Gold Investment – The Cornerstone of a Well-Constructed Portfolio

by John Embry

The US has provided the world’s reserve currency since Bretton Woods. Implicit gold backing was lost 1971, thanks to the pressure of the 1960s. Cash flew out of US coffers, and an ever-greater amount of gold-backed cash ended up in foreign hands. At the time, only central banks could redeem US currency for gold. By 1970, US gold reserves were depleting at an alarming rate, causing President Nixon to close off the vaults and unpeg the dollar.

Gold Investment – The Cornerstone of a Well-Constructed Portfolio

Then came Fed Chairmen Paul Volcker and later Alan Greenspan, who took enormous liberties with monetary policy, effectively addicting the financial markets to stimulus. Inflation remained muted, thanks in part to China flooding the world with cheap goods, and therefore financial returns were spectacular. It also corresponded with dramatic market dislocations.

The bond market bottomed in 1981; the stock market bottomed in 1982, then crashed in 1987. The dot-com bubble popped in 2001, followed by real estate and the global economy in 2007 and 2008. The central bank was there along the way, with fresh paper money to shore up markets at any sign of trouble. And what has been the result?

In 1981 federal debt was $960 billion, accumulated over the better part of 200 years. In 2007 and 2008, federal public debt was $10 trillion, a 10-fold increase in 26 years. This led to greater stimulus via QE.

Eight years later, the US is saddled with federally funded debt that has doubled again to $19 trillion. This isn’t the whole picture: Off-balance sheet debt liabilities, including Freddie Mac and Fannie Mae; unfunded liabilities for Medicare, Medicaid, and social security; plus other liabilities, equals a range of about $85 trillion to $175 trillion. Factor in that US GDP is a mere $18 trillion, and its obligations are between 4x and 8x its productive capacity. How long can this continue?


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