Why Gold?
History teaches us why much higher gold prices are inevitable — and why every investor needs to have a significant position in the metal while they still can.
By Brien Lundin
I’m constantly fielding questions from investors and media asking why I’ve been recommending gold so emphatically over the last few years.
I tell them there are three simple and compelling reasons: Debt…debt…and debt.
Let me put this into context. Just a couple of years or so ago, when Federal Debt was just poking over $20 trillion, I calculated the historic, effective interest rate on the federal debt over decades.
Now, this is a number that you’ll never get anyone to provide, and I’d searched vainly for it over the years. It’s always regarded as a moving target, as there are so many different durations and yields on Treasurys. Finally, I’d had enough, and simply took the Treasury’s quarterly interest cost data and divided it by the quarterly federal debt totals and, voila!, I had the effective interest rate on the debt.
And the data yielded quite a surprise: The effective interest rate is usually about 3% to 4% above the fed funds rate.
The implications from this were astounding…and frightening. Simply put, the costs of servicing the federal debt would grow to unmanageable levels if either interest rates or the federal debt rose significantly.
And what we’ve seen since is that the federal debt has indeed risen since I first made these calculations. In fact, it’s soared to over $31 trillion so far, and is progressing at a dizzying rate of climb.
At this rate of debt creation, the costs of servicing the debt will eventually crush the federal budget, regardless of where interest rates head.
And here’s the important part: At current interest rates, annual debt service costs will soon exceed $1 trillion per year.
That’s more than the U.S. government pays for any other line item, including national defense or any entitlement program.
In the modern political environment, paying that much in interest, every year — to “fat cat” investors and even the Chinese government — would lead to calls to simply stop paying. In other words, a default.
And just the serious mention of that in a political context would send the dollar crashing…and gold soaring.
Regardless, the size of the debt essentially creates a permanent cap on interest rates. And that cap is very low — requiring that interest rates must remain well below the rate of inflation. Thus, inflation-adjusted rates, or so-called real rates, must remain negative going forward.
To understand why, we need to look backward, as nothing we’re seeing today is new.
What’s Old Is New Again
Throughout human history, governments have always overspent their means, creating unmanageable debts.
Whether it be military campaigns, lavish lifestyles for rulers or bread and circuses for the masses, excessive debts have been a natural outgrowth of human nature and a consistent characteristic of governments from time immemorial.
From ancient Greece and Rome to today, the solution to these debts has always been the same: to depreciate the currency.
As the West’s governments and central banks have used cheap money and truckloads of debt to prop up an ailing global economy, their fiat currencies have weakened when measured against gold.
As you can see from the chart above, the Roman denarius was devalued consistently as the empire ran up its debts. In fact, the drop in the value of the currency closely traced the decline and ultimate collapse of the Roman empire.
Ancient gold and silver coins had their edges clipped and/or their alloys debased to create cheaper currency with which to pay off those debts. Later, in fiat money systems, currencies were simply printed up to ever-greater levels and the parties went on.
It will be the same today. Debt loads are so large around the world that dollars, and every other fiat currency, must be significantly depreciated, to lessen the real values and costs of those debts.
This is why real rates must remain negative, with the rate of interest being less than the rate of inflation.
In short, the dollar must depreciate more quickly (inflation) than debt service costs can rise.
The end result is that we’ll have negative real rates going forward, essentially as long as the current monetary regime is in place.
And that is an extremely bullish environment for gold and silver, as well as virtually all commodities.
This is the primary reason why we can rest assured that the prices of gold and silver, and mining stocks, will be much higher over the long term.
But there are other reasons, including the fundamental and irresistible trend of ever-easier monetary policy.
Easier And Easier Monetary Policy
In the U.S., as a prominent example, the trend toward overspending began with the “guns and butter” policies of the 1960s. These spending programs led to significant deficit spending, which in turn led to the creation of ever-increasing amounts of dollars as the Federal Reserve monetized the debt.
Eventually, this prompted governments around the world, most notably France, to take advantage of the dollar’s only remaining link to gold: The gold “window” that allowed foreign central banks to exchange dollars for gold from the U.S. gold reserve.
The outflow of gold from Treasury vaults grew so great that President Nixon was forced to “temporarily” close the gold window on August 15, 1971.
