Owning Precious Metals is an Insurance against Reckless Monetary Policies of Governments

Ever since the US election on November 8, the gold price has plummeted to levels not seen in almost nine months. Notwithstanding recent gold price swings, owning precious metals is a long term insurance against reckless monetary policies of governments.

Contrary to many predictions, the price of gold has taken a real drubbing during the last few weeks mainly on account of the surging US dollar. The expectation that Trump’s election would lead to a longer risk-off period in financial markets was soon overtaken by the perception that he would be able to boost growth and that inflation would be accompanied by rising interest rates, which raised a bearish scenario for gold.

It seems that many market participants are feeling optimistic about Trump’s big proposals such as the tax cuts, infrastructure spending, and abolishing many burdensome regulations.

According to its semi-annual report, the Organization for Economic Cooperation and Development mentioned that US president-elect Donald Trump is expected to offer some fiscal stimulus in the early months of his presidency. And that would probably boost US growth to 2.3% in 2017, up from its previous forecast of 1.9%. And for 2018, US growth could top 3.0%. The OECD also warned that “protectionism and inevitable trade retaliation would offset much of the effects of the fiscal initiatives on domestic and global growth, raise prices, harm living standards, and leave countries in a worsened fiscal position.”

However, Trumps plan will mean huge deficit spending. A Trump presidency will also probably mean the US Federal Reserve is going to be more aggressive with their rate hike campaign. It’s going to be an accelerated campaign.

An additional $1 trillion spending plan over the next 10 years together with rising interest rates will have interesting implications. I believe the consequence of this will be an inflationary environment.  The debt level of the United States is now rapidly closing in on $20 trillion, well in excess of 100% of GDP.

And even under the government’s most optimistic estimates, this debt is growing at a far more rapid rate than the economy could ever hope to expand.

In an interview with the Financial Post, George Gero, managing director of RBC Wealth Management, said that a long-term inflationary environment will drive investors into safe-haven assets, like gold.

“The basics longer term are going to be probably friendly to gold because we’re going to see inflation with a strong dollar, with higher interest rates and weak currencies elsewhere around the globe all of which means that people will be looking for a portable liquid and convertible into any currency option such as gold,” he said in the article.

The price of gold has dropped nearly 12 percent from a high of $1,337.40 on Nov. 9, when Donald Trump was announced U.S. president-elect.

Holdings of SPDR Gold Trust , the world’s largest gold-backed exchange-traded fund, fell 1.47 percent from the previous day to 891.57 tons on Wednesday. Holdings have declined by more than 5 percent this month.

The dollar index rose to its highest in nearly 14 years, boosted by recent positive economic data that has helped to boost the dollar, pressuring gold prices as investors raise bets on a U.S. interest rate hike that would increase the opportunity cost of holding non-yielding bullion.

Investors are now pricing in a nearly 100 percent probability of a December U.S. rate increase.

In other news, top consumer China’s net gold imports via main conduit Hong Kong rose 15.8 percent in October to the highest in three months, data showed on Thursday.

Meanwhile, in Europe and Japan people can invest in “risk-free” government bonds that guarantee that you’ll get less money back than what you invested.

A few years ago if investors had been told about this, they would not have believed it. Yet, today, they are buying these bonds.

Why are investors still buying these bonds, even though they’ll get back less money after ten years – less than if they kept their cash in a safety deposit box out of the banking system?

In the case of government bonds that offer a guaranteed loss, the answer is simple: Because that loss is less than the potential loss from other investments.

Right now, markets are on edge, especially in Europe. Britain will leave the EU, and Francois Fillion, the socially conservative former prime minister who plans to shrink the French state, has won the primary race to become the French right’s presidential candidate next spring. There are concern over the Chinese economy and currency, questions about the U.S. central bank raising interest rates, and underlying weakness in the global economy – these issues are all spooking markets.

Owning precious metals is an insurance against reckless monetary policies of governments

Typically, when investors are scared, they go to so-called safe haven assets. Government bonds are usually the safest place to go – because they’re “risk-free.” They’re also liquid, which means they’re easy to buy and sell. They’re the closest thing to cash. But, due to many government bonds now offering negative yields, there are many investors who are looking at alternative investments, in particular gold and silver.

Another issue that has spooked many global investors is the recent event that took place in India.

On November, 08 India’s Prime Minister Narendra Modi announced that 86% of the country’s currency would be rendered null and void in 50 days. Modi announced that its 500 and 1000 rupee notes are no longer considered legal tender. While there were some exceptions to the decree, including use of the notes to pay now for gas or hospital care, and receiving a “digital credit” for depositing your notes in the bank.

So people all across India have been tossed into a panic, standing in long lines at banks and ATMs to exchange more than 23 billion notes which amount to over $224 billion before they become worthless pieces of paper

Can you imagine the shock of suddenly being told that your life savings have become worthless?

The social impact of the demonetization exercise has been earth shattering for the common man on the street,” said Monishankar Prasad, the New Delhi-based author and editor for Alochonaa, an Australian current events publication.

Prasad explained how 500 and 1,000 rupee notes were the bedrock of the grassroots economy, being the primary drivers of most everyday monetary transactions, such as the payment of wages or in real estate deals.

Although the Indian Government has cited counterfeiting, corruption and black money in India as the reasons behind this decision, you can be sure that this is simply another government plot to move away from cash and install more governmental control.

These are all signs of a desperate government, and as Simon Black clearly points out:

History shows that whenever governments reach these tipping points, they tend to rely on a very limited playbook.

In ancient times, the Romans imposed wage and price controls under penalty of death.

In our modern era, governments default on the obligations they’ve made to taxpayers (for example, social security and pension payments).

They impose capital controls, preventing you from engaging in even the most basic financial transactions like withdrawing money from your own bank account.

They grab assets and retirement savings. They freeze accounts.

This isn’t theory or conjecture– it’s reality. Each one of these examples has actually taken place in the developed world in the past few years.

In a recent article from Dailyreckoning.com, Jim Rickards had this to say regarding this latest development in India:

“This war has been in full swing in Europe and the U.S. for a long time. Governments plan to use negative interest rates, confiscatory taxes and other techniques to rob savers of their wealth. In order to do this, they have to force savings into digital accounts at large government-controlled banks. As long as savers can hold cash, they can avoid many of these confiscation techniques. Therefore, governments must eliminate cash.”

So, if there is in fact a war currently being waged against cash, what asset class can investors turn to for peace of mind? What assets can investors actually hold in their hands, see smell and touch? What kind of asset can investors hold that is tangible and not simply some form of digital credit?

The answer is physical precious metals like gold and silver.

I have written about my mistrust for current governments countless of time. And, while you may still think it may never happen to you, think again.

If you don’t currently have an allocation in physical gold and silver, now is the time to consider one. If you already own gold and silver, now is the time to consider adding to your holdings.

These precious metals have been considered a reliable store of wealth and value for thousands of years, and are recognized and exchanged all over the globe. In my view, they are the only form of real money.

By David Levenstein | Lakeshoretrading

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