The Real Toll Inflation Takes On Your IRA Or 401(K)

How much are you putting away for your retirement? Will it be enough to support you through your golden years? You may have a specific monetary goal in mind for your IRA or 401(k) to reach, but whatever the number is, it’s likely a lot lower than it should be. Why? There are several reasons, but the biggest is that most people fail to take into consideration just how much of a bite inflation takes out of their nest egg.

How Inflation Affects Your IRA or 401(k)

For years, you’ve faithfully put aside a little money from each paycheck to go into your retirement fund. Say your investments do very well, and you’re able to accrue enough to subsist on $50,000 a year for the remainder of your life. It sounds like it will be plenty. However, think about how long it needs to last.

Maybe you assume you’ll live another twenty years or so after you retire. Now, consider how much $50,000 could buy twenty years ago, versus how much it can buy today. Over time, your income will remain fixed, but the buying power of that money will continue to decrease. $50,000 in the year 2036, or even 2020, just four short years from now, won’t get you nearly as far as it does in 2016.

The prices of basic necessities, such as food, clothing, fuel and more will continue to rise over time. As you get older, you’ll likely also need to rely on more medications, doctors’ visits, etc., all of which will continue to rise in price as well. Insurance may cover some of it, but you’ll still have to deal with the premiums. Medical costs are currently going up much faster than the rate of inflation, which will serve to deplete your savings that much more quickly.

How far off the mark your target amount is from what you’ll actually need to live comfortably depends on how close you are to retirement age. Once you get there, you may quickly find that the amount you’ve saved won’t sustain you at all. You’ll be forced to return to work in some capacity in order to make ends meet.

Guarding Your Nest Egg Against Inflation

What can you do to keep your own IRA/401(k) from being depleted too early? Well, there’s the obvious: starting saving more. Take a hard look at your expenditures and ask yourself, “Is this more important than building my security for when I’m older?” As tempting as that big flat screen TV may be, you’re going to live longer than it will.

Also, be sure you’re rebalancing your portfolio at least once a year, adjusting the riskiness of your investments downward as you get closer to exiting the workforce.

Another positive step you can take is to put a percentage of your funds in safe haven assets. These are investments that hold, or even increase their value in times of market downturn.

Real estate used to be reliable as a safe haven, as property is a physical asset that appreciates in value over time. However, after the housing bubble burst in 2008, it became far less of a safe place for your nest egg.

There are a few good options remaining, however. Gold and silver are among the best. Like real estate, gold is a physical asset that maintains its buying power over time. It’s more stable than real estate, though, and not volatile like stocks and bonds. It’s also easier to liquidate than a house.

But perhaps the best thing about gold is that, unlike the dollars in your savings account, it resists inflation. That’s why it’s the go-to asset for those looking to preserve the buying power of their wealth. Whenever you’re ready, it will be there waiting for you, as strong as when you bought it.

Gold Investment is the alternative currency that can safeguard you from these types of events. Putting a portion of your savings into this precious metal will help protect you. Download your free self directed IRA rollover gold IRA information kit today.

If Europe Goes Down, We Go with It

The euro is a disaster.

At least that’s the story according to Joseph Stiglitz, the Nobel prize-winning economist.

Looking at Europe, it’s not difficult to see what he means. Greece is drowning in one of the biggest debt crises in history. Italian banks are verging on collapse. And Germany is struggling under the pressure of vicious negative interest rates.

If even one of these dominos fall, Europe could go up in flames.

There’s a good reason why Britain voted to distance itself from the fragile continent. But even the Brexit vote threw fuel on the fire, casting its own banks into uncertainty.

Over here in the US, it’s like watching a car crash in slow motion. But we are not immune from the troubles in Europe. Our economies and our banks are intimately linked.

If the European banks crumble, you’d better believe it will create a financial tsunami. And that tidal wave is heading straight across the Atlantic.

Perhaps it’s time to prepare for the worst.

Panic in Italy

The crisis in Italy looks terrifying similar to the one in the US just before the 2008 financial crisis.

The country’s banks are sitting on €360 billion worth of bad loans. That’s a fifth of Italy’s GDP. The banks claim the bad loans are worth 45%–50% of their original value. But in reality, it’s closer to 20% according to Steve Eisman, the man who predicted the US banking collapse.

Sound familiar? That’s because US banks did the same thing. They wrapped up junk loans and sold them as AAA bonds, vastly overselling their true worth. And we all know how that turned out.

If the Italian banks acknowledge the real value of these loans, they could go broke overnight.

Italy’s worst performing bank, Banca Monte dei Paschi di Siena, is most vulnerable. It has already been bailed out by taxpayers (to the tune of €4 billion) and raised a further €8 billion from investors. But it needs more.

The Italian government is ready to provide a handout but hasn’t yet ironed out the details. The bank’s only other option would be to close a €5 billion deal with private investors by mid-January.

If that fails, the bank may be forced to consider a bail-in, requiring shareholders or even depositors to foot the bill.

There’s another problem too. Italy just threw itself into a political whirlwind. In a referendum earlier this month, Italians voted to reject constitutional changes proposed by Prime Minister Matteo Renzi. Renzi promptly resigned, leaving a political void and economic uncertainty.

