Lear Capital: Gold and Silver Victims of Profit Wars

2010_01_05_17_53_260001After a volatile 2013, both gold and silver hit the ground running as they were among the best performing assets of Q1, 2014.  By mid-March, silver was up 10% and gold nearly 15%.  As the quarter came to a close, prices slipped and out came the gold and silver bashers in force.

When stocks fell 7% during the quarter it was deemed healthy and necessary.  When gold and silver just gave back some of their monstrous quarterly profits, it was, “I told you so.” Even as stocks recovered from mid-quarter losses, by mid-March, the Dow and the S&P 500 still only showed a big year-to-date goose egg for gains.  As the best performer, the NASDAQ scrambled to an up 5% position before tumbling back to a near-nothing gain by quarter end.

Imagine, the panic of fund managers to show investors a profit at the end of Q1.  For months, all investors heard was that economic recovery was strong and to the extent there was any bad economic news it was written off as weather related.  Had the quarter ended with a zero profit report amidst all the good economic news, investors could get restless.

Fund managers had no choice but to grab profit wherever they could.  Gold and silver became prime targets as it was they who had scored significant gains for the quarter.  Hence a modest sell-off of metals in order to facilitate a profit harvest.  April trading of both metals and stocks appear to support this thesis.  Gold and silver are up 1% while the geese that laid the goose eggs have headed back south.

Ultimately, time will tell the story but be warned.  By the time you are convinced that $17.5 trillion of debt and rising is somehow good for the long-term health of the economy and the markets, that’s when we will get hit from the blindside by another crisis.

Of course this is my opinion and not necessarily the opinion of others.  But, if you agree, I would be honored to have you follow me @DaveTheGoldDr.

Lear Capital: Russia Putin’ Gold on the Spot

2010_01_05_17_53_260001Today, Gold prices shot higher as the threat of shots being fired in the Russian/Ukraine conflict, heightened.  The markets also slipped at the hint of higher oil and gas prices.  Russia is the second largest exporter of oil in the world.  A disruption in supply is deemed a threat to our economic stability.

I find it most curious.  Of all the impetus both gold and the markets could respond to, that it is a Russian conflict that has become the trigger that sends gold and the markets in opposite directions.

I have spoken many times about the massive accumulation of gold by the BRIC nations.  Brazil, Russia, India and China.  As though they are preparing for something.  Have they been preparing for isolationism?  Do they fear it?  According to Eric Sprott, billionaire fund manager, gold has been leaving the West en masse and winding up in the central banks of the East.  Russia included.  If it be true, that the West is almost out of gold and the East now holds hoards, then any attempt to isolate Russia from the G8 or Western Economies, would be like throwing Br’er Rabbit into the briar patch.  Remember!  He who holds the gold makes the rule – economically speaking that is.

I also find it curious that Russia called on China to support its actions in the Ukraine.  Support that China has since offered, saying Russia’s actions are reasonable under the circumstances.

Since the threat of conflict in this region arose, one has to seriously consider what an alliance between Russia and China could mean to our markets and our economy.  Between Russia and China, they have plenty of gold, plenty of oil and plenty of military might.  I think we should be a little nervous.  I don’t want to be Chicken Little but plenty of debt is no match for hoards of real money and real assets.

Surely debt is our weakness and everyone knows it.  Otherwise they wouldn’t call it “kicking the can down the road.”  That very statement implies there are dire consequences ahead for our massive accumulation of debt.  Debt has us weak in all ways and there may only be one way to defend against its consequences – Precious Metals!  You can’t print more gold or silver and neither has ever been worth zero.  That’s why I think Russia is Putin’ gold on the spot.  Own it now or forever give up your piece of prosperity.

As always, these are just my thoughts and opinions and I know this is Putin’ me in the minority.  But if you agree, I would be honored to have you follow me @DaveTheGoldDr.

Lear Capital: All Paths Lead to Gold

2010_01_05_17_53_260001As we all travel through this economy, directions are being shouted to us at every turn.  Unemployment is down!  The markets have corrected and are heading higher!  It’s the weather stupid!  Interest rates will stay low!  Don’t listen to the CBO!  Don’t buy gold!.

