Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
It’s a figure that’s virtually impossible to get your mind around. A trillion seconds, for comparison purposes, is 31,546 years. A trillion pennies equals a block almost a football field cubed. And a trillion dollars of debt amounts to more trouble than we could ever possibly imagine.
But we are not $1 trillion in debt. We are $34 trillion in debt. Actually, we are $34,443,295,784,000 in total debt (that’s the sum of the debt of American consumers, businesses, financial institutions and federal and state governments). That amounts to $117,808 for every man, woman and child in America. And this runaway debt train doesn’t show any signs of slowing. Consider the following:
- The dollar has fallen sharply, about 30 percent, against the euro during this past year. At the moment, one has to pay about $1.24 for each euro; three years ago, it was only 80 cents. To prevent a further dollar decline, the U.S. must attract $1.5 billion A DAY in foreign investments.
- The U.S. trade deficit reached a new all-time high in January, confounding hopes that the falling dollar – with the resulting cheaper American goods – would soon narrow that gap.
- The rising costs of imports and oil together with higher interest rates will be the first obvious “weak dollar” consequences to consumers. Oil is priced internationally in dollars, so prices are now adjusting to offset the weak greenback. Interest rates will also have to rise sometime soon to motivate foreign investors to buy up our dollars. Fed Chairman Alan Greenspan acknowledged this inevitability in a recent speech by saying that rates “cannot stay low indefinitely.”
- With the first uptick of interest rates, a devastating “falling domino” scenario could occur in the U.S. Rising rates would mean that higher credit card and variable mortgage rates could quickly shove shaky consumers into bankruptcy. New, higher mortgages would also mean a slowing of the housing industry … the same industry that, many experts believe, has kept our economy from spiraling into recession.
- Construction spending is at a peak, even as refinancing is now past its peak. Mortgage underwriting shows that 5 percent of people buying homes in 2003 really couldn’t afford to do so. Another 5 percent would quickly lose their homes should one spouse become unemployed.
Consumers … getting consumed
As it is, consumers are not in the greatest of economic health.
- U.S. consumers continue to buy without restraint – despite the fact that they’re getting deeper into debt by doing so. Last year, personal income rose 2 percent, but the growth in personal debt topped that at 10.4 percent. This year, according to a recent Fed report, consumer credit rose by a larger than expected $14.2 billion in January to a seasonally adjusted $2.016 trillion. Consumer debt, ominously enough, has doubled over the past 10 years.
- One out of every 73 U.S. households filed for bankruptcy in 2003, an all-time record high, despite our historically low interest rates.
- Americans are losing their manufacturing jobs to foreign nations at an alarming clip. These are decent jobs paying $45,000 to $60,000. One of these jobs lost means that some weary worker would have to take two to three lower paying jobs to replace his income.
‘Irrational exuberance’ revisited
Even so, there remains today an almost “irrational exuberance,” to use Alan Greenspan’s famous stock bubble quote, in the current stock market.
- According to a Yale School of Management poll, 95 percent of individuals and close to 92 percent of financial institutions believe U.S. stocks will be higher 12 months from now. Somehow people have acquired an almost unfounded bullishness in the stock market.
- Notable financial adviser Richard Russell recently pointed to the danger of this irrational stock market exuberance. “I’m worried because, as I’ve said, I believe the top for this market is now in. I’m worried because if the bear takes hold again here, it will be deflationary. Yes, declining stocks are deflationary. If stocks turn down here, they will be pressing against the greatest mountain of debt in world history.”
- Meanwhile, one of the richest men in the world, Warren Buffet, also believes that there are virtually no stocks to invest in that meet his valuation formula. Instead, he has “bet” $13 billion in foreign currencies against the sinking dollar. The Financial Times wrote, “The last time Warren Buffett chose to sit on the sidelines with anywhere near this much cash, it was a precursor to the largest stock market bubble in history.”
So … given record-breaking debt, the sinking dollar and America’s compromised consumers, what’s today’s wisest course? The answer may be to look at the last time these conditions existed in the U.S.
You’d have to look at the later ’60s. That’s when interest rates were poised to rise as a result of economic circumstances resembling today’s. And rise they did, for the next 15 years. Interestingly enough, this period correlated almost exactly with a rising gold market. That’s when gold went from $36 an ounce to $850 an ounce for a remarkable 2,261 percent increase.
According to Richard Russell, “Gold is the only money with intrinsic value and which has no debt against it. As such, gold is ‘bankrupt-proof.’ This is the great value of gold. In an all-out inflationary environment, gold will tend to keep up with inflation. On the other hand, in a disastrous deflationary credit collapse, gold stands as intrinsic money that will defy bankruptcy. Should there be a panic out of all paper currency in a world deflationary collapse, there could be a panic to own the only money that is pure intrinsic value … gold.”
Along with gold and its impressive performance over the past three years, gold’s “sister” metals, silver, platinum and palladium, have all been showing spectacular promise lately. But gold is the world’s acknowledged “default” currency – the standard of value the world turns to when there are few other monetary options.
Supply issues also tell a story. Current annual gold production is only about 2,500 tons. But demand has averaged about 4,000 tons over the past 10 years. Today, the short position amounts to two to five years of current production. Rising gold prices will certainly cause a “stampede to cover” – and that could, in turn, push gold prices even higher.
Now, couple this short supply issue with these other offshore factors (according to Nick Guarino, editor of The Wall Street Underground – along with a stack of correlating news reports):
- Chinese demand could soon eat up “3,000 tons of gold.”
- The Muslim gold dinar, together with worried Middle Easterners moving their dollars into gold, (ahead of potential U.S. military actions, global terrorism and dollar devaluations) could account for a tremendous boost in gold demand.
- If Middle Eastern demand soars to the tune of $10-20 billion in new gold purchases, it could essentially take gold “out of circulation and push its price to $2,000 an ounce.”
Gold today, gone tomorrow
If rates do climb this year as many analysts believe, if the dollar falls another 10 percent as Merrill Lynch predicts, if gold continues to feed on higher rates as they did in the ’70s, there’s a good chance that the precious metals will continue their established bull market. Perhaps for years to come.
In the shorter term, Merrill Lynch believes that gold’s rise will top $500 an ounce this year. But Barrons topped Merrill’s prediction: That financial publication recently included a prediction that gold’s rise could exceed $800 an ounce.
Now that’s one number, at least, you can get your mind around.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.