Why people buy gold

To protect against inflation

That’s a good reason, but the next crash will be deflationary like the 2008 crash, when stocks, homes, oil, gold, and everything else plummeted in value. Trillions of dollars vanished overnight.  The bailout has kicked the can down the road and will make the next crash even worse.

CASH is KING in a deflationary financial crash.

Deflation is too big a topic to go into it in depth.  But here are just a few reasons why inflation isn’t likely:

• You can’t have inflation until $673 trillion (Angelides 2011) of outstanding debt are wiped out and settled (i.e. Detroit bankruptcy).
• The electronic bits representing $16 trillion of federal-level debt is not PRINTED, and even if it were, is a meaningless speck of dust in the black hole of the unfunded liabilities / $205 Trillion fiscal gap.
• You can’t create inflation because we have a credit/debit system. We do not have a PRINTED MONEY system like Zimbabwe, where billion-dollar bills were carted around in wheelbarrows.  In a credit/debit system, money is created when a bank makes a loan, and extinguished when the loan is paid back.
• In America’s banking system, for ever dollar of capital reserve backed by collateral (real goods, like subprime mortgages), 9 imaginary electronic dollars are lent.
• At the height of the financial crisis it was discovered that many banks were leveraged by a factor of 40 imaginary dollars with collateral of subprime mortgages and other questionable assets.
• Half of Americans would have a hard time getting their hands on $2,000 in 30 days.  You can’t have inflation if no one has money.  The only way you could make it happen is government helicopters dropping cash over poor neighborhoods, or most people working for unions who could demand higher pay despite the high unemployment and illegal immigrants.

In a deflation, there might be 100 people who think they own a given ‘dollar’, but only one of them does.  Look at Detroit: some debtors get 80 cents, others 20 cents, and many just pennies on the dollar — and some won’t get any money at all.

Remember how in the 2008 crash half of the wealth JUST VANISHED as stocks, homes, precious metals, and anything else that wasn’t cash dropped in value? Why would it be different this time?  There’s been no reform of the financial system.

The goal now is not to make money, but to hang on to what you have.

Nicole Foss on Cash and deflation

If you want to know more about deflation, see these Nicole Foss posts “40 ways to lose your future” and “Bigger picture“.

“Stock market bubbles (and housing bubbles etc) are Ponzi schemes. As with all ponzi schemes, only a few manage to cash out, and the majority are those who do so early. Those who do not cash out become the designated empty bag holders, but that empty bag can look awfully attractive at a market top. Trying to catch the top tick, and wring every last ounce of profit out of a collapsing system, is foolish. Most investors who play that game are likely to lose badly.

We have lived through the largest credit expansion in human history. Credit expansions create excess claims to underlying real wealth through Ponzi finance. When the debt created can no longer be serviced, the bubble will implode and the excess claims will be messily extinguished. This is deflation, and it is inevitable once a bubble has developed. The aftermath of a bubble implosion is generally proportionate to the scale of the excesses that preceded it, hence we can expect the impact to be extremely severe.

They may be convinced that they are clever and quick enough to get out before the rest, but the odds are not good. Also, the rules of the game are likely to be changed along the way, so that one would have to be both right and lucky in order to profit. For instance, shorting is likely to be banned at some point, and speculators demonized. There will be opportunities to make a killing, but many more ‘opportunities’ to lose your shirt.

Capital preservation is essential in a deflation, and the best way to preserve capital at this point is to be liquid. Cash constitutes uncommitted choices, and in a world of uncertainty, one needs to be flexible. There will be plenty of opportunities over the next few years (both to improve circumstances and avoid disaster) that will only be available to the few who still have the options cash provides. It isn’t necessary to have a fortune. Even a small amount of cash can go a long way as deflation causes prices to fall.

Those without any cash, or the means to earn some (in what will be a very difficult earning environment), will be at the mercy of whatever the world has to throw at them. Most of us are accustomed to far more choice and self-determination than most people have had in human history, and there would be nothing harder to lose. Nothing is as addictive as freedom.

Also, it’s important to understand that in a deflation, the prices of essential goods, like food and energy, can go up and this is not inflation.  It means that an essential item is scarce, and in a deflation as people have less and less money to spend, especially cruel and creates great hardship.

The herd is always fully invested at tops and fully liquid at bottoms, meaning that they are never in a position to take advantage of opportunities. They typically buy high and sell low. Naturally insiders do the opposite, behaving as any predator would.

Being grounded in positive feedback, deflation builds momentum relatively slowly at first, but later at an increasing pace. When credit contraction reaches a ‘critical mass’ it can unfold with terrifying speed, and for this reason extreme caution is warranted. It is well possible for the global banking system to seize up in a matter of hours, as it came very close to doing in September 2008.

Mortgage interest resets will continue until 2012, helping to drive sky-high inventory levels that will depress housing prices drastically for years, and have knock-on consequences for individuals and for the banking system (as we have repeatedly pointed out).

