There have been decades of debate in finance over gold – long before the recent, rapid rise in gold prices. Some see gold as a way to diversify into an asset with less direct correlation to the overall market. Others view gold as no more than a lump of yellow metal. It produces no cash flows. How can it be possibly worth anything?

In a way, the naysayers are right. Gold does not produce any cash flows, so that naturally makes it suspect. If someone were trying to sell me a stock that produces no cash flows and never will, I’d tell him where to stick that stock –and let me tell you it wouldn’t be inside my brokerage account.

However, any company faces this same problem with its products. Take Apple, for example. Does Apple produce cash flows and dividends? Of course it does. At the same time, its products don’t do anything… they’re not much different than a lump of gold. No, I’m not crazy. Your Apple iPad does not produce cash flows. Not a single cent – just like an ounce of gold. Of course, Apple sells iPads to make cash flows and dividends, but really the same is true with gold. Newmont Mining and Barrick Gold also earn cash flows and pay dividends as well by selling their product: gold.

However, there’s a reasonable objection to this point. A gold-hater might say, “Wait, I’m still right. Gold is stupid. It’s just a block of metal. An iPad is actually useful and fun.” True, but who is to judge the preferences of others? Gold might be stupid in some people’s eyes, but maybe purchasing an $800 iPad is stupid in others’. Personally, I think that they’re way too expensive. I like the iPad, but at its current price, I could go the rest of my life without owning one.

The world is full of products which someone else finds dumb. Here’s another example: Louis Vuitton purses retailing for $3,000. In my personal opinion, if you’re spending that kind of money on a purse, you’re an idiot. Does that mean that I would never invest in Louis Vuitton? Even though I personally think these purses are dumb, my opinion doesn’t change the fact that others continue to buy them. Hence, at the right price, I wouldn’t mind owning shares of the company. The marketplace is not about just betting on products that you think are great, but investing in products that others find worthwhile.

This is what the anti-gold crowd doesn’t get. Even if you think that gold is pointless, a whole lot of other people in the world think otherwise – and they are going to keep buying gold as they have been doing for thousands of years. When times get tough and inflation rises, people will buy even more gold. Maybe they’ve all lost their minds, but that won’t change the end result of skyrocketing gold prices. Many societies values precious metals, and they will continue to do so.

However, the same can’t be said of many other products. If I buy a $3,000 purse for my wife and a new iPad, what will those be worth in 10 years? The purse will probably end up in a thrift shop, and I won’t be able to give the iPad away to a homeless man within a decade. With gold, it’s different. If you buy an ounce today, it’s going to worth something a decade from now. Maybe it’ll be worth $5,000 an ounce… or maybe $200, as the naysayers believe. But it certainly won’t be worthless.

Even stocks won’t necessarily keep their value. Sure, Apple’s cash flows and dividends seem stable now, but where are they going to be in a decade? That’s a long, long time in the world of tech. Are you sure that they’ll just keep making amazing product after product? I wouldn’t bet on it. Maybe the stock won’t be completely worthless in ten years, but what about a more distant time frame?

Would you bet against me in the following proposition? I bet that in 500 years, gold will still hold some value, while Apple’s stock will not. Few companies have retained any value over 500 years. In any time in history with almost any company, I would come out ahead in that bet. The odds are overwhelmingly in my favor.

But there’s a problem with my bet – besides the fact that both bettors will dead in 500 years. What are we going to bet: $1,000, $50,000, or maybe even a billion dollars? Do those stakes sound too high to you? They don’t sound very high to me… have I gone even crazier? No; the crazy person is the one who would accept the bet in US dollars.

Even if you’re really optimistic about the country’s immediate future, the long-run track record of fiat paper currencies is pretty bad. Those dollar bills might be worth something in 500 years – in a museum, but not on the street. Even at a low inflation rate of 2% over 500 years, a million dollars will have the purchasing power of a little over $50 today.

Look, maybe you still think that gold is stupid – and that’s fine. But the fact of the matter is that much of the rest of the world doesn’t. In fact, the world has valued gold for the last few thousands of years. This perception has survived wars, recessions, plagues, and natural disasters. Just like some people will keep spending money on expensive purses they don’t need, others will keep buying gold that just sits in a vault and does nothing. Maybe the gold naysayers are right that buying gold is silly, but that’s not going to stop people from doing it.

