Gold's role in the Greater Depression of 2020 / Commodities / Gold & Silver 2020
The most important measure for an economy, its recoveryor advancement is employment - that is, the availability of good-paying jobs. When citizens have jobs, they earn an income withwhich they can pay for their needs, and pay taxes to the government for itsneeds. So jobs and income, are the keydeterminants of a healthy, modern consumer-driven economy. Over the last several decades businessowners, globalists and bankers utilized foreign wage, borrowing cost,environmental and regulatory advantages to close production facilities in theU.S., moving thousands of factories and jobs to Asia. This job migration decision can be reversedat any time; however, it will take as many decades to bring jobs back to theU.S. as it did to move them overseas. Therefore,it will take many years to reverse this unfortunate U.S. worker-discriminating decision. As an unfortunate result, we are now toexperience the consequences of a depression (a long lasting recession) insteadof a recession.
Some economic observers and pundits have alreadypublically stated that we are now in an economic recession. Officialacknowledgment would require the passage, retrospectively, of two quarters ofnegative GDP growth to confirm this. However, considering all that has transpired since the beginning of thisyear in our country, admitting that we are now living in a recession is not aparticularly bold projection.
In reality, we must acknowledge that we are living nowin the Greater Depression of 2020! The descriptor of “greater” than that utilizedfor the Great Depression of the 1930s is appropriate, because this current depressionis likely to be both steeper and longer than the previous one. Yes, it will take a couple financialquarters or until next year for the appropriate government agencies such as theCongressional Budget Office or others to announce and confirm officially thatthe country entered a recession, and then continued sliding into a depressionin 2020.
On May 19, 2020 the CBO released a report entitled“Interim Economic Projections for 2020 and 2021” stating that the number ofpeople unemployed in the second quarter of 2020 will be some 26 million peopleless than those employed at the beginning of this year. More current data for the filing ofunemployment benefits implies that nearly 41 million people have lost theirjobs. The CBO also stated that “Although economic conditions are projected toimprove following their sudden drop, real output is expected to be 1.6 percentlower in the fourth quarter of 2021 than it was in the fourth quarter of lastyear.” The report’s chart shows clearly thatthe CBO will be able to confirm that the economy was in a recession in 2020;and if their projections arerealized, then depending on the actual slope of recovery experienced, it may beable also to confirm a depression having started in 2020.
This year’s specific economic performance numbers arenot particularly important to cite, as the ghastly economic numbers are legion. Most business enterprises across thecountry are simply closed, a record number of people have losttheir jobs; therefore, a record number of people are unemployed,a record number are not earning any income, all public events are outlawed,automotive sales collapsed, retail sales stagnated, ditto with manufacturing,shipping and commercial transport grossly diminished, etc., etc. With all these measurements in recordterritory with negative implications, we are not experiencing a recession – weare securely in a depression from which the economy will require years torecover. To read the economicrationalization see: (The Last Minsky Financial Snowflake Has Fallen – WhatNow? http://www.marketoracle.co.uk/Article66849.html)
Because many of the current economic numbers arealready known to be worse than those experienced in the Great Depression,announcing the Greater Depression is no bold forecast. So this is not a harsh prognostication;rather, it is the moderate application of historic experience to current events. If that sounds implausible, reflect on how impossibleit should seem that a nation which boasted just a few months ago the lowestunemployment rates in U.S. history, now is experiencing its historicallyhighest.
Near term future
An increasing number of state and national politicianshave stated that in order to resurrect the economy, huge additional amounts of currencywill need to be issued and distributed for various stimulus programs. Electronic printing or paper issue of hugeamounts of currency will destroy its value. Thus the net result of government policies to deal with the corona viruswill be twofold: first, it will have brought about the atrophying ordestruction of our global reserve dollar currency, and second, there will eventuallybe more deaths attributed to the disabled economy than to the virus.
In prior sales of our nation’s debt - when the U.S.sold Treasury bonds - countries like China and other countries were eager tobuy this debt. Now, with tradenegotiations semi-frozen, some tariffs and sanctions in place, threats ofdelisting Chinese companies from U.S. exchanges, suspected U.S. instigation ofriots in Hong Kong, and diplomatic relations at all-time lows, China is less likelyto buy this debt. We should not losesight of the fact that China’s historical purchasing of our Treasury securitieshas partially financed our government’s operations! If our debt offerings are unsold, and countriesare unwilling to lend enough money to the U.S. for its government to cover itsdeficit or roll over its debt – government operations become disabled. If, instead of China and other foreigninvestors, the majority buyer of our debt becomes the central bank (FederalReserve), the currency’s purchasing value will quickly decline, and lead tosignificant price inflation, and international retaliation. To the extent that the U.S. dollar is theglobal reserve currency, a decline in dollar reserve values will also create aglobal banking and economic meltdown.
