LAWRIE WILLIAMS: Scary year ahead. Should we be buying gold and silver

Portents for 2016 are worrying for any vaguely neutral observer.  There are so many potential problems ahead that some must come about – and perhaps the scariest of all is the U.S. Presidential election, although the full ramifications of that may not really become apparent until 2017 with a new President in place – but who?

In a recent interview on Kitco, veteran investment advisor and analyst Doug Casey, described all the Republican candidates, with the possible exception of Rand Paul, as ‘pathological warmongers’ and ‘extremely dangerous people’.  But as (I assume) a Republican at heart Casey also felt that Hillary Clinton – the far and away Democratic front runner – as being even worse.  While I am not close enough to American politics to cast such an opinion myself, I have to say some of the policies expressed by the Republican front runners are, to a European, somewhat beyond the pale.

Add to this in Europe, an expansionist NATO that seems determined to tweak the Russian bear’s tale – a dangerous exercise with, on the other side, an equally aggressive President Putin riding high in Russian opinion polls – that the potential for military confrontation in the Ukraine (and even in Syria where Russia and the West have some severe differences of opinion on how the terrorism threat should be countered) looks increasingly a possibility.  There is also the potential for a Chinese-American stand-off in the South China Sea, the ever-threatening posture taken by North Korea which recently claimed to have developed its own hydrogen bomb, instability throughout the Middle East and North and West Africa – and no doubt there will be other flashpoints emerging in the year ahead.

Economically, the year ahead looks additionally worrying.  Grant Williams in his latest Things that make you go hmmm… newsletter pulls no punches here in setting out many of the problems facing the world at large.  The newsletter intro has a Star Wars theme – ‘Into The Garbage Chute Flyboy’ -  relating to an episode where Han Solo, Luke Skywalker, Chewbacca and accompanying droids were attempting to rescue Princess Leia from the evil empire, but with no exit plan B when their original escape option had been blocked.

Keeping to the theme, Williams likens the ‘Empire’ to the cabal of central banks which have become self-appointed saviours of the global economic system, which the world population has allowed to happen over many years.  He poses the question – relative to Star Wars – as to Why would the citizens and protectors of a democratic Republic allow it to descend into a tyrannical empire?  He finds an answer of sorts in a quote on the rise and fall of democracy from 18th Century Scottish lawyer Alexander Fraser Tytler who stated thus:  "A democracy cannot exist as a permanent form of govern­ment. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship."

Now this may be overstating the case for an end to a democratic system as we know it, but it is also a truism demonstrating how successive Western Governments and their central banks have allowed debt to get totally out of hand – indeed become completely unsustainable – without the whole system ultimately collapsing around their ears.  Arguably a totalitarian regime like China has been more successful in holding things together than the Western democracies, but with so much interlinking in the global banking and trade systems, this is also creating strains and imbalances even in this much more tightly controlled economy.

Continuing with the Star Wars parallels, Williams comments: “Since the events of 2008, the world’s central banks have assumed the role of self-proclaimed Emperors of the Galaxy, taking full responsibility for safeguarding the global economy through a series of ever-more daring (and unprecedented) moves, thus cementing their power.

Of course, all of these moves revolved around the use of the might of their own Death Star; the printing press.

What has been needed all along is an effective escape plan—this time, not for the rebels, but for the Empire itself and, let’s face it, nobody can say that 7 years isn't a long enough period of time in which to hatch one.  Instead, as they have gone farther and farther in pursuit of all-encompassing control of financial markets, the unintended consequences have been intensifying almost daily.”

In effect, the central banks have been unable to come up with a workable Plan B and exit from this so-called ‘quantitative easing’ strategy.  The current moves by the U.S. Fed to ‘normalize’ interest rates are doomed to failure.  Any real normalization of rates would leave annual interest repayments to service this debt in the U.S. alone at a massive $500 billion a year – more than the U.S.’s total accumulated debt only 10 years ago.  The only reason the U.S. has been able to handle its current debt levels is the zero to low interest rate policy it has been running.