So, here’s the conundrum for the anti-gold crowd. If everyone keeps buying gold regardless of what happens, is it really so stupid to own it? Hey, I think that paper money is the dumbest thing on earth, but that doesn’t stop me from using it. Getting the market right is all about figuring out what other people want, rather than being swayed by your personal biases. As a result, even if you personally think gold is stupid, it still is a smart investment.

by Vedran Vuk

But They are Fiscally FUBAR…

• Significant Fiscal Deficits
• Gross Financing Needs Are Remarkable
• Debt/GDP now above 80% in all G7 Countries
• Debt/GDP ratio up significantly in Spain, Greece, Portugal, and Japan
• In most G7 countries short term debt is 20% to 30% of total debt outstanding

and Financial Repression and Domesticization has become rife…

• For Japanese investors JGBs look attractive
• Foreigners own only 5% of JGBs
• Japan: Holders of government debt as % of total outstanding. Foreigners hold 5%
• Institutional investor holdings of government debt

which has lead to a nation (people and banks) that are entirely as one connected to this SNAFU…

• Japanese banks have been increasing their holdings of Japanese government bonds
• Japanese banks: Deposit growth higher than loan growth
• Japanese banks buying JGBs for their surplus deposits
• Japan’s elderly rely mainly on public transfers when they turn 70

QUESTION:  “In case Japan becomes insolvent, what will happen to gov­ern­ment bonds?”

日本が財政破綻した場合、国債はどうなりますか : 財務省
http://www.mof.go.jp/faq/jgbs/04be.htm

 Answer . .  .
http://www.mof.go.jp/faq/jgbs/04be.htm
“Rest assured!” How bond­hold­ers can pos­si­bly rest assured under these cir­cum­stances remains a mys­tery, in par­tic­u­lar since the MoF then pro­ceeds to tell them exact­ly how they will get kicked in the groin: bonds will be redeemed “respon­si­bly.”

Not when they mature, but respon­si­bly.

Thus, we have the MoF’s offi­cial action plan for the moment when the big S hits the fan, the moment when Japan with its declin­ing wages and shrink­ing working-age pop­u­la­tion can no longer save enough to mop up all the gov­ern­ment bonds nec­es­sary to keep the gov­ern­ment afloat.

A selec­tive default. Bonds will retain their “value,” but the gov­ern­ment won’t redeem them when they mature. It will redeem them in bits and pieces, stretched into all eter­ni­ty, as it sees fit. You’ll die before you’ll see your money.

For a presidential election taking place when the US debt/GDP has for the first time in 70 years crossed above 100%, in which over 50 million Americans collect food stamps and disability, in which M2 just crossed $10 trillion, in which total US debt is about to pass $16 trillion, and when total nonfarm employees in America (133,235,000) are the same as they were in April of 2005, it is quite surprising that economics has not taken on a more decisive role in the electoral debate. But while both candidates may, for their own particular reasons, not want to bring up the slow motion trainwreck that is the US economy now, in 4 years whoever is running for president will not be so lucky, because as the US debt clock shows, assuming current rates of progression, things are about to get far, far worse.

To wit, this is how America will look like in 2016:

• Total US debt: $22.2 trillion (an increase of over $6 trillion from today)
• Total debt per US taxpayer: $180,000
• Debt to GDP: 130% (30% higher than today)
• Food stamp recipients: 50 million
• M2: $14.3 trillion (an increase of over $4 trillion from today)

and:

• Total US Unfunded liabilities of $147 trillion (or $1.2 million per taxpayer)
• $950 trillion in currency and credit derivatives, margined courtesy of TBTF banks’ cash deposits (forget about the return of Glass-Steagall. Ever). That’s in the US alone, which means roughly $2 quadrillion worldwide.

Actually, if those numbers do pan out, there very well may not be a presidential election in 2016. So enjoy this one. It may be the last one for quite a while.

http://www.usdebtclock.org/current-rates.html

Stagnating tax revenue and rapidly-diminishing savings rates which, as the graph below shows, have plummeted from 25% in 1989 to just above 0% today. The rate dropped precipitously in 2008 and briefly went negative in 2009/2010 before inching higher again. problems; stagnating tax revenue and rapidly-diminishing savings rates which, as the graph below shows, have plummeted from 25% in 1989 to just above 0% today. The rate dropped precipitously in 2008 and briefly went negative in 2009/2010 before inching higher again.

Should Japan need to fund itself externally, it is every Japan-watcher’s base-case that it will need to offer substantially higher rates in order to be able to do so and, with the mountain of debt under which Japan is currently foundering and the tiny amount of room it has before its tax revenues are eaten up by its debt-servicing costs. It currently spends over 50% of those tax revenues in such a fashion and it would only take an increase in borrowing costs to 2% for that figure to reach 100% (chart, below). At that point, you can finally stick a fork in Japan.

 When the Green line passes through the red Japan is going to print.