The world that retirees and pensioners face today is quite different from the world in which they attended school, raised a family, and prepared for their golden years. Somehow, the rules have changed. The world is no longer predictable. One’s financial security, no matter how well planned, is no longer certain.
At 67, I have many retired friends. I sympathize with those who have worked diligently to save for their retirement yet find themselves desperately underfunded and, in many cases, returning to the work force out of necessity. I find it deplorable that many, through no fault of their own, have to spend their last years fretting constantly about financial security. The recent expropriation of personal savings accounts in Cyprus serves as a warning that even cash in the bank is no longer safe in the event of an economic crisis or bank failure. Even Canadian depositors are insured only up to $100,000.
Canada’s chartered banking system, one of the most secure in the world, is based on the highly respected Scottish model. Yet, as Canadians discovered recently even Canada is highly indebted to many of the privately owned foreign banks that are causing many of the hardships in Europe. Retirees and pensioners must understand these changes and must protect themselves and their family’s wealth in ways that they may have never considered before.
Three key concepts are important to grasp in order to prepare for the years ahead. They are:
the nature of the modern fiat currency system
current government policies that are being implemented to counter the negative effects of this fiat model
the need for uncompromised bullion ownership
Concept One: The 42 Year Global Fiat Experiment Is Coming To An End
Forty-two years ago, on August 15, 1971, U.S. President Richard Nixon removed the final international peg of the U.S. dollar, the world’s de facto reserve currency, to gold. This simple act gave central bankers license to create unrestricted amounts of unbacked fiat currency – money that derives its value from government regulation or law. Every asset bubble since 1971 has been met with an avalanche of freshly created currency backed by nothing other than the government’s promise to pay. This process accelerated after the first debt crisis of 2007-2008. Between 2007 and 2012, Bank of England reserves increased by 362 per cent, and the U.S. Fed’s increased by 223 per cent.
The problems became larger and more unmanageable with each newly-printed dollar. Most important to retirees and pensioners is that those dollars lose purchasing power through this process of currency debasement, a term derived from the Roman practice of hollowing out gold coins and filling them with base metals.
Figure 1 shows that the U.S. dollar, so ubiquitous that all other global currencies are essentially its derivatives, began losing purchasing power rapidly in 1933 when President Franklin Delano Roosevelt removed its domestic peg to gold through Executive Order 6102 signed on April 5, 1933.
Both the U.S. dollar and the Canadian dollar have lost over 95 per cent of their purchasing power since that time.
The debt-based, or fiat, model depends on constant growth. It is like a spinning top that has no choice but to spin or fall over. In the years after World War II, growth was natural as the developed countries of the west led the world in manufacturing and natural resource production. This too has changed. Several trends that I describe in detail in my book, ‘$10,000 Gold,’ are creating the need for even more debt creation to counter the lack of growth. These are the aging population, outsourcing, depletion of natural resources (particularly cheap land-based oil), and, perhaps most concerning, the movement away from the U.S. dollar as the global reserve currency. These trends are long-term and in some cases irreversible.
Full-throttle currency creation isn’t the only solution to our problems, but the failure of cutbacks and austerity measures in Europe have led Western central bankers to choose a policy that is less visible to the average investor – the policy of financial repression.
Concept Two: Financial Repression
Financial repression worked well after WWII when many countries found their debt-to-GDP levels soaring. The policy is surreptitious and highly deceptive, but it effectively reduced government debt through currency debasement during the three decades after the war. Its success then was due to a robust manufacturing sector and high employment levels, conditions that do not exist today.
The four main pillars of financial repression are:
Negative real interest rates and interest rate caps through suppression of CPI
Nationalization of industry
Strict government control over investment criteria, capital controls, and lending practices
Currency debasement through unrestricted debt creation
Financial repression is a complex subject. For retirees, the most important aspect of financial repression, next to loss of purchasing power, is low interest rates. In 2007, the most secure ‘risk-free’ investment in the world, 12-month U.S. Treasuries, were paying five per cent interest. On $1 million, one could earn $50,000 a year. Today, thanks to financial repression, interest rates are at historic lows and the same 12-month Treasury bond pays 0.14 per cent. On $1 million, one can now earn only $1,400 in interest annually.
