Monthly Archives: November 2013

Chinese Gold Demand & World Gold Councils Estimates by Alasdair Macleod

Chinese gold demand and the World Gold Council’s estimates

By Alasdair Macleod
Posted 22 November 2013

There is considerable disagreement about Chinese gold demand, with delivery figures on the Shanghai Gold Exchange and import/export figures for Hong Kong suggesting the real totals are far higher than those published by the World Gold Council and Thompson-Reuters GFMS.

Recently Eric Sprott of Sprott Global Resource Investments Limited tackled this issue and wrote an open letter to the WGC pointing out that import/export figures show far higher levels of gold demand than the WGC’s estimates for Asia, particularly China, Hong Kong, Thailand, India and Turkey. The response is not on the WGC website, though it appears to be partially quoted elsewhere.

It seems that Sprott and the WGC are trying to do two different things. Sprott is interested in how much gold is actually taken into a country net of exports, irrespective of its use category, taking the view that there can be no more accurate estimate of overall gold demand, irrespective of how it is used. The WGC is trying to identify how much gold is used for specific purposes, which given the opaqueness of the market means they will never track all of it down. Crudely put it is top-down versus bottom-up.

To see how different the results can be let’s look at the solid figures for China and Hong Kong for the first nine months of 2013 which are set out in the table below, before comparing the result with that of the WGC.

 Chinese mainland  
 Shanghai Gold Exchange delivered  1,671.6
 HK exports to China  164.9
     Less Chinese exports to HK 264.9   _______
Net imports into China   1,571.7
Hong Kong
Total imports 1,926.2
     Less exports to China 164.9
     Less re-exports to China 1,077.5
     Less exports to rest of the world 46.0
     Less re-exports to rest of the world 78.8   _______
Net imports into HK (vault storage) 559.0
Total identified imports for China and Hong Kong 2,130.7

 

All these are published figures which we can assume to be accurate. Mainland China does not release import/export statistics for gold but we know what has been physically delivered through the Shanghai Gold Exchange, the monopoly physical market, and we know what Hong Kong imports exports and re-exports. We can also be reasonably certain that these figures exclude off-market government transactions, such as direct purchases from the mines of all China’s gold production, given that Chinese-refined bars are never seen in circulation. Exports from Hong Kong refer to gold processed into a materially different form from that imported, typically jewellery; so exported to the Mainland they are additional to SGE deliveries. Re-exports refers to imports re-exported with no material processing, and therefore can be assumed to be bullion trans-shipped and destined for the SGE, ignoring for simplicity’s sake that some may have bypassed the SGE and been sent directly to private buyers. Exports and re-exports to the rest of the world obviously must be deducted.

The conclusion is that between them gold absorbed by private sector purchases in Hong Kong and China amount to at least 2,130.7 tonnes in the first nine months of this year, or 2,841 tonnes annualised. This compares with the WGC’s estimates from their quarterly Gold Demand Trends of only 818.6 tonnes for the same period, or 1,091.5 annualised. Given the hard evidence of Hong Kong and SGE statistics it appears that the WGC’s figures substantially understate the true position. Furthermore, any analysis of gold demand will fail to account for the increase in gold ownership not constrained by national boundaries.

Estimates of China’s demand also exclude government purchases of gold in foreign markets, and gold that may have been acquired and imported by wealthy Chinese from foreign locations without going through Hong Kong or the SGE. So without taking into account these extra factors China and Hong Kong’s combined imports from the rest of the world exceeds all other mine supply by at least 580 tonnes on an annualised basis.

It now becomes clear that without significant leasing by Western central banks total Asian demand could not be satisfied at current prices, because there is no evidence of material selling by existing holders of above-ground stocks, with the exception of ETF liquidation which is minor compared with the amounts involved.

Open Letter to FOMC: Valuation Bubble in Equities by J Hussman

An Open Letter to the FOMC: Recognizing the Valuation Bubble In Equities

November 25, 2013

John P. Hussman, Ph.D.

To the members of the FOMC,

You’ve emphasized the tremendous burden placed on the Fed in recent years, and your dedication to collectively doing right by the country. It’s important to start with that recognition, because as concerned as I’ve been about the impact and economic assumptions behind the Fed’s actions, I don’t question your motives or integrity. What follows is simply information that may be helpful in realistically assessing the outcomes and risks of the present policy course, and perhaps to help prevent a bad situation from becoming worse.

Some brief background

As the head of an investment company, it’s natural to conclude that what follows is simply “talking my book,” but for what it’s worth, the majority of my income is directed to theHussman Foundation. Academically, I earned my doctorate in economics from Stanford, studying with Tom Sargent, John Taylor, Ron McKinnon, Robert Hall, and Joe Stiglitz, and spent several years as a professor at the University of Michigan and Michigan Business School before focusing on finance.

We’ve done well in prior complete market cycles (combining both bull and bear markets), and were among the few who warned of the market collapses and recessions of 2000-2002 and 2007-2009. In contrast, the half-cycle of the past 5 years has been challenging because of the awkward transition it provoked, following a credit crisis that we fully anticipated. Economic policy failures, departures from Section 13(3) of the Federal Reserve Act (which Congress subsequently spelled out like a children’s book), avoidance of needed debt-restructuring (except in the auto industry), and extortionate cries of “global meltdown” from the financial industry all contributed to a collapse in economic confidence beyond anything witnessed in post-war data. That forced us to stress-test every aspect of our approach against Depression-era outcomes. We missed returns from the market’s low in the interim of that stress-testing, and have foregone the more recentspeculat ive advance because identical features have resulted in spectacular market losses throughout history.

In hindsight, the crisis ended – precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned FAS 157 “mark-to-market” accounting, in response to Congressional pressure from the House Committee on Financial Services onMarch 12, 2009. That change immediately removed the threat of widespread insolvency by making insolvency opaque. My impression is that much of the market’s confidence and oversensitivity to quantitative easing stems from misattribution of the initial recovery toQE. This has created a nearly self-fulfilling superstition that links the level of stock prices directly to the size of the Fed’s balance sheet, despite the absence of any reliable or historically demonstrable transmission mechanism that relates the two with any precis ion at all.

The FOMC certainly had a part in creating a low-interest rate environment that provoked a reach-for-yield and a gush of demand for securities backed by mortgage lending of increasingly poor credit quality (I’ll note in passing that new issuance of “covenant lite” debt has now eclipsed the pre-crisis peak largely due to the same yield-seeking). Still, it may ease the burden of power to consider the likelihood that the actions of the Federal Reserve – though clearly supportive of the mortgage market – were not responsible for the recovery. One can thank the FASB for that, provided we’re all comfortable with the reduced transparency that results from mark-to-model and mark-to-unicorn accounting.

Recognizing the equity bubble

How does one establish the value of a long-lived asset? Hopefully, that question stirs the economist in all of you, and you immediately respond that every security is a claim on some long-term stream of cash payments (including any terminal value) that the holder can expect to receive over time. If price is known, the discount rate that equates price to the present value of expected future payments can be interpreted to be the expected long-term return of that security. This is how one calculates the yield-to-maturity on a long-term bond, for example. Conversely, we can make assumptions about the long-term return that investors will require over time and then calculate an implied price. Discounting the expected long-term stream of cash flows using some required long-term return results in a “fair value” that quietly incorporates those underlying assumptions.

