Lear Capital: In Gold We Trust – In Stocks We Bust

2010_01_05_17_53_260001Whether you are a gold bug or not, there are some irrefutable facts to consider about today’s markets.  For weeks we have heard, “Dow in record territory” as though that is the universal signal to buy, buy, buy!  At the same time, gold has been cast as the Rodney Dangerfield of investing – it gets no respect from the mainstream media.  A look at the facts should cause anyone to take pause and consider the truth.

Since the beginning of this year, gold has never traded in negative territory.  On the first trading day of 2014, gold began to rise from $1220 an ounce.  Only once did it threaten to trade down for the year, but, did not.  Even today, with gold off its yearly high, it still trades up 6% on the year.

Now, this will shock you.  Not once this year, was the Dow up 6%.  Even at record highs, which we heard about for weeks, the Dow was barely up 4%.  If we reason, that little voice tells us anything at record highs is in danger of a correction if not a total reversal in trend.  Throw in debt levels 80% higher than we had prior to 2008 and concern should rule the day.

Remember that old saying?  “Kicking the can down the road?”  I find it a little crazy to think  the can will not be kicked to the end of the road and stocks can continue to ignore the fact that each day we move closer and closer to a “Crash Point.”  I have referred to the Crash Point in the past.  Just to refresh, the Crash Point is when we do not bring in enough revenue to pay even the interest on our debt.

We may not be able to predict exactly when the crash point cometh but if you watch the debt clock, you see today’s total interest on debt is something over $2.2 trillion.  Interest on debt would include payments for Medicair/Medicaid, Federal Pensions, Social Security and interest paid on new borrowing.  Don’t be fooled.  All of these payments are interest payments.  Your social security is money that has been borrowed from you and owed.  The same is true for Medicair/Medicaid and Federal Pensions.  These are all unfunded liabilities.

At the same time total revenue is $2.9 trillion and change.  The minute interest rates rise, the gap begins to close at warp speed.  Do the math.  If interest on $18 trillion of debt goes up just 1%, that adds $180 billion to our interest expense.  A 2% rise in rates would close the gap between interest debt and revenue by 50% in a blink.  With the outlook being for debt to keep rising forever, you can see how fast interest expense and revenue can converge at a crash point.

As some of you may now be doing the math you may think we still have time for some financial miracle to occur.  I hate to burst that bubble but so far I have been using the wrong debt data to illustrate this point.  Total debt is not something just short of $18 trillion, the true total national debt, including unfunded liabilities, is nearly $120 trillion dollars.  If you don’t believe me, look at the national debt clock.  It’s right there in red ink at the bottom.  Now you see how a 1% rise in interest rates could immediately add $1.2 trillion to interest payments.  That would not just close the gap between interest payments and revenue, it would crash through that point of no return.

This is why highly regarded experts believe any rise in interest rates could deal a death blow to stocks, the economy and the dollar.  It would happen quickly but not without warning.  The Fed, behind a smoke screen of data suggesting the economy is recovering, intimates a rise in interest rates IS coming.  Some speculate as early as the beginning of 2015.

Today, as stocks capped off a 500 point 4-day losing streak, the experts seem baffled at the move in the face of stronger job data.  It is my opinion that the big money now fears rising interest rates.  They know what happens if we get just the slightest tick up in rates. Some say rising rates do not bode well for gold and silver.  I say they are the fuse on a ticking bomb that could cause metals prices to explode.  In a recent interview, Ron Paul said gold could rise to infinity.  It only takes some simple math to know why.

The opinions expressed herein are just that.  My opinion based on someone else’s facts.  If you agree with them, from time to time, it would be an honor to have you follow me @DaveTheGoldDr.

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