Surely, if we heeded these directions, we would all be racing down the stock market path to find our retirement fortunes. [Sarcasm added]  It’s a path riddled with blockades and blinking yellow lights that tell us, ROAD CLOSED!  Yet, many choose to ignore the yellow lights and blast through the blockades as though they do not exist.

The first blockade says, “There’s No Jobs – Go BACK!”  And, if you look at the map (that being the National Debt Clock Site) you plainly see the warning.  The “Official” number of unemployed is 9,935,448.  The “Actual” unemployed, however, is 19,356,380.  What on earth makes one think the path to prosperity is lined with more jobs?  Can an economy really recover when 14% of the working people do not have jobs?

The second blockade says, “Big Bubble Ahead!”  All you have to do is tune into the travel advisory channel and you would hear that one of the world’s richest most savvy investors, has shorted the S&P 500 to the tune of $1.3 billion.  That investor is George Soros.  Tell me he’s an idiot.

The next blockade says, “Watch For Falling Houses!”  Even AAA could tell you the reason new home sales are plummeting has nothing to do with the weather and everything to do with rising interest rates and high unemployment.  Since July 2012, rates on the 10 year bond have doubled and while rates may still be below “normal,” the new normal tells us if rates go higher home sales will go lower.  Were it not so, why did they lower rates to begin with if it was not to spur housing sales and sales of other durable goods?  Think about that.

And this is my favorite.  “Dead End Ahead – No U Turn.”  Acting as our GPS navigator, the CBO has issued an alert. The Affordable Care Act will cost our economy 2.5 million jobs by 2024.  The White House says the report is wrong.  Funny isn’t it?  Government saying government is wrong.

So, when it comes to investing where do we turn?  Since the pre-crash peak, in 2007, the markets have risen about 9%.  That’s 9% over more than 6 years for an annualized return of about 1.5%.  Assuming you survived the crash and were not forced off the path and out of the markets by massive margin calls, the return has been mediocre, at best, and not as meteoric as the talking heads would have us believe.

During the same period, between October 2007 and today, gold is up over 80%.  That’s a great return.  Making it even greater is the fact that gold is up over 80% after a correction greater than 30%.  Gold prices are still 30% off their record highs.  Stocks, on the other hand are just a few percentage points off all-time highs.  In hindsight they call the 2007 stock market a bubble that burst.  Now, $7 trillion of added debt later, they say stocks are not in a bubble and are headed higher.

With all roads to higher stock prices clearly marked as treacherous, the path to retirement fortune appears to be the golden path.  To own gold now is to own it post-correction.  To own another share of stock would be to own a pin that could prick another stock bubble.

Over the last half century, gold has corrected 15 times an average of 32%.  And each correction was followed by an average increase of 90%.

So, which seems the more logical path to retirement fortune from here?  Stocks now back to bubble levels? – or – Gold, after a 33% correction?

Before you turn down a path clearly marked with warning signs and blinking yellow lights, head to the next exit.  It’s likely paved with gold.  Travel it for awhile and see if you don’t feel just a little bit safer.

As always, this is just my opinion.  It’s up to you to decide whether or not to agree with it.  But if you do agree, I would be honored to have you follow me @DaveTheGoldDr.  Safe travels everyone.

Lear Capital: Gold Rises On China Demand

2010_01_05_17_53_260001For months we have heard gold has fallen out of favor with investors.  But, someone wasn’t listening –  China!  The numbers are in!  According to the China Gold Association, Chinese demand for gold rose 41% last year to a record 1,176 tons.  That number excluded central bank and institutional buying.  The Chinese are more secretive in that regard.

Chinese gold production also led the world for the seventh consecutive year.  428 more tons were mined and kept within its borders.  It seems China understands the buy low sell high theory.

Meanwhile, back in the ole USA, the media would have us believe gold is finished as an investment.  “Get out before the price drops,” was the cry.  Surely gold is headed to $1000 an ounce or below.

As gold rose past the $1,270 mark today, it crossed one line of resistance.  It is said, if gold can breach the psychological $1,300 threshold, one could claim a resumption in the gold bull market.  The way China is buying, you would think $1300 is a done deal.