Of course, nobody likes to discount an entire stream of expected payments, so investors create shortcuts. The most common shortcut is to compress all of the relevant cash flows and discount rates into a “sufficient statistic.” So for example, if we have a perpetuity with price $P that throws off cash flow $C every year forever, the ratio C/P is a sufficient statistic for the expected long-term rate of return, and everything knowable about valuation can be neatly summarized by that ratio. Nice economic assumptions about constant growth rates, returns on invested capital, payout ratios, and other factors encourage similar approaches in the equity market. So we look at price/earnings ratios based on a single year of earnings and immediately believe we know something about long-term value.

But valuation shortcuts are only useful if the “fundamental” being used isrepresentative of the entire long-term stream of cash flows that will be delivered into the hands of investors. And it’s precisely here where theFOMC may find a careful review of the evidence to be useful.

The chart below is from one of the best tools that the Fed offers the public, the Federal Reserve Economic Database (FRED). The chart shows the ratio of corporate profits to GDP, which is presently at a record. The fact that profits as a share of GDP are more than 70% above their historical norm should immediately raise a question as to whether current year earnings or next year’s projected “forward earnings” should be used as a sufficient statistic for long-term cash flows and equity market valuation without any further reflection. Then again, more work is required to demonstrate that such an approach would be misleading. We’re just getting warmed up.

A simple way to see the implications of the present elevation of the profit share is to relate the level of profit margins to subsequent growth in profits over a reasonably “cyclical” horizon of several years. Remember, when one values equities, one is valuing a long-term stream, not just next year’s earnings. Investors taking current-year or forward-year profits as a sufficient statistic should be aware that high margins are reliably associated with weak profit growth over subsequent years.

The next relevant question is to ask why profit margins are presently so high. One might argue that the profitability of companies has achieved a permanently high plateau. Despite historical mean-reversion in profit margins (which tend to collapse over the full course of the business cycle), maybe this time is different. As it happens, we can relate the surfeit of corporate profits in recent years rather precisely to the extraordinary combined deficits of the household and government sectors during the same period.

The deficits of one sector emerge as the surplus of another

To see what’s going on, we can exploit the savings-investment identity

Investment = Savings

Investment = Household Savings + Government Savings + Corporate Savings + Foreign Savings (the inverse of the current account)

Corporate Profits = (Investment – Foreign Savings) – Household Savings – Government Savings + Dividends

This basic decomposition, at least to an approximation allowed by national income accounting and modest statistical discrepancies, is shown below (h/t JesseLivermore, Michal Kalecki).

We can go further. The reason (Investment – Foreign Savings) are in parentheses above is because particularly in U.S. data, they have an inverse relationship, as “improvements” in the current account are generally associated with a deterioration in gross domestic investment. So the term in parentheses adds very little variability over the course of the business cycle. Likewise, dividends are fairly smooth, and add very little variability over the course of the business cycle.

As a result, the above identity reduces – from the standpoint of overall variability – to a statement that corporate profits as a share of GDP are nearly the mirror image of deficits in the household and government sectors. A simple way to think about this is that dissaving in both sectors helps to support corporate revenues and limit the need for competition, even when wages and salaries are depressed. It follows that most of the variability in corporate profits over time is driven by mirror image variations in the household and government sectors. As it happens, this relationship turns out to be strongest with a lag of roughly 4-6 quarters. Given the general improvement in combined government and household savings that began just over a year ago, it follows that current-year or even higher year-ahead earnings estimates may not be particularly useful “sufficient statistics” for the purpose of valuing equities.

A predictable response among investors is to immediately seek alternate explanations that might allow profit margins to remain permanently elevated. First among these is the argument that somehow the production of U.S. companies abroad is not being taken into account. But the difference between Gross National Product (which does exactly that) and Gross Domestic Product – even if it represented pure profit – is only about 1%. The adjustment might make a difference in Ireland, where the gap between GNP and GDP is far larger, but the effect is purely second-order in the United States. Moreover, any additional dynamic that prompts the claim “this time is different” had better be one that emerged in the past few years, because as the charts above demonstrate, the mirror-image relationship between variations in corporate profits and variations in combined government and household savings has hardly missed a beat in the past century.

Valuation measures and prospective equity returns

Even if we overlook the foregoing arguments, a historical comparison of competing valuation methods speaks loudly enough. The most important test of any valuation measure is how closely that measure is related to actual subsequent returns over a period of several years. While valuation measures often have little to do with near-term returns, valuation measures that are also unrelated to subsequent long-term returns are not only useless, but dangerous.

The fact is that valuation measures driven by single-period earnings (whether trailing earnings or forward operating earnings) are poorly correlated with subsequent market returns, mainly because they impose the counterfactual assumption that profit margins can be held constant over time. In contrast, measures that account for the cyclicality of profit margins typically have far greater explanatory power than their raw counterparts.

A few examples will demonstrate these regularities. The first chart presents estimated and actual subsequent 10-year S&P 500 total returns (in excess of the 10-year Treasury bond yield) based on the S&P 500 forward operating earnings, but adjusting for the predictablecyclicality of profit margins (see Valuing the S&P 500 Using Forward OperatingEarnings). Presently, this estimate implies that the S&P 500 is likely tounderperform even the depressed yield on 10-year Treasury bonds over the coming decade. The same was true at the 1972 peak (before stocks lost half their value), the 1987 peak, not to mention the more severe valuation peaks of 2000 and 2007. Present valuations notably contrast with the quite favorable estimated premium that briefly emerged in 2009.

The raw counterparts to the above graph are what Janet Yellen appeared to reference in her testimony to the Senate two weeks ago. Below are two alternate versions of the “equity risk premium.” The first shows the raw “forward operating earnings yield” of the S&P 500 less the 10-year Treasury yield. The second shows the dividend yield on the S&P 500 plus 6.2% (reflecting long-run nominal economic growth) less the 10-year Treasury yield. Neither measure has a very good empirical record of explaining subsequent S&P 500 total returns in excess of Treasury yields.

As a side-note, the presumed one-to-one relationship between forward equity yields and bond yields is actually an artifact of the 16-year period from 1982 to 1998 when bond yields enjoyed a disinflationary decline while stocks gradually moved from a secular valuation low to the dangerous elevations of the late-1990′s. Though Fed officials including Alan Greenspan and Janet Yellen seem attracted to the seemingly elegant simplicity of these “equity risk premium” models, they seem somehow oblivious to the fact that they don’t actually work.

Why is the historical record of these simple “equity risk premium” estimates such a cacophony of noise? The answer should be immediately apparent. It turns out that theerror between these estimates and actual subsequent 10-year S&P 500 total returns (in excess of 10-year Treasury yields) has a correlation of 0.86 with – you guessed it – profit margins. With profit margins at the highest level in history, the record suggests that these models are grossly overestimating prospective equity returns at today’s all-time stock market highs.  Unfortunately, this evidence also suggests that the faith expressed in these “equity risk premium” estimates by Janet Yellen and others is likely to coincide with their most epic failure in history.

My strong disagreement should not be confused with disrespect, and none is intended, but wasn’t it Janet Yellen who in October 2005, at the height of the housing bubble, delivered a speech effectively proposing that monetary policy could mitigate any negative economic consequences of a housing collapse, and arguing that the Fed had no role in preventing further housing distortions? Given the lack of concern with the present elevation of the equity markets, these remarks from 2005 have a rather ominous ring in hindsight:

“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it likely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no.’”

