10. All World’s Currencies are Fiat Currencies, and Fiat Currencies Always Fail.
99.9% of the world’s population is unaware that we no longer use money… we use “fiat” national currencies. What is a fiat currency? Fiat currencies are faith based. They are national currencies that are not backed by anything of value like gold, instead the government just declares that they have value and, as long as the people keep believing, they accept it… for a while. But here’s the thing, there have been thousands upon thousands of fiat currencies throughout history, and they have all failed… 100%… no exceptions.
But there is a vast difference this time around. Since 1971, for the very first time in history, all of the world’s currencies are fiat currencies simultaneously.
Remember this as we progress through the Top Ten…
ALL FIAT CURRENCIES FAIL.
9. The Current State of the Global Economy.
In my book, Guide to Investing in Gold and Silver, and in Hidden Secrets of Money, I show how societies have swung back and forth from quality money to quantity currency. Originally, quantity currency took the form of debased coinage (gold or silver money that has been diluted by adding cheap and abundant base metals such as copper). Then it took the deceptive form of national currencies that were initially backed by money, IE: claim checks on gold and/or silver. Once these were established, governments then could change the laws, basically making fraud legal, so they could print claim checks on gold that didn’t exist. The next step was to sever the connection between money and currencies entirely.
Back when we used real money gold would automatically balance all economies. When one country experienced an economic boom they would import cheap goods from countries with depressed economies and lower wage rates. The outflows of gold from the boom country would cause a deflation, cooling the economy, while the countries experiencing gold inflows would boom, causing their labor rates to increase, which in turn would cause the prices of their goods to rise. This meant that trade imbalances would always automatically rebalance. Government spending was also constrained. If a government wanted to spend more than its income (deficit spending) it had to borrow gold from the private sector. If the government borrowed too much it would cause interest rates to rise, which in turn would slow the economy, which in turn would cause tax revenues to fall, which meant less income for the government, which in turn would cause the government to cut spending.
But the debt based global monetary system has allowed deficit spending, trade imbalances, and bubbles to persist and balloon to levels unprecedented in all of history. We are in completely uncharted territory. The credit/debt bubble and the derivatives bubble threaten to take down the world economy. The only comparison you could make is to take every great bubble in history times one million and have it burst everywhere on the planet simultaneously… It threatens to be a global financial nuclear holocaust the only financial survivors of which will be the owners of gold and silver.
8. Currency Crisis / New World Monetary System.
I am a firm believer that everything happens in waves and cycles. So when I started writing my book back in 2005 I entered every financial crisis that I could identify into a spreadsheet, starting from the beginning of the USA, looking for a cycle, and something very dramatic stuck out at me. I had discovered that every 30-40 years the world has an entirely new monetary system.
From that day till now I have been telling as many people as I could that before the end of this decade (before 2020) there will be an emergency meeting of the G-20 finance ministers (or something like that) to hash out a new world monetary system. It’s normal. No man made monetary system can possibly account for all of the forces in the free market. They get old… they develop stress cracks… then they implode.
We have had four different monetary systems in the past 100-years. The system we are on today is the U.S. dollar standard. It is an ageing system that is way overdue for its own demise. It is now developing stress cracks, and will one day implode. Like I said, it’s normal.
But what is different this time around is that the last three transitions were baby-steps from full gold backing, to partial gold backing, to less gold backing, to no gold backing. In each of these transitions the system we were transitioning from had a component that could never fail… gold. This time we will be transitioning from a system based on something that always fails… fiat currencies. The key component to this transition from the U.S. dollar standard to some new standard is of course the U.S. dollar. By the time the emergency meeting takes place the U.S. dollar will be in the final stages of the terminal condition known as fiat failure.
But the U.S. dollar represents more than half of the value of all the world’s currency. A dollar crisis would cast doubts on all fiat currencies, and the cascading effect of loss of faith could cause the rest of them to fall like dominos. The central bankers will try everything they can think of to keep the fiat game going, but when everything they try fails they’ll look around and say, “What worked before.” And once again the pendulum will swing back to quality money.
