Gold and Silver - Your Hedge Against Central Bank Shenanigans

A recent Federal Reserve report reveals some shocking facts.

So Spain has recently became the 4th member of the euro to request a bailout since the beginning of the zone's insolvency disaster. The country is looking to receive as much as 100 billion euros ($125 billion) in order to ensure the 'survival' of its current banking system; or as I see it, an attempt at using debt to fix more debt! “The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total,” according to a Eurogroup comment. With similar rescues being drafted up for Greece, Ireland, Portugal and now Spain, the European Union and the International Monetary Fund have so far committed nearly half a trillion euros to finance these European bailouts!

But I think the lesson to be gleaned from these ongoing news reels about 'this country bailing out that one' and 'that one asking for loans from the other one' etc. etc. etc., is that these are all simply good examples of governments and central banks trying to solve an insolvency crisis with more debt. The markets quickly assimilated this data, as Italian and Spanish bond yields reached new highs on the year just 2 days after the announcement. This Tuesday, the yield on Spain’s 10-year benchmark reached 6.8 percent, while Italian yields nearly hit 6.3%. “It is quite likely that Spain needs a full bailout in the near future although policy makers will try all possible options to avoid this outcome, including a revival of bond purchases by the ECB as well as another three-year liquidity operation,” says Pavan Wadhwa, global head of interest rate strategy at J.P. Morgan Chase.

Even though sovereign yields are showing that nothing has actually been fixed, precious metals are signaling that central banks are most likely going to rely on money printing in order to prolong the status quo. Over the past 2 days, gold has risen $22 an ounce to retake the $1,600 level.

Despite this positive note sounding from the yellow metal, there are still negative consequences elsewhere, resulting from all of this monetary easing. According to a recent Federal Reserve report, America's median family net worth fell almost 40 percent between 2007 and 2010 - dropping to $77,300 in 2010, as compared to $126,400 in 2007. This has been the lowest level witnessed since 1992 and the largest drop since 1989, when the data first started to be collected. To summarize, this Fed-induced credit and housing bubble has basically wiped out enough net worth to send Americans' wealth back to a level that hasn't been seen in 18 years! I don't want to get too much into macroeconomics, or even politics here, but it's a pretty safe and relatively objective assumption to state that Americans may have placed too much trust in the central bank’s ability to manage interest rates and incorrectly relied heavily on their house as an asset - a classic textbook example of the misallocation of capital that comes from centrally-planned economies. Interestingly, during this SAME time period, gold and silver preserved wealth quite well.

From 2007 to 2010, gold prices increased from $640 to almost $1,100 an ounce. Meanwhile, silver prices climbed from $13 to $17 an ounce. Of course their journey wasn't a straight shot to the top, but let's just say that wealth was maintained much more effectively than most other assets. And the price of the two precious metals today make these prior prices look like the bargain of the decade. With the global solvency crisis being far from over, both gold and silver should still have plenty of room to appreciate as we can definitely expect much, MUCH more central bank shenanigans to come.

Be safe, be wealthy and above all else, be happy.

- Mitch

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