In the short term, it may scare off private investors who are so desperately needed by Monte dei Paschi. But there’s a bigger long-term threat. The referendum rejection was driven by the populist party, Five Star. The organization is hellbent on yanking Italy out of the eurozone. There’s a chance they’ll gain power next year, and that could spell the end of the euro.

Of course there are more than a few steps before we reach that fate. But after the populist uprising in Britain and America this year, it’s not unimaginable.

Unfortunately, the trouble doesn’t end with Italy.

Deutsche Bank Is the Biggest Risk

Germany is Europe’s largest economy, and Deutsche Bank (DB) is its largest bank. According to the IMF, DB “appears to be the most important net contributor to systemic risks.” Whatever happens there may have a global ripple effect.

The bank is already unstable, with negative interest rates eating away its revenue. The biggest challenge, however, is a possible US$14 billion fine being imposed by the US Department of Justice.

The fine threatens to cripple the bank, but Angela Merkel said “nein” to any hint of a bailout. That leaves Deutsche Bank in a tough spot. Either raise enough capital to pay the fine, go bust, or instigate a bail-in. In other words, force the bank’s depositors to pay the price.

Brexit

To round off the deadly cocktail, Brexit has thrown the UK’s banks into years of uncertainty. Just last month, the Royal Bank of Scotland failed a stress test. In part, due to the instability created by the referendum.

The Brexit effect is already being felt by US banks. JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, and Morgan Stanley are now moving operations out of Britain. They need a new legal home in the EU.

But that won’t come cheap. The cost and logistics of moving will be significant. Worse, the EU announced last month that foreign banks must increase their liquidity and capital to operate on the continent. Bottom line: Banking in the EU is about to get more expensive for US institutions.

The Domino Effect

Institutions like Deutsche Bank are intimately woven into the US economy. Just take a look at this IMF-produced diagram that shows how deeply connected Deutsche Bank is to US banks.

If there is a collapse, it will have an immediate effect on US institutions.

The threat of slow growth and sliding GDP is also weighing heavily on the US. As a result of the Brexit vote alone, economists revised the US GDP growth down.

Make no mistake; economic problems in Europe are contagious. Investor appetite will begin to weaken. Mergers and acquisitions will slow down. It will squeeze bank profits on both sides of the Atlantic.

Economic uncertainty will also keep US interest rates low, strangling growth at home. The Fed has already delayed planned rate hikes this year due to global instability.

If the US is doomed to wallow in low interest rates for longer, banks will have to settle for lower returns. Or worse, they’ll take bigger risks with your money to draw profit.

Time for an Escape Plan?

7 Reasons The Stock Market Could Crash In 2017

The stock market is always fluctuating. Even when it’s on the way down, it’s a safe bet it will come back up before too long. But sometimes a real economic crisis comes along, like the one in 2008. The market crashes, and investors lose almost everything.

Fortunately, if you look carefully at the signs, it’s possible to see a financial cataclysm like this coming ahead of time, and take steps to protect your own assets. And it looks like there’s another one right on the horizon. Here are seven reasons why the stock market is headed for a crash within the next year.

The Bull Market Is Drawing to a Close

It’s difficult to grasp the possibility that disaster is looming when the markets are in the midst of an upswing. It’s human nature; when things are going well buying is encouraged. The problem is, this bullish outlook has been going on for the last seven years. It can’t last forever, and once it’s over, things will quickly go the other direction.

Oil Prices Keep Declining

To the average person putting gas in their car, this seems like a good thing. But for investors it poses a serious problem. Oil prices tend to correlate with the stock market. When one falls, the other isn’t far behind. And as the industry continues suffering the effects of the oil debt bomb, a market correction seems imminent.

Interest Rates Have to Increase

For seven years, interest rates were near zero. Then in December of 2015, it finally went up, very slightly – and pressure is mounting on the Federal Reserve to keep moving on this. Even though the changes are likely to be incremental, it’s a precursor to a number of economic jolts. It will become more expensive to borrow money, which means mortgages and credit card payments increase.

Because of this, the average person has less disposable income. Businesses suffer as a result. Prices go up, and stocks go down. Since the Fed intends several future rate hikes, interest could go up even further in the coming months, sending stocks into a downward spiral.

The Housing Market Is Failing

Real estate prices are currently very high. The problem is that the average income is still fairly low. That, combined with the raised interest rate on mortgages, means that houses are too expensive for most people to buy. Fewer homes are going on the market, and the ones that are tend to stay there much longer than they should, rather than getting sold. This is making it virtually impossible for property investors to get a good return.

Bond Yields Are Declining

The return on junk bonds often serves as a harbinger for the stock market and other economic factors. Before the dot-com bubble burst, bonds were plummeting. They then went up again, but came down right before the crash of 2008. Now, for the last 18 months, bond yields have been declining once again.

Brexit

By now you’re likely very familiar with Britain’s decision to leave the European Union, and the effect it’s had on the world economy. Not only did the value of both the pound and the euro go down, the stock market declined sharply as well, losing a total of $2.1 trillion in June. Keep in mind that was just the announcement of the decision. When the actual exit takes place, there’s sure to create even more economic turmoil, not just for Europe and the UK, but for companies that do business with them all around the world—particularly in the U.S.

