The Biggest Threat To Your Personal Wealth 4 September 2002
This is an update to our prior report, “Gold’s Role in Protecting Your Wealth”. Several factors have recently taken center stage in the financial markets and further strengthen the case for investing in gold:
and growing current account deficit
Corporate fraud and bankruptcies
monetary and economic policies
This last point is really the cause of the prior three, in that the perpetual flood of money creation leads to: growing current account deficits, a declining currency, and a stock market bubble with valuations so high that corporate chieftains use every accounting trick available to try to live up to those valuations. The investing public is only now beginning to grasp what has transpired. It is blatant, yet not unprecedented, fiat money creation with no offsetting increase in production of goods and services.
Last week Mr. Greenspan proclaimed that he was powerless to deflate any suspected stock market bubble because any rise in rates would have brought about a recession in his estimation. When governments and central banks intervene in business cycles to prevent recessions at all costs, they are superseding the profit motive which capitalism is based upon. The liquidation of non-viable firms is prolonged, damaging the overall profit outlook. This can result in a deflationary environment, such as we experienced in the 1930’s, and Japan has been experiencing throughout the 1990’s.
While many claim we are “no Japan”, the bulk of our population is in much worse shape to weather deflationary forces. Japan has had very high savings and lower personal debt levels, while Americans and the economy depend on borrowing and consumer spending. With high cash levels, Japan has weathered the deflation quite well as their huge savings can buy more products and services as prices fall. This highlights the importance of holding high levels of cash during deflationary periods.
Additionally, gold makes sense as a commodity investment since production has not exceeded jewelry demand alone for over ten years. With production now in decline, much higher prices will be needed to encourage new mines, even if the demand for gold as money does not materialize, as we strongly believe it will.
 Current account- The difference between a nation's total exports of goods, services, and transfers and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities. www.investopedia.com
 Fiat money- Money that a government has declared to be legal tender, despite that it has no intrinsic value and is not backed by reserves.. www.investopedia.com