I’ve written about problems with the United States dollar and the US economy.
I’ve been influenced by folks like Peter Schiff and Simon Black. To say the least these guys are not bullish on the US economy. I think they’re right and I think it’s wise to listen to what they say, be aware of the risks, and determine what course of action makes sense for your unique situation.
But while things aren’t great, particularly for those on fixed incomes without assets or investments, there hasn’t been a significant stock market correction and the US dollar is still relatively strong. Does that mean that people like Peter Schiff or Simon Black are wrong? Does that mean I’m wrong?
Things aren’t getting better. The underlying problems remain and only get worse. Governments have tremendous debt, interest rates are distorted, governments continue to spend recklessly, central banks are out of control and asset prices are inflated.
In the face of these problems I think there are two mains risks when it comes to behavior that fall on opposite ends of a spectrum. To willfully embrace either of these mindsets and their resultant behavior is, I think, crazy.
The First Kind of Insanity: Doing Nothing
Proud as a Peacock
On the one hand there is a person who does not take the risks seriously because they don’t think there are any significant risks.
People with this mindset believe that the United States can manage it’s debt. They laugh at anyone who suggests the recovery isn’t real or that the stock market growth isn’t based on sound fundamentals.
Subscribers to this attitude think the United States is the richest and freest and greatest country in the world and that $20 trillion in debt and trillions in unfunded liabilities is not a problem. They think the US government can just print money or increase taxes or grow the economy and everything will be fine.
Folks with this type of attitude hold their savings entirely in dollars and US-centered assets. They are comfortable being heavily invested in US stocks. They believe that government promised programs will be there for them when they most need them.
They can’t envision a world in which the United States isn’t the dominant world superpower. They can’t imagine the US dollar not being the world reserve currency.
This mentality is common in those who are blissfully unaware of the lessons of history and the facts of math.
This is the peacock mentality. People with this mentality strut around and deny there are any problems and so do nothing to protect themselves.
An Ostrich Hiding
Similar to the peacocks of the world there are people who realize there are problems with the economy but still choose not to do anything about it. Maybe they think there isn’t anything they can do about it. They think if the dollar falls and the stock market crashes then they have no choice but to go down as well. They’re either unwilling to learn about alternatives or simply don’t think alternatives exist.
They also might willfully ignore anything suggesting there are problems. If pressed they would concede that another 2008 or 2000 crisis are possible and that government debts won’t be repaid, but they really don’t want to think about it.
People with this type of attitude don’t have the misplaced confidence of the peacocks but they make the same choice not to take any decisive action to protect themselves.
They stick their head in the sand. This is the ostrich mentality.
A Second Kind of Insanity: Living Life around Anticipation of Crisis
But at the same time I think there is a risk of having a bunker mentality. This attitude that crisis is imminent and the sky will fall any day now. Individuals who think this way might go 100% into cash. Or go 100% into gold. Or go 100% into guns and food. Or they take huge risks trying to short the stock market.
A Turtle in it’s Shell
But I think this attitude of going into one’s shell is not particularly helpful. It’s hard to accomplish anything or live a fruitful life when you’re hunkered down and metaphorically looking over your shoulder all the time. This is the turtle mentality.
The Golden Mean
Aristotle and the ancient Greek philosophers spoke of a golden mean. The idea that the correct course of action or virtue is the middle path between two extremes. For example, courage is the golden mean between recklessness and cowardly inaction.
The key to sanity in an insane financial world is decisive, measured and purposeful action when it comes to preparation. Two extremes when it comes to investing would be on the one end of the spectrum shorting the S&P 500 with one’s life savings. On the other end would be buying a 3x bull S&P 500 ETF.
But just because I believe US stocks are in a bubble doesn’t mean I’m going to go with the extreme of shorting the market. It does mean that I’m going to limit my exposure to US stocks and be very selective about which stocks I own.
When it comes to dollars the two extremes would be 100% in dollars or 0% in dollars. But just because I think dollars are overvalued and will continue to lose value doesn’t mean I have to go to the extreme of 0%. It doesn’t mean I go 100% into gold or I only own precious metals and cryptocurrencies. I actually advocate holding some cash. Emphasis on some. I also earn money in dollars and invest in value stocks.