Now let me ask you this.  If China has been buying gold as the gold price hovered low, near its all-in cost of production, while U.S. investors have been told to sell, who is better equipped to survive a global economic slow-down?  Could the rumors be true?  Is China preparing to un-seat the dollar as the world’s reserve currency?

Remember the golden rule.  He who holds the gold makes the rule.

 

Lear Capital: Sliding in Plain Sight – Gold Holding Bold

2010_01_05_17_53_260001It must be so because it is what we hear every day.  The economy is recovering and the outlook for 2014 is for greater GDP growth, lower unemployment and strong market performance.  But, the difference between what we hear and what we see could not be more stark.

Today, only 6 out of 10 people who could work are working, 2 out of 10 are on food stamps, and more than 300,000 people a week file for first time unemployment benefits.  New job numbers also disappointed the markets adding just 74,000 in the month of December.  And, for 2014, the roster of companies cutting jobs is growing.  The list includes IBM, Target, HP, the U.S. Air Force, Intel, USPS, JC Penney…I could go on.  This is all occurring in plain sight yet we hear recovery is underway.

Adding to the mayhem are new data from China.  In short, China is slowing down and that can only mean one thing — global demand for stuff is waning.  U.S. demand for stuff is waning.  Yet, recovery is underway.  And while experts still parade across the TV screen touting a global recovery, the markets are sliding lower and lower and lower.

On the other side of the aisle, gold is being brutalized.  Big banks and brokerages are downgrading their 2014 gold forecasts, expert talking heads tell us gold is headed lower and the voices of gold advocates are being muted.  Never have I seen the gold sentiment so low as it is today.  Yet, gold is holding bold to levels at or near its reported all-in cost of production.  Today, Gold is trading at a 2 month high.

You just don’t have to be that smart to see that rising debt and rising interest rates are beginning to weigh heavy on the markets.  A close friend in the mortgage business said the mortgage business has fallen off our fiscal cliff.  He’s wondering if food stamps will be available to the thousands of mortgage brokers who are fast approaching tough times.  And they say rising rates are good for the economy and another sign that we are in recovery.

Then, just hours ago, Treasury Secretary Jack Lew sounded the warning bells saying the nation’s debt limit will be reached earlier than the anticipated end of February deadline.  Here we go again.  Just when you think the rat is dead and buried it scurries across the floor to snatch one of the baby’s stray cheerios.  How long will it be before the Yellen begins.

While tapering was cheered and touted as a sure sign the economy was in recovery, what we see is quite the opposite.  One can only believe that tapering may be short-lived.  I doubt Janet Yellen is going to let the economy slide back into recession in her first months as Chair of the Federal Reserve.  Add to that an inevitable raising of the debt ceiling – AGAIN  -  and you see how quickly inflation and fear of a weaker dollar can dominate headlines to come.

The stage is definitely set for both gold and silver to resume another leg up in this bull market.  The economic news could not have been better than it was when Bernanke sang his swan song.  The sentiment for gold could not have been more negative as it has been over the last several months.  Its’ time to pay attention to what you see and not what you hear.  Every day, you are gambling your savings and retirement.  Where are you going to place your next bet?

As always, this is just my opinion and no one else’s.  If you agree I would be honored to have you follow me @DaveTheGoldDr.

Lear Capital: The “No-Taper” Caper Makes Gold Twitch

2010_01_05_17_53_260001As Chairman Bernanke sang his Swan Song, the crescendo heard through multiple stanzas was that the Fed would maintain a highly accommodative policy.  The longer we listened the more we heard the actions taken today to reduce Treasury Bond and Mortgage Backed Security purchases, each by $5 billion a month, were in fact the result of a switch in policy emphasis.  The Chairman traded bond purchases for forward guidance promising an extended period of very low interest rates.  The markets understood this and as the case has been in every other announcement of a stimulus program, the markets rallied.

Throughout his speech, Bernanke cited improved economic conditions, including a decline in unemployment.  He even went as far as to say, that by the end of the year, unemployment would drop by an additional 1.3 million workers and bring the data closer to the targeted 6.5% unemployment rate.  He glazed over some of the finer points of unemployment data by attributing the growing number of discouraged and under-employed workers to demographics.  Tell that to the 1.3 million who are about to drop off the unemployment rolls.

