It feels like 2007 all over again. Everywhere I look, I see euphoria in the air. There are probably more investors entering the fray now than perhaps ever before. The real estate market (at least locally in the Bay Area) is booming, and stocks have never been higher… When the markets are ONLY moving in one direction (UP, UP, and UP), with enough time, eventually, you’re going to witness everyone (who were previously standing on the sidelines) start wanting to get in the game.
And that absolutely terrifies me.
The level of greed that exists today is unprecedented… At least, I have never witnessed anything quite like it before. I know that I’ve been emphasizing on the topic of “Fear and Greed” quite a bit lately, but as it pertains to finances, it’s just about the most important topic on my mind these days.
So, we’ll just refer to May as “Fearmongering Month” on this blog. 😉
Quite recently, I’ve made a lot of sudden moves… One minute, I was investing in dividend growth stocks and amassing a portfolio in excess of $100,000. The next hour, I’m changing my mind, and deciding to liquidate a huge portion (85%) of my holdings, and switching over to Dividend Growth Trading…
For readers (and myself), it’s probably been quite clear that I’ve reached a crossroads of sorts… On one hand, of course I want this “economic boom” to continue, as I have invested a large amount of capital over these last few years, and who doesn’t want to see their assets performing? But on the other hand, I know that I also must play devil’s advocate, because what goes up ALWAYS comes crashing back down. To be ill prepared would be just about the stupidest thing that I could do at this point… Who wants to amass great fortune only to see their wealth suddenly come crumbling down like a house of cards?
I can’t predict the future. I can’t time the markets. And I can’t outsmart Wall Street… But I can prepare accordingly and do everything that I possibly can to help protect my wealth and life’s work. I never want to be blindsided by something that I could have prevented by simply paying more attention and considering all possible scenarios.
If you don’t have an exit strategy in place, well, you better put one together!
Current State of Affairs
On the surface, the dollar is stronger than ever. One doesn’t have to even look very far to psychologically believe that. Just login to your 401k, or brokerage account, and check out how your stocks are doing; I bet all that money “in the green” is going to make you feel pretty good… and smart.
If you’re an investor, chances are you’re well versed at reading a balance sheet. Stock investors love to look at things like debt and liabilities, free cash flow, etc.
Well, if the dollar is so strong and our economy doing so well, our country’s finances must be a tip-top shape as well, right?
Let’s see what we got! I got these graphs from a wonderful Jim Rickards interview video:
If you won’t invest in a company because their balance sheet is horrid and they owe too much in liabilities, would you seriously invest in Uncle Sam?
US Debt Ceiling Visualized: Stacked in $100 dollar bills @ $16.394 Trillion Dollars. United States owes a lot of money. As of 2012, US debt is larger than the size of the economy. The debt ceiling is currently set at $16.394 Trillion and approaching rapidly.
That’s rather disheartening… Thanks to QE, QE2, QE3, QE Infinity… the Fed just keeps pumping in more dollars into the system and growing our debt to unsustainable proportions… Over $16 Trillon in debt… Can you even process such a figure?
That’s a lot of zeros…
The Gold Standard
How does this even begin to happen? Well, before President Nixon took the U.S. off The Gold Standard in 1971, our policies used to be:
The international monetary system after World War II was dubbed the Bretton Woods system after the meeting of forty-four countries in Bretton Woods, New Hampshire, in 1944. The countries agreed to keep their currencies fixed (but adjustable in exceptional situations) to the dollar, and the dollar was fixed to gold. Since 1958, when the Bretton Woods system became operational, countries settled their international balances in dollars, and US dollars were convertible to gold at a fixed exchange rate of $35 an ounce. The United States had the responsibility of keeping the dollar price of gold fixed and had to adjust the supply of dollars to maintain confidence in future gold convertibility.
That all ended in 1971. Although the Bretton Woods system was not a TRUE Gold Standard (the government didn’t necessarily maintain gold reserves in exact proportion to circulating money), your dollars were more or less tied to something tangible of fixed value. These days, you can no longer bring your Federal Reserve Notes to a bank and exchange them for some gold (darnit)…
Of course, President Nixon had a reason for doing what he did. Historically, with a Gold Standard monetary policy in place, you might get the following:
Even if the price of gold is fixed, demand for it continues to wax and wane. People tend to hoard gold during periods of economic uncertainty, and this causes prices to fall (deflation). “When you take money out of the system by hoarding gold, that makes the available money able to support transactions and economic activity go down,” Gavin explained. Less money in circulation means prices fall and unemployment rises, and the government must adjust interest rates in response to try to stimulate economic activity.
But the key takeaway is this — The dollar, as it exists today, is no longer backed by gold anymore.
It isn’t money.
It’s fiat currency.
Fiat currency is what we call our “money” today. Our precious U.S. dollars.
