We are now in the early stages of what I believe will be a global sovereign debt crisis. With Greece, Portugal and Spain, we are seeing the results in what might be considered the “subprime” nations struggling with overly burdensome debt payments. However, just like in the mortgage crisis, many “prime” nations, like the United States and Great Britain suffer from the same disease. It is just that for these countries it will take a bit longer before the symptoms materialize.
The bottom line is that many nations, including the United States, have simply borrowed more than their citizens can realistically repay.
For many such countries, default may be the only way out. The only question is how to do it. Will governments simply refuse to pay, or will they pretend to pay by printing money? I believe either option would be very bullish for gold and silver. If nations default, gold and silver prices should rise, if they inflate, they should soar.
Today the collective governments of the European Union, who had been following a more responsible policy than the United States, decided to capitulate. With their massive trillion dollar bailout package to any euro zone country that needs help financing their debt, the Europeans have decided to follow the path blazoned by the Federal Reserve. All debt problems, on both sides of the Atlantic, will now be monetized with a printing press.
While gold sold off on the bailout news, there is no question in my mind that the development is extremely bullish for gold. Germany has caved and the inflationists have prevailed. The moral hazard of the bailout will mean bigger deficits in more euro zone countries. Eventually even Germany itself will succumb and join the party. To defend the euro and sterilize their bond purchases the ECB will have to sell dollars. But to whom? The U.S. is certainly not buying.
If Europe, like America, becomes a net foreign borrower, the industrialized West must expect emerging markets to pick up the tab for both America and Europe! After all not every nation can ride the debt wagon; someone has to pull the cart. This will mean that China in particular will have to buy even more foreign exchange to prevent a collapse of both the euro and the dollar. This may push them to the breaking point much sooner than many like to think.
Last Thursday as the Dow Jones plunged 1,000 points, gold surged $35 to just under $1,200 per ounce. Yes, gold and silver may already be “hot”, but I believe there are still great quantities of kindling now lying around which could fuel a continuing fire.
I do not think we should wait for the sovereign default disease to spread. I do not think that it is too late to buy physical gold and silver. Once more people comprehend the magnitude of the problem, I believe prices may go higher than they are today.
We are at the dollar/gold high water mark at this writing.
As for your IRA. Most people own dollars in their IRAs along with equity based mutual funds. These are both poor long term investments in consideration of the above. I believe the next recession will be worse due to this debt hangover. The world will run out of trees if Bernanke thinks he can print his way out of the next round.
The problem with moving an IRA fund to gold has always been the “holding” issue. One may not actually “hold” or use those funds designated as tax deferred. It must be held by an intermediary. Until just recently, this has limited ones ability to rollover an IRA to gold as only stocks of gold producing companies have fit that requirement. For some time, these stocks had not been stellar performers as the net cost to actually mine gold had been exceeded by it trading value. Much like many natural gas and shale oil investments, they only paid off when the price of the commodity itself was expanding. Now, with more money on the table from investors and more expansion in spot price, these gold based equities are attractive and are receiving lots of attention from IRA investors. But, these are gold “related” or gold based” but not gold backed or let alone gold. They are equities in higher than average risk ventures.
Samuel Clemens wrote that a gold mine was “a liar standing next to a hole in the ground”. He also recommended that when the next gold rush comes along, invest in shovels. Both great words of wisdom.
Next came the ETF’s (Exchange Traded Funds) or so called venture funds with are nothing more than mutual funds investing in commodities rather than equities. Many of these ETF’s are built on a combination of gold mining stocks, gold investment ventures & gold holding trusts. These have been very lucrative over their short history, but like all “cooperative” funds, raise some strong questions. Who’s calling the shots? Where are the hard assets? What are the assets? And, much more importantly, as they are simply taking your money and buying gold based or actual gold with that money, do they hold enough actual hard assets to cover their investors when a run comes? While I like ETF’s based on a commodity or even an entire regiaonal stregety, like a Brazilain ETF, I balk at these all glitter and maybe no gold venture funds.
Both of these avenues of gold investment are oft time NOT actually here in the lower 48 or even Alaska. Also, these vehicles are largely not investing in actual refined gold in hand out of the ground. A mining stock is investing in a future production or even a futures sale to another company and most ETF’s only hold actual gold in trust as hedge on their more speculative activities.
Also, other than actually in hand, gold is more often an offshore investment. Most gold stocks and gold ETF’s are based on an offshore mining group. Most gold mines are not in the lower 48.
Most recently, the opportunity to purchase gold, physical, out of the ground refined bullion, and have it held for you in trust is now being offered by a few mints around the globe. In the past, this was a service open only to the very wealthy. One that I do business with is the Perth Mint of Australia. OK, so the gold isn’t “in hand”, but for IRA use, it can’t be anyway. It’s in real, out of the ground gold rather than a piece of paper. It’s safe, in that no one can take it, it’s in their vault. I can sell it back to the mint at any time at current spot value. I am charged a small storage fee annually. I can also fly to Perth anytime and visit my gold or withdrawal it physically if I wish. Why would I want to? It’s an IRA.
Gold has been the best long term investment over the last decade. Period. One doesn’t need to bury coffee cans full of coins in the back yard to take advantage of this surge in gold and one shouldn’t miss the tax loophole that an IRA affords when investing in gold.
How long will this surge in gold run? Is there a top?
Mor elater - please comment.
Omar P Bounds III
Opinions expressed are those of the writer.
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