The bottom line is this.  Just because 1.3 million people will lose unemployment benefits by the end of the year, does not mean unemployment will drop.  The data may indicate a drop but the joblessness still exists.  And, just because you are a discouraged worker does not mean you are employed.  You are still unemployed.

Facts aside, the Chairman made his move based on the expectation the economy will continue to grow.  Hence the perfect exit scenario for the Chairman responsible for more money printing than any other throughout history.  The economy is improving, money printing has worked and if conditions change… Well… that’s for someone else to deal with.

As the Chairman made his exit on these high notes, the markets are left to decipher the message delivered.  On one hand, the net effect of the trade, forward interest rate guidance in exchange for modest tapering of bond purchases, was zero and the current level of stimulus has been maintained.  On the other hand, the economy is expected to continue improving, therefore justifying a taper.

Meanwhile, back at the House, our politicians are making a deal to raise the debt ceiling.  The sequester will be lifted, and in a bi-partisan show, debt and the deficit will explode higher.  To any extent the Fed can be viewed as cutting back on stimulus, our politicians are planning to pick up where the Chairman is leaving off by spending more.  Either way, someone has to print more money.  I suspect this is the reality markets will wake up to as the subject of rising debt and rising interest rates takes center stage in January.

Even as I write, one commentator on the financial channel expressed some skepticism about the recent stock rally saying trade volume behind this rally is low and that’s not what you want to see in a 300 point move.  Hmmm!  Maybe the light is beginning to shine through.

While the stock cheerleaders celebrate their rally, the gold bashers are out in force.  To listen to the talking heads, Gold is finished.  It would be hard for anyone to watch the financial channel and be convinced of anything else but to buy into the markets and sell your gold.  After watching and reporting on the gold market now for nearly 30 years, something just doesn’t seem right.  Generally, gold is as much in love with stimulus as the markets.  The more stimulus the higher the threat of inflation.

So, I did some due diligence to see if I could find some semblance of reason for the finger of gold traders to twitch and hit the sell button after Bernanke’s “No-Taper Caper.”  I found this as reported by Ed Steer.  It is a commentary by John Embry of Sprott Asset Management on yesterday’s gold move.  Here John Says:

The gold price traded in a very tight range in Far East and Europe trading—and the price activity only started getting interesting in the lead-up to the 2 p.m. EST FOMC report.  The high of the day came shortly before that time—and the price gyrations upon the release of the news didn’t go far in either direction.  By 3:25 p.m. the gold price was back to where it started at the close of trading on Tuesday.

Then out of the blue a seller appeared in the thinly-traded New York electronic market, and in less than half an hour had peeled over $16 off the price.  After that, the gold price traded sideways into the close.

This gives us a clue.  While the markets traded higher on light volume, which is not conducive to a sustained rally, the gold price tumble was set off by one trade.  The days ahead will be interesting to say the least.  Pardon me, but I get just a little curious that all this exuberance is being put forth just as holiday retailers desperately need to close the year on as high a note as the Chairman.  In the case of today’s markets and gold and silver, I don’t think reality is perception.

As always this is just my opinion and some may agree while others think I am full of bullion.  If you do agree it would be my honor to have you follow me @DaveTheGoldDr.  Merry Christmas everyone.  Enjoy your gift of low gold and silver prices while they last.

Lear Capital: Taper Caper Drives Gold and Silver Prices Higher

2010_01_05_17_53_260001It’s on again!  The latest taper talk would suggest the Fed is about ready to taper back the purchase of Mortgage Backed Securities and Treasuries.  A common belief is that the Fed cannot do so without disrupting a so-called recovery.  The argument, available today, however, is that the economy is in recovery and now the Fed is ready to act on its long-hinted intention to wean the economy off its current stimulus program.

I say “available today” because jobs data just came in stronger than expected, suggesting the economy has turned the corner and can grow on its own with less help from the Fed.  My take on the jobs data is this…DAH!  What do you expect during the season of seasonal hiring?  UPS, for example, began hiring some 55,000 seasonal workers back in October.  Last year Fed Ex hired 20,000 seasonal workers and this year they expect to increase that amount.

Retailers are also going for broke in a massive hiring spree.  According to the Wall Street Journal, Amazon will hire 70,000 seasonal workers.  In other reports WalMart is said to have hired 55,000 and Target Stores are weighing in with 70,000 new hires for the holidays.

