Debt: How high can we go?

Mounting debt

Debt is on the rise. The economy seems to be quickly and quietly spiralling out of control. The feelings of Nostalgia overwhelm us as the prospect of European states falling into default catch us off guard once again. The Federal Reserve has committed to injecting more than $40bn into the economy every month with no upper limit on this printing frenzy. Japan and China are now going through the motions in order to follow suit. Confidence in financial markets is diminishing owing to weak growth prospects, high inflation and ineffective controls.

This shouldn’t be a zero sum game and fortunately for our clients it’s not. As all of the above escalates, gold has been steadily rising. Gold has extended the biggest quarterly gain in more than two years on speculation central banks’ stimulus will spur investor demand. The questions from investors constantly change but at the moment it’s not a question of “when” it’s, “how high?”.

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As more currency is printed in the global Quantitative Easing programs, the value of traditional (or Fiat) currency is diminished. Along with reduced value, is falling preceived value as both individuals and institutional funds managers realise more money doesn’t equate to more value.

As a safe haven asset, gold benefits in times of falling currencies, especially the US Dollar. Investors flock to buy gold during these periods and it’s easy to see why. As a precious metal, gold cannot simply be printed like paper currencies. So while their value is undermined, gold simply cannot follow suit. It has to be discovered and mined. The fact that all the gold discovered in the entire history of the earth would fit into a cube the size of the Eifel Tower, demonstrates how lack of supply acts as a support mechanism for its value. Sadly for paper currencies, the central banks can simply continue to print more, further undermining the value.