Even before the grave economic effects of the coronavirus on our economy, the government was expanding its fiscal policy – that is,it started expanding its budget with additional spending intended to benefitthe overall economy. Governmentpoliticians were quite supportive of increased multi-trillion dollar spendingeven as it increases the budget deficit, and national debt. Politicians knowthat the FED will accommodate this additional spending by offering moreTreasury bonds for sale. Therefore,politicians will never act with a sense of accountability or responsibility. Reflect that it is politician prior financialirresponsibility over decades that has brought the nation to its currentcatastrophic over-indebted situation.
So let us now project what one important economicmeasure may become as we calculate the ratio of our nation’s debt to GDP at theend of this year. No scrupulous accuracyis required here; ballpark estimates will suffice. If the country’s GDP of roughly $22 trillionwere to decline this year by 25%, as the debt from special government spendingprograms rises from $24 trillion presently to $30 trillion, its debt/GDP ratiowould rise above 180%. If it takes fiveyears for GDP to get back to 2019 levels, while additional recovery and bailoutprograms further increase national debt, this ratio will rise to levelsrendering our national debt as junk.
Economists Reinhart and Rogoff determined from theirhistorical studies of country currency failures (This Time is Different, CarmenM. Reinhart and Kenneth S. Rogoff, 2009) that a ratio of debt/GDP exceeding 60%was conducive to debt default and currency failure. For that reason, this debt limit was legallyestablished and incorporated in the Maastricht treaty at the formation of theEuropean Union - in order to protect the Union from government defaults. At this time, all of the significant membercountries have ratios substantially exceeding this limit, signaling theirinstability. The ratio of debt/GDP as itmay be for the U.S. over the next several years belies severe economic problemsfrom which it may not recover. Given theprecarious economic state of the European Union, the over-indebted UnitedStates, and slowdown of China’s economy with its own significant internal debt,there is no escape from the debt destruction that is to come. As defaults rise loans will fail, and as banksolvency will be questioned, some significant banks will fail also. As domestic and foreign banks fail, this willbecome a financial and economic crisis of global codependence of ourinterconnected world. Thereforeindividual, corporate, municipal and government loan defaults around the world willeffect negatively the whole global economy.
The rationale fora gold allocation
We are reminded by many investment sages that everyinvestment portfolio should contain five to ten percent allocation of physicalgold. The rationale offered is that inthe event that stock or bond prices decline by one third, the ten percent goldallocation would rise to offset the loss. For example, in a stock portfolio valued at one million dollars, theloss protected portfolio would contain $100,000 worth of physical gold. Now, if the portfolio of stocks declines by$300,000 and the value of the investors fund has declined to $700,000, the goldportion of the portfolio is expected to rise to $400,000 so that the actualportfolio value remains unchanged. Inthis example the gold price would have rallied four times. If the gold value rises less than four times,the overall portfolio would suffer some loss – but less than implied by thesimple decline in stock prices without any gold allocation.
Among individual gold enthusiasts and gold dealers itis impossible to find those today who believe that gold prices in the nextseveral years could decline. Mostobservers would project that gold prices will rise multiple times, and couldexceed $10,000 per ounce in the next several years. So what is seemingly incongruentwith their gold price expectations? If the price per ounce of gold is likely torise that dramatically, and almost all gold followers and gurus are unified asto gold’s likely price rise – why on earth should one allocate just 5-10% ofthat portfolio to gold? Why should thatallocation not be 20%, 40%, or 60%, or even more? After all, if the reason for investing is toearn profits, why should one limit oneself to what almost everyone agrees willbe a highly profitable investment?
It is easy to conclude that large money managers withbillions of dollars under management cannot increase their gold allocations toa high percentage. First, the goldmarket simply isn’t large enough to accommodate such a policy foreveryone. The global financial marketsrepresenting both equity and fixed income is approximately $170 trillion insize, while the estimated value of physical gold is $11 trillion. Due to great market volatility these numbersdo change, but they suffice to provide perspective. Given these parameters, we can see that thereis not enough gold in existence to provide more than a 6.5% allocation to goldfor all financial assets. In addition, theproper storage and protection of large gold holdings require special andexpensive actions.
However, for the middle class investor there are essentiallyno practical limitations. It may take aperiod of time to accumulate a significant gold position, but it is still easilyachievable. For example, a $10 millionportfolio with a 20% allocation to gold would require $2 million allocated togold. At a price for gold at $1,750 perounce would require the purchase and storage of 1,143 ounces of gold, a volumeapproximating two six-packs of beer. Thatamount of bullion or coins can easily be stored in commercial storage, aprivate safe, or hidden somewhere.