The only beneficiaries of this event will be gold and silver, and those who own them.
7. Gold and Silver Come with a Central Bank Guarantee.
My book was written from 2005 through 2007. In it I said there would first be the threat of deflation (this came true in the crisis of 2008) to which Ben Bernanke would overreact with a helicopter drop (this came true with the bailouts and QEs) which would cause an inflation (this came true when the stock markets and real estate reflated.) Next there will be a real deflation… a contraction of the currency supply. This will happen when the credit/debt/bond/fiat currency bubble and the derivatives bubble begin to implode. The reaction of the world’s central banks will be to print until deflation gives way. I believe this will cause a hyperinflation. A hyperinflation doesn’t require a nation to print its currency into oblivion… it only requires a loss of faith.
But never fear, because, periodically, throughout history, gold has revalued itself as it is bid up in price by the free market as people rush back to it for safety. This is when gold does an accounting of all of the currency that had been created since the last time gold revalued itself. In doing so its purchasing power rises exponentially.
It’s always done this… and I believe it always will.
6. Everything Else is a Scary Investment.
By any realistic measure stocks have been in a super-bubble for more than a decade now with valuations and yields in the danger zone, while bonds are in the later stages of a 30-year bull market and real estate is still deflating from the biggest bubble in history.
Dr. Robert Shiller, of Yale University, has compiled data on the stock market going all the way back to the year 1880. His research concludes that by one measure the stock market has been in a bubble since 1998 and by his other measure the bubble is far bigger and more extreme than any prior bubble, including the stock market bubble of the Roaring `20s that led to the crash of `29. Further research shows that the only reason the markets have been levitated to these levels is due to Federal Reserve stimulus. What will happen if they take away the training wheels? I wouldn’t want to be invested in stocks when it finally implodes.
U.S. Treasury bonds have been a great investment for more than 30-years, but no bull market lasts forever. In fact, for the 37 years after WII, bonds were such a bad investment that by the end of the `70s they had earned the nickname “certificates of confiscation”, because they confiscated your wealth. But that was back when countries were financially responsible. Now most countries on the planet run their finances like Greece, and the United States of America is leading the way. And as the world’s central banks keep interest rates low it has caused bond investors to take extraordinary risks in search of a reasonable return. We are now in a global bond bubble, and I believe that this has made the bond market one of the most dangerous places to invest right now.
When the stock market crashed in 2000 it caused a recession in 2001. Alan Greenspan’s response was to cut interest rates dramatically. Then along came 9/11, making the stock market crash even worse, and his response was to take the Federal Funds Rate to lows for a duration last seen in the Great Depression. Greenspan’s goal was to reflate the stock market… his achievement was to accidentally create the greatest real estate bubble in history.
Since the popping of the bubble in 2007 real estate values have come back down to fair value and then bounced back into a small bubble. Dr. Shiller, also the creator of the Case-Shiller Home Price Index, agrees. This is typical price action of any super-bubble that’s in the process of popping… it’s called a “dead cat bounce.” The public always chases yesterday’s news. As prices reverted near fair value, investors rushed in to scoop up deals causing prices to rise once again. But then, just as in the crash of `29 and the NASDAQ crash of 2000, the dead cat bounce will roll over and the crash will continue until the opposite extreme of severe undervaluation is reached. This is natural and is what is required to clear out the excesses left over from the bubble days. Too many jobs were created in that sector and too many homes were built. Undervaluation is required to clear out the excess inventory and cause workers to move on.
But what worries Dr. Shiller is that institutional investment firms have bought up as much as 30% of the homes that were foreclosed on since the crash of 2008. This has the potential of making real estate as volatile as the stock market. If these firms ever decide to sell they can dump thousands of homes all at once, causing the 2008 real estate crash to look like the calm before the storm.
