The Best Argument for Gold

There are a lot of great arguments for owning Gold, but for me it boils down to one thing. It is the inability of the US to finance its budget and obligations. In a word, monetization.

It has happened in history to small countries or even large ones (Argentina). The government runs up to much of a deficit and when it loses its borrowing ability, it can’t finance it. It doesn’t matter if its monetization or default- its bad for the currency and bullish for Gold.

Financing can come from a few places 1) existing savings of the citizenry 2) foreign governments 3) Printing Press.

As this article by Porter Stansberry explains, number three is the only answer.

So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we’re still going to come up nearly $3 trillion short. That’s an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they’re not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.

Stansberry also points out that the market, when it senses the country can’t pay back what it owes, begins selling that country’s currency and bonds. Those damn speculators!

So it comes down to financing. If a government can’t get its citizens or foreign entities to increase their buying of US Gov bonds, it has the Federal Reserve do it. In a word, monetization. In Japan’s case in the 1990s, they had enough savings from their citizens and therefore their obligations were financed internally.

To be fair and play the other side, what would be bearish for Gold or bullish for the greenback?

Well, the Obama administration would need to significantly cut the deficit. Or, we could have even bigger monetizations going on in Japan, Europe and the UK.

Ironically, in the 2001-2007 period, the increased inflation and high commodity prices provided enough excess liquidity, globally, for our deficit to be financed. Remember how money was recycled back into US financial assets? Well now the global economy is much weaker, surpluses have vanished and yet, the US and the UK have increased their obligations. And foreign nations are putting a bit more money into Gold instead of into US financial assets. Could it be that they are increasingly worried, perhaps only a bit, about our ability to pay everything back?

Got Gold? Got Silver?