China’s Economic Slowdown

For decades, China has been one of the countries to help drive the world economy. As they expanded, so did Wall Street, which grew by 10% over the last three years due to China’s help. But in 2016, things have been different. China is currently going through an economic slowdown. In January, their stock market was shut down several times in the space of one week, and it’s declined 18% in the aftermath. Given the effect that their prosperity had on the stock exchange in the U.S., their hardship will likely have just as big an impact to the downside.

Any one of these factors, along with a myriad of others, could easily send the stock market into a decline. But all of them combined portend a very fraught new year. The writing is on the wall. But with this advance warning, you have a chance to prepare yourself. Secure your investments, including retirement accounts you’re going to need, so that you can make it through this next economic crisis without losing everything.

Again.

Protect Yourself Against The Coming Recession Using Gold

Economists and financial experts agree: another recession is on the horizon. The markets are unstable, housing and real estate are experiencing problems, and the oil industry is still suffering the effects of the debt bomb from a few years ago.

Much like in 2008, the elements are once again coming together to create a perfect storm of economic chaos. Raoul Pal, founder of Global Macro Investor, believes a recession will occur within the next twelve months. Fortunately, he also sees a solution: Investing in gold can help you protect yourself against the crisis to come. Due to a variety of factors, right now may be the perfect moment to get in on this safe haven.

The Evidence for a Recession

Raoul Pal’s prediction of a recession is based on more than just the current economic climate. It comes from his observation of a precedent going back over 100 years. Since 1910, every President who has served a second term has seen it followed by a period of recession within a year of their leaving office.

The prosperous Reagan years were followed by economic hardship under the first President Bush. The economy began to revive under Bill Clinton, but quickly fell again once he finished his second term. Then at the end of George W. Bush’s eight years, we were plunged into the worst financial crisis since the Great Depression. For the moment things are finally starting to turn around. But what will happen when President Obama leaves office? The writing is already on the wall: we’re headed for another downturn.

The Mispricing of Gold

How does buying gold help guard against this impending crisis? At first glance, it would seem to be a rather risky choice at the moment. The price has been on its way down in recent months. How does that make it a good investment?

The important thing to remember is that gold is an asset for the long term. It may be down 6% in the last few months, but it’s up 18% for the year overall. What’s more, experts agree that the price of the metal is currently much lower than it should be.

Given our current economic state, and based on past trends it should be trading at a considerably higher price. What’s more, when the recession hits, this disparity is expected to reverse itself, and gold will go up again. Essentially, we’re in a very narrow window wherein gold can be purchased more cheaply than normal, right before its demand, and then price, skyrockets.

Gold in a Recession

As a nation enters into recession, central banks try to slow the economic downturn through quantitative easing—essentially artificially injecting money into the financial system. It sounds like a good thing, until you realize it’s effectively devalued the dollars you were already holding, and the dollars in which most of your investments are denominated.

As paper- and market-based investments destabilize, more people turn to precious metals, due to their generally stable pricing and ability to preserve wealth. In addition, as investors rush to gold, logically enough, its price goes up. Pal believes once the recession hits the price of gold could double.

Another factor in play is the decline of other world currencies, including the pound and the euro, in comparison to the dollar. Pal believes this will continue over the next year or so. Additionally, the negative interest rates that have plagued Europe and other parts of the globe could serve to boost the value of both gold and the U.S. dollar.

Many experts, however, warn that the dollar’s increase in value is merely a bubble, which will burst before long and send it plummeting. So that leaves gold as the smartest and safest investment to guard against the coming recession.

With its price still artificially low at the moment, now is the optimum time to stock up on gold in preparation for what’s on the horizon. When its price goes up as everything else begins coming down, you’ll have a safe haven to keep you from losing your savings, your IRA, 401(k) and more. You can even set up your own gold IRA. But if you wait too long to make the investment, you might see that “sale” price on gold evaporate in the rush.

India’s Gold Battle Could Double Demand For Silver Worldwide

Gold has long been king in India, a nation that battles it out with China for the title of leading international consumer of the yellow metal. However, could silver be set to unseat gold, potentially doubling demand worldwide?

It may, according to financial experts familiar with India’s track record over the last century. In recent years, the Indian government has implemented a number of measures intended to reduce its citizens’ demand for imported gold. The move is partly rooted in a crackdown on the use of gold as black market currency, but it will likely have unforeseen consequences based on the lessons of the past – specifically, going back to 1910.

Indians’ renowned fondness for gold has always had considerable, continuing economic impact. Case in point: It’s estimated 78% of a typical Indian’s household savings is held in gold. The result of this phenomenon is that India effectively has a dual currency system where the population saves mostly gold, rather than rupees. It’s a unique situation compared to other major economies of the world, and raises the question: How do you transition a majority of the population away from a precious metal in which they’ve placed centuries of faith?

The Challenge of Gold

As the bulk of India’s population builds their savings in gold rather than in bank accounts, the result has been a permanent drag on national economic growth. This type of savings doesn’t increase funds available for lending within the banking system – especially when many Indians’ gold investment is in the form of jewelry rather than bars or coins.

In addition, while India is the global leader in gold jewelry consumption, at more than 700 tons in 2015, it mines less than two tons per year. To absorb the deficit, India must import gold worth an estimated US$25 billion annually, dragging down the rupee’s value.

