by Adam Crum
On February 24, 2010, Mad Money’s Jim Cramer was asked the question: “What about gold?” Reiterating the stance he has taken since the beginning of the economic crises, Cramer responded, “Just like no responsible driver would drive down the highway without automobile insurance, no responsible investor would go without insurance on his stocks, bonds and cash and the only insurance for those is… GOLD!”
Is the bond market on the brink of collapse? Recent data suggests several warning signs! Here are just a few…
I read the phrase “government gone wild” recently, and considering the economic times in which we presently find ourselves, the phrase seems apropos… painfully so.
Today, as government spokespersons and members of the media report that the world is emerging from the latest economic morass, I translate any rosy outlook currently being peddled not as a turnaround, but rather as a call to personal economic action – a call to defend one’s self and one’s personal finances. And the only defensive measures which can protect from total economic meltdown is owning tangible gold in one of its various forms. The following information is not reported in popular media, but is information which every investor should know.
By bailing out nearly everyone you can think of, Washington has managed to produce possibly the most perilous “bubble” yet: U.S. treasuries. According to highly-respected investment analyst Martin Weiss, “like the tech bubble and the real estate bubble, this new bubble will also burst, wiping out trillions more dollars of invested wealth.” I don’t know if Mr. Weiss will be proven correct. But why take a chance? After all, you probably won’t have an accident today on the way to the office, but you certainly aren’t going to cancel your auto insurance, are you? That would be irresponsible.
Given the economic environment, wouldn’t it be just as irresponsible to go without money insurance? Not convinced yet? Just look at these statistics:
Foreclosures, unemployment and entitlements . . . oh, my!
When you can’t pay your bills, it can get ugly. That’s true for you and me, AND it is true for the federal government of the United States.
The U.S. Treasury reported that approximately 3.9 million homes went into foreclosure in 2009. Government officials predict that a minimum of three million homes will face foreclosure in 2010. Washington’s response is to “throw money” at the problem.
Unemployment at this point in time is probably more than 20%, a combination of about 10% “newly” unemployed individuals and another 10% who have been unable to find jobs or have given up. Of course, there are also those who continue to be under-employed as they just try to hang on. Then there are those cities and counties throughout the country whose average unemployment rate is even higher than the nation’s average, severely higher. California alone has eight counties with unemployment at 20%. Again the government’s solution is to throw money at the problem. Money it doesn’t actually have.
According to CNSNEWS.com, the present administration will spend about 25% of the nation’s gross domestic product (GDP), nearly double that spent by Franklin Delano Roosevelt during the Great Depression . . . FDR having the distinction (at least for the moment) of being the president who spent the most! Even federal spending as a percentage of GDP during World War II was less than what the present Administration will spend in 2010!
Trillions of dollars of private sector junk credit has been guaranteed by the U.S. Federal Reserve. The Fed has also purchased over a trillion dollars in junk mortgages . . . all with money it doesn’t actually have, you understand.
The U.S. Treasury has bailed out Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, GM and others, directly AND indirectly. Last Christmas Eve, in order to relieve investor fears, the U.S. Treasury eliminated limits on aid to Fannie Mae and Freddie Mac for three years. From where do you suppose the money for that aid will come?
In addition to all of this “good news,” the Federal Reserve reports that many banks, credit unions and every kind of insurer you can think of are assuming ever higher levels of interest-rate risk. Plus, we have just learned that Federal entitlement payments now exceed the amount of money that the Federal government takes in through taxation.
Like the tech and real estate bubbles from which we are still feeling the repercussions, the bubble being created by Washington’s ever-increasing Federal debt (also known as U.S. Treasuries) cannot do anything but burst, destroying trillions more dollars of invested wealth.
To put things into perspective
To put things into perspective, Greece’s deficit as a percentage of its GDP is about 13%. The European Union Council of Financial Ministers is requiring that Greece must comply with EU austerity demands by March 16, reduce its deficit as a percentage of its GDP to three percent in three years or, according to Article 126.9 of the Lisbon Treaty, lose its sovereignty as a nation due to its insolvency. Let me repeat that: lose its sovereignty as a nation.
