By Craig Smith
A great many things have changed over the last decade. The financial world has become more dangerous, the dollar more unattractive, the government less trusted and the future more uncertain.
In 2006, the world priced gold at $600/oz. Four years later, in 2010, the price had doubled to $1,200/oz. Just 18 months later, in late 2011, gold traded at $1,800/oz. Today, 18 months later, gold is trading near $1,200.
All this fluctuation begs the question, when is the best time to buy gold?
If you don't own gold yet, the answer is TODAY no matter the price. If you do own gold, now is the time to buy more to cost dollar average.
Since 2000, central bank money pumping along with hedge fund and ETF buying has helped propel gold to near an all-time high. Gold prices have come back to extremely attractive levels in recent months. This offers yet another golden buying opportunity to exchange confidence-based paper for value-based hard money with total privacy.
Reasons Why $1,200 Gold in 2013 is a Better Value Than $300 Gold Was in 2000
1. U.S. FISCAL AND DEBT CRISIS
It's no secret America's national debt is out of control and that debt will inevitably continue to undermine the value of the US dollar. But most Americans are unaware of the degree to which our fiscal situation has sentenced the nation, and future generations, to economic and financial trouble for years to come.
Over the last five years the U.S. economy has become a debt bubble searching for a pin. Consider just how big our debt has grown:
-Total US federal spending has more than doubled since 2000, from $1.74 trillion to $3.58 trillion
-US federal annual budget deficit has grown to $1.087 trillion (In 2000, budget surpluses were projected)
-US federal debt has tripled since 2000, from $5.7 trillion to over $17 trillion
-Debt to Gross Domestic Product ratio has almost doubled from 60% of GDP to 106% of GDP
-State and local government spending almost doubled ($1.8 trillion in 2000 to $3.1 trillion)
-Some cities (ex. Detroit) have filed for bankruptcy
-Gross federal debt almost tripled from $7 trillion in 2000 to over $20 trillion today
This 2012 chart brings the national debt crisis down to the household level by removing 8 zeroes. It paints a clear picture of just how ridiculous (and debilitating) the numbers have become over the last decade.
The U.S. debt load is staggering. And still growing. From this perspective, we all know it would mean forced bankruptcy for us. Yet the Fed will get away with it, at least for a season, thanks to its ability to create new dollars from nothing substantive.
As the day of reckoning approaches we can expect a slingshot effect on the price of gold as it is now universally acknowledged as the world's only alternative currency to the declining US dollar. Remember: gold is one of the only assets that is not simultaneously someone else's liability!
2. NEGATIVE INTEREST RATES
In 2000, savers were rewarded with a decent interest rate on bank deposits (between 6-7%). For the last three years the Federal Reserve has been punishing savers with negative interest rates, which equates to savers paying bankers to keep their own money on deposit! This is known as financial repression and its use in the 1950s and 1960s caused 15% inflation rates in the late 1970s.
The Fed has pledged to keep rates near zero until unemployment falls below 6.5%, which they project to happen by 2014. Meanwhile, investors and savers have been forced to find a positive return on their money elsewhere. Some feel the Fed is forcing that money into riskier markets like stocks and commodities.
These policies are not only punishing savers and investors while rewarding borrowers but are also further devaluing the dollar.
3. EUROPEAN UNION DEBT CRISIS
In 1992, members of the European Union signed the Maastricht Treaty, pledging to limit their deficit spending and debt levels. However, in the early 2000s many EU member states failed to stay within the Maastricht guidelines and began securitizing future government revenues (i.e. printing money) sidestepping internationally agreed upon standards.
The 2008 financial crisis introduced the adverse economic effects of this for the most leveraged countries, including eight out of 17 Eurozone countries. Since then we have seen power shifts in Greece, Ireland, Italy, Portugal, Spain, Slovenia, Slovakia, and the Netherlands. Notably the Cyprus Bank closures, refusing depositors access to their money. Or the riots in Greece and Spain.
The Eurozone crisis is far from over. Reports that debt will sink the EU partnership abound. The financial world has indeed become a much more dangerous environment over the last 13 years, which explains why central banks, institutional investors and individuals are increasingly turning back to the world's safest form of money: physical gold.
4. THE CHINA FACTOR
Over the last decade China has become a major economic force and its government and citizens' natural trust in gold as money has driven prices much higher. China has become the world's bank of last resort and gold has become their asset of first choice.