In an attempt to resolve the difference, the Indian government implemented a Sovereign Gold Bond plan allowing gold investors to trade their investment for interest-bearing bonds. The incentive did make a dent in the problem, but didn’t solve it.

Another Plan

As an alternative, the Indian government raised import taxes on gold imports in 2013 to the current rate of 10%. However during the same period gold prices fell. The bargain price on gold led to a 12% increase in imports in 2015, eliminating any potential benefit from the government’s standpoint.

Turning the Clocks Back 100 Years

India has fought precious metals imports for decades, back to 1910 when the government increased import taxes on silver from 5% to 11%. Demand in silver fell 28% within the three years following the move, and net imports in silver fell by two-thirds. From 1930 on, India became the world’s largest gold consumer, only displaced in 2015 by China, as it made its own push for the yellow metal.

What’s Next for Gold—and Silver?

It appears a return to silver as a major investment for Indian consumers is within the short term future. Indian silver imports grew 14% in 2015 after the recent heavy import taxes on gold, up from a record-setting 2014. At the same time, demand for gold jewelry is down 30% over the period of September 2015 to 2016, an impressive figure considering that jewelry accounts for three-quarters of all Indian gold. The pendulum may swing back to silver as a more profitable investment in India: Silver jewelry demand is up 600% in the last decade. As a swap to silver seems likely in India, it could have a major impact on prices.

Silver May be the Big Winner

A marginal substitution from gold to silver could have a huge impact to increase the price of silver – even a reallocation of 10% from gold to silver jewelry in India would double demand for silver worldwide. Since mines and other sources could not meet demand right away, prices would rise to further boost demand. It’s a point worth considering for any investor looking to capitalize on a unique situation developing in India.

Watch Out for the Boomerang Effect from the Latest European Referendum Shocker

The verdict is out from yesterday’s crucial Italian referendum. Prime Minister Matteo Renzi and his much-lauded political and constitutional reforms were officially repulsed. Now Italian President Sergio Mattarella must decide if he will call for new elections well ahead of the planned 2018 polls. If he does, the latest anti-establishment populist candidate Beppe Grillo and his 5 Star Movement will win the election and begin another more potentially damaging referendum on Euro membership that could have far reaching consequences for your investments.

Five Star Movement is the establishment’s worst nightmare. It is a dangerous marriage between EU-skeptic ideas and progressive pro-nationalist slogans like “bring back our Italian Lira.” They have already upended Italian local politics by winning the Mayor office in Turin and Rome in June. Their aim is to hold a second referendum on Italy remaining in the Eurozone if they win the election. Polls have them beating Prime Minister Renzi’s center-right Democratic Party if elections were held today, 53% to 47%.

The repercussions of the tsunami this referendum has unleashed are just building. The euro initially plunged to its lowest level against the U.S. dollar once Renzi announced he would make good on his threat to resign. Italy’s sovereign bonds have also slipped on the fears that the nationalist movements will gain momentum from the referendum. The yields on Italy’s important ten year notes have risen to over 2 percent following the outcome.

Italy’s top eight largest banks are already in deep trouble, even before the political uncertainty erupted with this latest European political earthquake. Third largest Italian lender Monte Dei Paschi was in the late stages of its most recent effort to revive its troubled financial fortunes with a 5 billion euros capital raising effort all the while it is trying to spin 28 billion euros worth of bad debts off its books. Investors may walk away from the effort now, forcing Italy to wade into the quagmire.

Other troubled lenders like Banca Carige of Genoa are also under intense pressure to rebuild their failing balance sheets, courtesy of the European Central Bank and its stress tests. These Italian banks are similarly buckling beneath the immense weight of over 360 billion euros worth of loans gone bad.

This ought to be enough to concern you and your investments. Italian banks are not the absolute largest in Europe or globally, though Italy’s biggest bank UniCredito is among the too-big-to-fail globally systemic important financial institutions whose future is in play now. Other continental banks are teetering from their own problems, including largest German lender Deutsche Bank which itself may require a German or ECB central bank bailout shortly.

Italy has so far managed to avoid endangering its own national balance sheet directly amid the crumbling ruin of its failing banking sector. If Monte Paschi is unable to complete this bad debt dump and balance sheet cash infusion program soon, the country will be forced to bail it out. This would hurt more than simply the pensioners whose own life-long savings are tied up in the oldest bank in the world.

New European rules require both bondholders and shareholders take a total loss as part of any state-backed aid. The 7th largest economy in the world is itself at stake. If Italy catches a serious virus, it will surely infect the other major G7 economies in short order, separately from the very real danger of international banking giant contagion possibilities.

How Well Will Your Portfolio Weather the Impending Banking Crisis?

Regardless of what happens with Italian and European lenders in general, American banks are also hiding their deteriorating financial conditions using complex accounting tricks. Both they and their backstop the FDIC are woefully undercapitalized against another banking crisis that begins in Italy or anywhere for that matter. Fortunately there is an insurance policy for failing banks in Europe and the United States.

This is known as the yellow metal, physical gold bullion. You can safeguard the investments in your retirement and investment portfolios by placing a portion of your hard earned money into the precious metals themselves. Request your own free and no-obligation gold IRA rollover kit from Regal Assets by clicking here to obtain additional information on the best means for protecting your portfolio by adding tangible gold and silver to it today.