Portugal, Spain, Italy and Ireland are also in grave danger of defaulting on their debts. And, the United Kingdom and Japan, two of the world’s biggest debtor nations, are not far behind as they confront massive deficits.
According to a new report from a group of leading economists, financiers and former federal regulators, the possibility of yet another economic crisis is great.
The report is especially critical of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner, the very individuals who were in charge as the economy went into a free fall and who are now in charge of fixing the situation. Fascinating!
The study reports that: “In 2008-09, we came remarkably close to another Great Depression. Next time we may not be so ‘lucky.’ The threat of the doomsday cycle remains strong and growing. What will happen when the next shock hits? We may be nearing the stage where the answer will be – just as it was in the Great Depression – a calamitous global collapse.”
The United States of America, however, is the world’s greatest debtor of all. If we aren’t already at the point of no return, we most certainly will be soon, and we will be faced with some very difficult choices. Here’s why the potential for a crash in long-term bonds is seemingly unavoidable and what you must do to protect yourself.
Warning signals of a potential crash in the bond market
While I cannot cover them all in this article; here are some of the warning signals that indicate that the bond bubble could quite easily burst.
Warning Signal #1: Largest Federal budget deficits in U.S. history
During the last week of 2009, the Treasury Department set a record when it borrowed $44 billion with the sale of 2-year notes, $42 billion with the sale of 5-year notes and $32 billion with the sale of 7-year notes. It borrowed a grand total of $118 billion. Similar borrowing is expected throughout 2010.
The budget deficit for 2009 was a whopping $1.4 trillion (more than three times the previous record). The Congressional Budget Office (CBO) has projected that the 2010 deficit will be $1.4 trillion as well, with a projected $7.4 TRILLION increase in debt over the next decade. The Office of Management and Budget (OMB) at the White House offers us an even more dismal scenario, projecting the 2010 deficit to be $1.6 trillion and an $8.5 trillion debt over the next ten years.
We are witnessing the biggest government borrowing binge of all time! But, wait…that’s not all.
The New York Times has pointed out that over the past three decades approximately 80 percent of the government’s forecasts regarding deficits were too optimistic. Two years ago, for example, the CBO estimated that the 2010 deficit would be $241 billion…compared to the $1.4 TRILLION now being projected. What if the government’s other projections continue to be that far off as well?
Warning Signal #2: The most inflationary policy of all time
On November 21, 2002, and it doesn’t appear that he has changed his modus operandi since then, Federal Reserve Chairman Bernanke stated “…the U.S. government has a technology…that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Mr. Bernanke apparently believes that he has discovered the panacea to all financial challenges known to mankind. Just rev up the old printing presses and stand back.
We are seeing the most inflationary monetary policy ever in the history of the U.S., in addition to the doubling of the nation’s monetary base . . . a record breaker!
Don’t be misled. Just because the powers that be are failing to remember how difficult and painful it is to get inflation under control once it has reared its ugly head, inflationary policies are as bad as they’ve always been. With today’s low yields, the least little hint of inflation will turn long-term U.S. Treasuries into guaranteed losers.
Warning Signal #3: U.S. Treasury Bonds are no exception to the law of supply and demand
Washington not only has to borrow enough to cover budget deficits, it also has to borrow enough to replace Treasuries that are maturing. There is a detrimental effect on value when a massive increase in the supply of anything takes place. It is what we know as the law of supply and demand, and U.S. Treasury bonds are not immune to this law.
Warning Signal #4: Global investors are starting to back away
Moody’s is warning that the U.S. could lose its AAA credit rating, but foreign investors, who now hold about 60 percent of all marketable U.S. Treasuries, aren’t waiting for Moody’s or anybody else. Up until now, foreigners have been willing to pay higher prices and accept lower yields, but that may be changing. Some of these foreign investors are already beginning to back away.