Of course, like all confiscatory government programs, that temporary closing proved to be permanent. But the most important repercussion was that it freed the Federal Reserve to pursue easy-money policies without restraint.
To paraphrase our late friend P.J. O’Rourke, giving central bankers this power was akin to “giving whiskey and car keys to teenage boys.” The rampaging inflation of the 1970s proves this metaphor, as the Fed’s governors quickly veered the U.S. economy into a figurative ditch.
Thanks to the extraordinary conviction and political imperviousness of Fed Chairman Paul Voelker, the central bank was able to get inflation under control and the economy back on track. But subsequent Fed chairs were unable to resist the temptation to move back toward easier-money policies whenever the economy began to slow.
The result, as you can see in the accompanying chart, is an ever-descending staircase of interest-rate ranges.
The red lines mark the bottoms of each of the Fed’s rate-cutting cycles. Note that not only is each bottom successively lower than the previous, but the central bank was never able to “normalize” rates to anywhere near the previous levels.
The central bankers themselves became addicted to manipulating interest rates — the cost of money, and therefore the cost of everything — ever lower in response to any hiccup in the economy.
Even worse, in the process they also addicted the financial markets to the drug of easy money.
The upshot is that the current financial markets are towering to record levels of valuations, but with that growth fueled almost exclusively by the adrenaline of easy money.
At this point, they demand not just easy money, but ever-easier money.
The problem, of course, is that the descending stairs of interest rates hit the ground floor after the 2008 Great Financial Crisis. And then it returned to zero as a result of the Covid-19 crisis.
While the Fed has attempted to “normalize” rates, it is only a matter of time until they are forced to bring them back toward zero once again.
Own Gold — For Insurance And Profit
The bottom line is that every investor who has accumulated any degree of wealth needs to insure that wealth by owning gold and silver.
The very essence of gold is its ability to insulate you from the depreciation of your currency. It represents freedom — your independence from the inevitable destruction of your wealth by government policies.
Consider gold as insurance, but not against something that might happen, but from something you know will happen. You purchase home insurance, but you don’t expect your house to catch on fire.
But gold protects you from something that is inevitable: the depreciation of your currency.
Moreover, gold is the only insurance in which you can pay the premium only once.
The lesson of history — and recent trends — argue that you should pay that golden insurance premium soon, if you haven’t already.
Beyond its role as insurance, there are ways you can leverage the inevitable increase in gold prices to build your wealth.
Our Investor’s Guide to Gold and Silver is a comprehensive report that covers the entire spectrum of precious metals investments, from physical bullion to rare coins to futures and options and mining stocks. And the range of options and valuable strategies are discussed within each sector.
Our flagship subscription publication, Gold Newsletter, was instrumental in the fight to legalize gold ownership in the U.S. over 50 years ago, and has since evolved into one of today’s preeminent advisories on the junior mining sector.
These equities are high-risk/high-potential, but the risk is dramatically lowered during a secular gold and silver bull market based on monetary fundamentals. In short, precisely the kind of investing environment we have today…and likely for years to come.
Not only is the risk lowered in such a bullish environment, but the potential rewards are also raised. One pick, for example, recently soared over 55 times in value since it was recommended in a Gold Newsletter Alert in December of 2017. Many other picks have risen hundreds of percent in value.
But to maximize your returns and lower your risk in mining equities, you need to do your homework.
You see, the key to investing in mining stocks is to realize that it’s an inefficient market, especially so at the junior end of the spectrum. Thus, by dedicating time and money to researching the sector, you can gain a distinct advantage over those who aren’t as diligent.
That means subscribing to two, three or more of the best newsletters, and attending the best conferences that focus on the arena. Of course, we believe that Gold Newsletter and our New Orleans Investment Conference are among the best at what they do, but there are many other outstanding newsletters and events in the industry.
All of them are detailed in our Investor’s Guide, and I can’t recommend more strongly that you give it a read if you’re investing in metals and mining.
If you aren’t willing to put in such effort, you can still enjoy the protection of gold and silver, as well as some of the upside. Just buy the most recognizable bullion coins from trusted dealers and invest in the major mining-stock indices, GDX and GDXJ.
You likely won’t enjoy the same upside potential or security, but it’s better than not getting positioned at all.
Whatever you do, don’t delay. The trends I’ve discussed here are only accelerating.