded they wouldn't get the Fatherland's gold. Lately though questions have been raised in Germany about how well the country's gold is being monitored. So the official German audit agency - kind of like our General Accountability Office – notified the U.S. Government that it wanted to come to New York and actually inspect its gold.

Now the German government has announced that it's actually going to bring a big chuck of its gold back home. Details of exactly how much and how fast and by what route are for security reasons a bit sketchy but it seems to this observer that Germans really do believe, unlike some pundits here in the US, that gold really is a form of money. Oh, and by the way, Germany also has gold bullion stored in Paris and it's bringing all of that back home. Do they know something we don't?

The Germans are smart people. Actions such as these would indicate that they expect, at the very least, turbulence in the global economy in the no too distant future.

On the other hand the price of gold on world markets has been relatively steady for many months. There was a sharp drop a few weeks ago but now gold is slowly on the rise again. Also concerns about the possible collapse of the Euro and the European Union have all but vanished from the news. The value of the Euro is up and world stock markets have been hitting new highs. If a global financial crisis was looming would not that be signaled by gold moving sharply upward?

Not necessarily. I am well aware that there are people out there who believe there is a secret international cabal of powerful people – bankers, financiers, and politicians – who are manipulating the price of gold, keeping it low for now until the time comes to pull the plug on the world economy and usher in a global dictatorship.

I don't buy that scenario in toto, but we cannot rule out that it might contain a grain of truth, at least the part about manipulating the price of gold. I offer the following evidence for your consideration.

In 2006 the Chinese government listed its total gold holding at some 600 tons, only a fraction of that held by the US at over 8,000 tons. Then in 2011 the official Chinese total suddenly jumped to over 1,000 tons!

James Rickards, the prominent investment analyst, adviser to the Department of Defense, and author of the best selling book 'Currency Wars', says he expects to China to announce in the next year or so that their total gold holdings have jumped again to 3,000 tons and maybe even to 4,000 tons.

What's going on here? Why hasn't this affected the world gold price and how have the Chinese been able to boost their gold holdings so quickly?

The answers are simple. China is a huge police state. It can mine a lot of gold within its borders secretly. The gold never enters the world market but stays in Chinese government vaults, ready to back the Chinese currency when a global currency war destroys the dollar, the Euro, and the Yen. In addition, because China has such a huge favorable balance of trade it has billions of dollars in cash to invest in gold mines around the world, which it is doing.

Russia, also a police state with large gold deposits, may be playing the same game. Lately the Russians have been aggressively buying gold on the world market. When the coming global financial meltdown brings anarchy to Western economies China, and perhaps Russia, will emerge as the new world superpowers.

Is the above a plausible scenario? Up to a point I would say 'yes'.

The US - with its out of control spending and exploding, unsustainable entitlement costs - is courting financial disaster. One morning we could wake up to find that China has started dumping American treasuries in favor of gold or platinum or wheat or other commodities. Panic will spread across world markets within hours, first tripping trading circuit breakers, followed by what will be termed by authorities, 'a temporary closure' for 'a few days' to allow passions to calm down.

Governments may try to create an illusion of normality by opening markets to limited trading and then, using brokerage houses as surrogates, secretly buy stocks and bonds to halt the crash. The insiders though will know the game is up and so will the big national players. Very soon the markets will 'temporarily' close again, only this time it will be for good.

But you say, there is a key weakness in this scenario. China holds a couple of trillion dollars of our debt. If they dump our bonds the value of those bonds will plummet and China will be the ultimate loser.

True but here is where that critique fails. China has grave internal economic, political, and social problems. Most of the talking heads on cable TV have never taken the time to study Chinese history and culture. They just look at the shiny new high speed rail system, the new skyscrapers of a few cities, the new prosperity of one third of China's 1.3 billion people and conclude it will go on forever. They ignore the rampant corruption at all levels of Chinese society and the growing repression of a population equipped with mobile phones and the internet all the way down to poor villagers, two-thirds of China's population, who have not participated in the Chinese miracle and who are now coming to realize they probably never will.

Those who have studied Chinese history – and James Rickards is one of them - know that for all of its years as a unified nation China has also gone through long periods with war lords and no effective central government, what we would call today a 'failed state'.

When the day comes that the average Chinese villager gives up on the system, its curtains for the Communist leadership...and they know that. Which is why so many Chinese elites are looking for ways to get out of China and settle abroad.

You and I can't do anything about China or what happens on world currency and stock markets but if you are one of those really concerned about the future of the American economy and the possibility, however remote, of a collapse, here are few practical steps to prepare for a world very different from what we have today.

The first thing to do is find some friends and/or relatives who share your beliefs and ideals. They might be members of your church or civic group. Maybe you have some longtime friends from high school or college.

The point is that if someday the world does go to hell in hand basket, like minded groups are far more likely to make it through tough times than individuals or families. It's all about shared resources, financial, practical, and spiritual.

The second thing to do is to buy a good portable AM-FM-Shortwave radio. In a global crisis that threatens the political stability of the US, the government could decide that it needs to seize control of the internet and cell phone communications, as well as all domestic radio and TV stations. In the case of broadcast stations the technology is already in place in the form of the EAS box required to be in the equipment rack of every FCC licensed station.

If that ever happens reliable, uncensored information is going to be very hard to come by. Shortwave radio broadcasts however can originate thousands of miles from US borders and will not be under the control of the US government. 

You won't find shortwave radio receivers at Walmart or Best Buy but Radio Shack still stocks some and you can find a bigger selection at websites like Amazon. Having a shortwave radio is not as important as having some food and water stored away but more important than a horde of gold coins. And a lot cheaper.

 

©2013 by Allen B. Hundley

For permission to reprint this post please contact the author at

sowhatisthetruth@gmail.com