This applies to attitude as well. Being negative and pessimistic isn’t going to do anyone any good. Thinking everything is awesome and always will be isn’t a very good approach either. But there are still many great businesses in the US and there is lots of opportunity in the United States and in the world.
The United States has problems. Lots of economies around the world have problems too. There are going to be winners and losers. Many promises that have been made will be broken. But in the midst of all this there is tremendous opportunity. The important thing is to remain calm, take some practical steps to protect yourself and live your life.
Starting in October of 2008 gold made a run from 680 US dollars per ounce up to and over $1920 in September of 2011 for a gain of 182% in less than 3 years. Gold traded sideways and down for the next year and a half until April of 2013 when it crashed down to the low $1300s. For the next few years gold trended down in a falling wedge pattern. Gold was negative for years 2013, 2014, and 2015.
The recent multi-year low of $1045 was logged in December 2015 and I believe this price is the new bottom for the gold market.
Below is a chart of the gold market with my comments. Click the link if you’re not familiar with reading candlestick charts.
2016 was a positive year for gold even though a lot of the gains were surrendered in November. On the whole for 2016 the yellow metal was up over 9%. It’s my opinion 2017 will continue this trend of gains in extension of a new multi-year bull market.
Gold is up over 11% in 2017. It started the year around $1,155 per ounce and is currently trading over $1,290.
Gold still Undervalued and US Dollars are Overvalued
Despite these positive moves I still believe gold is significantly undervalued at this price.
Paltry efforts at “tightening” at the United States Federal Reserve notwithstanding interest rates are at historic lows. There is also record debt and unfunded liabilities paired with an unbalanced budget. The United States Federal Reserve balance sheet remains over $4 trillion. Globally interest rates are also historically low and debt is high. There are even negative interest rates in Europe and Japan. Geopolitical risk of war in North Korea and Syria may have caused the most recent bump in precious metals price.
President Trump has recently done a 180 on several issues. He told the Wall Street Journal the dollar “is getting too strong.” He has also warmed to Janet Yellen and has stated: “I do like a low-interest rate policy, I must be honest with you.”
The Recent Past of Gold
Last week gold made a strong move up through the 200 day moving average (the solid light blue line above is the 200 day simple moving average.
My Predictive Guesses as to the Price of Gold
The following are my guesses/predictions as to where the price of gold will move over the next year. I’m not recommending anyone buy or sell gold based on these predictions.
Gold has been trending upward since the December 2015 bottom. I think gold will make a new intermediate high between 1400 and 1425 in the fourth quarter of 2017. From that peak it should drop back down to 1260 sometime in mid-2018 perhaps around June.
Of course if there is another 2008-style crash or a hot war in the middle east then all bets are off.
The dashed purple line is my predictive guess as to the price of gold
Longer term I expect gold to make a new high above $1920 within the next four to eight years.
Although there is no substitute for physical possession of a percentage of one’s precious metals I also think it is vital to have some gold stored offshore.
The most cost effective way to own physical gold offshore, particularly for investors will less capital, is through Goldmoney.
I personally own several grams worth of gold via Goldmoney and I’ve been extremely pleased with the service.
Gold has been valued across cultures for thousands of years. It has no counter party risk and I believe it is an excellent defensive holding.
I wanted to flesh out the idea that my Caribbean Cruise was a microcosm of the global economy.
Basically Americans spend US dollars to consume goods and services while the rest of the world works to provide those goods and services in exchange for dollars.
One problem with this arrangement, at least for the people of the world who aren’t US citizens, is that the US dollar is no longer backed by a solvent and productive economy.
Another problem is that a lot of the loans American use to acquire dollars are provided by the very countries who also provide the goods and services.
In other words what are these countries getting in exchange for providing goods and services? IOUs.
These IOUs are promises to pay from a group of people and a country that has more debt that any country or people in the history of finance.
In the movie Dumb and Dumber, main characters Harry and Lloyd spend hundreds of thousands of other people’s money. But hey, they kept IOUs so they could pay them back! (both were unemployed)
So what will happen?
The US dollar will continue to lose a significant portion of it’s remaining value and American’s standard of living will continue to fall while the standard of living for the rest of the world will eventually rise once they stop selling their goods and services in exchange for overvalued US dollars.
This has been happening for a while, but people still have faith in the dollar and the other fiat currencies around the world are being devalued by their respective government even faster than the dollar.
