Does it really make sense to keep a portion of my wealth
in gold stocks, which are among the market's riskiest
securities?
Answer:
Yes, there are plenty of examples in history when gold
stocks (and other resource stocks) were safe havens
during a financial crisis. Look up the history of
Homestake Mining during the Great Depression, for
one example. Gold plays a unique role in the modern
economy. All of our fiat currency (and the entire global
financial system) is a huge, complex web of interconnected
IOUs. Anyone who says he really understands the implications
of a major bank or insurance company failure in our current
system is lying. That's why the Fed panicked in late 2008.
It had no idea what would happen if Lehman's failure led to
a run on its European creditors. It had no idea what would
happen if AIG failed and took Goldman (AIG's main trading
partner) down with it.
The Fed's actions from 2009 to 2014 "short-circuited" the
normal market clearing process, which means there's far
more "dodgy" debt out there than normal. There's a huge
overhang of credit excess just waiting to be written off.
This vast overhang of debt is largely responsible for the
weak economic rebound we've experienced – the excesses of
the last cycle were never really expunged.
My bet is that they'll continue to try fighting "the last
war" until there's some kind of epic collapse unlike any
we've ever seen in modern times… or until there's a sea
change in U.S. politics (unlikely, in my view). In any
case, when the time comes that either the U.S. begins
printing huge sums of money to fight deflation (and to
avoid writing down bad debts), or uncertainty grows
about the reliability of counter parties in the global
financial system, you'll see gold prices (and gold
stocks) soar. Gold is the only universally accepted
financial asset that isn't someone else's liability.
That's a unique trait in a world that has gone mad
for debt. And I'm certain that quality will be
appreciated at some point again.
- Good Stuff
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