In its latest update on gold holdings at the world’s central banks, the World Gold Council writes a sentence that says everything about the state of the world today: “This was the 17th consecutive quarter that central banks have been net purchasers of gold as they continue to seek diversification away from the U.S. dollar.”
The emphasis there is mine.
Those who make some of the most significant financial decisions in the world — central bankers for other sovereign nations — are moving away from the U.S. dollar. For anyone who is a dollar bull, that’s a message in marquee lights that just maybe your opinion is dead wrong.
For those, like me, who see the end of days rushing toward our greenback, it’s a message in marquee lights imploring you to trade some dollars for gold while you still can.
Central banks around the world — excluding, of course, ours — snapped up 119 tons of gold (3.8 million ounces) in the first quarter. Over the last 17 quarters, dating to the first quarter of 2011, central banks have added more than 2,300 tons of gold to their vaults.
For those who pan gold as an unworthy investment, the trend must be a head-scratcher.
Are central bankers outside America just stupid? Are they living in an archaic past, a time when precious metals were synonymous with real money?
Or do they see something we’re not told in America?
Do they see, where we refuse to, that America’s debts are unsustainable? That we face the very real threat of a currency crisis that rips across the globe in a storm that makes the global financial crisis — that the U.S. instigated — seem like a summer rain shower?
Do they see that interest rates in America cannot rise very far at all, even after the Fed starts to raise rates, because our $18 trillion in federal debt cannot support sharply higher interest payments?
Sinking Under Mounting Debt Payments
America is effectively a ginormous adjustable-rate mortgage — taken out by a dysfunctional family using the paychecks they hope to earn tomorrow to live large today. We roll over our debt constantly, repaying some here and reissuing more debt there. On average, the maturity of U.S. debt is in the five-year range.
With interest rates as low as they’ve been in recent years — near 0% — the country’s total annual interest payments have bounced around a range of between $413 and $454 billion a year. Average rates have been about 2%.
Now, start adding higher interest rates and see what happens…
An additional one percentage point in interest expense means about $180 billion in annual interest payments — a roughly 40% increase for Congress to manage. Two percentage points, which would get us up near normalized levels (which is where Wall Street economists naively think we’re headed), and our current interest payments as a country would nearly double.
Rise of the Anti-Dollar
We’re already running a budget deficit of more than half a billion dollars a year.
If higher interest rates start adding hundreds of billions in additional costs that Congress must cover in the country’s annual budget, then suddenly America is issuing more and more debt to keep up with just the interest payments — or lawmakers must take a meat cleaver to the budget and cut programs. But Congress has never had a stomach for that.
We rapidly approach a point where we hit the abyssal plain and stumble into a deep, dark debt spiral.
The Federal Reserve, to the best of its ability, is going to defend against that moment … which means it will keep interest rates excessively low for an excessively long period of time, foolishly hopeful (but hope is all we have at this point) that Congress will act before the laws of economics impose a solution on America.
And that means gold’s true day in the sun lies ahead of us.
Gold is the anti-dollar. Just like all currencies, it gains in value as the greenback declines. And the greenback has all kinds of decline baked into its particular cake at this point.
That is what the world’s central bankers know. That is what their consistent purchases of gold really mean — they’re preparing for a dollar decline, at best … or something far worse.
By the way, there’s one more fact from the May report you should know about. Investors grabbed 26 tons of gold through exchange-traded funds (ETF) in the first quarter, the first time ETFs have seen inflows since the fourth quarter of 2012.
That, too, is a message in marquee lights. It says sentiment on gold has turned bullish as the dollar has begun to decline.
At the end of the day it comes down to this: The dollar is a structurally flawed currency that will sink a good 30% or more from current levels … and as it does, you’re going to see gold prices higher than they are today.
As I routinely counsel: Buy gold. And buy it often. You’ll be happy you did when what’s headed for our dollar finally arrives.
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker