Kyle Bass, the founder of Hayman Capital, once said, “Buying gold is just buying a put against the idiocy of the political cycle, it’s that simple.” With political rhetoric heating up more than ever in anticipation of the November election, I can not think of a better way to describe the many valuable characteristics of precious metals in such short detail. The presidential nominees from the two major political parties recently took to the stage and debated various issues. As usual, they squabbled over talking points with no real solution in sight.
Every election cycle brings another round of soon-to-be broken promises. From energy independence to a balanced budget, there seems to be no limit of how many times political parties will repeat the same mantra to the general public. For more than the past thirty-years, presidents have been touting a better energy policy for the United States. Yet, gasoline station owners in California are currently shutting down pumps due to a lack of supply and surging wholesale prices. With the exception of 2009, a year in which the entire financial system was on the brink of a total meltdown, the average annual price of domestic crude oil has increased for the past decade. Broken promises and misguided hope have lead us to the situation we find ourselves today.
The financial state of affairs in the U.S. is very concerning. Politicians talk about improving the nation’s deficit or debt level, but the problem has only escalated. In August, the Congressional Budget Office projected a $1 trillion-plus budget deficit for America’s fiscal year 2012, representing a fourth consecutive year of trillion dollar budget deficits. Making matters worse, October kicked off fiscal year 2013 with an even bigger trillion dollar number. As of October 1, 2012, the amount of total public debt outstanding came in at a record breaking $16.2 trillion, or about 103 percent of the entire U.S. economy.
In regards to trillion dollar projections by agencies such as the CBO, Bill Gross, manager of the world’s biggest bond fund, explains in his most recent investment outlook, “What they’re saying is that when it comes to debt and to the prospects for future debt, the U.S. is no ‘clean dirty shirt.’ The U.S., in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth. Uncle Sam’s habit, say these respected agencies, will be a hard (and dangerous) one to break.”
Old habits die hard, and so do fiat currencies. Uncle Sam’s debt addiction is met with a constant supply of drugs from the Federal Reserve. The central bank, which is led by an unelected official, is responsible for providing demand for the government’s debt and manipulating interest rates. In fact, the only positive development on the nation’s staggering borrowing amount is a reduction on interest payments. For fiscal year 2012, the U.S. paid only $360 billion in interest, down from $454 billion in fiscal year 2011. This is much like a junkie feeling better after shooting up and having a bit more cash in his pocket, if Uncle Sam had any cash in his pocket. Even that statistic comes with an asterisk, though. The fiscal 2012 interest bill was reduced by $54 billion due to a change in accounting methods by the Department of Defense, according to Bloomberg.
The relationship between the U.S. and its dealer of choice has resulted in unprecedented debt levels and currency devaluations. Voting for a politician to solve these problems is setting one’s self up for disappointment. In a recent interview, Bass explains, “I’ve taken a pencil to the CBO budget as a non-partisan third party and I can’t fix it. As an accountant if you can’t fix it, I have no idea how as a politician you can fix it. You’d be unelectable if you make those decisions.”
The presidential debate at the University of Denver produced a phrase, “New Economic Patriotism.” However, its usage was merely another example of political rhetoric. True economic patriotism will come from individuals voting with their money, or in this case, protecting money with time-tested currencies that can not be abused by political deficits and central bankers, which are precious metals like gold and silver.
Investor Insight: Gold & Silver: Protection Against the Fed’s Punch Bowl
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Disclosure: Long EXK, AG, HL, PHYS
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