by Michael J. Kosares
Author: The ABCs of Gold Investing – How to Protect and Build Your Wealth with Gold
Founder: USAGOLD
"We live in an increasingly volatile and primal era, in which history is speeding up and liberal democracy is weakening. As Vladimir Lenin wrote, 'In some decades, nothing happens; in some weeks, decades happen.' Get ready for the creative destruction of public institutions, something every society periodically requires to clear out what is obsolete, ossified and dysfunctional — and to tilt the playing field of wealth and power away from the old and back to the young. Forests need periodic fires; rivers need periodic floods. Societies, too. That’s the price we must pay for a new golden age." –– Neil Howe, Washington Post, 2016 (Author,The Fourth Turning)
My abiding concern, and everyone's in my view, should be getting across the bridge between the great crisis and the new golden age with a minimum of damage. Between now and then, fortunes will be lost, small and great alike. Markets will reel. The economy will face extreme danger. For nation states around the world the Great Crisis will become the Great Test.
As investors, the choices we make over the next three years, particularly in the investment arena, will be crucial to our own well-being and and the future of our families. Increasingly, we will discover that it is not just markets or the economy that need to be hedged, but the times. That is why I own gold personally and why I think every thinking, well-established individual financially should own it as well. A diversification of 10%-30%, in my view, will get the job done. How high you go within that range depends upon on your own level of concern. This Special Report addresses the need for a diversification in the physical precious metals and specifics on how to go about it – recommendations drawn for nearly 45-years experience in the gold business.
The two scenarios with which we need to concern ourselves
Neil Howe, the author of The Fourth Turning (along with William Strauss who is now deceased), is now an analyst and forecaster of great reknown. In his book written in 1997, he makes one of the boldest predictions of our time. "The next Fourth Turning," he says, "is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire." Not only bold, he hits the nail on the head. The 2007-2008 financial crisis was the catalyst to what followed: Years of economic stagnation and a seeming inability of the authorities to pull the country out of it. In a recent interview, Howe maintains that 2007-2008 was just the beginning of the fourth turning. He projects it will conclude in the 2030s. A lot of water will run under the bridge between now and then.
The question becomes – What happens next? Howe's predicts further disintegration, a clearing of the forest so new growth can begin. He is not alone in his assessment. Not a day goes by that some pundit or analyst issues a warning a where the and financial markets might be headed.
Given the economic history since 1971, the year the United States broke with the gold-backed dollar and launched the fiat money era, there are two possible big picture outcomes:
– a disinflation trending toward a potentially catastrophic 1930's-style deflation. For the most part, the disinflation-deflation scenario would come the result of the Fed's inability to generate the second most likely possibility, i.e., inflation and a growing economy at the rate of 3%. The "New-new" moniker, applied regularly to the economy in which we find ourselves stuck today, came in the wake of the 2007-2008 financial crisis. It has become apparent that Fed policies did save part of the economy, i.e., the banking system and financial markets. What those policies did not save was the rest of the economy. The trickle down never made it to the rest of the economy. Our monetary system is based on debt. The more consumers borrow, the more money is created. If consumers refuse to take on debt or worse pay it off, money is consumed.
The great danger is that the current disinflation evolves to something worse producing another catalyst that takes us to the next level of the financial crisis. That catalyst under present circumstance could be another stock market crash. For a working historical example of a deflation-induced stock market crash, we have to go all the way back to the Crash of 1929. The suddenness and the depth of the collapse was breathtaking. Coming off a strong move to the upside, the DJIA suddenly dropped % in a single day, infamous Black Thursday, October 30, 1929. By January 1, 1930, the Dow Jones Industrial average dropped almost 50%. Before it was all over in 1932, stocks dropped a gut wrenching 90% and did not return the old high of roughly 380 until the mid-1950s – 26 years later.
That in a nutshell is the primary difference between more contemporary crashes and 1929 and the outcome every investor should take to heart. Instead of months for a market recovery engineered by the central bank and federal government to take hold, the recovery after 1929 took many years – over two and half decades. If you happened to have $1,000,000 invested in stocks, the value would have been $100,000 and on a very long road to recovery. The 50-year old would have been 76 years old by the time the Dow Jones Industrial Average reached its previous high.