According to a recent Forbes article, of 2100 retailers surveyed, 39% said they would be hiring seasonal help.  That’s up from 36% last year.  Some of those mentioned were Kohls, JCPenney and Toys R Us.  The Gap listed 10,000 positions to fill and Best Buy listed 6300 more.  Virtually hundreds more retailers are following suit in hiring hundreds of thousands of seasonal workers.

If we do a little math, we see well over 200,000 seasonal hires by just a few large employers mentioned herein.  This may spell temporary relief to some of our 11.3 million unemployed, but it is hardly a permanent fix to our current jobs dilemma.   With unemployment reportedly dropping from 7.3% to just 7%, we could attribute .13% of that decline to just the temporary hiring, by these few employers named.

And so opens the window of opportunity for the Fed to stop crying wolf and finally do some tapering.  In so doing, consumer confidence could get a small boost at the tail-end of a holiday buying season, boosting holiday sales in kind.  While I do not believe the printing of money can ever stop without triggering a default on debt, I do think the Fed is losing credibility with this on-again off-again taper talk.  They have to do something.

That said, I agree a taper announcement could be in the cards for next week’s Fed meeting.  If I was to speculate on how it might be accomplished, without taking the foot off the economy gas pedal, I could see a “switch” coming.  The Fed currently buys $40 billion per month of Mortgage Backed Securities and $45 billion of Treasuries per month.  A switch could look something like this.  Reduce MBS buying by $10 billion per month and increase Treasury buying by $5 billion.  The net effect would be a taper of $5 billion.

To what end?  Jacking up the purchase of Treasuries could serve to keep our country’s cost of borrowing at extremely low levels.  Since the “shutdown” ended in mid-October, our debt has risen by $300 billion.  That’s a pace of $1.8 trillion per year which would put our national debt near $19 trillion by the end of fiscal 2014.  In the event the latest budget deal actually passes, it will bring an end to the sequester and increase short term debt.  That means more short term borrowing by government and rising deficits.  The Fed may have to jack up Treasury purchases just to fund the increased debt while keeping interest rates relatively low.

This all bodes well for gold and silver.  It is inflationary and as debt rises, it brings our debt situation closer to a crash point.  That’s when the “revenue in” is not even enough to cover even the interest payment on our debt.  This could explain gold and silver’s short term spike in prices but, as always, at any given time, there are a hundred reasons for gold and silver prices to rise from these prices which are lower than the all-in cost of production for most mines.

Make no mistake!  Debt is on the rise and likely much faster than anyone has forecast.  As David Stockman said this morning in a Television interview, this latest attempt to arrive at a bi-partisan budget deal is just another kick of the can down the road.  Gerald Celente, one of the most respected market trend forecasters, says by 2Q 2014 we will see a crash in the markets that “will make 2008 look like a picnic.”  If that happens, which investment would you like to be holding?

That’s my opinion for the day and maybe not yours but if you agree with it, I would be honored to have you follow me @DaveTheGoldDr.

 

 

 

 

Lear Capital: Bank Deposits Go Bust, Gold Gets Boost

2010_01_05_17_53_260001There’s a hundred reasons gold prices could go up one day and down the next.  With so much taper tampering, nuclear noodling and health care hassles, it’s no wonder the markets jitter.  But, I bet, never in a million years did you expect to see the day when banks would have to charge you to hold your money.

That’s the news that flooded the airwaves this morning.  Gone may be the days when you can expect to earn interest on your bank deposits.  Currently, the Fed holds about $2.4 trillion of bank reserves.  Reserves they normally pay interest on to the banks who claim title to those reserves.  Today, we learned the Fed is threatening to cut that rate by as much as a quarter point.  And, at that rate, banks lose money – or so it is said.

You know what that means?  Say hello to an epidemic of back pain due to an increase in lumpy mattresses.  Who in their right mind is going to want to pay the bank to hold their cash when all it means is a guaranteed devaluation of every dollar held.  Mattresses everywhere will fill with cash and hard money.  Hard money like gold and silver.