To make matters worse, financial repression, to succeed, relies on complete co-operation between government, the banking industry, the financial services industry, and the mainstream financial media. Government statistics on inflation are parroted by financial media, bankers, and investment advisors, even though they are completely deceptive. Anyone who eats, drives, heats their home or sends children to college knows the cost of living is much higher than officially stated.
Beginning with the Bill Clinton presidency in the U.S. and its Boskin Commission, the consumer price index (CPI) went from measuring a ‘fixed standard of living’ with a fixed basket of goods to measuring the ‘cost of living’ with a constantly changing basket of goods, measured with metrics that are themselves constantly changing. John Williams, of Shadowstats.com, (see Figure 2) still uses the original pre-Clinton basket of goods that includes food and energy. By this measure inflation is running at close to 10 per cent, not the official two per cent.
Despite the talk of eventually raising interest rates, this cannot happen with so much debt in the system as it would immediately crush any hope of an economic recovery, the housing market would collapse, and interest payments to privately owned foreign banks would be impossible to meet.
Therefore, interest rates will likely remain low and retirees will have fewer and fewer options through which to gain interest income through investments. I, along with many other value-based economists, feel the best solution for wealth appreciation and wealth gain in the days that lie ahead will be through ownership of uncompromised bullion – gold, silver, or platinum that is owned outright and to which one holds title.
Concept 3: Uncompromised Bullion
Financial repression proponents will never support gold ownership; however, we tell our clients to do what central banks do, not what they say. In 2012, central bank gold bullion purchases amounted to 536 tonnes, the highest level of central bank gold buying in any year since 1964. Eastern buyers, who seek protection from what they see as the collapse of the western fiat model, are also buying gold at a record pace. In 2012, Chinese and Indian buyers alone accounted for 2,000 tonnes of the 2,655 tonnes of gold mined. They have faced currency crises in the past and know how quickly and thoroughly such events can decimate wealth.
Gold has served as the most stable store of purchasing power for thousands of years. One could buy approximately the same number of loaves of bread for an ounce of gold during biblical times as can be purchased today for an ounce of gold. Thinking in terms of how many ounces of gold an item costs, rather than in the more relative measure of paper currencies, leads to a true appreciation of gold’s stable purchasing power.
In truth, gold is not rising in price; currencies are losing purchasing power against gold. In the past decade alone, the U.S. dollar, the Canadian dollar, the British pound, the euro, and the yen have lost more than 80 per cent of their purchasing power against gold.
Most important, there is a direct correlation between debt and gold. This is the basis of my prediction that gold will reach at least $10,000 an ounce if it continues its lock-step relationship with debt, particularly U.S. debt. Figure 3 shows this relationship to date and is extrapolated to the official estimates of projected U.S. debt, the point where it would reach a five-figure price.
Gold Outlook 2013
Gold has been in a healthy consolidation period since September 2011. This has been intentional as the main buyers, central banks, have used techniques such as leasing gold into the market to suppress the price while they accumulated. As gold has shown a consistent pattern of breaking out the year after a U.S. presidential election, most notably since 2000, it is likely that 2013 will see gold’s resumption on its path to $10,000 an ounce.
There are several options for wealth protection, but perhaps of most interest to retirees is the Gold Advantage Return Bullion Fund which was launched in 2012. It combines a fixed cash flow with bullion’s historical wealth preservation qualities. The concept of the fund is to provide a convenient way of liquidating a portion of capital appreciation. The fund pays a fixed monthly cash distribution of seven cents per unit, representing a superior rate of cash flow (8.4 per cent annually as calculated on the opening net asset value of $10 per unit) compared to most bonds and equity dividends. Although the intent is to pay the cash distribution from capital gains, the cash distribution is fixed and may result in a capital distribution in certain circumstances. The fund allows for daily redemptions.
Events in Cyprus are one more indication that the fiat model upon which our lives depend is coming to the end of its cycle. Those who adapt to this new economic reality will both prosper and protect their wealth. Those who do not will inevitably wish they had.
Nick Barisheff is president and CEO Bullion Management Group (www.bmgbullion.com).