So dollars are the cleanest dirty shirt.
But will this continue forever? Will Americans be able to continue to borrow at low rates and live beyond their means while the rest of the world foots the bill?
I doubt it.
The World Reserve Currency
The US dollar is the world reserve currency which means that many things that are traded on the global market are priced and bought and sold with US dollars.
It also means I was able to buy a Hawaiian shirt in Honduras, go snorkeling in Belize and buy drinks in Mexico at a low cost using US dollars.
Using China as an Example
Why do countries put up with this lopsided arrangement?
It has everything to do with history and perception. I touch on this some in another article downfall of the US dollar. But the short version is that the US was the most powerful and dominant country after World War II and the currency reflected this strength.
The result was that critical goods like oil were priced in dollars.
Countries like China therefore need dollars in order to buy oil.
Meanwhile the American consumer wants goods and services.
So in order to get dollars China produces goods and services that are then sold to Americans for dollars.
Back when the majority of Americans had a lot of savings and the dollar had more value this worked fine.
But the US began producing less while simultaneously consuming more resulting in trade deficits.
In 2015 the US imported $497.8 billion in goods and services from China and exported $161.6 billion to China. Thus the U.S. goods and services trade deficit with China was $336.2 billion.
You can’t consume more than you produce (which is what a trade deficit is) without losing money and as time passed the US consumer found his savings depleted.
About half of Americans have zero net worth.
But China has an large portion of it’s economy built around American consumption and the world associated dollars with strength and prosperity.
So China loans money to the American consumer to pay for the American to buy the things China produces.
This works for the time being because the US is the most powerful economy in the world and the dollar is the world reserve currency.
So of course the American will pay back the Chinese producer! Or so the thought goes.
It’s the ultimate vendor financing: China provides the goods and services as well as the loans to pay for the goods and services.
Meanwhile the US government has also taken on monstrous amounts of debt and has devalued the dollar.
So the IOUs the Chinese producer already has are worth less and less each year.
How long before the Chinese producer begins to seriously doubt if the US consumer will ever pay back the IOUs?
Once this doubt takes how long before the Chinese producer stops providing the loans to buy the goods and services?
When this happens prices will have to rise and it will be harder for Americans to buy goods and services.
This process is explained in more detail in an excellent book that I recommend. The book is written by Peter Schiff and is called “How an Economy Grows and Why It Crashes“.
Two beers, four mixed drinks and chips and salsa for under 20 USD. Compliments of El Cial La Ceiba in Cozumel, Mexico. It wasn’t just the two of us imbibing though!
This is basically what I was witnessing on my Caribbean Cruise.
I was able to spend my higher valued US dollars for goods and services provided by peoples outside the US who wanted dollars.
It is a great benefit that Americans have had for some time but will it continue forever?
I don’t think it will.
I think there are lots of opportunities to position oneself to avoid getting destroyed as the dollar continues to lose value.
Thats why I created this website.
What is a 60/40 asset allocation? I’ll take a quote from an article on my favorite online finance wiki, investopedia:
For many years, a large percentage of financial planners and stockbrokers crafted portfolios for their clients that were composed of 60% equities and 40% bonds or other fixed-income offerings. And these portfolios did rather well throughout the 80s and 90s. But a series of bear markets that started in 2000 coupled with historically low interest rates have eroded the popularity of this approach to investing. – “Why a 60/40 Portfolio is No Longer Good Enough“
With that in mind, I’ve found a delightful free tool called Portfolio Visualizer that I’ve been using to backtest various asset allocation strategies.
Today I’d like to share a few basic ones to provide some food for thought. Each of these portfolios is modeled for annual rebalancing, meaning assets would be bought and/or sold each year to retain the original allocation percentages.
Portfolio 1: 100% Allocation to US Stocks
Using this tool, you can see that if in 1972 you invested $1,000 in US stocks, it would grow to be worth $78,509 at the end of 2016, representing a compound annual growth rate (CAGR) of 10.18%. You would have had to endure a drawdown of 50.89%, from November of 2007 through February of 2009. During this crisis the portfolio would have gone from $43,886 down to $21,551.
Portfolio 2: 60/40 Asset Allocation of US Stocks and Bonds
Most people don’t have the iron stomach needed to hold onto their stocks while their portfolio drops by 50%.
