Why Gold Makes The Most Sense During Debt Crisis

Guest Blog || Keith Weiner ||

The price of gold is rising, but that’s not the most important thing. People who just want to speculate on gold’s price are missing the boat. Let me explain. The baseline budget deficit—this is how fast the US government is sinking deeper into debt—is around $1.7 trillion. Add to that the $2.3 trillion spent under the CARES Act, and the 500 billion under the follow-on bill. This brings us to a total of $4.5 trillion so far (more stimulus and bailouts are coming).

But it gets worse. Tax revenues will be significantly lower, as over 30 million people just lost their jobs, and most businesses are making less money (or no money). Assume a $1 trillion drop in revenues. That means the government will add $5.5 trillion to its debt this year.

The debt was already unpayable, trillions of dollars ago. Crisis was already inevitable. But in 2021, it will hit $33 trillion. Then the debt burden on every man, woman, and child will be $100,000.

Alas, children and many other people do not produce anything. Only working people support the debt. After 30 million people were laid off, 128 million people were still employed. But 28 million of them work for government. You end up with 100 million in the productive sector.

Thus, the debt burden will be, not $100,000 but $330,000 for each and every worker. Does anyone still think that most workers can support this on top of all their other debts (including their share of state and city debts)?

One kind of default or another is unavoidable. And when debt is defaulted, creditors lose their money. Smart savers seek a way to opt out.

The challenge is that, to own a dollar is to be a creditor. The dollar bill—bill is a word for credit—says on its face “Federal Reserve Note”. Note is another word for credit. To own that piece of paper is to be a creditor to the Fed. The Fed uses that credit to finance its purchase of Treasury bonds.

So, even if you do not own Treasuries, and only have cash, you are still exposed to the risk of default by the US government. The dollar is only as good as the Treasury bond.

Gold is the way to opt out. It’s the one financial asset which is no one’s liability. A piece of gold does not depend on a debtor who must keep making payments. Gold exists regardless of who defaults.

With each crisis, more people exchange some of their dollars for gold. The financial crisis of 2008 was then unprecedented. And so was the demand for gold. The virus crisis of 2020 is still in the early days of unfolding, but already it has given more people a kick in the behind. Crises make the debt problem more obvious.

Now let’s look at the return of being a creditor. In autumn 2018, the 10-year Treasury was paying 3.2%. That was a pretty attractive rate, to most people. As recently as this winter, the rate was still 1.8%. But unfortunately by March, the yield on this same bond had collapsed. It hit 0.5%. At 0.5%, the reason to hold government bonds has all but vanished.

The rising debt burden means there is more and more risk in owning the dollar. The falling interest rate means there is less and less opportunity cost to own gold.

Gold is the logical haven from the dollar.

Earlier, I said betting on the price of gold misses the boat. However, most people end up turning to the price action, even if they started with risk avoidance. The reason is that a gold coin is just a piece of metal. It doesn’t do anything, and it doesn’t earn anything. If its price isn’t rising, then many gold owners feel frustrated and question why they bought it in the first place. If they paid $1,600 to buy that coin, then they feel good when they see that they can sell it for $1,700.

Just keep one thing in mind. Selling your gold brings you right back to the problems of being a creditor to Uncle Sam.

I founded Monetary Metals to change the game. We have a simple vision: to pay interest on gold, in gold. Our investors are earning between 2% and 4.5% on their gold. The return comes from leasing gold to companies such as jewelers, who use it productively as inventory and work-in-progress.

This is how savings used to be. How it should be. You work hard to save money, and then your money works for you.
Keith Weiner is a leading authority in the areas of gold, money, and credit and the founder of Monetary Metals, an affiliate of Jordan Goodman. www.monetary-metals.com

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