Personally… the thought of investing in real estate right now is down right scary.
So the stock market, bonds, and real estate are either in a bubble or have been in a bubble in the last decade. Gold and silver, however, haven’t been in a bubble for more than 30-years, and from my measurements still appear to be less than half way through their bull market.
The next great bubble will someday be in gold and silver… It‘s just their turn.
5. Market Psychology.
I’ve often said that the markets and the economy are both psychological and cycle-logical. Nobody can really understand the markets or the economy, but you can get an inkling of what they’re about if you understand what drives them… greed and fear. And the most entertaining part of monetary history is the study of their byproducts; manias, panics, bubbles, and crashes. When you study these you quickly learn the meaning of the old saying “The bull climbs the stairs, but the bear jumps out the window.” What it means is that it can take years to create a bubble, but only days or weeks for it to burst. This is because, when it comes to greed and fear… fear is by far the more powerful emotion.
Gold and silver are sometimes the exceptions to this rule because they can rise as fast as lightning in a panic. In the golden bull market of the 70s, it took nine years for gold to rise from $35 to $400, but once a panic out of dollars to the safe haven of gold began to develop, it took only 33 trading days to more than double, rocketing to $850.
But actually, it was only a very small percentage of the population that was panicking out of dollars in the 70s. This time I think it will be everyone. Where do you think gold and silver will be headed if my reasons ten through six come to pass?
4. This Time it Really is Different.
The first time I submitted my book, Guide to Investing in Gold and Silver, to the publisher it was rejected. I had overwritten the book. It was 800 pages long. I was provided with two editors and over a six-month period 600 pages were cut, including nine entire chapters. One of the deleted chapters contained what is probably the most important factor in trying to determine where gold and silver prices may be headed in the future. It was the chapter on the differences between the precious metals bull market of the 1970s and the great gold and silver rush of today. Since then I have traveled the world showing people just how dramatic the differences are, and that… “This time it really is different.”
In the 1970s the number of investors in state run economies like Mao’s China or the U.S.S.R. was zero, and most of the rest of the world lived in extreme poverty. The price of gold was set by two major exchanges, the London Bullion Market Association (LBMA) and the Commodities Exchange (COMEX) in the U.S. so only north America and western Europe, about 10% of the world’s population, could participate in the rush that drove gold up 24 times in price from $35 to $850. This time it’s everyone.
Every country on the planet has expanded their currency supplies about 10-fold since the `70s, so each potential investor has 10-times the currency. And within each population there has been the extraordinary development of the investor mindset. In the 70s we were a planet of savers, but then, as nations around the world abandoned gold and silver as money and adopted fiat currency, inflation raged punishing savers and rewarding investors and speculators. Then we had the tech bubble of the `90s and everyone became a stock investor or trader. Then we had the global real estate bubbles and everyone became a real estate investor or flipper. For more than 30-years saving has been punished and investing and speculating has been rewarded. The result is that there are many, many times more people that are likely to invest in gold and silver this time around. The number is very hard to project, but I would guess it’s somewhere between 10 and 100… possibly even as much as 1,000 times more people with an investor mindset. Remember that in the state run economies (more than half the world’s population) there were no investors, and today China is in the midst of an investor driven real estate hyper-bubble.
So that’s 10-times the people, each with 10-times the currency, and somewhere between 10 and 1,000-times the number of people with an investor mindset. That is somewhere between 1,000 and 100,000 times more currency that will someday come chasing gold and silver this time around.
This time… it really is different.