Enter the 60/40 asset allocation.
A traditional allocation in the investment community is (or has been) 60% stocks 40% bonds (in this case I used Intermediate Term Treasuries). The thought being that if stocks are going up, bonds are going down, but also that if stocks are going down, bonds will go up. If you did this 60/40 allocation starting in 1972, again with $1,000, the 2016 value would be $58,011, the CAGR would be 9.44% and the 2008 drawdown would have been around 28%.
So you give up $20,500 in exchange for some peace of mind.
Portfolio 3: 60/40 Asset Allocation of US Stocks and Gold
I think that US debt has nowhere to go but down. And I’ve never been particularly fond of loaning the government money, through treasuries or otherwise, so I thought: what if one replaced the 40% allocation to bonds with my favorite yellow metal?
With this allocation the $1,000 invested in 1972 would grow to $85,886 by 2016, the CAGR would be 10.40% and the maximum drawdown would have been 30% back in 1980-1982.
So over the 1972-2016 timeframe, a 60/40 asset allocation of US stocks and gold would have performed better than either 100% US stocks or a 60/40 US stock and bond portfolio.
You can always cherrypick allocations in hindsight that will outperform. But I think it is an interesting datapoint in the case for gold.
I favor gold over Bitcoin as a long-term store of value. I do think that blockchain technology is here to stay for a long time. However, I question the long-term viability of Bitcoin.
But before I get into that I want to say that if someone loves Bitcoin and hates gold they are free to own Bitcoin and no one will force them to own a single gram of gold! The opposite is also true. You can also own some combination of both!
For me, I’ve chosen to own much more Gold than Bitcoin but I still own both.
I’ve written about how I buy bitcoin and also about bitcoin arbitrage. I’ve also written about owning physical gold outright and physical gold through Goldmoney.
I do think having a very small percentage of my assets in crypto currency is appropriate for me but I’m leery of having too much of my net worth in cryptocurrency.
So with that in mind I present gold versus Bitcoin. This is a comparison between the two as I think of it. What you value or find important will likely be different.
That is the great thing about free markets: there doesn’t have to be one answer that is forced on everyone.
What I like about Bitcoin
International Value Transfer
I think BTC beats everything else out there for international value transfer. I’ve done international wire transfers and domestic wire transfers in traditional government fiat currency and Bitcoin is faster, easier and cheaper than anything else I’ve used.
Bitcoin has Advantages over Fiat Money
Dollars (and other fiat money) are constantly being devalued and destroyed via fractional reserve banking and central bank debt monetization and money “printing”. The total number of Bitcoins that will ever exist is set by how the bitcoin algorithm is coded.
What I don’t like about Bitcoin
It is Centrally Controlled
A disillusioned insider I came in contact with has swayed me to the opinion that Bitcoin is not decentralised. The decisions about Bitcoin are made by the Bitcoin Foundation and a few of the larger miners.
Bitcoin evangelists will tout Bitcoin as being decentralised. I’m open to new arguments and evidence supporting that Bitcoin is in fact decentralised but as of now I see Bitcoin as being centrally controlled.
It’s Direct-Use Value is Very Low
Some people argue that there is direct-use value in Bitcoin. It can be used as an experiment, political statement, etc. Others argue that Bitcoin has no direct-use value.
Even if Bitcoin is valued for direct use I think that value is very low. Dollars have some direct use value as well, for example kindling, tacky wallpaper, etc, but it is a fraction of the value dollars currently command in trade.
The reason I think this is a problem is because the direct-use value (aka non-monetary use value which is also sometimes called “intrinsic value”) provides a floor.
Government fiat currencies and Bitcoin have little (or zero) direct-use. So when these mediums of exchange fall out of favor, they can go to zero or near zero.
Bitcoin Could be Replaced by a Better Cryptocurrency
Bitcoin has some issues in my opinion. Bitcoin could be improved to overcome those issues, but it is also possible one of the myriad of alternative coins (called “altcoins”) could become more popular than Bitcoin and eventually replace what is currently the most established and largest cryptocurrency.
Delay in Confirmations
Virtually all vendors require a certain number of confirmations after Bitcoin is sent before it is confirmed and is considered successfully sent. This is to avoid the problem of double-spending.