Only, our currency isn’t really even money at all…
Paper that the Fed controls… Paper that the Fed can conjure into existence out of thin air. The Fed is brilliant when it comes to magic tricks; they can do just about anything their minds can come up with.
And in case you didn’t know, the Fed, or “Federal” Reserve… is NOT owned and operated by the U.S. government, but instead by the richest and most powerful banks in the world (too big to fail or to put behind bars).
A popular saying goes: “The Fed is as much federal as Federal Express (FEDEX)”
The only value that our fiat dollars have is the confidence that is backing it up. And if that confidence starts to wane (Russia and China are leading the charge), or erode away completely, that will likely spell the end of everything as we know it… Should that ever happen, our paper dollars will be worth less than blank pieces of paper; at least with a blank sheet, you can use it to write down your shopping list (I’m being dramatic of course, but you get the point)…
And that seems to be the path that we are heading towards. The world leaders have all lost faith in our paper because the Fed is a possessed madman who won’t give his printing press a break! Russia and China have already entered into partnership deals to break away from the dollar… and perhaps replace it as the world’s reserve currency someday in the near future.
Should the U.S. dollar ever lose its place as the reserve currency of the world, look out below!!
So, if our fiat dollars aren’t really money at all, and are only being propped up by the frail confidence that still exists… what is REAL money?
By definition, money is a store of value.
When you own REAL money, it does not degrade over time and buy you less things in the future. Unlike your dollar bills which have lost 96% of their purchasing power, real money preserves your wealth.
Throughout history, the defacto standard of money has always been gold.
Gold works tremendously well as real money because it provides the following:
- Portable and easy to store.
- Durable. Gold is the most non-reactive of all metals. It will not rust, tarnish, corrode, or react with oxygen.
- Fixed supply. Gold cannot be conjured into existence. It takes physical labor and capital expenditure to extract it from the earth.
- Rare. There is simply not enough of this stuff that exists in the earth. Therefore it is valuable.
Gold is REAL money. History has shown that gold has always been a valuable commodity and prized by human beings. When Zimbabwe fell victim to hyperinflation and its economy collapsed, its fiat currency was rendered useless.
Have you ever seen a bill this large?
Regardless, when fiat currency fails, people always resort back to gold. They who have the gold, survive…
The value of gold:
Now I’m not trying to be “doom and gloom”, but if things hit the fan and our entire economic system collapses, gold will be at the heart (front and center) of the post-apocalyptic reboot.
For bartering and trading, nothing beats gold.
FYI, there is more “doom and gloom” to follow, so maybe indulge yourself with this entertaining (but educational) cartoon video first:
Manipulation of the Markets
As mentioned above, we all know that the top 0.01% (the country’s largest banks and most affluent) are the ones who are really calling the shots in this country. Further, you don’t have to work in the government or on Wall Street to realize just how much corruption exists in our current system today.
The wealthy are manipulating the markets on a daily basis. People make billions of dollars rigging the game… Just look around you. There is no Middle Class that exists in our society anymore. On one end of the spectrum, you have the affluent who control the vast majority of wealth. On the other end, you have the rest of us.
People that sadly get slaughtered along the way…
When Ben Bernanke was trying to con the public into believing in the mystical powers of QE, there was a lot of funny business going on in the commodities markets. As we know, mass hysteria by the people can lead to sudden attacks on the trading markets, and we can’t have that if we want any semblance of peace… A massive exodus from the equities markets would have been devastating at this most sensitive time.
To inspire confidence in the system and our almighty dollar, the Fed turns to its most trusted (and secret) buddies to manipulate the markets when desperate times arrive. Back in 2011, an independent bullion trader by the name of Andrew Maguire suspected such activity and accurately predicted a forthcoming “glitch” in the Matrix.
Tune in at the 25:45 mark for more details:
Maguire described a sudden and massive wave of selling of up to 45,000 contracts which drove the price of silver down. “Investors big and small try to cut their losses and sell as the price drops.” People who had invested heavily lost everything. Then the mysterious seller just as suddenly started buying the electronic silver again. The price of silver soared as did profits for the seller. 45,000 contracts with a profit of $80,000 per contract totaled $3,600,000,000 for the mystery seller.
According to Maguire, the precious metals markets trade “pretty much in tandem”, but because the silver market is so much smaller, it is harder to disguise one’s activities and therefore easier to figure out who is behind a manipulative event. After Bear Stearns and their short silver positions were acquired by JPMorgan, manipulative events in the silver market became more frequent. Maguire decided to inform the CFTC. He contacted commissioner Bart Chilton, who had Eliud Ramirez, a senior investigator from the CFTC’s enforcement division, get in touch with Maguire. Maguire explained the manipulations in great detail, both over the phone in an hour-long interview and afterward, in a series of e-mails with screen shots.