The reason that the Fed does not see an “obvious” stock market bubble (to use a word regularly used by Governor Bullard, as if to imply that misvaluations cannot exist unless they smack their observers with a two-by-four) is because while price/earnings multiples appear only moderately elevated, those multiples themselves reflect earnings that embed record profit margins that stand about 70% above their historical norms.

We can demonstrate in a century of evidence that a) profit margins are mean-reverting and inversely related to subsequent earnings growth, b) margin fluctuations are largely driven by cyclical variations in the combined savings of households and government, and importantly, c) valuation measures that normalize or otherwise dampen cyclical variation in profit margins are dramatically better correlated with actual subsequent outcomes in the equity markets.

A few additional charts will drive this point home. The chart below shows the S&P 500 price/revenue ratio (left scale) versus the actual subsequent 10-year nominal total return of the S&P 500 over the following decade (right scale, inverted). Market valuations on this measure are well above any point prior to the late-1990′s market bubble. Indeed, if one examines the stocks in the S&P 500 individually, the median price/revenue multiple is actually higher today than it was in 2000 (smaller stocks were more reasonably valued in 2000, compared with the present). This is a dangerous situation. In this context, the dismissive view of FOMC officials regarding equity overvaluation appears misplaced, and seems likely to be followed by disruptive financial adjustments.

One obtains a similar view, with equal historical reliability, from the ratio of nonfinancialequity capitalization to nominal GDP, using Federal Reserve Z.1 Flow of Funds data. On this measure, equities are already beyond their 2007 peak valuations, and are approaching the 2000 extreme. The associated 10-year expected nominal total return for the S&P 500 is negative.

The unfortunate situation is that while the required financial adjustment may or may not be as brutal for investors as in 2007-2009, or 2000-2002, or 1972-1974, when the stock market lost half of its value from similar or lesser extremes, the consequences of extremely rich valuation cannot be undone by wise monetary policy. The Fed has done enough, and perhaps dangerously more than enough. The prospect of dismal investment returns in equities is an outcome that is largely baked-in-the-cake. The only question is how much worse the outcomes will be as a result of Fed policy that has few economic mechanisms other than to encourage speculative behavior.

Textbook speculative features

A discussion of bubble risk would be incomplete without defining the term itself. From an economist’s point of view, a bubble is defined in terms of differential equations and a violation of “transversality.” In simpler language, a bubble is a speculative advance where prices rise on the expectation of future advances and become largely detached from properly discounted fundamentals. A bubble reflects a widening gap between the increasingly extrapolative expectations of market participants and the prospective returns that can be estimated through present-value relationships linking prices and likely cash flows.

As economist Didier Sornette observed in Why Markets Crash, numerous bubbles in securities and other asset markets can be shown to follow a “log periodic” pattern where the general advance becomes increasingly steep, while corrections become both increasingly frequent and gradually shallower. I’ve described this dynamic in terms of investor behavior that reflects increasingly immediate impulses to buy the dip.

Along with this pattern, which has emerged with striking fidelity since 2010, we observe a variety of other features typically associated with dangerous extremes: unusually rich valuations on a wide variety of metrics that actually have a reliable correlation with subsequent market returns; margin debt at the highest level in history and beyond 2.2% of GDP (a level that was matched only briefly at the 2000 and 2007 market extremes); a blistering pace of initial public offerings – back to volumes last seen at the 2000 peak and featuring “shooters” that double on the first day of issue; confidence in the narrative that “this time is different” (in this case, the presumption of a fail-safe speculative backstop or “put option” from the Federal Reserve); lopsided bullish sentiment as the number of bearish advisors has plunged to just 15% and bulls have crowded one side of the boat; record issuance of covenant-lite debt in the leveraged loan market (which is now spreading to Europe); and a well-defined syndrome of “overvalued, overbought,overbullish, rising-yield” conditions that has appeared exclusively at speculative market peaks – including (exhaustively) 1929, 1972, 1987, 2000, 2007, 2011 (before a market loss of nearly 20% that was truncated by investor faith in a new round of monetary easing), and at three points in 2013: February, May, and today (see A Textbook Pre-Crash Bubble). Many of us in the financial world know these to be classic features of speculative peaks, but there is career risk in responding to them, so even those who view the situation with revulsion can’t seem to tear themselves away.

While I have no belief that markets follow any mathematical trajectory, the log-periodic pattern is interesting because it coincides with a kind of “signature” of increasing speculative urgency, seen in other market bubbles across history. The chart above spans the period from 2010 to the present. What’s equally unsettling is that this speculativebehavior is beginning to appear “fractal” – that is, self-similar at diminishing time-scales. The chart below spans from April 2013 to the present. On this shorter time-scale,Sornette’s ”finite time singularity” pulls a bit closer – to December 2013 rather than January 2014, but the fidelity to this pattern is almost creepy. The point of this exercise isemphatically not to lay out an explicit time path for prices, but rather to demonstrate the pattern of increasingly urgent speculation – the willingness to aggressively buy every dip in prices – that th e Federal Reserve has provoked.

The way forward

In my view, good public policy acts to both impose and relieve constraints – focusing on relieving obstructive constraints when they actually become binding; imposing constraints where their absence creates excessive risk or the potential for undue harm to others; and avoiding policies where the risk of unintended consequences overwhelms the expected benefit from any demonstrated cause-effect relationship.

From this perspective, the policy of quantitative easing has run its course. It undermines planning, as every economic decision must be made in the context of what the Federal Reserve may or may not do next. It starves risk-averse savers, the elderly, and the disabled from interest income. It lowers the bar for speculative, unproductive, low-covenant lending (as it did during the housing bubble). It relaxes a constraint that is not binding – as there are already trillions of dollars in idle reserves at U.S. banks, on which the Federal Reserve pays interest both to keep them idle and to avoid disruptions in short-term money markets. It undermines price signals and misallocates scarce savings to speculative pursuits. It further skews the distribution of wealth, and while the extent of this skew has a scarce chance of persisting, the benefits of any spending from transiently elevated stock market wealth will accrue to primarily to higher-income individuals who are not as constrained as the millions of lower-income, low-asset families hoping for some “trickle-down” effect. We have seen numerous variants of this movie before, and we should havelearned the ending by now.

Importantly, the magnitude of the “wealth effect” on employment is dismally small. Even if the entire relationship between stock market fluctuations and employment fluctuations was causal and one-directional, it would still take a roughly 40% advance in the stock market to draw the unemployment rate down by 1%. Unfortunately, price advances do not create the underlying cash flows to support them, so the strategy of manipulating stock prices higher also involves a piper that must be paid.

As for inflation-unemployment “tradeoffs,” we should all be clear about what the data look like in practice, particularly how weak and unreliable the relationships are between the two. There are numerous ways to plot the data. For example, lagging unemployment strengthens the positive relationship between inflation and unemployment, while lagging inflation flattens the nearly non-existent relationship from unemployment to inflation. One can augment this with expectations, or vary assumptions about NAIRU all one likes. The scatter is simply not amenable to a practical degree of “optimal control.”

This isn’t to say that A.W. Phillips was incorrect. Rather, his “Phillips Curve” was actually a relationship between the unemployment rate and wage inflation, in a century of British data when Britain was on the gold standard and general prices were stable. What Phillips said, in effect, is that unemployment is inversely related to real wage inflation. That proposition holds true in U.S. data as it does internationally. But it is hardly the basis for any strong belief that we can buy a few more jobs by targeting a higher inflation rate in the general price level.

