The Gold Market Discussion with Jim Clark: A Look at the Bond Bubble

The Gold Market Discussion with Jim Clark: A Look at the Bond Bubble

by Jim Clark

2/27/2015

Gold rose 1% percent this week closing at $1,213.00 an ounce, with silver closing at $16.65 an ounce. As I mentioned last week, Central Banks are some of the largest buyers of gold today. They have been adding to their gold reserves for five years, which is a reversal from being net sellers since the late 1980’s. The Central Banks are set to be net buyers again in 2015. Governments have purchased 477.2 tons of gold in 2014, and it is estimated by the World Gold Council that they will purchase 400 tons this year. And why are they doing this? ……What do they know that we don’t? Smart investors will follow the lead of Central Banks and accumulate gold. Let’s look at some of the issues that make purchasing gold at these prices a valuable buy for you.

Alan Greenspan, the former chairman of the Federal Reserve, had a much different take on the economy from the present chairwoman, Janet Yellen. In an interview on CNBC, Alan Greenspan said that, “US economic growth is not strong,” and, “The stock market is up but the economy is not.” He points out that entitlements are “crowding out capital investment and savings which is key to productivity.” And he made an amazing statement coming from a central banker that, “Effective demand is extraordinarily weak-tantamount o the late stages of the great depression.” He explained that the Fed was, in fact, the main driver of the P/E multiple expansion in stocks. When asked if this ends badly again, he concluded, “…When real interest rates start to move up, that’s when the crisis could hit.” The chart below comparing the S&P to the US Macro shows the Mr. Greenspan is right.

 

The 2008 Financial Crisis was not THE Crisis. The real crisis will hit when the bond bubble collapses. What does this mean? Let’s talk about some rather technical but important numbers that will affect your future economic picture. The current global monetary system is based on debt. For many years, Western countries have been completely bankrupt due to excessive spending, and all of this spending has been fueled by bonds. Government s issue bonds to a select group of large banks and financial institutions (e.g. Primary Dealers in the US). These financial institutions list the bonds on their balance sheets as “assets”. In fact, these bonds are the senior-most asset they own. That is why Central Banks do everything they can to stop defaults from occurring in the sovereign bonds space including: cutting interest rates to make these gargantuan debts more serviceable and targeting inflation because it also makes the debts more serviceable and puts off inevitable debt restructuring. The banks then issue their own debt-based money via inter-bank loans, mortgages, credit cards, auto loans, and the like into the system. Thus, “money” enters the economy through loans or debt. In this sense, money is not actually capital but legal debt contracts. Ever since the early 80’s, an entire generation of investors and money managers have been investing in an era in which risk has generally gotten cheaper and cheaper. In turn, this has driven the rise in leverage (which means borrowed money) in the financial system. As the risk-free rate fell, so did all other rates of return. Thus investors have turned to more and more leverage, in other words using borrowed money, to try to gain greater rates of return. Today the US bond market is well over $38 trillion. If you include derivatives based on these bonds, it is more than $191 trillion in the US alone.  Globally, the bond bubble is now more than $100 trillion in bonds. And this $100 trillion has been used as collateral for a derivative market that is more than $555 trillion. Now, to put this in a little more perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion). (http://www.zerogedge.com/news/2015-02-23-real-issue-isnt-stocks%E2%80%A6-its-bonds). Those numbers are staggering to even contemplate! But the long story is when the bond bubble bursts, it will make 2008 look like the good old days. Those who bought gold in 2007 were protected during the 2008 crisis. When the results of so many years of unsound government and monetary policies eventually lead to a day of reckoning, as it always does, gold will help protect your wealth.

Let’s look at some other economic news that has investors concerned.

  • Even though the unemployment figures are down, Gallup reports a staggeringly low rate of 44% of full-time jobs as a percent of the adult population, 18 years and older. We need that to be 50% to replenish American’s middle class. The government figures don’t reflect the 30 million Americans either out of work still or severely underemployed. And it doesn’t consider those working part time but wanting full-time work.
  • Continued unrest in the Middle East and elsewhere in the world.
  • Global growth expectations are expected to decline in 2015.

 

The Fed has printed so much money that inflation is inevitable. Though it is difficult to predict when, we are at risk of having very high rates of inflation.The markets crashed in 2000 and 2008. Gold will protect your wealth when they crash again and during inflation. Safeguard a portion of your hard earned wealth by moving it outside the banking and financial institutions. It is insurance that makes sense.

“I’ll be keeping a sharp eye on the market and I encourage you to do the same!”
jim-sign