The argument for owning physical gold in my mind is very simple. All you have to do is look at what is going on in the world. I have been writing about the national security and economic effects of our overwhelming sovereign debt for years now.
We are witnessing in a multitude of ways the fruits of our fiscal and monetary mismanagement. In addition, gold is at a very attractive place technically. It’s time to back the truck up for gold!
Let’s start with the old but durable argument about our debt. We are approaching $20 trillion owed to various global creditors including our Federal Reserve. We have exceeded the historically alarming level of a 100% debt-to-GDP ratio. Yes, our deficits have come down recently to only a half trillion (read that again, have come down to half a trillion). However, any intellectually honest spectator will see that shortly, in the out years, the deficits balloon again due to out of control entitlement liabilities. And, the costs for ObamaCare are not even fully understood yet.
These numbers do not include other unfunded liabilities, municipal, and state debt. The simple, undeniable truth is that we cannot pay this money back without printing money and devaluing our currency.
And printing is exactly what our central bank has been doing in obscene amounts for years now. In banana republics they call it printing money, here we call it “quantitative easing.” The Fed’s balance sheet has exploded to $4 trillion. This currency has to be withdrawn from the economy at some point. I’ve heard many learned experts try to spin this fact in tortured arguments with lots of big words, that this is not the case. They say we can basically just go on printing forever and there will be no detrimental consequences. Every parent knows that there are negative consequences to bad decisions. We can delay the inevitable but at some point we will have to pay the piper.
Now let’s look at this problem globally. The entire developed world is in the same boat. Japan and Europe are worse off than we are. It seems Europe is about to embark on a massive QE program of its own. There is a huge risk of another financial crisis as the underlying structural issues have been kicked down the road, not solved.
We are now seeing the diminution of the collective national power of the West in the Russian annexation of Crimea, the Chinese threatening their neighbors, Iran developing a nuclear weapons capability, and on and on. The world is a much more dangerous place without an America that is capable of projecting power. We have made mistakes but as a whole, the United States has been a force for peace and stability. This time in history feels very much like a pre-WWI environment. Old empires are resurgent and there will be crisis’ ahead that will shake the global foundations of prosperity and our way of life.
These are several reasons why I feel one should own physical gold in their portfolio. Individuals, nations, and corporations like to place their wealth in an instrument that will hold its value in the face of adversity and uncertainty. Throughout history gold has fulfilled this role. On its march to higher valuation levels, gold recently experienced a nasty correction as the ECB and the FED delayed the pain of needed deleveraging.
For a year now, gold bullion has been building a nice base around the $1,300 level and telegraphing a near-term bottom. It's no secret that China, Russia, and other nations have been actively increasing their ownership of bullion and most likely plan on continuing this effort. They see the uncertainty in the future as well. The world financial system is changing as our economic competitors strive to replace the USD as a global reserve and trade currency.
For all of these reasons, I believe it is time to back the truck up on gold bullion. The risk factors facing our global financial system are just too great. Empires throughout history have crumbled by devaluing their currency and spending money they didn’t have. I don’t believe it's somehow different this time.
L. Todd Wood is a former emerging markets bond trader. His thriller novel, Currency, deals with the consequences of overwhelming sovereign debt. LToddWood.com