Silver, Gold, and What Could Go Wrong

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Gary Christenson - Deviant Investor

Richard Russell is almost 90 years old and has seen it all. He recently stated:

“My advice, as it has been, is to move to the sidelines while holding large positions in physical silver and gold. Regardless of what the markets do, silver and gold represent eternal wealth, and the bid to sleep undisturbed at night. No amount of money is worth the loss of peace of mind. The power of gold opened the American West and populated Alaska. Men have spent their lives searching for gold. You can own gold by the simple action of swapping Federal Reserve notes for the yellow metal. I advise you to do it.” Richard Russell – April 10, 2014

He stated on March 31, 2014:

“Here’s what I did last week. I took some unbacked junk currency called Federal Reserve Notes, and with them bought some constitutional money, known as silver. I consider gold and silver, now being manipulated, as on the bargain table.”

Richard Russell thinks the stock market is currently dangerous and that silver and gold are safe. He understands that gold and silver are eternal wealth with NO counter-party risk. What is counter-party risk? It is the risk that paper wealth is not real, that debts will not be paid, that dollars, yen, and euros will decline in purchasing power, that your employer will declare bankruptcy and your pension will be cut in half, that your brokerage account will be hypothecated by management, that your bank will declare bankruptcy and your deposits in that bank are unsecured liabilities of the bank and may not be paid either timely or in full. In short, there is counter-party risk in almost everything.

Examine the following graph of the S&P500 Index for the past 20 years. Does that graph inspire confidence in further gains in that index, or does it cause you to think about corrections and crashes?

Yes, the Bernanke/Yellen “put” may support the market as the Fed does not want a market crash. But what happened to the power of the “put” in 1987, 2000, and 2007?

Now look at the following 20 year graph of silver. Instead of being at all-time highs, like the S&P, it is off nearly 60% from its high. Silver looks like a better place to park, as Richard Russell says, unbacked junk currency called Federal Reserve Notes, instead of in the S&P.

What do we know for certain?

  • The grass is still green.
  • The sun still shines.
  • The government is spending and spending and spending.
  • The Fed is injecting liquidity, monetizing bonds, creating currency swaps, and “printing money.”
  • Inflate or die remains the unspoken command.
  • Silver and gold will continue their rise as the purchasing power of fiat currencies declines.
  • Politicians talk.
  • Debt is increasing and people are realizing it can never be repaid.
  • Gold and silver are still real money, even if they are suppressed, denigrated, hated, and lied about. Why should we expect anything different? They are competitors to a paper currency backed only by the full faith and credit of a country that spends roughly $1,000,000,000,000 more each year than it extracts in revenue.

So what could go wrong? Let me count the ways.

  • Derivative crash
  • Another war in the Middle-East
  • Large scale dumping of US T-bonds
  • Failure of confidence in the dollar, caused by loss of confidence in either political or monetary leadership
  • More foreign policy blunders
  • Any war with either China or Russia
  • Loss of reserve currency status for the US dollar
  • Evidence that most of the gold supposedly stored at the NY Fed is gone, missing, leased, borrowed, or hypothecated.

What else could go wrong? Sarcasm alert!

  • Congress balances the budget in an election year and causes an immediate depression.
  • The US government admits it will not repay its bonds. Financial chaos overwhelms the nation.
  • China and Russia publicly apologize for criticizing the Fed’s “money printing” and agree to all US foreign policy objectives. The world is stunned into silence and then laughs.
  • Israel and Iran declare peace and mutual harmony. More stunned silence and laughter.
  • Politicians swear they will tell the truth and forego the use of Teleprompters. Wouldn’t it be nice?
  • China agrees to dump over 10,000 tons of gold on the market at sub $500 prices in the spirit of international cooperation. The S&P soars, gold crashes, and politicians sprain their arms patting each other on the back.
  • Goldman Sachs and JP Morgan announce they will donate 100% of their profits from Proprietary and High Frequency Trading in 2013 to charity. Financial stocks plummet and politicians worry about future payoffs.