Whether or not the Federal Reserve can pull another rabbit out of the hat as it did in the aftermath of the 2007-2008 and pull the stock market out of a fatal tailspin remains an open question. Many feel that the Fed has backed itself into a corner with little room to operate – a dangerous proposition for both the economy and financial markets. The observation of Andrew Dickinson White on a totally different subject entirely applies nevertheless: "There is a lesson in all this which it behooves every thinking man to ponder."
– a stagflation trending toward a full-blown runaway inflation, or hyperinflation –
That said, the second potential outcome, inflation, should not be ruled out entirely. That would come the result of an already induced and hidden price inflation caused by year's of Fed easy policies, i.e., very low interest rates and money printing (quantitative easing). In other words long-smoldering monetary inflation would suddenly ignite becoming a runaway price inflation like it did in the 1970s, or worse, a hyperinflation like it did in Germany during the 1920s German.
the former at this juncture appears the most likely.
In order to set the stage for subsequent sections on the proper portfolio play for you, let's take a brief, but closer look at the two most likely scenarios just outlined:
Disinflation-Deflation
Since we are already mired in a stubborn disinflation, it makes sense to take a look at that Great Crisis scenario first.
Much will be made of a fiscal solution, i.e., a restructuring of the tax system more beneficial to the middle and upper middle classes and heavy infrastructure spending (a program similar to the one president Franklin Delano Roosevelt launched in the 1930s) to kick-start the economy. Such measures will encounter heavy wrangling in the Congress and in the present environment would likely remain a matter of debate, not substance, for months perhaps years to come. Even if it were launched, it would take many months, even years, before the economy felt the full effect. Don't forget that Roosevelt's infrastructure and other spending programs did not lift the economy out of the deflationary abyss. It took World War II to accomplish that objective.
If monetary and fiscal policy fail, the economy could go off the rails into a full-blown, 1930s-style deflation and the Great Crisis will begin – the worst case scenario. Investors would find themselves on their own with respect to guarding their fortunes. With that in mind, it would be worthwhile to take a closer look at what happened in 1929 and how the average investor was affected.
Chart courtesy of GoldChartsRUs/Nick Laird, with thanks
The chart immediately (originally published in the January 1, 1930 edition of the Wall Street Journal) shows both the suddenness and the depth of the 1929 stock market collapse. Coming off a strong move to the upside very similar to what we have witnessed in the stock market over the past several months, the DJIA dropped almost 50% in a roughly 75-day period. Note too the months during which the collapse occurred – September and October, the time of year when markets historically have been known to go bump in the night.
Before it was all over in 1932, as you can see in the next chart, stocks dropped a breathtaking 90% and did not return the old high of roughly 380 until the mid-1950s – 26 years later. That in a nutshell is the primary difference between more contemporary crashes and 1929 and the outcome every investor should take to heart. Instead of months for a market recovery engineered by the central bank and federal to take hold, the recovery after 1929 took many years – over two and half decades. If you happened to have $1,000,000 invested in stocks, the value would have been $100,000 and on a very long road to recovery. The 50-year old would have been 76 years old by the time the Dow Jones Industrial Average reached its previous high.
Chart courtesy of MacroTrends, with thanks.
Gold and silver as disinflation-deflation hedges
Since we do not have a good working model of how gold and silver might react under deflationary circumstances such as the kind that might develop from the current disinflation. Among the most prominent markets – stocks, bonds and real estate – the 1930s provide important history-based guidance, but gold at the time was regulated under the gold standard. The price was fixed by federal governments around the world. In addition, president Franklin D. Roosevelt issued an executive order in 1933 seizing the gold holdings of the American people. (More detail on this subject in the Products section below.) So few realized the benefits of a fixed price of gold under circumstances when most other prices were falling. Now there is elasticity in gold and silver prices, as we all know, so that makes their uses in portfolio design much different than it was then.
That said, since disinflation is a close cousin economically to deflation, we can learn a great deal from how gold reacted to the disinflationary breakdown that began in 2007-2008.
We will treat the inflation-double digit-hyperinflation under a separate section.
*For a thorough review of Neil Howe's current viewpoint, please see this Neil Howe interview (Courtesy of MacroVoices, 8/10/2017)
OVERVIEW GOLD AND SILVER
Gold and silver would likely benefit from either of those scenarios. In a disinflationary/deflationary breakdown, the metals would benefit fundamentally from the long-held belief among private and professional investors that gold and silver are the best last resort, safe-haven. Investors flocked to the precious metals after 2007-2008 not to make money but to preserve the wealth they already had accumulated. In the inflationary scenario, the metals would benefit from their centuries old reputation as the best inflation hedge.