It’s notable that the “dual mandate” of the Fed repeatedly includes the phrase “long run.” The Federal Reserve has not been asked to be “data-dependent” in response to every monthly fluctuation in output, employment and financial markets. Instead, the Fed is asked to consider the long-run effects of its actions. Minimizing the consideration of longer-term risks in the pursuit of outcomes that are largely beyond the reliable effects of the Federal Reserve’s tools cannot be justified by referencing the Federal Reserve’smandate.

The intent of this letter is not to criticize, but hopefully to increase the mindfulness of theFOMC as to historical evidence, the strength of various financial and economic relationships, and the potentially grave consequences of further relaxing constraints that are not binding in the first place.

To some extent, certain consequences are baked-in-the-cake, as are various adjustments that the Federal Reserve will have to make in order to normalize its policy stance in the years ahead. Gradually rolling assets off the balance sheet as they mature is certainly an option, though the time profile of maturities is not smooth, the strategy may not be robust to material economic acceleration even several years from now, and such a strategy will continue to punish risk-averse savers for years. You already know my views on what a time-consistent path for normalizing the balance sheet would look like.

The immediate objective, I think, is to continue to emphasize that a gradual reduction in the pace of Fed purchases is distinct from a “tightening” – our own estimates are that a contraction of more than $1 trillion in the Fed’s balance sheet would be required simply to bring Treasury yields to 0.25% without raising the interest rate the Fed pays on excess reserves. Having missed the opportunity for a broadly anticipated “taper” in September, and having provoked even greater speculation as a result, the potential disruption of even a small move in this direction is a legitimate concern. At whatever time this occurs, my own view is that even $10 billion may be too large for a speculative market to swallow, while $5 billion is so small that it could make the Fed appear timid. One might suggest $8.5% billion, or 10%, which is so small a taper that the markets would hopefully view an overreaction as ridiculous – which is not to say tha t the markets would not overreact even then. From the standpoint of a financial market participant, I can’t emphasizeenough how broadly the Fed is viewed as the only game in town.

There is certainly more progress that needs to be made on employment and economic activity. The legitimate question is whether continued relaxation of non-binding constraints is likely to produce this outcome without the increasing risk of severe and unintended consequences. This is a question that begs not for verbal arguments, but empirical evidence, realistic estimates of effect sizes, and clear transmission mechanisms. The Federal Reserve has a critical role in easing constraints – particularly shortages of liquidity in the banking system – when they become binding, and in applying constraints and oversight – or at least refraining from further harm – when risks become untethered. The second aspect of that role is far more imperative today than might be obvious.

I hope that some part of this is useful.

Sincerely,

John P. Hussman, Ph.D.
Hussman Strategic Advisors

UK Property Market & MSM awakening….28/11/13 by Mitch – Silver Sufferer

It seems that the Main Stream Media (financial writers, editors and general news reporters) have at last awoken to the complete farcical situation in the UK’s property market, that has been made much worse by the Conservative Government’s blatant cynical electioneering ploy to push house prices higher into the General election in 18 months time.

Now the article (see link below) written in the Telegraph by Jeff Randall (I could have picked any one of dozens of MSM articles), talks of the UK House price ratio against Salary of 4.6 : 1 and the rising debt leverage, however that completely mitigates the true extent of this upcoming financial disaster which is the Greater London Area where all the real house price inflation has actually occurred.

As of June 2013 (Land Registry of England) Greater London average house price was £ 475,940

Detached                           £ 825,069

Semi-Detached                £ 496,468

Terraced                            £ 542,238

Flat                                     £ 404,973

However Rightmove put the average in October 2013 of £ 544,232, after another huge rise.

As of 25th November the average London Salary was £ 35,218

That is a ratio of 15.45 : 1 Greater London Average Property against London Average Salary!!!

But again that discounts the true picture. The actual real hard evidence of my friends and colleagues (including myself) on a number of various London boroughs that we purchased in the early mid 1990’s, house prices were trading on a multiple average of 3.5 : 1 and these same properties are now physically trading at between 27 : 1 up to 32 : 1.

Now obviously I understand that the ratio of 3.5 : 1 was a massive over-reaction to the property market collapse of the late 80’s into 1993 (extreme affordability brought about by the UK raising Interest Rates from 8.5% Dec’87 to 15% Oct’89), but that’s what markets do – they overreact / overshoot.

But a move from 3.5 : 1 to 31 : 1 , you cannot see a disastrous ending of this particular cycle???

Ideal Time to buy a house is at the top of the interest rate cycle, interest rates move lower, payments fall and house prices become much more affordable and hence prices rise in a higher ratio against income.

Now Interest Rates are at a new 320 year low. A 33 Year Super Cycle in Debt / Lower Interest rates has resulted in extreme Real Negative Interest Rates, heavily supported by aggressive Central Bank Intervention.

What does the future hold ?

1. Interest Rates will move higher

2. Housing Debt costs will rise dramatically

3. House prices will fall hard.

Now I hear all the same excuses from every property investor (I have heard this many times)  “the house prices are being driven by foreign money and hence this supports higher property prices” -  This reminds of the Tech Boom Nasdaq bubble into the year 2000 when everyone was telling me “Revenues are not important in analysing stock valuations, it’s the amount of clicks (visits to sites) that are important”, well that ended well !!!

In all super bull markets, they end the same way  - the last 10% of time period involved in a Super bull market ends in a parabolic rally along with excuses of why its different this time !!

Now I actually believe this madness will continue into mid 2015, but if you are investing or leveraging up debt loads to purchase a house, then I would seriously think twice  - as the end result is only going to end one way.

Best of Luck…..Mitch.

 

http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/10471564/Help-to-Buy-is-nothing-but-an-election-ploy.html

When the best business story of the week involves a Methodist preacher, a holier-than-thou bank and Labour Party funding, laced with allegations of narcotics abuse, rent boys and dubious expenses claims, it is, I accept, no easy task diverting readers’ attention to less exotic matters. This, however, is my goal today. For, while the Rev Paul Flowers has been busy incinerating the Co-operative movement’s reputation, Britain’s property market has caught fire and the blaze is running out of control.

Strange though it may seem, these events have a common theme: inappropriate adult material. In the case of Flowers, it was racy images left on his computer at Bradford council. For the rest of us, the offending content, known to some as “property porn”, can be ogled on the government’s Help to Buy (HTB) website. The HTB scheme is designed, it seems, almost entirely to please those with a prurient interest in house-price bubbles: builders, estate agents and local solicitors. It is nothing more than populist, short-term electioneering posing as a cure for Britain’s chronic, long-term housing headache.

If affordability is the problem, a policy that makes houses even more expensive cannot be the solution — but that is what’s happening. Buyers are able to tap state-funded assistance up to a value of £600,000. This is emergency aid for the huddled masses of Kensington and Chelsea. When property prices are rising and real wages (inflation-adjusted) are falling, as they are, only the suspension of disbelief will bridge an ever-widening gap. HTB may well help to buy votes, but it will end in tears.

The housing challenge facing government is not complicated: too many people, too few homes. When you have more buyers than sellers, guess what? The price goes up and up until the elastic snaps. The trouble is, few ministers will address part one of the problem – population growth – because it necessitates being honest about immigration and the impact it is having not just on numbers in the country today but on tomorrow’s birth rates.

