Got Gold?

"Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating." … Alan Greenspan, ex-US Federal Reserve Chairman, August 23, 2011

Just had an interesting conversation with a long-time good friend of mine who has spent most of his career in wealth management for big banks and knows a lot about financial theory. He commented that the only solution that makes sense for wealthy people is to put their money into very short duration Government bonds and don't worry about rate of return because anything else that might pay a higher yield is just too risky right now.

WRONG! The best answer for someone who is wealthy and looking for a place to invest is that they should be putting at least 1/2 of their wealth (really more) into physical gold and silver.  Ultimately any paper "investment" is only as good as the guarantor behind that investment. Does anyone really ultimately trust the U.S. Government? Seriously. At some point the Government will have issued so much debt that in order to pay it back, it will have to restructure. This can come in many forms. But here's one very plausible scenario: let's say that you are invested in 3 month T-bills and it is obvious to everyone that the Government can't pay these off unless they print money. Well, they don't have to print money. They can hold the equivalent of a gun to your head and offer this deal: they exchange your 3 month paper for a new piece of paper that matures in 10 years and pays a coupon that increases each year, but starts at zero. You'll have no choice but to take this deal because otherwise the Government will default, rip up the bond indentures and start over. You get nothing. The problem is that the new bond will trade at something like 30-50 cents on the dollar, because the market will price in heavy default risk and the fact that it will pay little or nothing to start. Now how does it feel to have all your money in short term Government paper?

Think this can't happen? 10 years ago did you think ANYTHING that's happening now couldn't happen? Look at Greece. Spain, Italy and Portugal are next. It just so happens that as I was composing this commentary, zerohedge.com posted a report that contained a Treasury pitchbook for issuing floating rate debt:  LINK  Clearly the Treasury is looking for gimmicks to induce demand. And, quite frankly, the outsized demand for short term Treasury debt issuance is largely coming from European banks who buy the short term paper and then turnaround and use it as collateral to obtain 3-yr financing from the ECB.

At the end of the day, ANY paper claim is only as good as the entity that issues it and promises to repay it. There are plenty of other ways for the Government to devalue the claims against it. The most likely next step in this country will be something like the 3-yr LTRO program going on in Europe right now. This is essentially a program that lets Governments print up more bonds, sell them to banks and then the banks turn around and put them up as "collateral" for 3 yr "repo" financing at the ECB. Technically its not "QE" but in reality it is and it's a de facto non-transparent mechanism for the Fed to finance the enormous bond issuance requirements of the Obama Government.

How is this different from just an extension of the perpetual Ponzi financing going on at all levels of the economy? In fact, it's really just money printing in disguise because the Governments over there simply print up bond certificates, sell them to the banks who then monetize them at the ECB. The only reason its not considered an expansion of the money supply is because it's "debt." For now. But defaulted debt becomes "equity" which has to be monetized. At the end, it's still money creation - and the creation of it is going parabolic. 

(M2 - Money Supply) 

(U.S. Treasury Debt Outstanding, as reported.  Does not include $7 Trillion In Agency Debt)

Tautologically, the devaluation of the U.S. dollar is in the formation of an inverse parabola.  If you own dollars, that's what's happening to your wealth - the value of it is in inverse parabola formation.  Still like short term Treasuries?  At the end of the day, debt issued by any Government that is either "restructured," defaulted on or devalued via inflation/QE is nothing more than fraudulent money.  Gold is the only true, honest form of money.  So says "The Maestro" himself (see opening quote).