Interest Rate Hike Quietly Looms In Wake Of Election

As America’s presidential election at last limps across the finish line, there’s been a lot going on in the economy while the circus was in town. No one really expected a surprise interest rate hike from the Fed in November, which would have certainly sent the markets into a panicked free fall just days before the election. Nevertheless, indicators after last week’s meeting, coming on the heels of a stronger than expected jobs report, did imply the Fed was still on track for an interest rate hike in December.

Meanwhile, businesses are pointing to the divisiveness of the current election as the reason sales of big ticket items are lower. Apparently the bread and circuses of the current election cycle are prompting consumers to put off expensive purchases and businesses to delay hiring and major investments. The election is becoming a feature of the forward risk environment for many companies. Humans, for all the amazing features of our big brains, are still easily distracted.

The Jobs Report

The October jobs report showed the economy creating an additional 161,000 jobs and the September job numbers were revised upward to 191,000, driving the unemployment rate under five percent. The best news wasn’t the number of jobs created; it was the average hourly wage increase of just under three percent, higher than the rate of inflation. For the first time in decades, American workers actually got a real raise, even when wages are adjusted for the cost of living. When it comes to ammunition to justify a rate hike, this jobs report was just the cover the Federal Reserve needed.

An Interest Rate Hike is Coming

Most Fed watchers agree that the stars have aligned for a December interest rate hike. Stocks have steadily lost ground since late October, pricing in the likelihood that markets will see a rate increase before the end of the year. The only thing that could derail an interest rate hike is, as you might guess, a surprise outcome in the election. In a bizarre twist, this could mean a stock market surge at the end of the year regardless of who wins.

Rest of the World Takes Advantage

For the rest of the world, the Fed raising interest rates is just fine with them. In the crazy environment of the globally connected economy, the weakest currency is the most competitive in the worldwide manufacturing jobs market. It should come as no surprise then that our “allies” in Europe are considering extending quantitative easing (QE) at the very time the U.S. Federal Reserve is talking about hiking rates. That would// weaken the euro compared to the dollar and allow Europe to tip the balance of global trade in their direction./

The combination of an interest rate hike and continued QE in Europe will push commodity prices lower. That’s already happening in oil, and once the volatility of the election is past we could see gold prices move lower because of price pressure from the dollar. A rate hike is actually good news for gold buyers as it lowers their point of entry. At the first whiff of any broad reversal in the stock market, regardless of the cause, the Fed will certainly slash interest rates and start up the QE machine to juice the economy. When that happens, gold prices will skyrocket higher.

With the U.S. already working at a competitive disadvantage because of our strong currency, expect the Federal Reserve to overreact to any weakness in the economy. If that sudden weakness is introduced because of the election, we could not only see the Fed take the December rate hike off the table but move quickly to try and stimulate the economy, which will be great news for gold and oil prices.

How Gold Combats The Effects Of Inflation On Your Retirement Savings

Our economy has a problem. In fact, it has a number of problems, but one in particular. Inflation is increasing significantly faster than income for most people. Therefore, even if you’ve gotten a cost of living increase, chances are your paycheck today doesn’t go nearly as far as it did a few years ago. That also means if you’ve been paying the same amount into your IRA/401(k) over that time, that’s not going to go as far either.

Understanding Inflation

When you first started building your nest egg, the amount you were paying in regularly seemed like it would be enough; by the time you reached retirement age, to support you for the remainder of your life. But if you do the same math today, chances are you’ll find yourself coming up short. It’s the same amount it always was, but that money simply doesn’t go as far anymore.

Think of it another way: How much did a candy bar cost when you were a kid? A quarter? Fifty cents? Now that same candy bar costs well over a dollar, and it’s a lot smaller. Everything is more expensive than it used to be—often many times more expensive. Price inflation is a fact of life, and it causes your cash to lose value over time. By the time you reach retirement age, that cash will have devalued even more, and prices will be even higher. What seemed like enough to live on when you started out will end up running out much faster than you anticipated, leaving you struggling in the last years of your life.

Combating Inflation with Gold

In order to maintain the value of your retirement nest egg, you need to invest it in something that’s not subject to inflation; a physical asset that will continue to maintain value, and buying power, over time. Sadly, there are fewer and fewer assets that can do that anymore. Real estate used to appreciate reliably, but after the housing crisis of 2008 it’s a much riskier market than it used to be. Even bonds are losing value over the last few years.

However, there’s one asset remains a reliable investment that’s not subject to inflation: gold. Say you take a $100 bill and $100 worth of gold coins, and put them away for 30 years. After that time, you’ll still have exactly $100 in cash—but it won’t be able to buy nearly as much as it does today. However, the gold will be worth much more than $100. The value of the gold itself hasn’t gone up. But its buying power has remained constant, even in the midst of inflation.

Your retirement savings will need to be able to cover all the same expenses you have now—things like food, clothing, bills, etc.—plus escalating medical care and a variety of additional expenditures. The money you need to spend will be greater, but the cash in your retirement account, even as you add to it over time, will be worth less due to inflation.

However, if you invest your retirement savings in physical gold, then thirty years from now that gold will have the same buying power it does today—if not more. Gold also remains stable as the markets fluctuate, making it more secure than stocks and bonds. With gold in your retirement account, you can add not just money to your IRA/401(k), but actual, lasting value.