Nothing terrifies Westminster MPs more than the suggestion of being “racist”. This is craven, head-in the-sand politics. Only last week, the European Union issued a report showing that the United Kingdom has the EU’s fastest-growing population. According to Eurostat, official numbers living in the UK (not including illegals) grew by 392,000 in 2012, 38 per cent of which was accounted for by net migration. The Office for National Statistics (ONS) puts the figures slightly higher at 420,000 and 39 per cent respectively. For context, Nottingham’s population is about 300,000.

Part two of the problem is the rate at which we are constructing homes. A government-backed report in 2004 concluded that Britain needed 250,000 new houses a year to meet growing demand. Even before the credit crunch, completions fell way short of that and, despite a recent surge in new buyers with cash to burn, only 28,500 private houses were started in the three months to September. In other words, the situation is deteriorating, as the number of people who want homes in the UK far outstrips supply.

The upshot is that the average house now costs £173,678 (Nationwide figures), yet the average weekly wage, including bonuses, is £474, or £24,648 a year (ONS). Even allowing for the fact that newcomers to the housing market tend to join the ladder at the cheaper end, the ratio of first-time buyer house prices to average incomes is still 4.6:1.

HTB is encouraging people to overstretch their finances at the bottom of the interest-rate cycle – the very worst time to do so. With money priced at a 320-year low, the only way is up. When that happens, monthly outgoings will rise, house prices will fall and those on the edge of solvency will go bankrupt. After the credit crunch, household debt in Britain fell from 170 per cent of annual income to 140 per cent. That trend is now reversing, as government “initiatives” lure punters into a debt trap. The Bank of England’s financial stability report points out that 20 per cent of home loans have been made to households that are left with less than £50 a week after housing costs and essential spending. Even a 1 per cent rate rise could create a new cohort of distressed borrowers.

The Bank, the Office for Budget Responsibility and the ONS have all been behind the curve in assessing the rapid recovery in the British economy.

Job creation has been much stronger than official figures suggest. The Bank’s 7 per cent unemployment “target”, the point at which it expects to start increasing rates, could be here sooner than Mark Carney, the Governor, envisages. When that happens, those who have gambled on the housing market remaining a one-way bet on cheap money and rising property prices will be stuck in a difficult place: under water but with no liquid assets.

HTB is fiscal chicanery that prompts irrational behaviour by making the unaffordable appear within reach. In the short run, it rewards the Treasury with a bonanza of stamp duty payments. But how much of those receipts will be lost when the taxpayer is called upon to bail out delinquent mortgages?

Tackling Britain’s housing problem requires two bold moves: much tighter restrictions on the number of people arriving in the UK and an ambitious building programme to provide decent accommodation for existing citizens.

Handing out funny money to bid up prices is simply weasel economics.

 

Finally  As Pento stated on KWN……

 

Pento:  “It’s actually comical that after 5-years of telling the market that QE is all about pushing interest rates lower, particularly long-term interest rates, now they (the Fed) are doing backflips and trying to say that ending QE isn’t going to cause interest rates to rise.  Let me just go back into a speech that Bernanke gave last year in Jackson Hole….

 

“This is a quote from Ben Bernanke, ‘The Federal Reserve’s long and large scale purchases have significantly lowered long-term Treasury yields.’  Did you get that?  The Federal Reserve’s large scale purchases, their QE program, by the way they are on QE4 right now since they announced this program in March of 2009, they have ‘significantly,’ not my words, his words, ‘significantly lowered long-term Treasury yields.’

 

And now they are trying to propagandize, lie, obfuscate, and confuse the market into telling you you are so stupid not to remember what they’ve been telling you for 5-years:  That their manipulation of interest rates and counterfeiting and printing money hasn’t worked.  But it has.  It has lowered interest rates on the long-end of the yield curve.

 

And now they are threatening to stop doing it because they (feel) can’t do it any longer.  They can’t stand the fact that they have counterfeited $4 trillion worth of credit and money.  It hurts them (their credibility).  They really feel uncomfortable doing it, but they can’t stop.  They’re trapped.

 

They are trying to get out of QE, but the exit door is blocked by soaring Treasury yields, (what will be) plummeting equity prices, another real estate crisis, skyrocketing US sovereign debt service payments, massive currency disruptions, and a deflationary depression.  That’s what lies on the other side of year, after year, after year of money printing, credit creation, counterfeiting, and interest rate manipulation.

 

There is no exit.  There is no easy exit, and that’s why they are delaying the tapering, Eric.  Do you ever wonder why they didn’t do it in September, when the market was ready for it?  It’s because the 10-Year Note went from 1.5% to (roughly) 3% in just a few weeks.

 

If the Fed goes ahead and tapers, interest rates go to 4% on the 10-Year (Note), and all of the things I just mentioned occur, and we’re back into a deflationary depression.  I believe that would cause them to institute a permanent state of QE.  That’s where we’re headed, Eric.  That’s what 2014 has in store for you.”

Top 10 Reasons I Buy Gold & Silver by Mike Maloney

Top 10 Reasons I Buy Gold & Silver

By Mike Maloney
Posted August 30, 2013
Top 10 Reasons I Buy Gold & Silver

As I have said many times before, the economic crisis of 2008 was only a speed bump on the way to the main event.  I believe that before the end of this decade there will be an economic crisis so historic that it will eclipse the crash of 29 and the subsequent great depression.  I also believe it is both unavoidable and inevitable, because it is merely the free market releasing the stored up energy from decades of economic manipulation.  Yes… bad things are going to happen, but it could be the best thing that ever happened to you.

This guide started out as “The Top Ten Reasons TO Buy Gold and Silver” and was originally drafted by some good and well-intentioned employees, but when I read it something just didn’t feel right.  It contained all the usual reasons that any precious metals dealer would point out as to why people should own gold and silver…  they’re the ultimate insurance policy, they’re private, they’re a hedge against inflation, they’re a timeless investment, and so on.  I spent lots of time trying to rewrite them but there was still something wrong.  And then it dawned on me… though they were all good reasons to own gold and silver; they weren’t the reasons that “ I “ buy gold and silver.

So here you go… a countdown of “The Top Ten Reasons That I Buy Gold And Silver.”

10. All World’s Currencies are Fiat Currencies, and Fiat Currencies Always Fail.

99.9% of the world’s population is unaware that we no longer use money… we use “fiat” national currencies.  What is a fiat currency?  Fiat currencies are faith based.  They are national currencies that are not backed by anything of value like gold, instead the government just declares that they have value and, as long as the people keep believing, they accept it… for a while.  But here’s the thing, there have been thousands upon thousands of fiat currencies throughout history, and they have all failed… 100%… no exceptions.

But there is a vast difference this time around.  Since 1971, for the very first time in history, all of the world’s currencies are fiat currencies simultaneously.

Remember this as we progress through the Top Ten…

ALL FIAT CURRENCIES FAIL.

9. The Current State of the Global Economy.

In my book, Guide to Investing in Gold and Silver, and in Hidden Secrets of Money, I show how societies have swung back and forth from quality money to quantity currency.  Originally, quantity currency took the form of debased coinage (gold or silver money that has been diluted by adding cheap and abundant base metals such as copper).  Then it took the deceptive form of national currencies that were initially backed by money, IE: claim checks on gold and/or silver. Once these were established, governments then could change the laws, basically making fraud legal, so they could print claim checks on gold that didn’t exist.  The next step was to sever the connection between money and currencies entirely.

