Why Now Precious Metals?

Source: Ahead of The Herd, by Richard (Rick) Mills

As a general rule the most successful man in life is the man who has the best information

John Exter was an American economist and a member of the Board of Governors of the United States Federal Reserve System.

 

Exter is known for creating Exter’s Pyramid – useful for visualizing the organization of asset classes in terms of risk and size.

 

When the credit system is expanding most money flows to the top of the pyramid – the increasingly speculative and illiquid investments. When the credit system comes under pressure and debt cannot be repaid, the items at the top of the pyramid get sold and money flows towards the bottom.

 

“In order to make use of it though, we must first make the distinction between real wealth and claims on wealth. Real wealth is represented by actual items that people want or need. This can be food, land, natural resources, buildings, factories etc. Financial assets, shown as layers in the pyramid, represent claims on real wealth. In a fully developed financial system, in good perceived standing, there is a high ratio of claims on wealth to actual underlying real wealth. In this environment the average buying power of the financial assets is lower. This can best be observed by looking at the purchasing power at the bottom of the pyramid. Gold is at a minimum here. It is competing with all of the other claims on wealth for a relatively constant amount of underlying real assets.

 

According to Exter’s theory of money, when economies get into trouble through the accumulation of too much debt, the levels of the pyramid disappear in order from highest to lowest. As the pyramid contracts downward, the remaining layers represent a proportionally higher claim on the real underlying wealth. In other words their value increases. Using gold as our reference point, it’s relative purchasing power increases as the pyramid contracts. Gold finds itself in a secular bull market.” Trace Mayer, The Paper Empire

 

The Debt Pile

 

In January of 2017 the Institute for International Finance (IIF) reported global debt levels – total world debt – rose to more than 325 percent of the world’s annual gross domestic product in 2016. Global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion with general government debt accounting for almost half of the increase.

 

Reuters

 

U.S. Dollar

 

The IIF said “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness presented challenges for borrowers…a shift toward more protectionist policies could also weigh on global financial flows. Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

 

Moody’s Investors Service Inc. reports that US$3.9 trillion worth of global private debt (the combination of business debt and household debt) was issued in 2016, a record high.

 

For the full year 2016, total U.S. household debt rose by $460 billion to $12.58 trillion, the biggest annual increase in a decade. Total U.S. household debt is $99 billion (0.8%), shy of its all-time peak of $12.7 trillion set in Q3 2008 just as the financial crisis was starting. When measured as a percentage of GDP, total household borrowing today is 67% of nominal gross domestic product, compared with 85% in 2008.

Read More Here: Ahead of The Herd – Why Now Precious Metals?



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