While the US is floundering economically, China is aggressively muscling its way in to America via South America. China is pushing toward a new gold-based reserve currency, moving the world away from a dollar-centric economy. One needs only look at the tonnage of gold Bejing has acquired. What was once just a rumor is now a valid threat.
In recent years China has negotiated deals to lock in natural resources like oil in Iran, Iraq, Venezuela, Ecuador, Argentina, Brazil, Vietnam and surrounding territories. This is how the balance of power shifts quietly during times of crisis.
China has signed as many as 18 important bilateral trade agreements in recent years. Some of these, including a deal with Russia, have required the countries to trade with each other using their own currencies, not US dollars.
Both China and India have a special affinity to owning physical gold as a sign of prosperity and good fortune. This is a lesson that Americans should also learn, rather than putting the focus on gold's price.
5. CYPRUS BANK CONFISCATION
On March 15, 2013, the citizens of Cyprus lost trust in their banks. Bank of Cyprus depositors stood to lose every Euro they had entrusted to the bank. After several tense days, the ECB decided to insure accounts up to 100,000 Euros. While those with more than 100,000 Euros still faced the loss of up to 60% of their deposit as part of the bailout. They welcomed this significant haircut after the complete seizure of ALL deposits over 100,000 EU was initially proposed. This was enough to stop the run on the banks but should have done little to ease Cypriot fear.
The centrality of property rights is the real reason why the Cyprus Crisis now threatens to go viral during the next financial crisis.
Cyprus set a dangerous legal precedent. It allows governments to loot private bank accounts if spendaholic politicians need the money - not just in Cyprus but also Greece, Portugal, Spain and Italy. If the Eurozone falls, it could easily drag the rest of the world down with it as the EU accounts for 25% of the world's economy and 10% of US exports.
This precedent also creates uncertainty about the legal status and individual ownership rights of all private property, a legal precedent that governments outside of Europe also might soon use. It is not out of the realm of possibility that this same confiscation could happen in the US. The FDIC only has $550 billion set aside to cover the $14.7 trillion worth of deposits.
6. U.S. GOVERNMENT SCANDALS
Historically, when trust and confidence in institutions such as government become eroded, people turn to gold as an asset because it is not dependent on anyone’s promises. Paper currencies rely on confidence to maintain value. If recent polls on public confidence are an accurate indicator, the future for the dollar is questionable indeed.
Today, even more so than 2000, trust and confidence in BIG government is at an all-time low due to the numerous scandals uncovered over the past several months:
Numerous whistleblowers have come forward revealing a government cover-up of the incident, its causes and its aftermath. And yet not a word from the State Department or White House, other than to quote Hillary Clinton, "What does it matter?" It appears at least a handful of government officials lied to the American people about what happened. Including blaming a riot resulting from a Youtube video for what was clearly a well planned terrorist attack.
Tea Party groups, political organizations and religious groups improperly, and perhaps illegally, targeted for special scrutiny in an effort to intimidate and silence dissent. This, more than any other scandal in modern times, is the most insidious and dangerous of all the scandals emerging. One that is sure to make distrust of government grow. Word is already spreading that major GOP donors were flagged for back to back audits.
NSA Wire Tapping
The National Security Agency (NSA) warrantless compilation of data on and monitoring of private citizens' phone calls and internet activity. Not only does this call into question the motives and trustworthiness of government but it also speaks to the need for private, tangible assets. Assets one may take physical possession of rather than have them appear in cyberspace for prying eyes to examine and potentially seize.
These scandals have created a new era of distrust and lack of confidence in a government that has never imposed a greater financial burden on its people.
7. GLOBAL CURRENCY WARS
"At the heart of every currency war is a paradox," writes James G. Rickards in his important book Currency Wars. "While currency wars are fought internationally, they are driven by domestic distress. Currency wars begin in an atmosphere of insufficient internal growth.
The country that starts down this road typically finds itself with high unemployment, low or declining growth, a weak banking sector and deteriorating public finances. In these circumstances it is difficult to generate growth through purely internal means and the promotion of exports through a devalued currency becomes the growth engine of last resort."
We now live in this upside-down reality in which the central bankers and politicians scheme to drive down the value of their currencies, to make them worth less.
Some analysts now call it "the Race to Debase." These currency wars are part of the inherent manipulation of fiat money by government leaders and central bankers. The fear of deflation is setting the stage for worldwide double-digit inflation or worse. Bank of Japan, ECB and Bank of China are very open about their desire to print money out of thin air to move equity prices higher.