Approximately one in seven Americans is on food stamps already. The number one cause of personal bankruptcy in the US, even among people who have health insurance, is healthcare emergencies, as the co-pays are so high. More and more people are falling off the edge all the time. Their plight is ignored higher up the financial food chain, but it cannot be ignored forever. The middle class is dying, and the already poor are being driven into destitution. Eventually the ruined will reach a critical mass, and people who have nothing left to lose, lose it. This is a recipe for a degree of social unrest that will threaten the fabric of society.

There will definitely be hard choices to be made, as we have collectively invested so much in a way of life that cannot continue, and extracting oneself from the resulting structural dependencies can be both difficult and time consuming. Trying to live with a foot in two different worlds during the transition to a more resilient life can initially mean all the work of both, without the many of the benefits of either. This is not an easy path to walk. We wish all our readers the very best of luck in walking it.”

To have something of value to trade after a financial crash, sovereign default, during a war, or after a major natural disaster

Barter doesn’t work because it’s too hard for people trading goods to find one other.

When a currency failed in the past, either a local currency was created or goods like cigarettes, alcohol, and flour became the new “cash”.  Not gold or silver. Other goods traded that I found in various history books: butter, coffee, chocolate, gum, wood, oranges, bullets, razor blades, soap, over-the-counter & prescription drugs, razor blades, rechargeable batteries, shampoo, eggs, potatoes, and even candy bars — at one  Rainbow Festival, where money isn’t allowed, Snickers bars became the currency.

A 1-ounce gold coin, or even 1/10 is too valuable to trade for most goods.

Farmer’s don’t trust money, they’ll only take useful goods, and in a really serious crisis farmers become quite wealthy from the black market.

If a disaster is serious enough to create social chaos, using gold is too dangerous.  The local mafia, thieves, gangs, and roving militias will stop by your house and take your gold and whatever else you’ve got hoarded away.

 

Because after the next financial crash we’ll go back to the gold standard

The global system will NOT be recapitalized with physical gold reserves, because of the sheer momentum of the existing system of fiat currency and the debt mechanisms are too entrenched.

Also, there isn’t enough physical gold. Nor can we mine enough new gold to create enough gold reserves to back up paper currencies, because we’re at Peak Gold.

And if we had a gold backed currency, so what?   Banks would go back to their usual fraudulent practice of issuing too much paper currency against the gold reserves and create more financial crashes.

 

The USA controls the world with a currency that is backed by oil

We went off the gold standard, but the dollar is backed by something far more valuable: oil. That’s how America maintains its empire and controls oil markets.

Also, the world is flooded with dollar-denominated debt, which gives the USA huge leverage when there is very little cash to go around.

Better than gold OR cash: land, real estate, tools — real goods

Cash is KING in a deflation.  Real, physical cash.  But not for long, perhaps for only a few years if peak energy — peak everything really — strikes.

For the next two to ten years, the best way to protect yourself is to buy hard goods.

First, stockpile grains and beans, a grain mill with manual attachment, and enough food for every member of your family to survive for a year.  There are many food storage calculators on the web.

Second, buy long shelf-life goods that will be “currency” if times get really hard.

Finally, if you can afford it, buy a modest home in a town surrounded by agriculture.

The case for buying gold

Gold could be of use in a crisis to escape to a stable area.  For example, many Jewish parents got their children out of Nazi Germany using gold coins to pay their passage to safer places.

Gold makes a savings vehicle that cannot be defaulted upon or devalued by a government, and more importantly, is mobile wealth unlike real estate or stocks, giving a rich person the option to leave WITH a portion of their wealth if they want to.

We’re at the end of the stagflation stage on the verge of the crisis phase, which lasts about 20 years (Turchin).  Gold or better yet, silver, will be good to have when stability returns.  If you want to buy precious metals for your children or grandchildren, wait until after the next economic meltdown.  And you’d better have physical cash to purchase the gold with, because your bank may be insolvent, and the FDIC is in the red  and won’t be able to sort out the mess for a few years, let alone pay you back.

Gold will always be worth SOMETHING, and we appear to be at Peak Gold now, and as energy grows scarcer, mines will be forced to close.

Cash is not going to be king forever!  And if you have it, just like with gold, local mafias will try to get it out of you, and the government will tax real estate and stocks to death, as well as any other traceable wealth to avoid sovereign default. Cash might be hard to hide if it’s marked and traced electronically to fight “the war on drugs” or “the war on terror” (pick your excuse).

Short-term treasury bills are not going to be safe for long.  If you didn’t save enough to buy real estate, and you don’t have any family or friends to pool money with to do so, and you couldn’t afford even a half acre of arable land (with no home on it — much cheaper), and you’ve bought all the real goods you need, you’ve got to put your cash somewhere before cash too becomes worthless, which it definitely will at some point.  So gold could be a place, though silver would be better if you’re that poor probably.

Bottom line: real goods have priority over gold.  You can’t eat gold…  but if you’re really wealthy and want to leave something to your grandchildren, or have just a little to get through roadblocks, or the price is low because others have sold their gold to get cash and the USA is on the verge of default or changing the currency, or taxing your savings — there are reasons to buy gold.