So what percent of your investmentportfolio should you allocate to gold? Clearly, the allocation for the average investors should exceed the5-10% recommended by most gold experts. It is equally clear that the allocation should not be 100%, asdiversification is a sound investment principle. The actual percent allocated to gold woulddepend on many factors including the composition of your portfolio, includingtax considerations of liquidating a part of your older assets. But if you do not have gold, buy it now; atthis point there is no more time to waste, as the reckoning time is finallyhere. You should also consider not beinginvested in financial markets at all. See the January 20, 2020 report: FOMO or FOPA or Au? http://www.marketoracle.co.uk/Article66455.html
Gains on gold maynot be free
Let us now consider what could go wrong with this“dependence on gold” theory. You have been wise and insulated your investmentportfolio against loss with a generous allocation to gold. The gold price risehas served you well, and two years after the big financial market decline youfeel almost confident financially as your portfolio value is now greater thanbefore the fall. Is this a reasonable expectation?
You should remember that your federal government hasbeen trying to deemphasize and suppress gold prices since the 1970s, when thedollar was uncoupled from gold.
You should also acknowledge that gold has been thenemesis of a freewheeling spendthrift government that wants to print and spendwithout any accountability.
When the gold paper certificate was still incirculation one hundred years ago, a one ounce gold coin was worth $20, and youcould exchange one for the other at any time. With that one ounce gold bullion now valued at about $1750 in purelypaper fiat currency, it is clear that over this time period the paper currencyhas lost 99% of its value. This resultis less than commendable for the government/FED performance, and disastrous toall citizens.
The government/FED axis has also eliminated largerdenomination paper currencies. Indeed, acouple of years ago there was some brief consideration of eliminating the onehundred dollar bill. Thankfully, thisharebrained idea was abandoned. However,at one time paper currency included larger denominations including a $10,000bill, with former Treasury Secretary Salmon P. Chase on its face. In the early 1950s, one could buy threeGeneral Motors Chevrolets with that Chase bill. If the bill was still in circulation (it was discontinued in 1969), itwould take three of those large face amount bills to buy a single Chevrolettoday. That would be another easyreminder of just how huge a failure paper fiat currencies have been (forcitizens, not government), so it needed to be extinguished from people’smemories - hidden by elimination.
In the 1960s and 1970s many U.S. citizens were eagerto own a foreign made car. As foreign autodealerships were not that common, some citizens would pay for a foreign car incash while visiting Germany, and drive their new car around Europe, and at theend of their trip they would ship their “used” car back to the U.S. Law permitted that one could bring itemsvalued under $10,000 duty free and without any declarations. Since that law has not been amended forannual currency devaluation, today you might be able buy just two wheels ofthat auto for the $10,000. Said anotherway, $10,000 in 1971 dollars adjusted by CPI (which has been manipulateddownwards after cost of living adjustments increasing Social Security paymentsin 1973) has the purchasing power of $63,300 today. Another excellent reminder on fiat currencies.
In Germany in 1923, at the time of the Weimarhyperinflation, the only way to enjoy a decent standard of living was to haveforeign currency. Should that event everrise to a modest probability in the U.S., citizens would likely come to asimilar realization and seek to also hold a “foreign” currency. In fact some citizens are alreadycontemplating that possibility, and that is why they are looking at gold (aforeign money to the populace) and cryptocurrency such as Bitcoin. To control the citizenry, the government/FEDaxis is looking to eliminate all paper currency and issue only electronicmoney, which can be totally controlled with the click of a single electronicbutton. How devious and convenient!
The reason for showing these examples is to convey toyou that government and its real leaders will always act in a persistent fashionto confiscate portions of your income, savings, and investments. Within the context of your having outsmartedthe government by exchanging their paper currency for real money (gold andsilver), you will have displeased some powerful central planners. Therefore, do not assume that when an ounceof gold is priced exceeding $10,000, the axis will not have trotted out somelaw that tries to capture a large part of your gain. Remember, financial suppression is somethingthe government has applied at various times against its citizenry for over onehundred years. See: America’s One-sidedDomestic Financial War http://www.marketoracle.co.uk/Article62968.html
Alternative to amarket decline
Every gold dealer is claiming that gold going up – butrarely does one suggest a larger gold allocation to an investment portfolio. Traditionally markets rise when the economyand corporate earnings are expected to increase or recover. In a period of economic decline, the stockmarket performance should lead the economy down, trashing markets. However, there is an alternative possible tothis more reasonably expected experience. It is possible for the stock indexes to rise, with stock prices seekingnew highs. In that lesser experiencedevent – it is the dollar currency that gets trashed while the market appears toadvance.