Maguire then predicted a manipulative event in the silver market and gave detailed information in an e-mail to the CFTC about what to expect, sending it on February 3, 2010, two days prior to the event. The event transpired exactly as Maguire predicted. While the event was taking place, Maguire sent e-mails in real time, pointing out certain details because the CFTC enforcement seemed not to know what to look for or how to interpret the data.
GATA chairman Bill Murphy gave a detailed account of Maguire’s allegations to the Commodity Futures Trading Commission (CFTC), stating how “JP Morgan Chase signals to the market its intention to take down the precious metals. Traders recognize these signals and make money shorting the metals alongside JPMorgan. [He] explained how there are routine market manipulations at the time of option expiry, non-farm payroll data releases, and COMEX contract rollover, as well as the ad hocevents.”
As of present day, no one has been arrested and the investigation is still on-going… Go figure.
Here’s an entertaining video that is short, to the point, and perhaps a “less dry” way of exposing the manipulation (from 2010-2011) that goes on in the commodities markets:
So, one minute you have JP Morgan selling naked shorts on silver to suppress the price (much to the delight of Ben Bernanke), and the next, you read something like this — In 2015, the same JP Morgan is now stockpiling 55 million ounces of the physical silver.
What’s going on here?
As of today’s prices, gold is trading for about $1,200/oz and silver is at $17/oz. The Gold-to-Silver ratio is about 70-1.
Historically, let’s see how that holds up:
Looking back in history to 1687 (the oldest records we have), this ratio has swayed between 14 and 100, but was stable at around 16 for centuries. According to the U.S. Geological Survey, silver is about 17.6 times more abundant in the earth’s crust than gold, which provides some rationale for the long-term average of about 16.
16-1 ratio. Currently, the ratio is at 70-1… Silver sounds like it’s still being manipulated and selling at a screaming discount TODAY!
If that weren’t enough, due to the extremely strong consumption of silver through industrial uses, silver is actually more rare than gold today. In other words, there’s less of the stuff floating around. Whereas gold is being nothing more than hoarded (mostly), silver is being readily depleted everyday.
Who knows what the implications will be in the future… But unlike with fiat currency, I know for certain that the odds of gold and silver going to ZERO are in fact ZERO!
Here are today’s prices for gold and silver:
The chart of gold over the last 10 years:
For starters, gold and silver have been in a bear market over the last few years (coincidentally, while stocks have been ON FIRE!). Whether or not this is due to market manipulation matters not, as prices are clearly affordable TODAY.
While the sheeple and everyone and their mom, dad, uncle, dog, cat, etc. is rushing in to buy equities and real estate right now, there exists a market that is flying well under the radar… You know what they say about “buying low and selling high”…
But that’s not the point of this article! At this stage of the game, an investor should only be looking at precious metals as insurance (hedging) to preserve wealth.
If our fiat currency is in fact one day rendered to nothing more than toilet paper, we’ll be looking back and screaming about how much a bargain gold was at $1,200/oz and silver at $17/oz!!!
The Shift to Precious Metals
Something is brewing… JP Morgan is loading up on physical silver. China and Russia are furiously purchasing up gold.
Buying surreptitiously allows Beijing to buy bullion at bargain prices; if the world knew how much gold China was really amassing, a run on gold the likes of which the globe has never seen would likely ensue. “We believe China is controlling the gold price because it is buying in such a way so as not to push prices up.” That’s the opinion of respected precious-metals analyst Julian Phillips of The Gold Forecaster, along with a host of other informed sources. (source)
Russia’s increase is the most dramatic, according to the recent report from the IMF. The Russian central bank has almost doubled its gold holdings within the last 5 years to 1,094.8 tonnes in June of this year. China’s Central Bank followed with an increase of 75% from its holdings in 2009.
Sounds like we’ve got manipulation all across the board in the commodities markets. Since I’m not an insider, I have absolutely no way of knowing what’s really going on behind the scenes… But to me, one thing is clear — All the big players are loading up on precious metals NOW!
The superpowers that be are always 10 steps ahead of the rest of us… Precious metals get a bad rap in the Western world because everyone is conditioned to believe in the institutions and fiat currency. But as we know, fiat currency isn’t money… it’s debt. We are a debt-addicted society that solves our problems by creating more and more debt…
Let’s not be so arrogant and quickly dismiss these precious metals as archaic. Gold and silver have withstood the test of time and have always been highly treasured and revered, especially by those in power. Even today, gold and silver are worshipped in the East.
All the claims that precious metals hold no value because they can’t multiply and issue you a quarterly dividend are indeed misguided. Precious metals have never been about generating offense, but about preserving wealth.
If you have any doubt at all in the future vitality of fiat currency, perhaps it wouldn’t be a bad idea to at least diversify and hedge by purchasing some precious metals before it’s too late…
At least I like to believe, better a year early than a day too late. Because if the markets do indeed plummet, precious metals will without a doubt be sought after (good luck trying to buy some then!) and take off like a shining star.