And as far as safety – there is NOTHING safe, not even a home, though if you buy a modest home without more land than average you’re more likely to escape the notice of who ever is in power or roaming gangs/militias.

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WHAT WILL YOU DO WITH YOUR GOLD?  Feb 2, 2008. Gary North

[This is an excerpt from a very long article about gold that starts out with a discussion of German Hyperinflation, which is not going to happen in America because we have a credit/debit system, not a monetary system based on actual printed cash. But you might find it of interest since we will enter a crisis period where food, coal, and other goods matter more than cash or gold — in both hyperinflation or deflation real goods are what matter].

Gold and foreign currencies kept families alive. It did not make them rich.  Who won? The great winners were farmers. They easily paid off their pre-War debts. Even before 1923, a farmer could pay off his all of debts by the money generated by the sale of a single egg.  What counted most in 1923 was your ability to keep your job. What made jobs desirable were products to sell that everyone wanted: basic foodstuffs, coal, and liquor. People in cities sold off their prized possessions and heirlooms in order to get food. The flow of grand pianos to German farmers never again reached such a rate.

There was almost no way to get rich in cities. There was no asset, other than stored food and coal, that could have made someone rich. But rich as measured in what? The greatest urban wealth was food and coal. Holders refused to sell.

Almost no one gets rich in a crack-up boom. The few who do generally go bankrupt after the currency reform, when economic conditions return to normal.

THEN WHAT GOOD IS GOLD?

Gold serves as a valuable asset in the time leading up to the crack-up boom. Its price rises faster than the prices of most other assets.

In the crack-up boom, gold serves as an insurance policy against a catastrophe. You can buy your way out of circumstances that bankrupt others. You preserve much of your lifestyle by selling off a widely sought-after asset: gold. But understand: this is not a way to get rich. It is a way not to become totally impoverished.

After the currency reform, gold is more likely than any other crack-up boom asset to retain its purchasing power. This means that gold is a good investment in three phases: in the years before the crack-up boom, during the boom, and in the reconstruction phase after the boom.

Other assets require trading in and out. They require almost perfect timing. Gold doesn’t. You buy it before the boom is expected (e.g., 2001), hold it through the boom phase and the crack-up phase, and then re-enter the capital markets as the owner of an asset that has universal desirability as an investment.

You don’t get rich as a holder of gold during a time of serious inflation. Yet get rich as an investor with capital to invest after the crack-up boom has ended.

CONCLUSION

People do not see gold in this way. They see it as a way to get rich in a time of inflation. They do not understand this principle of economics:

The division of labor through invested capital is what makes people rich, slowly. The crack-up boom destroys the division of labor. Most people get poor in the crack-up boom, except those who (1) operate successfully in a low division of labor environment (think “Amish”) and (2) debtors who live outside urban areas, who pay of their debts with depreciated money.

The Amish don’t pay much attention to their wealth, except maybe to buy better horses. Debtors who learn how to play the pyramiding game in the boom phase generally go bankrupt after the monetary stabilization takes place.

So, don’t expect to get rich in an age of inflation by owning gold. That’s because you would have to sell it to get rich. Your timing had better be perfect.

References

Angelides, Phil. 2011. The Financial Crisis Inquiry Report. Final Report of the national Commission on the Causes of the Financial and Economic Crisis in the United States.

Bonner, Will. 2007. Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics

Kerr, R. 2 March 2012. Is the World Tottering on the Precipice of Peak Gold? Science Vol. 335 no. 6072 pp. 1038-1039

Krassimir Petrov, PhD. 4 Apr 2007. The Proposed Iranian oil bourse will accelerate the fall of the US Empire.  The Guardian.

MacDonogh, Giles.  2007. After the Reich. The Brutal History of the Allied Occupation

MacKay, Charles. 2013. Extraordinary Popular Delusions and The Madness of Crowds

Martenson, Chris. 2008. How Safe is My FDIC-Insured Bank Account?  marketoracle.co.uk

Orlov, Dmitry. 2005. Post-Soviet Lessons for a Post-American Century.

Pandurangi, A. June 25, 2011.  The Future of Physical Gold, An Imperfect World in The End

Puplava, Jim. Confederation, Nationalization & the New Oil Order.  Financialsense. The BIG Picture Transcript February 24, 2007

Turchin, P. “Secular Cycles” and “War & Peace & War”.

Vaughan, L. Feb 28, 2014. Gold Fix Study Shows Signs of Decade of Bank Manipulation. Bloomberg

Wall Street Journal. Aug 21, 2008. FDIC Faces Balancing Act in Replenishing Its Coffers

This just in: the gold bugs were right, the price of gold was being manipulated

Bloomberg News has a story captioned “Gold Fix Study Shows Signs of Decade of Bank Manipulation” (Vaughan). Since 2004 there have been times when the banks united to manipulate the price of gold DOWNWARDS.

Probably manipulation has been going on longer than that, but this is the best evidence I’ve seen for who and how it was done.

So the people most likely to make money are the banksters, not you..