WHY BUY GOLD IN 2017?

The main reason to buy gold and silver any time is as insurance against extreme negative events. I have always recommended having approximately 5-10% of one’s portfolio in physical gold outside the financial system. Gold is money in extremis. It has been passed down in my family from generation to generation to have 5-10% in gold and pray God it will never be needed. Diversification of financial assets when the financial system collapses is meaningless. Ask those who were “statistically” well diversified with a CDS basket in the 2008 financial crisis. With a looming systemic crisis you can even allocate higher than 10% of gold.

The main reason for buying gold in 2017 remains the risk of an international monetary system collapse. It hasn’t happened yet but events in 2015 make my case of a collapse not weaker, but stronger. When you hear people like the past chairman of the U.S. Fed (Ben Bernanke) saying, “the system is incoherent”, and the former governor of the Bank of Canada and present governor of the Bank of England (Mark Carney) who remarked, in a December 2011 speech that, “the global Minsky moment has arrived”, you have to be prudent at least. Those are not your typical fear mongering people but those in charge of the financial system. Several U.S. Fed governors have also admitted that we are in “unchartered territory”, that central bank policies are “experimental” and that they learn as they go along. Journalists even found that one U.S. Fed governor was holding gold for himself in his investment portfolio.

In 2015 we have seen currency wars accelerating, not diminishing, and now we see signs of trade wars appearing. At the end of 2015 the U.S. has announced it will impose a 256 percent tariff on Chinese steel imports. I became bullish on gold in 2004 based on research on global debt and, more specifically, U.S. debt. The 2008 financial crisis has confirmed my hypothesis of a major secular reset of the international monetary system. The balance sheet expansion of global central banks is clearly seen in the chart below and its close correlation, even if not perfect, with the price of gold.

In the chart below we can see the close correlation of gold also with U.S. debt. The U.S. Congress approved at the end of the year legislation to increase the debt limit even more, again to allow more debt.

The recent divergence between U.S. debt and global central banks balance sheet vs gold is, in my view, mostly due to the manipulation of the gold price by central banks starting in the ‘60s with the London Gold Pool and that continued since then. Observe in the two charts below the close correlation between the sales of gold by the Bank for International Settlements (BIS) and the price of gold. As you can see, the gold bear market coincides with the sale of gold reserves by the International Monetary Fund (IMF), which was done through BIS in Basel, Switzerland, right after the 2008 financial crisis. At the same time, the IMF has increased its SDR holdings ten-fold.

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