For investors who are both just beginning their foray into gold investment, and for those who have been long time proponents of gold, Sprott Senior Advisor John Embry breaks down the recent history of the U.S., highlighting the pressures that have brought fiat currency to the brink, U.S. debt liabilities to staggering heights, and gold back to the institutional investor’s crosshairs. It’s a must-hear, dispassionate and highly instructional speech for anyone seeking to fully understand the state of the global economy and its implications for gold and silver, and why gold remains a cornerstone of a well-constructed portfolio today. 

To quote Voltaire: “Paper money eventually returns to its intrinsic value. Zero.” 

The U.S. has provided the world’s reserve currency since Breton Woods. Though we did not lose the implicit gold backing until 1971, the pressure of the 1960s set the stage. As President LBJ tried to fund both his Great Society program and the Cold War era arms race and the Vietnam War, cash was flying out of U.S. coffers. In the process, an ever-greater amount of U.S. cash – gold-backed cash - was ending up in foreign hands. At the time, only central banks could redeem U.S. currency for gold, and they came forward with arms outstretched.  By 1970, the U.S. gold reserves were depleting at an alarming rate, causing Nixon to close off the vaults and unpeg the dollar.  Few could imagine the financial engineering that was to follow. 

After that came the reigns of Fed Chairmen Paul Volcker and later Alan Greenspan, who began to take enormous liberties with monetary policy, effectively addicting the financial markets to stimulus. Inflation remained muted, thanks in part to emerging China flooding the world with cheap goods, and therefore financial returns were spectacular. It has also corresponded with dramatic market dislocations. 

The bond market bottomed in 1981.  The stock market bottomed in 1982.  The stock market crashed in 1987. The dot com bubble popped in 2001, followed by real estate – and essentially the global economy – in 2007 and 2008.  And the central bank’s been there every step of the way, accommodating fresh paper money – monetary heroin -- to shore up markets at any sign of trouble.  And what has been the result? 

In 1981, when Ronald Reagan was sworn in, federal debt was $960 billion, an amount accumulated over the better part of 200 years. 

In 2007 and 2008, federal public debt was $10 trillion, a 10-fold increase in 26 years.  This only led to greater stimulus via QE. 

Eight years later and we find ourselves saddled with federal funded debt which has doubled again to $19 trillion.  And this isn’t the whole picture: Off-balance sheet debt liabilities, including Freddie Mac and Fannie Mae, at an estimated  $5 to $6 trillion; unfunded liabilities for Medicare, Medicaid, and social security, estimated between $60 trillion and $150 trillion; plus other liabilities, equals a range of about $85 trillion to $175 trillion. Factor in that U.S. GDP is a mere $18 trillion, and we can see that our obligations are between 4x and 8x our productive capacity. And how long can this charade continue? 

For this presentation and a full compendium of audio material from the Sprott Natural Resource Symposium, please consider our Sprott Conference MP3 Package—which includes presentations by Rick Rule, Ross Beaty, Bob Quartermain, Rob McEwen, and many others. 

If you have any questions about this article, please contact your Sprott financial advisor at 800-477-7853. 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.


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