"We've only printed about 800 billion dollars in the last 100 years," calculates Bob Wiedemer, author of The Aftershock Investor. "We're going to print more than that next year. So, literally 100 years of printing next year." Because of this Wiedemer calls gold, "the once and future king" and predicts, "gold will go to $6,000 to $7,000 per ounce."
As we explain in The Great Debasement, if the U.S. Dollar is no longer anchored in gold, and if the US Government and Fed debase its value by printing dollars in irresponsible quantities, then why should the dollar remain the world's Reserve Currency? Simple answer: It shouldn't!
Global money creation is fueling the mother of all currency wars today. A war more destructive to more people than conventional bullet and bomb warfare. A war that America is rapidly and quietly losing on the front lines of the financial repression battle.
Central bankers all over the world are following Ben Bernanke by emulating his policy of printing enough currency to cheapen exports, thus boosting the economy to the point where inflation will likely be the next BIG problem. Today growth and employment gains are still weak despite a rising stock market. As the world banking system becomes flooded with paper, commodities traditionally rise substantially and smart money turns to gold for safety and wealth preservation. However, these recent pullbacks in gold prices indicate that all the pumped money has yet to hit the system. It is still sitting in banks and corporate balance sheets. Deflation is alive and well even after a tripling of the FED balance sheet.
Once money velocity returns, the U.S. will gradually stagnate at best, stagflate or hyperinflate at worst, taking the buying power of Americans savings and our global reserve currency credit status down with it. Just as other reserve currencies (Roman, Athenian, Ottoman, British and Spanish) have fallen before, we too could fall victim.
8. OBAMACARE/MEDICARE/SOCIAL SECURITY FUNDING CRISIS
Did you know that 20 new or higher taxes on American families and small businesses lie dead ahead? It will be a nightmare in 2013, a disaster in 2014!
With many Obamacare taxes taking effect, Americans will be slammed with an estimated $264 billion in new taxes this year alone. Making 2013 memorable for delivering one of the largest one-year tax increases in American history.
Worse yet, Social Security, Medicare, and federal employees' future retirement benefits already exceed $86.8 trillion, or 550% of GDP.
Why haven't Americans heard about the titanic $86.8 trillion liability from these programs? According to an opinion piece by Cox and Archer in the Wall Street Journal, One reason: The actual figures do not appear in black and white on any balance sheet. However, it is possible to discover them.
Today nearly two-thirds of Americans 65 and older receive at least half of their income from Social Security, and more than 20 percent live on it entirely.
U.S Treasury officials recently announced that both Social Security and Medicare are going bankrupt more quickly than previous projections estimated. Social Security will start paying out more in benefits than it collects in taxes in 2016 and the trust fund will be depleted by 2037.
It is like watching a slow-motion train wreck as the U.S. entitlement era collapse upon itself.
As it draws to a close, many will give up all remaining hope in our political leadership and their confidence-less currency (the dollar) and turn to gold to preserve their capital from further and accelerating depreciation.
Perhaps the most startling concern for our nation's financial health today is the fact that the world's greatest superpower has not had a federal budget in five years! No wonder our fiscal house is in such disarray.
The next hurdle we face is the debate over once again raising the debt ceiling. Starting last May the U.S. Treasury began using "extraordinary measures" to keep the country from defaulting on its obligations by suspending the country's legal borrowing limit at $16.394 trillion.
As we now face the consequences of a decade of profligate spending we can expect interest rates and inflation to begin rising. The cost of living is going up faster than the government data claims and sadly, the government will not protect us. We must protect ourselves!
Each of these compounding reasons presented makes the case even stronger for all Americans to own time-tested, battle-hardened tangible assets like gold and silver coins which do not depend upon empty political promises to protect our future.
A pullback in gold should in no way alarm gold investors, it should alarm the FED! This drop signals deflation (i.e. Bernanke's kryptonite). With interest rates at zero percent, Bernanke's only answer is to print even more money. And once that money starts hitting the system, all the pieces will be in place for skyrocketing inflation.
Take action now before the inevitable inflation wipes out your paper-denominated life savings. Don't look back in a few months or years at $1,200/oz. gold and $20/oz. silver and say the same thing so many millions have said ... "Why did I wait to buy?"
The writing is on the wall. The players are in place. This window of opportunity may never be open again.