This article is based on a Q&A with Andy Hoffman, marketing director at Miles Franklin, the largest bullion dealer in the US.
The general macro economic outlook of Andy Hoffman is based on the expectation we will see “more of the same,” including more money printing, weaker economies, higher unemployment, social unrest … and importantly weaker currencies. With the Dow Jones index almost at all-time highs (14,009 closing price on February 1st) and the VIX indicator close to all time lows (12.90 on February 1st), weakness is not reflected in equity prices.
Markets are not real; they no longer exist. Every market is manipulated to levels we have never seen before. Governments have always been buying bonds. Now they admit that they are buying stocks as well; they use the exchange stabilization fund to manipulate currencies. They have so thoroughly taken over the market that they have literally destroyed volatility. That is why the metals are the safest place to be.
This is clearly an artificial situation and cannot go on forever. These conditions have continued for much longer than expected. Andy Hoffman can hardly believe the slow motion pace at which conditions are deteriorating, saying “this will continue until it stops.” Case in point is the debt situation which went from arithmetic to parabolic growth. Somewhere it will stop; the point is nobody knows when and how exactly. The first signs of higher interest rates are there in the US and Japan, with the 10 year Treasury yield moving to 2% very recently. Governments will react with even more monetary easing (QE). Japan has just announced QE11.
Similarly, for gold and silver, the key question is for how long paper gold and silver (in the form of futures and ETF’s) can control the price. It will be possible until physical demand will take over. Nobody knows how long exactly when it will happen and what the (final) trigger will be. However, one thing is clear: the longer this game goes on, the stronger the reaction afterwards.
There you have one of the key reasons to own physical gold and silver.
The danger of today’s fiat (promise) based currencies
Miles Franklin believes people should prepare for the worst case scenario when it comes to their financial assets (money in the first place). Recent research has shown that 600 paper based currencies in recorded history have ALL failed, for different reasons. Physical gold and silver exist for 5,000 years and have preserved their purchasing power.
The above chart tells us that gold has preserved historically well the purchasing power of people. More importantly perhaps, in times of financial instability like today, it increases our purchasing power. The gain in purchasing power comes from the loss in value of the currency in which gold is denominated. In fact, the gold price increase is simply the RESULT of the decrease in value of the currency in which gold is denominated.
Miles Franklin sees an increasing number of people who realize they better convert their money into gold and silver. Note the difference between converting money or investing money. It could seem a subtle difference, but it is a fundamental one: gold and silver are not an investment; it is another way of saving. Andy Hoffman points to the fact that people do not say they invested their money when putting it on their bank account. Likewise, converting money into gold and silver is not an investment, it is one of the ways to hold money. It is everyone’s choice to save in real money.
The global economic scene is focused on additional monetary easing and continuing currency debasement in order to inflate their debts away. Consequently gold is set to rise higher. Precious metals owners should be rewarded with much more than only preservation of purchasing power, assuming the continuation of the current trend. The US is the most indebted nation, worldwide and historically, with declining manufacturing and labor participation rates. The only thing that makes the US strong today is that the fact that so many nations own the dollar. Today’s monetary system is historically unique given that it is backed by nothing but a promise to pay the holders of banknotes back. That is what “fiat currencies” are: promise based currency backed by nothing tangible. This is the only time in history where ALL countries globally are living on a paper based (fiat based) currency system. What we know from history is that every single fiat currency in history has collapsed. Ultimately, all these fiat currencies disappear, each in its own way. Some people believe that the Yen is going to collapse and the US dollar will be fine. Andy Hoffman classifies this as a myth, being convinced that the dollar will collapse as well.
The underlying belief at Miles Franklin is that today’s gold bull market is much stronger than the one in the 70’s. In particular, the scale today is much bigger. Andy Hoffman points to some obvious differences:
- The 70’s gold bull market was primarily based on US centric issues. Today’s scale is global; international trades are huge between the US, China, Japan, Europe.
- The past decade marked an explosion in derivatives which resulted in an extreme leverage in the economy.
- The world came off a gold standard in 1971. There was almost no debt in the 70’s compared to today, neither in the US nor in Europe. So when inflation hit in the late 70’s it was possible to raise interest rates. Today, with 16 trillion dollars in outstanding official debt and some 70 trillion in unfunded liabilities, each percent rise in interest rates results in an additional 160 billion dollars cost of debt servicing. With all this “good economic news” coming out, QE is not really decreasing, making it impossible to move interest rates go up.
- Debt based currencies are simply a Ponzi scheme: the only way to keep it going is to make it bigger. That “game” goes on until confidence is lost. We are 40 now years after the start of this big Ponzi scheme.
The global currency war is starting a historic break out
Miles Franklin’s blog reports on a daily basis how the economic situation is evolving. The blog posts are accessible. With trustful news and global events as the underlying source of information, one of the latest blog posts “The final currency war” is a must read. It shows how the global currency war has taken off more or less openly and officially. Japan’s latest announcement to increase their monetary stimuli and their commitment to debase their currency is potentially that last trigger for the global currency war to break out.
Andy Hoffman points to the suppression techniques of central banks to massively attack gold and silver, aiming to hide the underlying state of the economy. Suppression is extremely obvious and happens in full daylight. When QE3 and QE4 were announced in the US, dollar gold surged but was hit substantially almost immediately. Andy says: “They are so terrified. Gold and silver are not allowed to break out. Still the metals are up 12 years in a row. An increasing number of people know what is going on. Since December 13th, the day QE4 was announced, Miles Franklin had extremely busy weeks; sales were literally on fire. So, the price drops should act to slow down or stop the massive buying. As a bullion dealer, we can only confirm the huge disconnect between the paper and the physical market.”