Fiat Money and Gold

It is time to revisit the Fiat Money Quantity (FMQ), which totals US dollar money deposited in the banking system, the commercial banks’ money on deposit at the Fed and physical cash.

Besides alerting us to how the expansion of fiat money is progressing, an objective of this exercise is to give some guidance on the price relationship with gold. It is particularly appropriate at a time when banking analysts have turned generally bearish, believing that the rally in gold is now over.

The idea behind FMQ is to define the quantity of fiat money, which can then be compared with the value of monetary gold, which is some or all of the above-ground stocks of physical gold. The long-term chart update is shown below.

The chart shows the long-term trend of FMQ growth established before the financial crisis, and the subsequent effect of the monetary measures introduced to rescue the banking system. This rapid expansion of FMQ warns us of the potential effect of monetary inflation on prices. Most of this is for the moment latent, because the expansion of FMQ has been mainly of bank reserves held on the Fed’s balance sheet, and therefore not currency in public circulation.

The last monthly data point is September 1, and the rise of FMQ is showing signs of accelerating again. Within that acceleration, there has been a fall in bank reserves held at the Fed from $2,786.9bn in August 2014, to $2,265.3bn. This is more than compensated for by a greater rise in customer deposits and savings accounts, from $9,006bn to $10,571bn. The worry, when the Fed created excess reserves mainly through quantitative easing, was that these would be one day used to fuel fractional reserve lending. The other side of bank credit is customer deposits and savings, so the fear originally expressed has come to pass.

The expansion of bank lending can also be detected in the next chart, which is of M2 money supply minus M1, which gives an approximation of bank credit.

In this chart, the expansion to above-trend growth started at the beginning of 2016. Between the two charts, we can confirm that both customer deposits and bank lending are accelerating above recently established trends.

The expansion of bank credit is not being picked up yet by many commentators, but it is a serious issue. This could be because lending growth within the US’s domestic economy appears to be moderate. The answer must lie partly in international lending, particularly to foreign banks and emerging market economies not offered dollar swap facilities at the central bank level. Certainly, USD LIBOR rates are considerably higher than the rate paid by the Fed on bank reserves, perhaps reflecting international demand for dollar loans.

If the decline of reserves at the Fed is the consequence of currently higher money-market rates, the expansion of money has entered a new phase. Further expansion of bank credit will have to be controlled by raising the Fed Funds Rate, at least to close the gap on LIBOR. So an increase in the FFR is overdue, and probably should be more than the 0.25% everyone seems to expect, to bring bank credit growth under control.

The Fed has a problem with raising rates by the required amount, because it would widen interest rate differentials with other major currencies. The dollar is strong enough as it is, and any rise in dollar interest rates seems likely to encourage further dollar strength, leading to potential currency instability. Then there is the question of the effect on asset values, particularly government bonds, not only in the US but particularly in the Eurozone. If bond yields rise, valuations of equities and property will also be threatened, not to mention the cost of government borrowing rising. At the moment there are political pressures on the Fed to do nothing during the presidential election, but that will no longer be an issue by December’s FOMC meeting.

Implications for placing a value on gold

Always bearing in mind that both the price of gold and the purchasing power of the dollar are both subjective variables, their relative quantities will always be a factor behind prices. We have managed to define, so far as we can, the quantity of fiat dollar currency deposits, but what is the quantity of gold, for the purpose of determining a theoretical value for it?

It so happens that James Turk with the assistance of Juan Casteñeda produced a white paper on this subject in 2012ⁱ. Based on his work, we can assume that today’s above-ground stock is approximately 169,000 tonnes, a figure incidentally about 10,000 tonnes less than other estimates. The question then arises, how much of this can be regarded as monetary gold?

Officially, central bank reserves total 33,978 tonnes, or 20% of our estimate of above ground stocks. In theory, this gold is not available to the public as money, because no central bank today operates a gold exchange standard. But we also have further problems with determining the quantity of so-called monetary gold owned by governments and their central banks. We are confident that declared reserves are not the full extent of government holdings of gold bullion, particularly with China, and possibly Russia as well. Furthermore, gold reserves are known to be double-counted in many cases, because gold which has been leased or swapped is reported as if it is still the unencumbered property held by the reporting central banks. Furthermore, there is no way of knowing if governments are actually being honest in their declarations.

This is particularly true of the US Treasury, which according to the Fed’s accounts, owes the Fed 8,133.5 tonnes of gold. Whether or not the US Treasury actually possesses this gold is unclear, and beyond inquiry, because the UST’s gold bullion has been frequently used by the Exchange Stabilization Fund to manipulate prices. Created under the Gold Reserve Act of 1934, the ESF is secret and not accountable to Congress or the American public.

We are asked to believe, in defiance of the ESF’s mandate and anecdotal evidence to the contrary, that the ESF has not materially altered its physical gold balances in the last thirty-five years. Furthermore, given China and Russia have ramped up the strategic importance of gold, it is not beyond the bounds of possibility that the US has secretly been stockpiling physical gold outside Treasury accounts. We just don’t know.

There is also the vexed question of jewelry, which is commonly thought to represent about 60% of above-ground gold stocks. We are aware that the Indian sub-continent regards gold jewelry as a form of long-term saving and collateral for emergency funding, but how about anyone else? We generally regard gold as valuable, but that’s not the same thing as regarding it as money, though public opinions are likely to change in this respect if the gold price rises significantly.