Bottom line: There is an abundance of risk in the world that involves other parties, other countries, derivatives, debt, debt, and lots more debt. Gold and silver have no counter-party risk and will retain their value regardless of whether the debts are paid, regardless of political promises, regardless of monetary and fiscal policy, and regardless of the Bernanke/Yellen put.

Your cheerful but sarcastic blogger,

GE Christenson
aka Deviant Investor

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16 thoughts on “Silver, Gold, and What Could Go Wrong

  1. You can’t eat silver. You can’t eat gold. No matter how much gold you have, if there’s nothing to buy, what good is it? I’d much rather have something I can eat and/or the means to create food, shelter, and clothing.

    If political and financial systems are up and running, collecting shiny metal is fine. If the system degenerates enough to really worry, I have my land and the means to sustain life on it.

    I know that’s probably too simplistic for all the financial experts out there, but it worked for my parents who survived and thrived in the Great Depression.

    • I don’t think food, land and the means to grow food is simplistic. I think it is very sane. My wife has a garden. It helps. But silver and gold have been exchanged for 5,000 years. I expect that you will be able to trade silver for food probably anywhere in the world? at almost any time, assuming the food is available.

      I think more difficult days lie ahead, but I don’t think we will get a “Mad Max” world. Regardless, food growing, food storage, and silver are a good plan.

      GE Christenson
      aka Deviant Investor

  2. I don’t think the U.S. dollar will lose reserve currency stutus to the Yuan or any other currency as they are currently configured. The dollar will only lose its top spot if and when another major economy credibly backs its currency with a hard asset, namely gold.

    • I agree that is a good possibility. James Rickards also points out the SDR issued by the IMF could become the new reserve currency. Whatever the powers that be eventually choose, the result will be more durable and credible if it is backed, at least partially, by gold.

      GE Christenson
      aka Deviant Investor

  3. Thanks Richard,
    for laying it all out in such a way as to make me feel that I’m not crazy. It’s hard to swim counter trend, even though it make sense.
    There is so much peace of mind owning something physical (real estate, gold, silver, farmland,….) as opposed to electronic digits in some unsecured lending institution.
    Fortunately I’m old enough to remember my parents and more so my grand parent speak of banks and bankers back in the depression. The loathing animosity felt when your hard earned savings are stolen from you is not hard to imagine, especially when told to you by the people you trust. I know that its only antidotal, but it seems these bank crashes only happen once enough people have forgotten the last one.

    • Yes, the depression days were ugly. And preventable but they served a purpose for other entities – no need to go into that here. But yes, many people lost farms, homes, lives. Something physical will help weather the storm that is coming.

      GE Christenson
      aka Deviant Investor

  4. I have been hording gold and silver for 10 years now and believe in the fundamentals etc, but I have begun to have reservations about selling my gold into the teeth of a worldwide depression that could last decades.

    I am beginning to wonder if a sea container full of quality solar panels or a small parcel of farmland might not be better for the years ahead. How can we be 99.99% sure our gold will be negotiable? You say it has no counterparty risk but when it’s very price is manipulated by banks that control the currency, and electronic wage system, any result they desire can come to pass can it not?

    • I think banks have considerable control over the price of gold in the short term. They can dump thousands of contracts onto the Comex in minutes, but in the long term, buying, selling, and supply of physical gold is what matters. In the long term, demand will increase, supply from mines will be flat or possibly decrease, and supply from central banks will fall. Based on just supply and demand, long term prices will, in my opinion, go up.

      In the short term, like say tonight, or next week, who knows? Ask JP Morgan and the algorithms I suppose.

      I think we give banks and the Fed too much credit as to the degree of control they have over gold.

      Just my opinion.

      GE Christenson
      aka Deviant Investor

  5. As usual, I disagree with much of what you write…

    I do agree that the US stock market is overvalued and toppy. I am out of it. Unfortunately, I thought so (and went out of it) almost a year ago. Something tells me that I might have made a mistake. Not a fundamental mistake (it was overvalued and still is) but one of timing. I should have held longer.