Bitcoin takes about 10 minutes per confirmation. In the world of the internet, 10 minutes is a long time. Some vendors require 2 or 3 confirmations, which would take between 20-30 minutes. That is a really long time.
There are also concerns about the scalability of Bitcoin.
There are probably other reasons that haven’t even been invented yet that could make some new Bettercoin™ a superior choice to Bitcoin.
So while the number of Bitcoins is fixed the number of competing altcoins is not fixed.
Competing altcoins can serve to devalue Bitcoin. I like it when companies compete for my business to lower price but if I owned $1,000 worth of Bitcoin and then BetterCoin™ comes out and everyone switches to it, my $1,000 worth of Bitcoin could drop to a small fraction of a dollar in value.
The United States Commodities Futures Trading Commission (CFTC) declared Bitcoin is a commodity
Which means it’s taxable as a commodity.
Just because the government decrees that something is the case doesn’t mean that it is true.
Various elements of the US government can say that dollars are a store of value but that doesn’t mean they are.
I can disagree with the CFTC intellectually. But I obviously can’t ignore what the government says if I don’t want to get fined or go to jail.
Like most Americans I’m afraid of the Internal Revenue Service (IRS) so compliance with all appropriate tax laws is very important to me.
That means that every time I transact in Bitcoin I have to keep track of my cost basis and pay any appropriate capital gains.
Mt. Gox, Bitfinex, and countless other exchanges have been hacked. You have to be kinda savvy to secure your Bitcoins. Plus, if you go the cold storage route you lose may of the benefits of Bitcoin as a medium of exchange.
What I don’t like about Gold
Gold isn’t used as Money or a Medium of Exchange
Few if any retailers will accept gold as payment for goods and services. One must first convert the gold into money and then spend the money.
Gold is not considered a currency and like Bitcoin does not get favorable tax treatment.
It could be Confiscated
The United States government has made gold bullion ownership illegal in the past and could do so again. Therefore any gold held in the US is susceptible to confiscation. I think it is unlikely this will happen again because not very many people own gold bullion, as compared to years past, but this is a possibility.
You Can’t use it to Buy Stuff Online
I can’t get onto Overstock.com and use physical gold in my possession to buy goods or services. What that would look like would be to mail in a shipment of gold, Overstock would wait until the gold arrives, and then ship out what I ordered.
I think the Paper Gold Markets are Manipulated
I think governments have a vested interest in keeping the price of gold down. I think the gold futures markets are manipulated down. While I think that this manipulation is not sustainable and eventually the price of gold will reflect supply and demand fundamentals, it is annoying in the short term. On the flip side, gold manipulation does provide a lot of great buying opportunities.
What I like about Gold
It’s Been Valued for 3,000 years
Despite all the changes since 1,000 B.C. gold is still valued by billions of people.
It has Significant Direct-Use Value
Gold is used in electronics, jewelry, dentistry, satellites, and decoration. Even though gold is not used as money or a medium of exchange today it is still valued by billions of people.
How many people would want US dollars if they weren’t used as money?
Gold is a Natural Element that Satisfies the Classical Requirements of Money
Gold is one of the least reactive chemical elements. Gold that has been lost on the ocean floor for hundreds of years is still in the same shape it was when the ship went down.
Gold is durable, portable, scare, divisible and uniform. Gold can act as a unit of account, a medium of exchange and a store of value.
Gold is Scarce
A new element that has all the properties of gold is unlikely to be discovered or created.
New gold can only be created in a nuclear reaction and gold can only be pulled out of the ground with significant effort and time.
Mining gold-rich asteroids would also be tremendously expensive and dangerous.
Gold can be used with Payment Technologies
Much of the below thought is from or inspired by Roy Sebag. Mr. Sebag makes a distinction between money technologies and payment technologies.
Dollars and Euros are debt-based, fiat money technologies or assets that can act as a store of value (albeit poor stores). Gold is an asset that can act as a store of value. Bitcoins are an asset that can act as a store of value.
Credit card networks, Paypal, Apple Pay, Bitcoin, and Ether are examples of payment technologies. These are networks and systems that allow ownership of assets to be transferred.
Buying things online with a credit or debit card, Goldmoney, Paypal, or Bitcoin is simply ownership transfer of an asset via a payment technology.
In the case of credit cards, the credit card network is the payment technology and dollars are the money “technology” or asset being transferred.
