The Phony Wealth Effect and Gold

The comments below are an edited and abridged synopsis of an article by Rudi Fronk and Jim Anthony

Gold is real wealth; it is its own final settlement and no one else’s liability. In these days of radical central bank policies, gold has no central bank to control its issuance or its value. Its value is determined by those who wish to exchange it for other valuable things. It is rare and difficult to extract.

The Phony Wealth Effect and Gold | BullionBuzz
Vintage golden armchair

The question is: Are financial assets—stocks and bonds—real wealth? They are if a dollar’s worth of securities can be exchanged for a dollar’s worth of goods and services. Unlike gold, financial assets are claims on something else. Securities must ultimately be backed by an equivalent value of goods and services in the real economy.

The US economy has credit market debt of $70 trillion as claims against a $22-trillion economy as measured by real GDP. The $70 trillion is someone’s liability, but it is also someone’s asset, including pension funds and other savings vehicles meant to defer spending into the future, where it is depended upon to fund consumption.

To debt claims, add about $34 trillion in equity claims, the estimated current value of the US stock market. This does not include private company ownership, privately generated debt, or real estate and cash balances, which are also stores of value and potential claims against the real economy. The global picture is no better.

Meanwhile, the current dollar value of the world’s above-ground gold supply is about $8 trillion, more than half of which is probably not immediately tradable, since it is in the form of jewelry and artifacts.

Claims against the real economy have grown exponentially faster than the economy that must meet those claims. Either real GDP must rise at a frenzied pace, or the value of financial assets must fall. There is a huge phony wealth problem that is unsustainable, and it cannot be fixed by monetary policy that depends on printing more claims.

What is the resolution of this mismatch of real vs. financial assets? Investors will begin to flee to reliable value that protects their wealth and purchasing power. That inevitably means fleeing to gold.

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