    Is silver better than gold? Hell, no. Silver is for astute speculators only. Even I wouldn’t touch it. It is a tiny market. Huge volatility. Plus, silver has a lot of industrial uses. If the global economy turns south (as I think it is overdue of doing), silver will suffer. Yes, silver tends to outperform gold – but this usually happens for a very short time at the end of a bubble and you have to be very, very good to exit in time with most of your profits. I’m good, but not that good.

    The government was “spending and spending” and the Fed was “printing and printing” all the while gold was “falling and falling” during the past couple of years, so that’s not a valid argument.

    Are gold and silver money? I don’t think so. In fact, I don’t think that money exists any more. Money has to be (1) means of exchange, (2) unit of account and (3) store of value. The US dollar is (1) and (2) but not (3). Gold is (3) but not (1) or (2). Nothing statisfies all the requirements for being money any more – not fiat currency, not gold or silver, not Bitcoin – nothing.

    Does gold have “counterparty risk”? Hell, yes. If you own “paper gold” (gold stocks, futures and ETFs), the risk is that the other party won’t continue to track the price of gold properly. If you own physical gold, you have to store it somewhere. Dunno about you, but I cannot afford to store it at home. So, it has to be at some kind of financial institution. Which creates the risk that when you want to get your gold from there, the said institution won’t give it to you. Either because it is no longer there (sold, lent, rehypothericated) or because it was stolen/confiscated by the government. There is also the risk that you won’t be able to buy anything with your gold (not even fiat money) because the all-seeing government has strictly forbidden any ownership and trading of gold and is enforcing draconian laws with draconian means, so everybody is afraid. Not to mention that you can’t buy something cheap (like a loaf of bread) with something as expensive as gold (nobody would want to bother with minuscule quantities of it, having them assayed, etc.).

    The political arguments – war in the Middle East, threat of war with China or Russia, etc. – are just pure crap. These have been going on for decades while the price of gold has been merrily going its own way (up, down, or sideways), moved not by politics but by the collective psychology of the traders.

    • Thanks for your comments. Yes, as usual, we disagree on most everything. I’ll address a few of your comments.

      1) Silver has its place and in the larger scheme of things, will appreciate more than gold and with more volatility. Yup, we disagree.

      2) The govt. was spending and spending? for the past 42 years. It is a valid argument as long as you look at it with perspective, not the last month or even the last 2.8 years. Yup, we disagree.

      3) Are gold and silver money. Yup, 5000 years of history disagrees with you.

      4) Gold is not someone’s liability so it has no counter-party risk. It might have storage risk or theft risk but it has no counter-party risk. Yup, we disagree.

      5) “Political arguments are just pure crap.” Yup, 5 for 5 – we disagree.

      Keep it up, you are doing fine.

      GE Christenson
      aka Deviant Investor

      • Mr. Christenson,

        I agree with you that gold and silver is money. Gold and silver like any thing else, including dollars, can be used as a form of money. Gold and silver has been used as money through out history, usually in the form of coinage though. However gold today is not a very good form of money. Gold is not widely accepted as a medium of exchange or a means of final payment. I can not go into any business and use it to purchase anything with it. Probably not even coin stores and pawn shops. I need to first convert it to fiat currency, namely dollars. Dollars today are widely accepted as a medium of exchange by everyone. The dollar today is used as a form of money. And 99.99% of people agree that paper currency is money. But one day that may and probably will change.

  6. Way too many of you clowns are all saying the same thing still, and that is not helping. That is not how major bottoms are formed. You have not even acknowledged a very serious bear market in metals even exists. Counting on and hoping for the overall market to collapse to prop up metals is shaky at best, see 2008 and more.

    • Thanks for your comment. Sorry if I made you think I am a clown – I’m not. I’m just trying to communicate some valuable information that not everyone appreciates. Maybe next time. And by the way, I did not suggest that the overall market collapsing would push the metals higher. I did suggest that money invested in metals was likely a better investment than in the S&P.

      GE Christenson
      aka Deviant Investor

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