THE DAILY RECKONING: BY GOLD

The Daily Reckoning Presents

By Gold

Gold Have you ever had any doubts about gold? Does it sometimes feel like it should be performing better? Are you concerned about its volatility? Do you worry about how it might perform in the future? Have you ever wondered about its true purchasing power? Maybe you’re nervous about a big drop in price again? I decided to go directly to the source to address these concerns: Gold himself. He put his arm around me and asked me to tell you a few things... — Jeff Clark, Casey Research I hear that you’ve had some worries about me. I understand. Your world is a very uncertain place right now. And when it comes to money, it looks as though your leaders don’t understand some basic monetary principles, making things even more unsettling. But I want you to know that the problems you’re experiencing are actually nothing new. I’ve seen these monetary, fiscal, and economic difficulties many times before. And I can tell you this: you’re safe with me. That’s a bold proclamation, but I’ve provided monetary protection numerous times throughout history — too many to count, in fact. I’ve served all kinds of people over the centuries, from kings and counts to serfs and servants. To put your mind at ease, let’s review my core characteristics, along with some history, to show how I can protect you against the monetary danger that’s likely to worsen in your near future. We’ll also take a look at your peculiar set of circumstances to see how I can be of service. By the time we’re done, I think you’ll feel much better about my ability to help your portfolio withstand whatever is thrown its way. Enduring Characteristics Let’s start with the basics. I have some characteristics that no other matter on Earth has... I cannot be: Printed (ask a miner how long it takes to find me and dig me up) Counterfeited (you can try, but a scale will catch it every time) Inflated (I can’t be reproduced) I cannot be destroyed by; Fire (it takes heat at least 1945.4 degrees F. to melt me) Water (I don’t rust or tarnish) Time (my coins remain recognizable after a thousand years) I don’t need: Feeding (like cattle) Fertilizer (like corn) Maintenance (like printing presses) I have no: Time limit (most metal is still in existence) Counterparty risk (remember MF Global?) Shelf life (I never expire) As a metal, I am uniquely: Malleable (I spread without cracking) Ductile (I stretch without breaking) Beautiful (I am the ultimate accessory) As money, I am: Liquid (easily convertible to cash) Portable (you can conveniently hold $30,000 in one hand) Divisible (you can use me in tiny fractions) Consistent (I am the same in any quantity, at any place) Private (no one has to know you own me) I am internationally accepted, last for thousands of years, and probably most important, you can’t make any more of me. And by the way, don’t fret about those who say I’m not as good an asset as an income-producing vehicle. They misunderstand my role. I’m not trying to be a stock, for example. My function is as money and a store of value, so the proper comparison is to your dollars, or what you call Treasury Bills (of similar nominal value). And here is where I excel and serve my purpose: since 1913, the US dollar has lost 96% of its purchasing power. I have lost none. Remember, I am the only financial asset that is not simultaneously someone else’s liability. I don’t require the backing of any bank or government. The History Lesson Because I am eons old, I’ve observed something throughout history that you may not be aware of: government fiat currencies are a relatively new invention, and none has endured.  Eventually, they have all failed. Me? I’ve never been defaulted on or worth zero. Remember this the next time you have any doubts about my long-term worth. You can rest assured that over time, I will hold my value. And when you near the end of your life, you can pass me on to your loved ones, knowing full well they will have something that cannot be devalued, debased, or destroyed. What Color Is Your Money? Like you, I’m concerned about the current state of fiscal and monetary affairs. It seems your government leaders have boxed themselves into a corner. They’ve incurred too much debt and are spending too much money. It’s important that you understand some lessons from history about this kind of behavior so that you’re certain of what I can do for you. The common denominators that lead to the downfall of every fiat currency are the two big Ds: debts and deficits. With that in mind, consider the following: Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they have exceeded 80% of GDP. US government debt will exceed 100% of GDP this year. Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” By some estimates, the US will hit that ratio this year. Peter Bernholz, a leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” Next year’s US budget deficit is projected to be $1.3 trillion. The solution many of your leaders are pursuing is to create more currency units. The US monetary base has exploded 205.8% during the last three years, while my price is only up 65.8%. This fact, alone, implies that my price in dollars is likely to climb much higher. This is also the reason why I’m not in a bubble, as some have tried to claim. It is your central banks and bond markets that are in a bubble. The fact that my price is rising is a warning that what your leaders are doing is unsustainable and potentially dangerous to your currency. Think about this: the US has debt backed by debt, based on debt, dependent on debt, and leveraged with debt. You can, for example, buy a bond (i.e., lend money) on margin (i.e., with borrowed money). This is not a sound way to run financial markets. Meanwhile, the warning bells continue to sound regarding Europe’s debt crisis. In just the past 30 days: Moody’s cautioned that it may cut the triple-A status of France, Austria, and the UK; and it downgraded six other European nations including Italy, Spain, and Portugal. Standard & Poor’s cut the triple-A status of France and Austria, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia, and Slovenia were downgraded. Fitch downgraded Belgium, Cyprus, Italy, Slovenia, and Spain, and stated there was a 50% chance of further cuts in the next two years. Standard & Poor’s downgraded 34 of Italy’s 37 banks. Moody’s warned just last week that it may cut the credit ratings of 17 global financial institutions and 114 European ones. The European crisis is far from over; and the path of least resistance for politicians is to create more currency units. This action can and will have clear and direct consequences: currencies will devalue, and inflation — perhaps hyperinflation — will result. Once again, I encourage you to use me to protect some of your wealth. How Much Is Enough? Given the state of your monetary system, you should accumulate me (and silver) on a regular basis. Just buy some every month and put it in a safe place. After what I’ve witnessed throughout history, and based on the current path your government leaders insist on pursuing, I suggest using me as your savings vehicle instead of putting dollars in a bank. If you don’t own enough of me when these fiscal troubles really accelerate, I fear you will regret it. I’ve warned many in the past about the dilution of nations’ currencies, and those who didn’t heed my warnings experienced severe financial pain. Excuses won’t pay the mortgage nor feed the family when the effects of currency debasement hit your home and pocketbook. Make sure you own enough of me to make a difference to your portfolio. This means having more than a couple coins or a few shares of GLD, the latter of which is only a proxy for my price. How do you know if you own enough? Ask yourself: If inflation returns, or even hyperinflation hits... If the economy is flat... If uncertainty and fear continue around the globe... If stock markets languish... If the amount of spending from the world’s governments proves futile... If government interference in the economy continues to increase... If the value of the US dollar takes a major fall... If the world enters a recession or depression... If you wonder if you have enough “safe” money... ..would you feel that you own enough of me? Buy a sufficient amount so that as your currency continues to lose value, your portfolio won’t. If you do your part, I promise I’ll do mine. Your monetary friend, Gold