Back when we used real money gold would automatically balance all economies.  When one country experienced an economic boom they would import cheap goods from countries with depressed economies and lower wage rates.  The outflows of gold from the boom country would cause a deflation, cooling the economy, while the countries experiencing gold inflows would boom, causing their labor rates to increase, which in turn would cause the prices of their goods to rise.  This meant that trade imbalances would always automatically rebalance.  Government spending was also constrained.  If a government wanted to spend more than its income (deficit spending) it had to borrow gold from the private sector.  If the government borrowed too much it would cause interest rates to rise, which in turn would slow the economy, which in turn would cause tax revenues to fall, which meant less income for the government, which in turn would cause the government to cut spending.

But the debt based global monetary system has allowed deficit spending, trade imbalances, and bubbles to persist and balloon to levels unprecedented in all of history.  We are in completely uncharted territory.  The credit/debt bubble and the derivatives bubble threaten to take down the world economy.  The only comparison you could make is to take every great bubble in history times one million and have it burst everywhere on the planet simultaneously… It threatens to be a global financial nuclear holocaust the only financial survivors of which will be the owners of gold and silver.

8. Currency Crisis / New World Monetary System.

I am a firm believer that everything happens in waves and cycles.  So when I started writing my book back in 2005 I entered every financial crisis that I could identify into a spreadsheet, starting from the beginning of the USA, looking for a cycle, and something very dramatic stuck out at me.  I had discovered that every 30-40 years the world has an entirely new monetary system.

From that day till now I have been telling as many people as I could that before the end of this decade (before 2020) there will be an emergency meeting of the G-20 finance ministers (or something like that) to hash out a new world monetary system.  It’s normal.  No man made monetary system can possibly account for all of the forces in the free market.  They get old… they develop stress cracks… then they implode.

We have had four different monetary systems in the past 100-years.  The system we are on today is the U.S. dollar standard.  It is an ageing system that is way overdue for its own demise.  It is now developing stress cracks, and will one day implode.  Like I said, it’s normal.

But what is different this time around is that the last three transitions were baby-steps from full gold backing, to partial gold backing, to less gold backing, to no gold backing.  In each of these transitions the system we were transitioning from had a component that could never fail… gold.  This time we will be transitioning from a system based on something that always fails… fiat currencies.  The key component to this transition from the U.S. dollar standard to some new standard is of course the U.S. dollar.  By the time the emergency meeting takes place the U.S. dollar will be in the final stages of the terminal condition known as fiat failure.

But the U.S. dollar represents more than half of the value of all the world’s currency.  A dollar crisis would cast doubts on all fiat currencies, and the cascading effect of loss of faith could cause the rest of them to fall like dominos.  The central bankers will try everything they can think of to keep the fiat game going, but when everything they try fails they’ll look around and say, “What worked before.”  And once again the pendulum will swing back to quality money.

The only beneficiaries of this event will be gold and silver, and those who own them.

7. Gold and Silver Come with a Central Bank Guarantee.

My book was written from 2005 through 2007.  In it I said there would first be the threat of deflation (this came true in the crisis of 2008) to which Ben Bernanke would overreact with a helicopter drop (this came true with the bailouts and QEs) which would cause an inflation (this came true when the stock markets and real estate reflated.)   Next there will be a real deflation… a contraction of the currency supply.  This will happen when the credit/debt/bond/fiat currency bubble and the derivatives bubble begin to implode.  The reaction of the world’s central banks will be to print until deflation gives way.  I believe this will cause a hyperinflation.  A hyperinflation doesn’t require a nation to print its currency into oblivion… it only requires a loss of faith.

But never fear, because, periodically, throughout history, gold has revalued itself as it is bid up in price by the free market as people rush back to it for safety.  This is when gold does an accounting of all of the currency that had been created since the last time gold revalued itself.  In doing so its purchasing power rises exponentially.

It’s always done this… and I believe it always will.

6. Everything Else is a Scary Investment.

By any realistic measure stocks have been in a super-bubble for more than a decade now with valuations and yields in the danger zone, while bonds are in the later stages of a 30-year bull market and real estate is still deflating from the biggest bubble in history.

Dr. Robert Shiller, of Yale University, has compiled data on the stock market going all the way back to the year 1880.  His research concludes that by one measure the stock market has been in a bubble since 1998 and by his other measure the bubble is far bigger and more extreme than any prior bubble, including the stock market bubble of the Roaring `20s that led to the crash of `29.  Further research shows that the only reason the markets have been levitated to these levels is due to Federal Reserve stimulus.  What will happen if they take away the training wheels? I wouldn’t want to be invested in stocks when it finally implodes.

U.S. Treasury bonds have been a great investment for more than 30-years, but no bull market lasts forever.  In fact, for the 37 years after WII, bonds were such a bad investment that by the end of the `70s they had earned the nickname “certificates of confiscation”, because they confiscated your wealth.  But that was back when countries were financially responsible.  Now most countries on the planet run their finances like Greece, and the United States of America is leading the way.  And as the world’s central banks keep interest rates low it has caused bond investors to take extraordinary risks in search of a reasonable return.  We are now in a global bond bubble, and I believe that this has made the bond market one of the most dangerous places to invest right now.

When the stock market crashed in 2000 it caused a recession in 2001.  Alan Greenspan’s response was to cut interest rates dramatically.  Then along came 9/11, making the stock market crash even worse, and his response was to take the Federal Funds Rate to lows for a duration last seen in the Great Depression.  Greenspan’s goal was to reflate the stock market… his achievement was to accidentally create the greatest real estate bubble in history.

Since the popping of the bubble in 2007 real estate values have come back down to fair value and then bounced back into a small bubble. Dr. Shiller, also the creator of the Case-Shiller Home Price Index, agrees.  This is typical price action of any super-bubble that’s in the process of popping… it’s called a “dead cat bounce.”  The public always chases yesterday’s news.  As prices reverted near fair value, investors rushed in to scoop up deals causing prices to rise once again.  But then, just as in the crash of `29 and the NASDAQ crash of 2000, the dead cat bounce will roll over and the crash will continue until the opposite extreme of severe undervaluation is reached.  This is natural and is what is required to clear out the excesses left over from the bubble days.  Too many jobs were created in that sector and too many homes were built.  Undervaluation is required to clear out the excess inventory and cause workers to move on.

But what worries Dr. Shiller is that institutional investment firms have bought up as much as 30% of the homes that were foreclosed on since the crash of 2008.  This has the potential of making real estate as volatile as the stock market.  If these firms ever decide to sell they can dump thousands of homes all at once, causing the 2008 real estate crash to look like the calm before the storm.

Personally… the thought of investing in real estate right now is down right scary.

So the stock market, bonds, and real estate are either in a bubble or have been in a bubble in the last decade.  Gold and silver, however, haven’t been in a bubble for more than 30-years, and from my measurements still appear to be less than half way through their bull market.

The next great bubble will someday be in gold and silver… It‘s just their turn.

5. Market Psychology.

I’ve often said that the markets and the economy are both psychological and cycle-logical.  Nobody can really understand the markets or the economy, but you can get an inkling of what they’re about if you understand what drives them… greed and fear.  And the most entertaining part of monetary history is the study of their byproducts; manias, panics, bubbles, and crashes.  When you study these you quickly learn the meaning of the old saying “The bull climbs the stairs, but the bear jumps out the window.”  What it means is that it can take years to create a bubble, but only days or weeks for it to burst. This is because, when it comes to greed and fear… fear is by far the more powerful emotion.