3. They Should Buy a Whole Lot More Than They Do.
Many analysts in the precious metals community claim that gold is the ultimate wealth insurance because it maintains its purchasing power throughout the centuries. There is an old myth they propagate that in ancient Rome an ounce of gold could clothe a man from head to toe with a toga, sandals, and a belt, and that today a man can still clothe himself in a suit, shoes, and a belt for the price of an ounce of gold. They claim that this has always been the case. Nothing could be further from the truth. Before the Federal Reserve was created in 1913 you could buy a man’s suit, shoes, and belt for an ounce of gold, and gold’s price was $20.67 per ounce, but due to inflation, by the end of the roaring `20s you couldn’t. At the beginning of the great depression gold was still $20.67, but because of deflation you could once again buy the outfit. Then in 1934, as the dollar was devalued, gold’s price rose to $35 and you could now buy an exquisite outfit, but by 1970, with gold still at $35 per ounce, it would only buy the shoes, but just ten years later, when it hit $850, it would buy a topnotch suit, very fine shoes, and a great belt. Then by the year 2001, when gold bottomed at $252, it could only buy a shoddy suit, cheap shoes, and a crummy belt.
Yes gold is always worth something, but it has always varied in a range of purchasing power. This myth that gold maintains the same purchasing power throughout the centuries is based on the true fact that we mine gold at about the same rate as the growth of the population so there is relatively the same amount of gold per person on the planet today as there was in ancient Rome. So let’s dissect the myth of the Roman suit and see why gold’s purchasing power has varied, and what it could be in the future.
The gains in efficiencies made since ancient Rome are mind boggling. To make a toga required either cotton to be hand planted, hand tended, hand picked and hand separated from the seed, or it required sheepherders to tend small flocks of sheep and then shear them by hand. Then the cotton or wool had to be hand washed, hand combed, and hand spun into thread, but the spinning wheel was yet to be invented, so a spindle and distaff (basically two sticks) were used instead. This was a very laborious process so it could take someone weeks to make enough thread for a toga. Then the thread was hand dyed with hand made colors that had been hand mined or harvested. Then it had to be hand woven on a two person vertical loom (again, slow and laborious.) Then the cloth was cut to a pattern and hand stitched into a toga. The shoes and belt were equally labor intensive.
Today, with factory farming, cheap fuel, modern irrigation, and pesticides it’s possible to tend thousands of acres planted at densities never before imagined. Giant combines drive through the field plowing the dirt and sowing the seeds in one pass. At harvest time specialized combines pick the cotton and other machined separate the seed. With factory ranching efficiency is the same story with thousands of sheep being tended and shorn in production line fashion. Then trucks deliver the cotton or wool to where it’s washed, combed, and spun into miles of thread in minutes, then dyed with cheap mass production dyes and woven into miles of cloth by machines… again in minutes. Then the cloth is stacked many layers thick and a computer guided shear cuts out dozens of each of the parts of the suit in a single pass. The parts go to an assembly plant where workers, who specialize in making the left sleeve, or right leg and such, do so at amazing speed. Workers that can turn out dozens of suits per day do the final assembly, also at a blazing rate. Then it’s shipped to a store where you can pick from dozens, or even hundreds of styles, colors, and sizes. It’s a similar story at the shoe factory that spits out a pair of shoes every few seconds, and the belts that come off the production line by the thousands.
The end result is that the “time value” of the Roman outfit most likely measures in months of human labor, whereas the modern suit contains only a few hours of human time. This is true of all the other stuff in society as well. When it comes to the time value contained in stuff… everything today is on sale for a tiny, minuscule fraction of what it once cost. And as proof to support my thesis I offer this… Today a good percentage of the world’s population has maybe a hundred times more stuff than 99% had 2,000 years ago. Think about it. You are surrounded with furniture, cell phones, computers, TVs, refrigerators, grocery stores, cars, planes, hotels, restaurants, a great bed to sleep in at night, and just about anything else that you want. By contrast 2,000 years ago most people, with the exception of the ruling class, lived a subsistence living barely able to afford the things they needed to survive. In many cases a great bed or pair of shoes were extravagances they would not experience in their lifetimes.
So if this is true… and it is… then why is gold’s purchasing power so low? If there’s so much more stuff per person, but the same amount of gold per person… shouldn’t an ounce of gold buy many, many, many times more stuff than it does today? Absolutely, emphatically, YES… it should.