In particular, gold is most defensive, and burns brightest when:
- Blood is in the streets and everyone is exiting out of equities.
- There is no trust in the government or government backed fiat currencies.
- Hyperinflation environment that can ensue when fiat currency becomes “worthless”.
I’m buying gold and silver now, while supplies last…
Buying Precious Metals
There are many ways to “purchase” precious metals, but if you are doing so as a hedge towards a very possible economic collapse in the future, you ONLY want to buy and hold the physical.
Sure, you could buy ETFs such as SPDR Gold Trust (ETF) (GLD) or iShares Silver Trust (ETF) (SLV), but at a time of desperate need, do you really want to be waiting in line (with everyone else), hoping and praying that your paper certificate that entitles you to redemption of the REAL stuff will actually materialize?
If you already have limited faith in the current system, why would you take on the risk of holding even more paper? And who even really knows how much physical supply these ETFs even have on hand… My guess is that any supply is going to the big banks first and foremost at a time of crisis.
Don’t take that risk… don’t buy ETFs. If you’re going to be buying precious metals, you ONLY want to own the physical goods.
I realize that the outlook of this article is rather sad and depressing… By no means am I trying to elicit any fears and doubts with readers; just like with anything else, you must ultimately do your own research and form your own conclusions.
Nothing that I have presented should be misinterpreted as “a calamity of epic proportions is guaranteed to happen”. In general, I’m an optimistic guy and I like to stay positive. 🙂 But as I’ve mentioned many times this month (in numerous articles), it does me absolutely no good to live in fantasyland and just assume that things will always work out splendidly.
I try to be a realist as much as possible. And right now, I simply know this much:
- I am heavily invested in the markets (real estate, stocks, etc.). If the markets keep booming, I only stand to profit. Even if I continue to do NOTHING and never invest another $0.01 again. I will be more than OK!
- If the market does correct, or worst-case CRASH, then I could very well lose EVERYTHING. If I don’t take the proper precautions, I’m putting my entire portfolio at risk.
I believe that there is a misconceived notion that people who purchase precious metals do so because they are looking to make it rich; that’s completely false. People acquire precious metals because they want to preserve and store the value of their money (the whole freekin’ point of money in the first place!). Today, the dollar is worth 96% less than it was worth in 1913. The same does not apply to gold or silver.
Ron Paul makes some great points as to why we need to hold money, not fiat currency:
Makes sense to me. As such, I’ve been on a mission to reconstruct my portfolio so that I can protect from the downside as much as possible.
In general, most advocates recommend a person hold between 5-10% of their wealth in precious metals. Just like with stocks, real estate, etc., there’s no right or wrong answer. Do what you think is best for your own situation!
All I know is that I was previously holding 0% of my net worth in precious metals… That’s going to have to change!
Who Really Knows?
No one knows what will ultimately happen… Some people predict deflation. Some say inflation. Some say first deflation followed by hyperinflation. Others believe that the Fed actually knows what they are doing and will somehow find a way to navigate us through this mess (wishful thinking but I like the optimism!).
I don’t have much faith in Uncle Sam right now, but I sincerely hope that I am wrong for underestimating him!
When it comes to building wealth, preserving wealth, and finance in general, it doesn’t matter if your opinions and viewpoints are right or wrong (the market will do what it needs to do). Check your ego at the door. It’s not about being the smartest and the brightest person.
I couldn’t care any less about that nonsense!
I’m interested in learning and not being ignorant… Just because I’ve been buying up a lot of real estate in the past, it does me no good to just keep on doing the same thing over and over again (assuming that what I’ve done before will always keep working)… Not when I know how overpriced and insane the market is at this time! Like I’ve said before, I’m not gifted enough to time the market… but I would be a damn fool if I didn’t pay attention to at least what’s going on in the world. And right now, I think that I’ve got an overwhelming amount of evidence to at least warn me to tread carefully from this point moving forward.
Again, I hope for the best, but need to plan for the worst.
Greed is insidious and knows no bounds! I’ve been seduced before in the past, and am doing everything in my power now to tame it. By now, I should know well enough that when times are euphoric, it’s time to panic!
The U.S. has got a very serious problem on its hands. Who knows if we’ll be able to overcome these challenges without having to reboot the entire economic system…
Of course, I hope this wonderful country keeps doing well and keeps prospering! But that doesn’t mean I should turn a blind eye and not take proper precautions. If I’m well prepared, at worse, nothing bad will happen and I’ll just end up owning a lot of physical coins! 😉
Things are going to get very interesting in the near future. In the meantime, I’m just about done with investing. I’m going to buy some precious metals, instead.
- If things keep going Up, I win.
- If things come crashing down, I want to be as best prepared as possible.
Diversifying into precious metals is a start.