Gold and silver are sometimes the exceptions to this rule because they can rise as fast as lightning in a panic.  In the golden bull market of the 70s, it took nine years for gold to rise from $35 to $400, but once a panic out of dollars to the safe haven of gold began to develop, it took only 33 trading days to more than double, rocketing to $850.

But actually, it was only a very small percentage of the population that was panicking out of dollars in the 70s.  This time I think it will be everyone.   Where do you think gold and silver will be headed if my reasons ten through six come to pass?

4. This Time it Really is Different.

The first time I submitted my book, Guide to Investing in Gold and Silver, to the publisher it was rejected.  I had overwritten the book.  It was 800 pages long.  I was provided with two editors and over a six-month period 600 pages were cut, including nine entire chapters.  One of the deleted chapters contained what is probably the most important factor in trying to determine where gold and silver prices may be headed in the future.  It was the chapter on the differences between the precious metals bull market of the 1970s and the great gold and silver rush of today.  Since then I have traveled the world showing people just how dramatic the differences are, and that… “This time it really is different.”

In the 1970s the number of investors in state run economies like Mao’s China or the U.S.S.R. was zero, and most of the rest of the world lived in extreme poverty. The price of gold was set by two major exchanges, the London Bullion Market Association (LBMA) and the Commodities Exchange (COMEX) in the U.S. so only north America and western Europe, about 10% of the world’s population, could participate in the rush that drove gold up 24 times in price from $35 to $850. This time it’s everyone.

Every country on the planet has expanded their currency supplies about 10-fold since the `70s, so each potential investor has 10-times the currency. And within each population there has been the extraordinary development of the investor mindset.  In the 70s we were a planet of savers, but then, as nations around the world abandoned gold and silver as money and adopted fiat currency, inflation raged punishing savers and rewarding investors and speculators.  Then we had the tech bubble of the `90s and everyone became a stock investor or trader. Then we had the global real estate bubbles and everyone became a real estate investor or flipper.  For more than 30-years saving has been punished and investing and speculating has been rewarded.  The result is that there are many, many times more people that are likely to invest in gold and silver this time around.  The number is very hard to project, but I would guess it’s somewhere between 10 and 100… possibly even as much as 1,000 times more people with an investor mindset.  Remember that in the state run economies (more than half the world’s population) there were no investors, and today China is in the midst of an investor driven real estate hyper-bubble.

So that’s 10-times the people, each with 10-times the currency, and somewhere between 10 and 1,000-times the number of people with an investor mindset.   That is somewhere between 1,000 and 100,000 times more currency that will someday come chasing gold and silver this time around.

This time… it really is different.

3. They Should Buy a Whole Lot More Than They Do.

Many analysts in the precious metals community claim that gold is the ultimate wealth insurance because it maintains its purchasing power throughout the centuries.  There is an old myth they propagate that in ancient Rome an ounce of gold could clothe a man from head to toe with a toga, sandals, and a belt, and that today a man can still clothe himself in a suit, shoes, and a belt for the price of an ounce of gold.  They claim that this has always been the case.  Nothing could be further from the truth.  Before the Federal Reserve was created in 1913 you could buy a man’s suit, shoes, and belt for an ounce of gold, and gold’s price was $20.67 per ounce, but due to inflation, by the end of the roaring `20s you couldn’t.  At the beginning of the great depression gold was still $20.67, but because of deflation you could once again buy the outfit. Then in 1934, as the dollar was devalued, gold’s price rose to $35 and you could now buy an exquisite outfit, but by 1970, with gold still at $35 per ounce, it would only buy the shoes, but just ten years later, when it hit $850, it would buy a topnotch suit, very fine shoes, and a great belt.  Then by the year 2001, when gold bottomed at $252, it could only buy a shoddy suit, cheap shoes, and a crummy belt.

Yes gold is always worth something, but it has always varied in a range of purchasing power.  This myth that gold maintains the same purchasing power throughout the centuries is based on the true fact that we mine gold at about the same rate as the growth of the population so there is relatively the same amount of gold per person on the planet today as there was in ancient Rome. So let’s dissect the myth of the Roman suit and see why gold’s purchasing power has varied, and what it could be in the future.

The gains in efficiencies made since ancient Rome are mind boggling.  To make a toga required either cotton to be hand planted, hand tended, hand picked and hand separated from the seed, or it required sheepherders to tend small flocks of sheep and then shear them by hand.  Then the cotton or wool had to be hand washed, hand combed, and hand spun into thread, but the spinning wheel was yet to be invented, so a spindle and distaff (basically two sticks) were used instead.  This was a very laborious process so it could take someone weeks to make enough thread for a toga.  Then the thread was hand dyed with hand made colors that had been hand mined or harvested.  Then it had to be hand woven on a two person vertical loom (again, slow and laborious.)  Then the cloth was cut to a pattern and hand stitched into a toga.  The shoes and belt were equally labor intensive.

Today, with factory farming, cheap fuel, modern irrigation, and pesticides it’s possible to tend thousands of acres planted at densities never before imagined.  Giant combines drive through the field plowing the dirt and sowing the seeds in one pass.  At harvest time specialized combines pick the cotton and other machined separate the seed.  With factory ranching efficiency is the same story with thousands of sheep being tended and shorn in production line fashion. Then trucks deliver the cotton or wool to where it’s washed, combed, and spun into miles of thread in minutes, then dyed with cheap mass production dyes and woven into miles of cloth by machines… again in minutes.  Then the cloth is stacked many layers thick and a computer guided shear cuts out dozens of each of the parts of the suit in a single pass.  The parts go to an assembly plant where workers, who specialize in making the left sleeve, or right leg and such, do so at amazing speed.  Workers that can turn out dozens of suits per day do the final assembly, also at a blazing rate.  Then it’s shipped to a store where you can pick from dozens, or even hundreds of styles, colors, and sizes.  It’s a similar story at the shoe factory that spits out a pair of shoes every few seconds, and the belts that come off the production line by the thousands.

The end result is that the “time value” of the Roman outfit most likely measures in months of human labor, whereas the modern suit contains only a few hours of human time.  This is true of all the other stuff in society as well.  When it comes to the time value contained in stuff… everything today is on sale for a tiny, minuscule fraction of what it once cost.  And as proof to support my thesis I offer this… Today a good percentage of the world’s population has maybe a hundred times more stuff than 99% had 2,000 years ago.  Think about it.  You are surrounded with furniture, cell phones, computers, TVs, refrigerators, grocery stores, cars, planes, hotels, restaurants, a great bed to sleep in at night, and just about anything else that you want.  By contrast 2,000 years ago most people, with the exception of the ruling class, lived a subsistence living barely able to afford the things they needed to survive.  In many cases a great bed or pair of shoes were extravagances they would not experience in their lifetimes.

So if this is true… and it is… then why is gold’s purchasing power so low?  If there’s so much more stuff per person, but the same amount of gold per person… shouldn’t an ounce of gold buy many, many, many times more stuff than it does today?  Absolutely, emphatically, YES… it should.

Then why doesn’t it?

Because of the other big factor in busting this myth…

In ancient Rome, if you wanted to save some of your wealth for the future there was only one asset available for you to save your purchasing power in… real money… the gold and silver coins that made up their money supply.  Today if you want to save some of your wealth for the future you do so with financial assets such as stocks and/or bonds, and maybe a tiny portion of currency in a checking account.  These highly liquid assets actually compete with gold and silver as a place to store your wealth.  They all dilute each other’s purchasing power.