Then why doesn’t it?
Because of the other big factor in busting this myth…
In ancient Rome, if you wanted to save some of your wealth for the future there was only one asset available for you to save your purchasing power in… real money… the gold and silver coins that made up their money supply. Today if you want to save some of your wealth for the future you do so with financial assets such as stocks and/or bonds, and maybe a tiny portion of currency in a checking account. These highly liquid assets actually compete with gold and silver as a place to store your wealth. They all dilute each other’s purchasing power.
So that’s the answer… competing fiat currencies and other financial assets. In ancient Rome there was only one place to store your wealth… today there are thousands. The gains in purchasing power that gold should have made due to man becoming so much more efficient at making stuff, have been almost exactly offset by alternative liquid financial assets in which to store that wealth.
Highly liquid world financial assets (which exclude all real estate, any business not listed on an exchange, and derivatives) total about $230 trillion. Total world currency, including bank deposits, stands at about $50 trillion. So that’s a grand total of $280 trillion of liquid assets. That’s $40,000 worth of wealth per person on the planet stored as transient digits in computers.
Today, investment grade gold (coins and bars) held by the public totals about 1.1 billion ounces and there are about 7.1 billion people on the planet. That’s 0.15 ounces of gold per person. At today’s prices it’s about $200 worth of gold per person. If you include official reserves, such as central bank gold, you get about $400, and if you include all above ground gold, including things like jewelry and religious artifacts… in other words, all the gold ever mined in history, you get about $800 worth of gold per person. That’s it… That’s all.
With technology, machinery, and super cheap energy we’ve become a thousand times more efficient at producing stuff, and at the same time we’ve created a thousand more ways to store our wealth. If it weren’t for all those competing currencies and alternative financial assets gold would buy many, many times more stuff. But even with all this competition, because of the gains in efficiency, an ounce of gold should buy 10 men’s suits today. And if fiat currencies were to fail (like they always have) then it should buy a hundred or a thousand.
So what happens to those alternate financial assets in the inevitable market crash that lies out there in the future? Those trusted financial assets suddenly become, hocus-pocus, voodoo, financial assets and their value evaporates, just like those AAA rated Mortgage Backed Securities did in the crash of 2008. What happens to fiat currencies in the coming currency crisis? All those currencies become hot potatoes that nobody wants, causing hard assets, like gold and silver, to be bid up to the moon. Either way, gold will buy a whole lot more stuff someday in the near future.
So you have $40,000 worth of wealth per person stored in alternative liquid assets compared to just $200 per person stored in investment grade gold. That’s a 200-1 ratio. That means that in a crisis if just 10% of the wealth invested in those alternative assets were to come chasing gold, its price could rise 20-fold.
The moral of the story is… If you want to buy 20 suits, shoes, and belts a few years from now… buy an ounce of gold today.
2. Add Up Reasons 10-3… It’s All Happening At Once, and It’s Global.
Since 1971 all of the world’s currencies are fiat currencies simultaneously… and all fiat currencies in history have failed.
The world’s central banks are simultaneously creating fiat currency on a suicidal scale never before imagined.
Every 30-40 years the world has an entirely new monetary system, but for the first time we will be transitioning from a system based on something that always fails… fiat currencies. So unlike previous transitions, this transition will be felt by everyone on the planet.
This time there is 10-times the people that can buy gold, each with 10-times the currency, and somewhere between 10 and 1,000-times the number of people with an investor mindset. That is somewhere between 1,000 and 100,000 times more currency that will someday come chasing gold and silver this time around.
Periodically, throughout history, gold accounts for all of the currency that was created since the last time gold did the accounting. This time it has to account for a mountain of currency the scale of which has never been seen before.
We are in completely uncharted territory.
Real estate, stocks, and bonds are all in bubbles.
The credit/debt and derivatives bubbles threaten the world economy.
It takes years to create a bubble, but only days or weeks for it to burst… and all bubbles eventually burst.