Given that the Federal Reserve has recently createdtrillions on new dollars, and is expected to create additional if not unlimitedtrillions – it is possible that the currency gets destroyed, even as we are notfully aware of its destruction. Therefore, the rise of financial markets may beannouncing a different phenomenon taking place than a hoped-for economicrecovery. It may be confirming thatdestruction in the value of our dollar currency exceeds any real gain ineconomic activity, requiring the transacted price of goods, including stocks,to be larger in amount of that devaluing currency, and therefore giving thefaulty impression that stocks and markets are going up. In Weimar’s Germany of the 1920s, its stockmarket rose for a couple of years even as the relentless printing of currencywas leading to hyperinflation and total destruction of its currency.
Can we avoid theworst outcome?
The government and the FED can be expected to continuethe “printing” of dollars, because if they stopped, the nation’s finances wouldbe thrown into comprehensive chaos, and soon thereafter government itself wouldrisk collapse. As the value of thedollar declines and approaches an eventual collapse, it will evaporate thetrust that people have had in government and democracy. Therefore, there can be no stability ingovernment, if there is no stability of the currency. In this regard, the government’s approval of acentral bank which issues debt-based currency, over time all but guaranteeseventual currency collapse. Everyonewill lose money as pensioners, professionals, government workers, and smallbusiness people will have had to sell their valuables just to survive. Unfortunately, when money collapses, therewill be a similar collapse of decency and morals, as people become desperatefor the very basics of life.
The downfall of our democratic republic is also now visiblytaking place. The persistent printing ofdebt-based money has led to a 99% decrease in the value of our currency in lessthan one hundred years, and a decrease of 84% in purchasing power of the 1971dollar, when the dollar was totally uncoupled from gold. In this regard, Communist revolutionaryleader Lenin is “said to have declared that the best way to destroy thecapitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate,secretly and unobserved, an important part of the wealth of their citizens.”
Notice also the gradual but persistent shrinking ofour liberties, with government inciting fear (corona virus and otherwise), andincreasingly dictating to the people. Ina true democracy it is people who dictate to the government, as government isaccountable to the people. Famously,Thomas Jefferson stated that ‘When governments fear people, there is liberty. When the people fear government, there istyranny.”
The nation has been seeking ventilators for its coronavirus victims. However, the economy has been infected with a deadly politicalvirus which has shut down our economy. In addition, the economy has also been suffering for decades from thesevere bacterial disease of Keynesian monetary policies. With this viral and bacterial onslaught thereal victim is the economy, and our way of life. The people will have to rally and unite toameliorate their ideological, cultural and political beliefs, and rediscoverdecency, if our constitutional republic is to survive.
The scoreboard
So let’s look at the scorecard: the value of our papercurrency continues to erode savings, pensions, and investment, which overlonger periods of time is visible as theft. The nation and its taxpayers, who havebeen made responsible to service its national debt, which government andpoliticians incur without pause, has seen debt rise without citizen approbationfrom simply burdensome to a level impossible to pay off under any conditionsexcluding the collapse of the currency. As unemployed workers cannot contribute totaxes, government borrowing will accelerate now with well understood results onthe value of currency.
The stock and bond markets have followed thepronouncements of the Federal Reserve rather than economic fundamentals inrecent years. Indeed, it is thenear-daily pronouncements and crisis actions of the FED that confirm that oureconomy is in deep trouble; if the economy and markets were stable and sound,we would or should hardly be aware that the FED exists. Therefore, their frequent public presence oractions are actually quite foreboding.
The stock and bond market are full-blown bubbles. Astute money managers are now forced intopurchasing gold or cryptocurrencies to protect their investment portfolios againstirresponsible fiscal and monetary policies. Market volatility has raised investment risk as corroborated by thedrastic, rapid and record market decline between February and March of 2020, whenthe DJI dropped 35% in just one month. This is a market to avoid for the foreseeable future. It is a time to own gold and silver bullionor coins.
We are already starting to witness riots in a numberof cities. The basis of grievance willchange, from acts of municipal law enforcement to basic food needs, jobs, homesecurity, and finally to government and the Federal Reserve – as the riots willexpand and become more intense. Civilityand decency may become scarce in large cities, as smaller cities and communitieswill be safer and better, but not immune. Lord Rothschild, advised in the eighteenth century that the time toinvest is when “there is blood in the streets”. By that measure there likely will be many investment opportunitiescoming over the next several years. Butto take advantage of those future investment opportunities we will first haveto successfully navigate this period with health and our financial foundationintact. We will need to survive theGreater Depression of 2020.
Raymond Matison
Mr. Matison was an InstitutionalInvestor magazine top ten financial analyst of the insurance industry, foundedKidder Peabody’s investment banking activities in the insurance industry, andwas a Director, Investment Banking in Merrill Lynch CapitalMarkets. He can be e-mailed at rmatison@msn.com
Copyright ©2020 Raymond Matison - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general informationpurposes only and is not intended as investment advice. Information andanalysis above are derived from sources and utilizing methods believed to bereliable, but we cannot accept responsibility for any losses
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