The other unworkable Plan B option would have been to sell off Fed assets, but at a current $3.1 trillion any significant such sale would have a hugely adverse impact on the markets.  Going back to earlier Fed statements this had always been seen as an exit strategy option, but as the total figure has spiralled out of control, it no longer is – Williams’ ‘unintended consequences’ noted above,

Now the Fed seems to be coming round to the idea that that its high debt levels should perhaps be the ‘new normal’.  They don’t really seem to have any other option.  Of course the U.S. Fed is not the only central bank going down the easing path.  This has been mirrored elsewhere – notably in Europe - and indeed China appears to be following suit too as it is otherwise finding it tough to meet its growth targets without some form of stimulation of its economy as it moves to switch from a manufacturing/export driven one to a domestic consumption/services driven one.

Williams covers much more in his latest TTMYGH letter, which runs to 47 pages, including commentary, videos and charts from some of the world’s top economic thinkers.  Although it costs $295 a year to subscribe, for an always entertaining and thought-provoking read (from Williams himself and from the other commentators featured) it would seem well worth the money for any serious investor or fund manager involved in global markets to give a broader perspective on what is really going on. 

In this latest issue, Williams concludes his own commentary with the following:

“As we head into 2016, with its 'bold' (sarcasm) hike, the Fed is far, far away from signalling the end of the dark days that that crisis created' but rather has put the final piece of the jigsaw in place that will disavow the world of the notion that 'The Empire' is all powerful once and for all.

With one small upward move in interest rates, Janet Yellen and the rest of the FOMC have thrown us all into the garbage chute and, I'm afraid, what lies down there is not pretty.

Not pretty at all.”

Now for some words from Mark Valek and Ronni Stoeferle from Liechtenstein investment managers Incrementum AG’s Christmas letter to investors:  “We do believe that 2015 could make history as the year when the myth of central bank infallibility began to crumble: it began with the SNB abandoning the fixed exchange-rate regime with the euro, then the ECB set a precedent by introducing a quantitative easing program in the Euro Zone, then in Summer the People’s Bank of China devalued the Renminbi, which can be seen as a small, but symbolic, sign for the end of China’s economic miracle.”

Interestingly the Incrementum letter makes many similar points to those of Williams – but from the Austrian School of Economics principles.  For those unfamiliar with this aspect, Stoeferle and Valek have just published a book in English on the Austrian Scholl Economic history and principles, available from Amazon.com, entitled Austrian School for Investors: Austrian Investing between Inflation and Deflation.

While both Williams and Incrementum are primarily bullish on gold at current price levels and as an ongoing store of value over time, their latest letters do not make any real mention of what the various world economic and other geopolitical instabilities mean for precious metals, concentrating on the fundamental flaws in global central bank and governmental actions and thinking.

These commentators all view the current situation as perilous in purely economic terms – they don’t even mention the various global geopolitical and military flashpoints that could really blow up in the very near future which would just exacerbate the bleak economic outlook and global uncertainty.  While such flare-ups have had relatively little effect on the gold price in the past few years, the combination of these – some of which potentially pit superpower against superpower - with some of the economic factors outlined above could well start to bring safe haven precious metals investment back into favour.  And if sentiment, currently anti-gold, turns positive we could well see a sharp recovery in the yellow metal – and in silver, platinum and palladium which tend to follow its path.

But let’s leave it to Doug Casey for the final comment here.  He ended his earlier-mentioned interview in saying that he is aggressively buying gold and silver – because he feels there just isn’t any other place to go!  According to Casey he sees almost everything else as overvalued – stocks, bonds, property – even the dollar.  Precious metals may be out of favour and he admits they could yet fall further – ‘never say never’ - but feels they are at the least very close to their lows.  As prices fall they get nearer and nearer their eventual bottom and he hopes and feels that 2016 will see the beginning of the inevitable upturn.

22 Dec 2015

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com