This leads us towards some flaky estimates for the quantity of today’s reserve currency, US dollars, in issue per ounce of gold. We could take the official reserves figure from the US Treasury of 8,133.5 tonnes, and say that each ounce covers $56,171 of fiat currency. But that’s meaningless, because there is no convertibility and we cannot rely on the accuracy of government figures for the quantity of gold it holds anyway.

The best we can do is to take market prices for gold and adjust them for the increase in the fiat money quantity, taking a point in history for reference. The next chart takes 1934, the year when the gold exchange price was raised to $35, not that it could actually be exchanged by the public.

The two plots give us a maximum and minimum to suit all tastes of speculation. The upper line (dark blue) is the gold price since 1934 deflated by both FMQ and the increase in above-ground gold stocks, while the lower line is the gold price since 1934 deflated by FMQ only. This gives gold today an adjusted value range in 1934 dollars of $3.76 to $12.87, at today’s nominal price of $1250.

Admittedly, the $35 price in 1934 was not necessarily a fair market price, being commanded by the Roosevelt government, but our intention is not to give a precise definition of gold’s value, because as stated at the outset, all values are actually subjective. We can only speculate that if gold priced in dollars today bore the same relationship to the quantity of dollars in existence some eighty years ago, the price range in today’s dollars would be between $4,000 and $11,640.

Returning to the accelerating path of FMQ, our assessment of its effect on gold’s value does not discount further rises in FMQ. If, or perhaps when, gold moves up above current levels towards $2,000, it is likely there will be a wider realization of the inevitability of accelerating monetary inflation. In this event, the general price level will be rising faster as well, and interest rate rises could prove insufficient to support the dollar’s purchasing power. A falling purchasing power for the dollar inevitably means a rapidly rising gold price.

In conclusion, not only is FMQ continuing to grow above its long-term trend, but it appears to be accelerating because banks are drawing down their excess reserves to increase their lending. The inflationary implications at the price level are obvious. Gold is already under-priced to a substantial degree. Therefore, further expansion of FMQ seems certain to eventually lead to a complete reassessment of the price relationship between fiat dollars and physical gold, to gold’s benefit and the dollar’s detriment.

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Why Europe Must End in Tears

The latest consequence of economic mismanagement in Europe was the failed attempt at constitutional reform in Italy this week.

The Italian people have had enough of their government’s economic failure, and is refusing to give it more power.

The EU and the euro project have been an economic disaster for all participants, including Germany, which will eventually be forced to write off the hard-earned savings she has lent to other Eurozone members. We know, with absolute certainty, that the euro will self-destruct and the Eurozone will disintegrate.

We know this for one reason above all. The political class and the ECB are guided by economic beliefs – I cannot dignify them by calling them reasoned theory – which will guarantee this outcome. Furthermore, they insist on using statistics that are incorrect for the stated function, the best example being GDP, which I have criticised endlessly and won’t repeat here. Furthermore, the numbers are misrepresented by government statisticians, CPI and unemployment figures being prime examples.

This article takes a column written by William Hague for the Daily Telegraph published earlier this week to illustrate the depths of misunderstanding even a relatively enlightened politician suffers, with this mix of nonsense and statistical propagandaⁱ. This article also refers to a speech delivered this week in Liverpool by Mark Carney, Governor of the Bank of England, showing how out of touch with reality he is as well. Many of his and Lord Hague’s misconceptions are shared by almost everyone, so for the most part go unnoticed.

Lord Hague basically blames the euro for all Europe’s ills: “…… it has made some countries, like Italy and Greece, poorer while others get richer”, he opines, and it is certainly a common sentiment. But it is never the currency that’s to blame, but those that attempt to use it to achieve policy outcomes, and inevitably fail in their quest.

Before the euro came into existence, different currencies offered different interest rates, reflecting the market’s appraisal of lending risk. So, the Greek government, borrowing in drachmas, would typically have to pay over 12% interest, while Germany might pay 3% for the same maturity in marks. The fact that there were differing rates in different currencies imposed market discipline on borrowers.

After the introduction of the euro, interest rates for sovereign borrowers converged towards the lowest rate, which was Germany’s. The reason for this was banks could gear up their lending in the bond and money markets to make easy money from the spread between German rates and the others, risk-free on the assumption that the whole caboodle was guaranteed by the EU and the ECB. It was perfectly reasonable to expect this outcome, but whether the panjandrums in Brussels were smart enough to know this would happen is not clear. If they were, they displayed ignorance of the eventual consequences, and if not, they were simply ignorant, full stop.

These same operatives bent the rules they themselves had originally set to allow countries to join the euro. Under the Maastricht Treaty, budget deficits were to have been less than 3% and government debt to GDP less than 60% for a state to qualify for membership. Neither Germany nor France qualified at the outset. And when it came to Greece, the Greek government simply lied, with the full knowledge and encouragement of the other members. No, Lord Hague, it was the policy makers that were at fault, not the currency itself.

But he continues: “Membership of the euro has put the Italians on a permanent path to being poorer”. Not so. It was the Italians who used cheap euro-denominated money to borrow profligately. They, and they alone are responsible for the mismanagement of their economy and their debt problems, which incidentally now exceed the Maastricht 60% limit by a further 75%.