So that’s the answer… competing fiat currencies and other financial assets.  In ancient Rome there was only one place to store your wealth… today there are thousands.  The gains in purchasing power that gold should have made due to man becoming so much more efficient at making stuff, have been almost exactly offset by alternative liquid financial assets in which to store that wealth.

Highly liquid world financial assets (which exclude all real estate, any business not listed on an exchange, and derivatives) total about $230 trillion.  Total world currency, including bank deposits, stands at about $50 trillion.  So that’s a grand total of $280 trillion of liquid assets.  That’s $40,000 worth of wealth per person on the planet stored as transient digits in computers.

Today, investment grade gold (coins and bars) held by the public totals about 1.1 billion ounces and there are about 7.1 billion people on the planet.  That’s 0.15 ounces of gold per person.  At today’s prices it’s about $200 worth of gold per person.  If you include official reserves, such as central bank gold, you get about $400, and if you include all above ground gold, including things like jewelry and religious artifacts… in other words, all the gold ever mined in history, you get about $800 worth of gold per person.  That’s it… That’s all.

With technology, machinery, and super cheap energy we’ve become a thousand times more efficient at producing stuff, and at the same time we’ve created a thousand more ways to store our wealth.  If it weren’t for all those competing currencies and alternative financial assets gold would buy many, many times more stuff.  But even with all this competition, because of the gains in efficiency, an ounce of gold should buy 10 men’s suits today.  And if fiat currencies were to fail (like they always have) then it should buy a hundred or a thousand.

So what happens to those alternate financial assets in the inevitable market crash that lies out there in the future?  Those trusted financial assets suddenly become, hocus-pocus, voodoo, financial assets and their value evaporates, just like those AAA rated Mortgage Backed Securities did in the crash of 2008.  What happens to fiat currencies in the coming currency crisis?  All those currencies become hot potatoes that nobody wants, causing hard assets, like gold and silver, to be bid up to the moon.  Either way, gold will buy a whole lot more stuff someday in the near future.

So you have $40,000 worth of wealth per person stored in alternative liquid assets compared to just $200 per person stored in investment grade gold.  That’s a 200-1 ratio.  That means that in a crisis if just 10% of the wealth invested in those alternative assets were to come chasing gold, its price could rise 20-fold.

The moral of the story is… If you want to buy 20 suits, shoes, and belts a few years from now… buy an ounce of gold today.

2. Add Up Reasons 10-3… It’s All Happening At Once, and It’s Global.

Since 1971 all of the world’s currencies are fiat currencies simultaneously… and all fiat currencies in history have failed.

The world’s central banks are simultaneously creating fiat currency on a suicidal scale never before imagined.

Every 30-40 years the world has an entirely new monetary system, but for the first time we will be transitioning from a system based on something that always fails… fiat currencies.  So unlike previous transitions, this transition will be felt by everyone on the planet.

This time there is 10-times the people that can buy gold, each with 10-times the currency, and somewhere between 10 and 1,000-times the number of people with an investor mindset.   That is somewhere between 1,000 and 100,000 times more currency that will someday come chasing gold and silver this time around.

Periodically, throughout history, gold accounts for all of the currency that was created since the last time gold did the accounting.  This time it has to account for a mountain of currency the scale of which has never been seen before.

We are in completely uncharted territory.

Real estate, stocks, and bonds are all in bubbles.

The credit/debt and derivatives bubbles threaten the world economy.

It takes years to create a bubble, but only days or weeks for it to burst… and all bubbles eventually burst.

In market crashes and currency crisis, trusted investments can sometimes evaporate.

In currency crisis, a stock market crash, or in the final stages of a gold bull market, fear is what drives investors.

When it comes to greed and fear, fear is by far the more powerful emotion.

Gold and silver haven’t been in a bubble for more than 30-years, so the next great bubble will be in gold and silver… It‘s just their turn.

There’s more stuff per person than at any time in history but the same amount of gold.

Competing fiat currencies and alternate financial assets have diluted gold and silver’s purchasing power.

There is 200 times more wealth invested in liquid assets other than gold.

If 10% of that wealth came chasing gold, its price could rise 20-fold.

And that’s 10%.  In the crisis I see coming, fear should drive a lot more than just 10% of the world’s liquid wealth towards gold and silver.

Knowing this you would think I would take every spare unit of currency I can get my hands on and buy gold.  So why don’t I?  Because silver is undervalued compared to gold.  So I take every spare unit of currency I can get my hands on and buy lots of silver and a little gold.

1. I Sleep Better.

As I said at the beginning of this article, I believe that an economic crisis of historic proportions is headed straight at us, and there is no avoiding it.  Never before have all governments on the planet simultaneously laid down the foundation for the perfect economic storm.  I believe that there will be a global fiat currency crisis that will cause the bubbles in stocks, bonds, and real estate to burst simultaneously.  This will result in the greatest economic crash the world has ever seen.

Things could get pretty bad.  The possibilities range from my being completely wrong and things going pretty much like they are, to a total economic collapse and financial Armageddon from which we never recover.  Toward the bad end is the possibility of the failure of the monetary system, which would raise the likelihood of social unrest (rioting), and disruption of the food supply.

But in any range of possibilities there is something called a bell curve of probabilities.  What that means is that either of the extremes (also called the tail risks) are very unlikely to happen, but that something in the middle is very likely to happen.

Believe it or not, I am not a doomsayer, but nor do I believe the government when they tell me everything is going to be all right.

I think it’s going to be something in the middle.  Yes, I believe it’s going to be the greatest crash in history, but I have great hope.  Man is an amazing species.  We have a resilience and ability to adapt and bounce back from anything.

How have I prepared for the range of possibilities?  I have been accumulating precious metals since 2002.  To me this relieves a lot of anxiety.  And now I have purchased a small supply of emergency food. I found an assortment that will have me eating like a king in an emergency situation.  I have given one of these assortments to each of my family members, my best friends, and all of my employees.  This has relieved any remaining anxieties.

Yes, the stock and real estate markets will probably crash, and for those who are unprepared it will be devastating.  But if it’s going to happen anyway, and if there is nothing I can do about it, then I may as well try to figure out how to turn this catastrophe into the best thing that has ever happened to me.  When I talk about an economic crash, most people get a picture in their head’s of the devastated, bombed-out wastelands left over after a war.  It’s not going to be that way.  All the true wealth, the buildings, the real estate, and the factories will still be there… they’ll just be on sale.

It is when stocks and real estate are bottoming that I intend to sell my gold and silver and buy up as much true wealth as I can.

Yes, banks could fail, but new, more efficient ones will take their place.  Yes, the world monetary system could collapse, but this could be a good thing.  If we could make fraud, theft, and conflicts of interest illegal for the banking sector and monetary system, and if we just leave the free market alone and stop manipulating and meddling with it, it would quickly provide us with a new, efficient, stable, and honest monetary system that would increase the prosperity and standard of living for us all.

As I have said many times… there are these brief moments in history where the safest asset class, gold and silver, the safe haven to protect your wealth for the last 5,000 years, simultaneously become the asset class with the greatest potential gains in absolute purchasing power.  I believe we are in one of these episodes right now, and the performance of gold and silver over the last twelve years have proven me correct.

In periods of crisis gold and silver are the asset class that out performs all others.  This decade will see the greatest financial crisis in history.  That means it will also be the greatest wealth transfer in history.  And that means that it is the greatest opportunity in history.

How do I sleep at night?

Very well thank you.