The Limitations of Cash
In times of monetary stability and soundness cash saved in safe places never fails. Most of us consider cash in the bank was the safest conservative investment you could have. In the days of our grandfathers or before this was largely true.
But then that horrible word, “inflation” came into being, where prices kept on rising and cash saved could buy less and less. Ah, but interest rates compensated for this inflation, you may well answer. Then interest rates stopped rising and when they did rose less than the pace at which inflation rose. That cash lost buying as time went by. Bank charges then ate away at any gain that might have been made. At first, this inflation happened in one country at a time and the exchange rate on those currencies fell hurting international buying power still more. Today inflation is a global phenomenon.
Then investors have to move out of cash and into businesses or other investments that made more than inflation cost them. This was not so easy unless inflation happened while growth is vibrant. And this benefitted those middle classes that enjoyed such growth. The poor whose income rises slower than inflation feel the pinch.
Suddenly, booms turn into busts and businesses don’t do well leaving the value of businesses and its shares falling, losing investors money harshly. Even self-managed businesses fall in value turning rich people to bankruptcy. This is deflation, a monetary mood that causes values to shrink. But in deflation the value of cash grows as prices fall.
Those who believe they are skilled investors answer, sell, then buy back cheaply. We look at that timeless story of an investor who did that just before the Wall Street Crash. His friend did not do so well selling only when the fall was half way down. But our hero who sold at the top, overwhelmed by his own skill bought back in, when the fall was half way down. His friend did not buy back in, but stayed in cash. It’s not so easy!
Then you get a situation when the bust happened and markets, all of them, plummet as forced selling drives investors out of the market. Interest rates fall to negative levels. If cycles are consistent, as many have thought, there should have followed a boom period. But growth was so anemic that stagnation set in. Businesses and the economy struggle to find small amounts of growth and some cut back, just turning over at survival level. Suddenly, again, something that shouldn’t happen in a downturn happened. It was inflation, driven by factors no government can control. It came from energy and food and became uncontrollable. This type of inflation is deflationary. So businesses just covering expenses suddenly found their costs ate away at profits much the same as deflation would have done and inflation does. This is ‘stagflation’ a climate where stress levels steadily eat away at sanity.
Surely bills and bonds are a way out of the hole, as they pay an interest rate, while being almost like cash? The trouble with this thinking is that interest rates have fallen so low that the bill and bond markets are so high as to be heading for a fall, far worse than any Wall Street Crash had been.
Next interest rates rise, which common sense tells us they have to, to stop negative interest rates from rising higher, then the prices of fixed interest securities have to fall, while their yield rises. The moment that happens, the exit from those markets will see more than a few investors trampled in the rush.
Surely there is no escape from these three economic ailments? Well, there is. Our friends in Asia have suffered poverty and hard times together with government corruption and mismanagement, for long enough to have found a haven that they turn to in good times and bad times remembering that bad time memories sink deeper into the psyche than good time memories do. They want to see their financial security investments lasting for more than one generation. Correctly invested, their savings provide financial security for many generations, not just their own.
You would have thought that Europe in particular would have learned the same lessons with their background of currency collapses and wars, completely changing their worlds, in the last century. What are these investments - precious metals!
Why Precious Metals?
Gold, in particular [but to a lesser extent silver] is more than a barbarous relic from yesteryear. Its rising price is telling us that it is a very modern investment preference because
It is both Cash and an Asset
It outperforms cash in the long term, because of the combination of these following qualities.
- It has all the features that makes cash valuable, even capable of earning an income [when lent out].
- It is an enhanced version of cash, in that it is not subject to the vagaries of interest rates solely dictated by central banks and banks.
- It carries no national obligations. It does not rely on nations to supply collateral to honor payment. If you ask the Fed to honor the value of your dollar, they will simply exchange it for another.
- It is not dependant on the creditworthiness of the nation issuing money.
- It has the same value in Mongolia as it has in the U.S. or Europe.
- It is collateral in any transaction and of greater value than the price it can be exchanged at.
- It cannot be issued at will, with the intention of being withdrawn from the system later.
- It does not decline when an individual currency declines [and does not rise when that currency rises in value]. It is a ‘counter to currencies’.
- This century it has moved away from the control of the U.S. and Europe to global control. In the years to come rising demand from Asia will dwarf demand from the developed world making it a fully internationally valued asset again.
- In a deflating global economy, just as cash is a national protection, internationally gold is better than cash even when local currencies are not.
- In an inflating global economy, gold acts as an asset, when currencies are cheapening. There are no other currencies [cash] that are deemed as assets, like gold.
- In a stagflationary economic environment, gold acts both as cash and an asset.
How will Gold and Silver behave in the dark days ahead?
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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.