Since we are already knee deep in a stubborn disinflation, we should take into account the rolling monetary bubble in our economy that already moves from one market to the next as circumstances change. Once capital begins to flow in measurable quantity from the stock and bond market (and to a certain extent the commercial and residential real estate markets), it will be looking for a home. The precious metals are likely to be the logical beneficiary of such an exodus – the next primary assets in line.
If that is a case, the path to the old highs seems clear, though it will be a matter of debate as to how long it will take to get there. A price extension beyond the old highs is possible given the price deflation and systemic risks implied in the deflation of the stock, bond and real estate bubbles. Then "new" money will find its way into the precious metals. We should keep in mind, too, that when it comes to gold and silver, we are talking about a fully develped market globally – one with major demand centers beyond the United States, principally China and India. Europe, with its long tradition of seeking safe harbor in the precious metals, could become another center of physical demand. When Britain voted for Brexit, investors lined up at gold companies across London to buy the metals. How high gold and silver might go under such circumstances is anyone's guess and that is something we leave for further debate.
Portfolio section notes:
“If buying gold, don’t buy futures or ETFs. Buy the real thing. . .“The lesson learned was that if gold liquidity dries up along with the broader market, so does your hedge, unless it’s physical gold in a vault, the true hedge of last resort.”” — Jeff Currie, Goldman Sachs
In order to protect and build your wealth under the various circumstances just outlined, the proper mix of precious metals products will become an important issue. Here are some recommendations based upon our many years experience in the gold and silver business and having lived through all the scenarios outlined above, with the noted exception of a deflation tending towards a full-blown 1930s style breakdown.
Go through each scenario. Outline the monetary and financial circumstances. Use historical examples. End with suggested portfolio designs under each scenario.
* * * * * * * * * * * * *
Scenario #1 – Disinflation, possibly even deflation
All the signs were there. The persistent siren-call of an economy that could't seem to get out of its own way – one that appeared to be in trouble: Dogged underemployment and unemployment; businesses, small and large, in trouble everywhere; more and more malls shuttering up; big box retail stores closing down; a frightening number of homeless and beggars wandering the streets; a troubling lack of consumer spending and willingness to take on new debt; government revenue plummeting; personal income dead in the water; a large swath of the population (63%) that couldn't come up with $500 if needed for an emergency. . . . .and I could go on.
America, it seemed, was unravelling at the seams and no one had a clue what to do about it. Most annoyingly, the Washington politicians could't seem to get anything done only adding to the national anxiety. Meanwhile, it had become increasingly apparent that the huge Federal Reserve stimulus had gotten the economy nowhere except for another stock and bond market bubble.
Suddenly out of nowhere came the defining moment – a potentially cataclysmic event. . . . .
Scenario #2 – Stagflation
Slowly, but surely, the numbers on the inflation side of the economic ledger began to turn favorable
Scenario #3 – Inflation, possibly even hyperinflation
The warning signs were everywhere you looked. Suddenly, the gears meshed and the American economic machine lurched into motion:
Scenarios
"A true cycle is self-generating. It cannot be determined, short of catastrophe, by external events. War, depressions, inflation may heighten or complete moods, but the cycle itself rolls on, self-sufficient and autonomous. . .The roots of this cyclical self-sufficiency lie deep in the natural life of humanity. There is a cyclical pattern in organic nature – in the tides, in the seasons, in night and day, in the systole and diastole of the human heart." - Arthur Schlesinger, historian
Portfolio design is serious business. It cannot be approached casually or half-heartedly. It must be focused, disciplined and take in the genuine possibilities or it is likely to fail. If some advisor tells your, for example, that we are headed for the worst depression since the 1930s and there's not doubt it, you now immediately not to take that advice seriously. No one know what's going to happen, and if someone assumes only one outcome, whatever it is, they are fooling themselves and quite possibly trying to fool you. What we say at a family dinner conversation for the sake of interesting discussion is not necessarily the same logic we would apply to the well-constructed portfolio for the times. Anything is possible. It is not enough to simply understand that economies and financial markets, as Arthur Schlesinger so convincingly explains above, we must understand that the turns can be sudden and take us to places we never thought possible or anticipated. With that in mind, let's start this section with a brief overview of the economic and financial circumstances likely to be present under each of our two broad outcome scenarios.
Design
The goal of solid portfolio design is the proper diversification. That goes for overall design, i.e, stocks, bonds, real estate, precious metals, etc. It also goes for the narrower scope encompassed by precious metals. Many investors believe that they can tolerate a high level of risk until those risks manifest themselves in the form of heavy losses. The stock market declined by 50% in 2007-2008 – a drop that cut a good investors' wealth half. Had you margined stocks – even a minor portion of your portfolio – it would have been considerably worse. In the period1929-1933, the stock market dropped an incredible 90% wiping out most of Wall Street's ordinary investors. Fortunately, the 2007-2008 disaster reversed over the years and many recovered. Back in the Great Depression, investors weren't so lucky. It took until 1955 for the stock market to return to its 1929 high – 26 long years.
So the proper structure for a portfolio is one that covers the contingencies that most concern you. That is where the previous section might have been helpful. Once again, the best portfolio design attempts covers the most likely possibilities from your perspective. With that in mind let's proceed to list the categories of products recommended by USAGOLD and how they should be applied in your particular portfolio design.
You've decided that the time has come to prepare for the worst and hope for the best.
No one wants it to happen. We all would rather think a positive turn is just around the corner, but if you find yourself among the group thinking as just described, this Special Report is for you. It will tell you how investors were affected by the the signs it may not come are difficult to ignore. You have come to a watershed moment, and you've decided there to act – to take USAGOLD's long-standing advice and diversify your portfolio 10% to 30% in gold and silver as a hedge in case it does. In fact, you may have already begun the process.
Will it get you through the worst case scenario?
In this Special Report, published in conjunction with the launch of of our new Online Order Desk, we delve into the possibility of another 1929-style breakdown. Since history repeats, or it at least rhymes, as Mark Twain reminds us, we will find that there is much to learn from the previous episode that captured the minds and hearts of a generation, and apply those lessons to the present.
Keep in mind that this Special Report is written from the perspective of "what if". We do not want this to happen any more than you or anyone else. We simply recognize that, given the stubborn circumstances, it could happen, and we want to do the best we can to help our clientele prepare.
1929 revisited? History repeats and sometimes with a vengeance
I came across this clip posted at the ChartsRUs website from an old Wall Street Journal dated January 1, 1930. Interesting to see the very same chart investors were scratching their heads about almost 90 years ago. Note the suddeness and depth of the collapse. Stocks declined 50% in the two months of September and October, 1929. Before it was all over in 1932, as you can see in the second chart, stocks dropped a breathtaking 90% and did not return the old high of roughly 380 until the mid-1950s – 26 years later. Imagine having a million dollars in stocks at the end of the summer 1929 only to watch them drop steadily in value until they were worth $100,000 by 1932. For those who say to themselves "Well, that is something that happened almost 100 years ago. It can't happen now." I remind that history repeats and sometimes it repeats with a vengeance.
"You might think history teaches; it repeats;
page after page, a poem in perfect rhyme
tolls echoing bells from both sides of the sheets
for births and funerals, tells the time
of ageless Alice, Hamlet's fallacies –
the latest light from vanished galaxies."
- Harold Witt, Suite of Mirrors
Hussman predicts 63% decline in stocks
John Hussman of Hussman Funds is among those concerned with the possibiity of a major stock market breakdown in the near future. Hussman commands attention because of his uncannily accurate predictions. In 2000, he predicted the exact decline in the NASDAQ – 83%. He was also one of the few who publicly predicted the stock market crash in 2008. Now, he is predicting a 63% decline in the S&P 500:
"In my view (supported by a century of market cycles across history)," he says, "investors are vastly underestimating the prospects for market losses over the completion of this cycle, are overestimating the availability of 'safe' stocks or sectors that might avoid the damage, and are overestimating both the likelihood and the need for some recognizable 'catalyst' to emerge before severe market losses unfold. We presently estimate median losses of about -63% in S&P 500 component stocks over the completion of the current market cycle. There is not a single decile of stocks for which we expect market losses of less than about -54% over the completion of the current market cycle, and we estimate that the richest deciles could lose about -67% to -69% of their market capitalization. As in 2000 and 2007, investors are mistaking a wildly reckless world for a permanently changed one, and their reeducation in the concept that valuations matter is likely to be predictably brutal."