In response, gold and silver prices erased early day losses and began to climb in after market trading.  Good news travels fast.  Bad news travels faster.  For the first time in history, gold and silver prices, often criticized for not producing cash flow, may be able to stand still and outperform returns on bank deposits.

Is this why gold and silver prices got a boost today?  Sleep on that one!

Lear Capital: Gold Has Tamper Tantrum Over Taper Tampering

2010_01_05_17_53_260001It’s now nearly a daily routine – Taper Tampering!  One minute it’s on and the next it’s off… as though the economic data supports it one minute and not the next.  The latest taper fear-inducing data was an unexpected rise in non-farm payrolls.  In the month of October, non-farm payrolls came in over 200,000.  If you listen to the media, this was a blockbuster number and cause for Fed tapering to begin sooner than later.

The news was said to be a major surprise, although numerous reports tell us the holiday selling season is beginning early this year.  Some sales have already begun, Black Friday has become Black Thursday and across the country, Christmas displays are appearing much sooner than usual.  But, I guess that has nothing to do with an accelerated holiday hiring season.  Mix in lower gas prices and the markets seem to be buying into the story that the economy is improving and new-found disposable income, by way of lower energy costs, will rescue retail profits.

Just two months ago, on September 17, it was deemed almost certain the Fed would announce tapering measures.  On September 18, the Fed shocked everyone saying it would not taper.  Then taper talk crept back into the news reports only to be met by Janet Yellen’s assurance that she was prepared to continue the current Bond and MBS buying strategy.

So, while the Fed’s job has always been to tamper with economic liquidity, taper tampering is being brought to a new on-again off-again level.  And the media eats it up.  I mean really!  The last debt crisis hit amid reports that Fannie and Freddie were fine, real estate was not in a bubble, the Dow was headed to 20,000 and home values could continue to rise 15% a year.  No one tampered with that news.  Instead we got the economic weather report after we got 12 inches of rain in 3 hours.  “It’s raining!”

While reports of the day seem to be that economic recovery really is underway, there are still many experts who believe the Fed can never taper without sending the markets and the economy into stimulus withdrawal.  Scott Carter recently interviewed Dr. Marc Faber, editor of the Gloom Boom and Doom report, and asked what he sees ahead for Fed stimulus.  Dr. Faber, in classic style said $85 billion a month of stimulus will soon be $150 billion a month and then don’t be surprised if it grows to $1 trillion a month.  Yup!  No kidding.  I was there when the question was asked and answered.

So, the taper tantrum continues and for the moment the markets are in a mood to believe the economy can recover without tapering.  Meanwhile, gold and silver are having their own tamper tantrum.  They refuse to move higher amid all these conflicting economic forecasts.  They also refuse to move much lower than their accepted all-in costs of production of $1300 an ounce and $21 – $29 an ounce respectively.  Pounding their fists and kicking their feet is all gold and silver can do until the Fed puts an end to its own taper tantrum.

So which forecast is right?  What should you be doing with your savings and retirement accounts?  It seems that with Gold and Silver now at suppressed prices, maybe at prices as low as they can go, now is the time to take no chances and own some.  And, if gold and silver prices go down further own some more.  I would hate to see the tantrum we all would throw if we got blindsided by another debt and economic crisis.

Lear Capital: Budget Crash Point Coming Gold Ready To Soar

2010_01_05_17_53_260001Is debt about to drive our national budget to a Crash Point?  Since our shutdown showdown ended in mid-October, the budget deficit has soared some $160 billion.  When the showdown ended, it was called to our attention that the debt ceiling was extended but no one ever said by how much.  Guess we just had to extend it to find out.  Well it’s been less than a month and we’re finding out.  The budget deficit is rising faster than ever.  At this pace, the budget deficit would climb nearly $2 trillion dollars in this next fiscal year.

The Crash Point is what I refer to as the time when national revenues do not cover even the interest on our national debt.  Aside from this recent spike in the rate our debt is rising, we have been speeding to this point faster than anyone has imagined.  While the rhetoric suggests our national debt is currently near $17 trillion dollars, the real number is closer to $60 or $70 trillion when unfunded liabilities enter the equation.  Those debts include such things as Social Security, Medicare, Medicaid and Federal Pensions.