In market crashes and currency crisis, trusted investments can sometimes evaporate.
In currency crisis, a stock market crash, or in the final stages of a gold bull market, fear is what drives investors.
When it comes to greed and fear, fear is by far the more powerful emotion.
Gold and silver haven’t been in a bubble for more than 30-years, so the next great bubble will be in gold and silver… It‘s just their turn.
There’s more stuff per person than at any time in history but the same amount of gold.
Competing fiat currencies and alternate financial assets have diluted gold and silver’s purchasing power.
There is 200 times more wealth invested in liquid assets other than gold.
If 10% of that wealth came chasing gold, its price could rise 20-fold.
And that’s 10%. In the crisis I see coming, fear should drive a lot more than just 10% of the world’s liquid wealth towards gold and silver.
Knowing this you would think I would take every spare unit of currency I can get my hands on and buy gold. So why don’t I? Because silver is undervalued compared to gold. So I take every spare unit of currency I can get my hands on and buy lots of silver and a little gold.
1. I Sleep Better.
As I said at the beginning of this article, I believe that an economic crisis of historic proportions is headed straight at us, and there is no avoiding it. Never before have all governments on the planet simultaneously laid down the foundation for the perfect economic storm. I believe that there will be a global fiat currency crisis that will cause the bubbles in stocks, bonds, and real estate to burst simultaneously. This will result in the greatest economic crash the world has ever seen.
Things could get pretty bad. The possibilities range from my being completely wrong and things going pretty much like they are, to a total economic collapse and financial Armageddon from which we never recover. Toward the bad end is the possibility of the failure of the monetary system, which would raise the likelihood of social unrest (rioting), and disruption of the food supply.
But in any range of possibilities there is something called a bell curve of probabilities. What that means is that either of the extremes (also called the tail risks) are very unlikely to happen, but that something in the middle is very likely to happen.
Believe it or not, I am not a doomsayer, but nor do I believe the government when they tell me everything is going to be all right.
I think it’s going to be something in the middle. Yes, I believe it’s going to be the greatest crash in history, but I have great hope. Man is an amazing species. We have a resilience and ability to adapt and bounce back from anything.
How have I prepared for the range of possibilities? I have been accumulating precious metals since 2002. To me this relieves a lot of anxiety. And now I have purchased a small supply of emergency food. I found an assortment that will have me eating like a king in an emergency situation. I have given one of these assortments to each of my family members, my best friends, and all of my employees. This has relieved any remaining anxieties.
Yes, the stock and real estate markets will probably crash, and for those who are unprepared it will be devastating. But if it’s going to happen anyway, and if there is nothing I can do about it, then I may as well try to figure out how to turn this catastrophe into the best thing that has ever happened to me. When I talk about an economic crash, most people get a picture in their head’s of the devastated, bombed-out wastelands left over after a war. It’s not going to be that way. All the true wealth, the buildings, the real estate, and the factories will still be there… they’ll just be on sale.
It is when stocks and real estate are bottoming that I intend to sell my gold and silver and buy up as much true wealth as I can.
Yes, banks could fail, but new, more efficient ones will take their place. Yes, the world monetary system could collapse, but this could be a good thing. If we could make fraud, theft, and conflicts of interest illegal for the banking sector and monetary system, and if we just leave the free market alone and stop manipulating and meddling with it, it would quickly provide us with a new, efficient, stable, and honest monetary system that would increase the prosperity and standard of living for us all.
As I have said many times… there are these brief moments in history where the safest asset class, gold and silver, the safe haven to protect your wealth for the last 5,000 years, simultaneously become the asset class with the greatest potential gains in absolute purchasing power. I believe we are in one of these episodes right now, and the performance of gold and silver over the last twelve years have proven me correct.
In periods of crisis gold and silver are the asset class that out performs all others. This decade will see the greatest financial crisis in history. That means it will also be the greatest wealth transfer in history. And that means that it is the greatest opportunity in history.