Last December, regardless of the reason, China became a major net seller of U.S. government bonds. The holder of more U.S. debt than anyone else, China got rid of more Treasuries than in any month since 2000, the year the government started keeping track of this kind of data.
U.S. headed for debt-driven “financial meltdown” within five to seven years according to outgoing Senator Judd Gregg (R-NH).
In an interview for the Financial Times’ View from DC series, U.S. Senator Judd Gregg was very complimentary when it came to China’s concern over the expanding U.S. public debt.
“We have had China say that they are looking for other places to put their reserves and that is probably a smart decision on their part,” said Mr. Gregg, who will not seek re-election in November. “So, the warning signs are pretty clear and the path is unsustainable and, at this point, unless we take different actions, unavoidable.”
As takers for Washington’s debt appears to be waning, the 30-year auction was especially dismal. Compared to a 43.2 percent ten-auction average, indirect bidders (mostly foreign governments and investors) purchased only 28.5 percent of the bonds sold. Investors were enticed with higher yields to get them to buy.
If massive selling occurs, it will send ALL bond prices – government, corporate and municipal – into an uncontrollable nose dive. Credit will evaporate and interest rates will rise, creating massive instability in every asset class…not just the bond market. It will ignite an even more destructive phase of economic volatility.
Gold will explode!
Rare gold coins: Insurance…a hedge…an asset class…and more
Now, if there ever was one, there is potential for a “gold rush” of epic proportions.
Gold has historically been the best inflation hedge. Gold is truly a form of insurance and should be one of the foundational elements of any portfolio to reduce overall risk and create the ultimate hedge against inflation and other economic turmoil.
In a recent interview on CNBC, famed billionaire investor Jim Rogers said that one of the world’s biggest bubbles was in U.S. Treasuries. He also predicted that gold would hit $2,000 per ounce in the next 10 years, adding that ALL of the world’s currencies are suspect.
The three shared attributes of inflationary periods:
Inflationary periods, first off, always occur under fiat money. This took place quite some time ago with the end of the Bretton Woods System in 1971 . . . and currencies have been falling ever since. Today, when trading currencies, you just look for the “less-ugly” one.
Second, inflationary periods are a function of huge public deficits, largely due to the increase of the monetary base. It is fairly obvious that this is the nature of the beast today in Washington.
Third, inflationary periods are always a result of conscious political decisions. In their report, Rethinking Macroeconomic Policy, economists at the International Monetary Fund have recommended that the world central banks double their official inflation target from 2 percent to 4 percent.
And, if that weren’t enough to make the case for coming inflation, we have Ben Bernanke, our nation’s inflationist-in-residence. Remember, he is already on record saying he will “drop money from a helicopter,” thus earning him the moniker “Helicopter Ben.”
Gold is an asset class of absolute value! Since time immemorial, gold in all its various forms has possessed a security and intrinsic value like nothing else. You will never see the government bailing out gold. While past performance is no guarantee of future results, it is well documented that gold in its various forms has generated strong long-term increases in value . . . a true storage of wealth which is both private and portable. With rare gold, you can quite literally store hundreds of thousands, even millions of dollars of wealth in a shoe box! In addition, rare gold coins are that unique investment that combines value with rarity and history with a fixed or diminishing supply. As demand increases, so does the price.
Gold remains a strong buy. Gold has been in a secular bull market and the inflationary which are potentially looming on the horizon argue that this bull market has a long way to go. Strategically gold still is a strong buy and the situation for gold looks very attractive.
Gold is an uncomplicated investment. Gold in its various forms is essentially management-free, an investment that does not require daily buy/sell decisions or monthly statements to decipher. And, it is easy to liquidate your gold coins when the time comes.
If you do not yet have adequate insurance for your money, then now is the time to act. Owning gold in one of its various forms is the only way to truly insure your other assets. It is capable of huge upside movement and can only diversify and complement your other holdings.
Call Monaco Rare Coins today to discover the many ways you could protect your wealth using gold. We stand ready to assist you in developing a personalized gold acquisition strategy that fits your unique financial situation. Call Monaco at 888-900-9948 today.