In the case of Bitcoin, the Bitcoin blockchain is the payment technology which also has an integrated and inseparable unit of account, also called Bitcoins.
Gold can be used separately from a payment system (physically exchanged), or it could be used in conjunction with another payment system.
Goldmoney is one such service that combines physical gold ownership storage and transfer with the payment technology potential of internet based transactions.
Gold remains a fantastic store of value. I think the best of both worlds in money would be a gold-backed currency or electronic ownership transfer of Gold held at a trusted third party.
Bitcoin has a very low (if any) direct-use value. That fact combined with the potential for Bitcoin to be supplanted by a superior payment technology makes me skeptical of Bitcoin as a long-term store of value.
I like gold because it has a 3,000 year history of being valued across cultures. It’s scarce and I think it’s extremely unlikely that another element will come along that will be able to replace the desired and historically valued properties of gold.
Not only that, but you can still make payments and spend gold in a way that takes advantage of the electronic payment systems that are so useful today.
Ultimately investors and consumers will make their own decisions. Gold and Bitcoin are competitors but they could also continue to exist side by side for some time.
That is just how gold and Bitcoin compare in my view. Which one do you prefer? Let me know in the comments section below!
I own too much gold.
I’m an advocate of holding gold. I think it is a key part of my portfolio but I own too much as a percentage of my other assets.
Not counting retirement-specific accounts, gold (and silver) make up 54% of my liquid net worth.
That is way too high for me!
So I decided to read what some public figures have said or written in regard to the percentage of a portfolio that should be gold (and silver).
The following is educational only and NOT SEC-investment-advice. So make up your own mind with the help of an appropriately licensed, registered, and SEC-anointed financial advisor.
Warren Buffett – Berkshire Hathaway – 0%
Warren Buffett doesn’t like precious metals. He has several famous quotes regarding why he doesn’t like the shiny stuff. While I wouldn’t be surprised if he actually did own some precious metals, but the way he speaks he acts like he doesn’t own any. I’m not a Buffett fan but I think you can learn from him if you carefully sift what he does from what he says or writes.
Jim Cramer – CNBC – No More than 10%
Mad Money host Jim Cramer recommends no more than 10% in gold. He recommends owning gold via an ETF unless you have enough money to buy physical in bulk.
I’m not a Jim Cramer fan, but I include him because he is a big-time stock guy and yet he still recommends holding some gold. I think there is reason to believe the ETFs don’t hold the gold they claim to so I don’t like gold bullion ETFs. I also disagree that gold is just an insurance policy. Pure insurance (such as term or homeowners) is not an asset, it’s an expense. I think gold is an asset class in and of itself.
Peter Schiff – SchiffGold and EuroPacific Capital – 5-10%
Peter Schiff recommends 5-10% in physical gold. I was actually surprised by this low number because Schiff talks about gold and silver A LOT. Schiff’s 5-10% allocation to gold and silver does NOT include mining stocks–but that is a different topic.
Tim Price – Price Value International – ~25%
In the September 2016 edition of Price Value International, Tim Price proposes owning roughly 25% in “real assets” like gold and silver.
Mike Maloney – GoldSilver.com – 100%
Mike Maloney is the most pro-precious metals person I know of. He is 100% allocated to precious metals with 90% to silver American eagles and 10% to gold American eagles.
John – HowIGrowMyWealth.com – 10-25%
I would like physical precious metals to be around 10-25% of my liquid, non-retirement portfolio. I don’t have an opinion on the amount of silver relative to gold. I am of the opinion that silver is more undervalued than is gold and as a result has more upside potential.
I think gold and silver are a great way to preserve wealth but they are not a great way to build wealth since they don’t pay a dividend or yield. For many readers that might be obvious but I’m still learning!
I purchased a lot of gold in 2013, on the heals of the all-time highs, so much of my gold and silver holdings are worth less in fiat than I paid for them. So I intend to reduce my gold holdings as a percentage of my portfolio by focusing my savings and investments on other asset classes going forward. By doing this I can reduce my gold and silver holdings as a percentage of my assets without selling any of my gold and silver.
On the flip side, if my portfolio did have less than 5% physical gold I would consider adding to my holdings via gold maples, silver American eagles, and foreign-stored physical gold via a Goldmoney personal account.