So, who is policing that?

Lord Hague also trots out the canard about how the euro benefits Germany: “Germans keep exporting easily and running up a surplus, while the Italians struggle and go deeper into debt”. This statement in quotes is undoubtedly true on face value, but it is wrong to blame the poor euro. Instead, the blame lies with fiscal imbalances, relative rates of bank credit expansion, and the additional horror of TARGET2. This last artifice is intended to even out the monetary imbalances that would otherwise occur from trade imbalances. But its designers seem to have been completely unaware that the only way trade imbalances can be controlled is through the money shortages and accumulations that result from trade deficits and surpluses respectively. Instead, TARGET2 makes good the money deficiency that results from excess imports, and reduces the money surplus that accumulates in the hands of the exporters. It recycles the money spent by Italians so that it can be spent again, or even hoarded outside Italy, ad infinitum. TARGET2 is living proof of the ridiculousness behind the euro project.

Lord Hague provides an exception to his argument and conclusion, by citing Germany’s greater productivity and suggesting that the only way out was for Mr Renzi to enact bold reforms to raise Italian productivity to the same level as Germany’s. He doesn’t say what these reforms might be. I can tell him: the new government should downsize from 52% of GDP to less than 40%, the lower the better. The redeployment of capital from government destruction to private sector progression will work wonders. Tax policies should favour savers. At the same time, ordinary Italians should be allowed to get on with their lives and made to understand the state is not there to support them with handouts.

Finally, Lord Hague’s conclusion, while correct legally, is incorrect from a strictly economic point of view. He states that leaving the euro is a far more difficult problem than leaving the EU, there being no Article 50 to trigger. He implies that if Italy simply returns to the lira, there can be little doubt that it will rapidly collapse taking its banks with it, because Italy’s creditors will still expect to be repaid in euros while the cost of borrowing in lira is bound to increase rapidly, undermining government finances.

However, contrary to everything Keynesians have been taught and in turn teach gullible students, the economic objective of monetary independance should be sound money, not continual depreciation. Italy has enough gold to arrange a gold exchange standard for herself, or alternatively she could run a currency board with the euro, to ensure the lira retains value for foreign creditors. Either course requires something novel from Italian politicians: they must bite the bullet on government finances and permit capital to be redeployed from moribund businesses to new dynamic entrepreneurial activities. It can be done, and Italy would rapidly emerge as a new industrial force.

But will it be done? Sadly, there’s not a snowball in hell’s chance, and here we must agree with Lord Hague. In common with their opposite numbers everywhere else, Italian politicians have surrounded themselves with economic yes-men, trained at the expense of the state to justify state interventions in the economy. It has become a feed-back loop that ultimately concludes with economic instability, crisis and eventual collapse.

Carney’s groupthink

Lord Hague, while respected as a senior British politician is at least not involved in Italy’s monetary or fiscal policies. Far more dangerous potentially is someone with his hand on the monetary tiller, Mark Carney, Governor of the Bank of England. This week he made a speech in Liverpool, which put the blame for the failure of his monetary policies on everyone but the Bankⁱⁱ. He said politicians need to foster a globalisation that works for all. Really? How are they going to do that? He blames economists for been at fault for not recognising “the realities of uneven gains from trade and technology”. But surely, we all know that establishment economists, including the Bank’s own, have an unrivalled track record of getting things wrong. To expect them to suddenly exhibit forecasting prescience is Carney’s personal triumph of hope over reality. Carney berates companies for not paying tax. This is the classic “someone else’s fault” line, and ignores the easily proven fact that money deployed by the private sector in pursuit of profit is productive, while giving it to government is wasteful. More tax paid may be desired by the state, but it is anti-productive.

The Governor then claims the Bank’s monetary policy has been “highly effective” and that “the data do not support the idea that the period of low rates has benefited the wealthy at the expense of the least wealthy.” He has obviously been unable to make the connection between the falling purchasing power of fixed salaries for the low paid and for pensioners relying on interest income, while stock markets roar to all-time highs on the back of suppressed interest rates and injections of money through quantitative easing. Yes, Mr Carney, my middle-class friends have done very well out of their investments and property, thanks to monetary inflation, but they still pay their gardeners and maids roughly the same depreciated wages.

This is relevant not only to the mismanagement of the UK’s economy, but also that of Europe. Carney attracted considerable criticism, rightly, for falsely threatening economic hell and damnation in the event of a vote for Brexit. This presupposes that everything in Europe is considerably better than for Britain on its own, and confirms that his opposite numbers in Europe, who were pushing the same line, have as much grasp of the economic situation as he has. Carney got this as wrong as he possibly could, but there’s no mea maxima culpa.

If Mr Carney and Lord Hague want to criticise current economic events, they should start by properly understanding the negative effects of fiscal and monetary intervention. They should realise that propping up defunct enterprises by lowering the cost of borrowing and supporting them with government contracts is Luddite and destructive. And above all, they should realise that ordinary people going about their business are infinitely adaptable, have an ability to withstand government and central bank silliness to a remarkable degree, and would deliver their taxes much more effectively if they were simply allowed to just get on with their business without having to suffer from government and central bank micro-management.

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