While the rhetoric also suggests these are down-the-road obligations, why is it then that the majority of our nation’s fixed expenses include these payments now?  The answer is simple.  These payments are essentially interest payments we are making on debts that are materializing every day as our country ages and more and more people move to retirement age.  That being the age where we get paid back for all the money withheld (borrowed) from our paychecks over the last 40 years or so.

They are called unfunded liabilities because the money they withheld isn’t really there.  But, the obligation to make the payments is.  Here are the current amounts we have to pay out of current revenues.  Don’t quote me on these, though, they are rising every second.  No one can write fast enough to keep up.  Social Security – $862 billion.  Medicare and Medicaid – $813 billion.  Federal Pensions – $229 billion.  And finally interest on $17 trillion of debt is $261 billion.

Added together you get about $2.164 trillion of payments made each year to cover these fixed obligations.  I say fixed, because they are not discretionary budget items.  Defense would be a discretionary budget item.  We can choose each year how much of our revenue will be dedicated to defense.  Welfare payments are also discretionary.  For example, at any time we could reduce our spending on food stamps.  Subsidies are another discretionary budget item.  If we so choose, we do not have to subsidize, oil, corn, milk, soybeans etc.  Foreign aid would be another discretionary item.  And finally, pork.  All these items are subject to budget scrutiny.  The aforementioned are not.

If we isolate just on the $2.164 trillion of fixed expenses, we begin to realize that our ability to afford our current budget is much more fragile than we are told.  Considering current tax revenues of $2.7 trillion (this also changes faster than I can write) we are just $536 billion dollars away from a crash point.  That being total revenues minus current fixed expenses.

Now we can do some math.  In the last five years Medicare payments have increased at about a 7.5% rate annually.  Social Security about 7%, Federal Pensions about 6%.  Interest on debt (at least the $17 trillion portion) has only risen about 2%.  That may sound good, considering our debt 5 years ago was only $10 trillion.  Keep in mind, however, the Fed has lowered interest rates over 90% since 2008 and has kept them artificially low via money printing.

Now if we do a little more math, we see that at the present rate of growth of our fixed payment obligations, within 5 years we hit $3 trillion of fixed liabilities.  When you chart growth of Revenue at about 2% a year, our revenues hit $3 trillion and collide with our fixed payment obligations within the same 5 year period.  That’s a crash point.

This all assumes, of course, that revenues will continue to grow, debt will stop rising and the rate baby boomers retire does not increase.  Well we all know debt is rising and has been at a rate of 6% a year.  That means interest on debt will rise faster than the 2% rate over the last 5 years.  Irrespective of a rise in the rate boomers retire, the crash point moves to 4 years.

Now you consider the number of baby boomers retiring is adding an exponential factor to the equation, and that the boomer expenses are the largest budget expenses, we could see the crash point move to just 2 years.  But don’t take my word for it, go to the national debt clock and do some figuring yourself.

Now there is just one wild card left.  Interest on the debt and rising interest rates.  Since 2008, the Fed has cut interest rates by over 90%.  This explains the anemic growth of actual debt expense since.  But, what happens if rates retrace 20% or 30%?  Interest on debt could double or even triple in a blink.  Then what?

Do that math and you can see how rising interest rates, piled on top of these other rising debt obligations put us perilously close to a crash point even as I write.  Now, some say interest rates never have to rise.  That is not true.  At some point, rates have to rise to entice investors to buy our bonds (lend us money).  Face it.  The pool of investors willing to buy our bonds is shrinking.  Were it not so, the Fed would not have to be buying treasuries every month just to keep our government funded.

What happens when we hit the crash point?  One of two things has to happen.  Either we default on debt or we keep printing money at an even faster rate.  Should it be the latter, inflation, even hyperinflation is inevitable.  There goes the value of all the dollars you have saved for retirement.  Should it be the former, and we get just one default on any payment, faith is immediately lost in the dollar and the dollar crashes and once again, there goes the value of your savings and retirement accounts.

Enter Gold and Silver.  The case for owning gold and silver in the face of so much debt is getting stronger by the minute.  But as always this is my opinion.  The numbers however, belong to all of us.  If you agree dare to follow me @DaveTheGoldDr.  If you think I am full of bullion follow some of the talking heads that tell you we have nothing to fear.