Yesterday I discussed a brief history of
Keynesian monetary policy
, and how it is becoming increasingly difficult for our Government
to maintain their policies further.
The problem is too much debt. And while there's no way for anyone
to wipe this debt clean or pay it down with higher taxes, lower
spending, etc. - it will be taken care of. And as I said yesterday,
it will be passed onto EVERYONE who owns dollars and dollar
Obviously Central Banks and Governments have been trying to
socialize losses for two years now by crushing their currencies and
taking on the bad debt through bailouts, Quantitative Easing,
Austerity and a variety of other programs designed to push these
losses onto the general public.
This is the best example of the boiling frog metaphor I have ever
seen with the Federal Reserve slowly turning up the heat while
hoping we sit in the water not noticing that we are stewing in our
Free-Gold is most simply put as the push back against this attempt
to socialize the losses, but the process is not simple nor is it
guaranteed. Physical gold and silver are clearly the best bets for
diversifying your assets away from those that are going to be
devalued by government action and to retain your purchasing power
and, if you get in early enough, possibly increase it dramatically.
As the fortunate, intelligent, investor who got into precious
metals over the past few years while many of your friends, family
and colleagues watched their houses 401ks or even jobs plummet in
value it will be those few of us who own precious metals who will
be more strongly influencing the future.
Every family member who took your advice and bought a few ounces of
gold will be grateful and eager to hear your future opinions while
those who have scoffed and derided your decisions will be forced
toward the realization that you were, at the very least
temporarily, right. This is the beginning of the cascade and the
early stages of Free-Gold.
The evidence for this stage is all around us with the massive
success of precious metal based ETFs and demand for coins
skyrocketing and prices hitting record highs.
Obviously the most recent of these changes aren't being driven by
the hardcore gold bugs as they have traded in the majority of their
assets for gold years ago, and unless they are also all getting
multimillion dollar bonuses from
Goldman Sachs (
this small segment of the population simply can't be driving the
newest demand. The simplest conclusion to draw is that new
investors are converting their assets to gold at rates high enough
to create near perpetual new highs. Stage 1 of Free-Gold is well
Stage 2 is a continuation of Stage 1 as more entrants for the gold
market are found. The place to find them will be in the areas that
have not yet suffered major losses and that place is clearly the
bond market. Basically all bonds issued prior to 2006 and haven't
defaulted have done very well in this climate with record low
interest rates driving up demand for the securities available that
hold some kind of decent yield. These prices will face pressure in
the near future in all likelihood.
An increase in inflation will eat into the return of all bonds and
cause flight and frustration. Some will run into the equities
markets but most bondholders are often in that market specifically
because they are risk averse, they don't mind passing on some yield
if they think it provides them with greater security and the past
few years aren't exactly going to instill them with confidence that
the equities market is a calm, safe place to put their money.
This is one reason why the coming phenomenon is called Free-Gold
and not Free-Precious-Metals or Free-Silver. Gold has both a long
term reputation that is better known than silver and the additional
short term reputation created over the past decade.
If the Fed tries to anticipate and nip inflation in the bud all the
bonds, including the trillions in debt governments have racked up
the past few years, which have been sold recently will decline in
value. And if history is any guide a simple ½ to 1 point increase
will not be enough to fight inflation and the losses will be
dramatic while also erasing some of the gains that older bonds had
The scenery for Stage 2 is set with the end of QE2 in sight. Either
QE3+ will be implemented and inflation will eat away at the bond
market or QE3 will be postponed and rising interest rates will eat
away at the bond market, either way its dinner time for gold
Portions of stage 2 have already occurred with the Fed driving out
many traditional bond holds (think PIMCO), and this stage could
last for several years or it could see a catalyst of epic
proportions (think China dumping $1.7 trillion in bonds as they
have recently threatened to do) and spiral in a few weeks or even
Stage 3 is what separates Free-Gold from those who believe a return
to the gold standard is in the cards or those who believe a crash
in the dollar will lead to a true free market in money.
Keep in mind that though Free-Gold implies a crash and run from the
Greenback it does not imply its total destruction.
Stage 3 is when central banks start looking to the gold price for
their marching orders. Students of hyper-inflation know that prices
eventually start to spiral faster than the printing of money would
imply. They also know that gold's price rises even faster than
general prices. In fact during hyperinflation in Weimar there were
two types of currency available- the paper mark and the gold mark
and there was actually deflation in terms of the gold mark! Cash,
in terms of gold as cash, truly was king even during
Next time I'll discuss the end-game for Free-Gold and dollar, and
I'll give you some ideas about what to do next.
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