Gold and Silver will become two of the best assets to own in the future, however most investors are still clueless to why this is true. Currently, the Main Stream Media Bandwagon has hoodwinked the majority of investors into buying and holding some of the most overpriced, dead-end, and increasing worthless investments in the market. These investments include most stocks, bonds, retirement accounts, pension plans, commercial and residential real estate.
Over the past few years I have listened to many interviews and read many articles on how hedge funds have bragged about picking up large chunks of real estate for their portfolios. While the investment strategy of picking up real estate for a bargain has worked in the past… the future will be a much different story. I will explain more about this later.
If we look at the chart below, we can see where the majority of the world invests their hard-earned money:
According to TheCityUK Fund Management Report dated Nov. 2012, global conventional assets under management are estimated to be $85.2 trillion in 2012 up from $79.7 trillion in 2011. Furthermore, a recent report from TheCityUK states that global pension funds increased from $31.3 trillion in 2011 to $33.9 trillion in 2012 — a fourth successive year of recovery… or so they say.
The majority of the Global Pension Funds are dominated by the United States which accounts for 56% of the total market based on the latest 2011 figures (TheCityUK March 2013 Pension Markets). Thus, in 2011 the U.S. held $17.6 trillion out of the total $31.3 trillion.
The table below shows the asset allocation of selected countries pension funds:
If you look at the column next to the U.S., you will notice that nearly 75% of its pension fund asset allocations are in equities, bonds and bills. Furthermore, almost half were invested in equities alone. With the majority of the United States pension funds invested into these assets, it’s no wonder why the Fed is buying up Treasuries while member banks are propping up the broader stock markets. It’s one big happy family.
The remaining portion of the U.S. Pension funds are invested into the “other category”, which includes real estate, loans, mutual funds and private investments. Normally, when they list these “other” categories they do so in rank of highest to lowest in percentile. With real estate being the highest percentage of this category, we can see another motivation for the Fed and US Govt to keep real estate prices from falling — hence, the purchase of $40 billion a month of Mortgaged Back Securities included in the QE 3 announcement of Sept. 2012.
Of course the housing market is good for the economy but as we can plainly see, all of these so-called assets are all interwoven into one giant propped up bubble. This also includes the global insurance funds.
According to Deutsche Bank Group’s Insurance Investment First Half 2013 Report, the $24.4 trillion of insurance fund assets were allocated in the following sectors:
The table above shows that the majority of global insurance funds are invested into sovereign and corporate bonds. We must remember bonds of all types are nothing more than debt instruments. So, with the world’s insurance funds heavily invested into corporate and foreign government debt as well as equities, mortgages and real estate, it’s no surprise that the central banks are working frantically together to keep the greatest Ponzi Scheme in history alive.
Even though the grand masters of finance have kept this system from collapsing by printing, pumping and propping up the world’s economies, they are about to hit a brick wall… and that brick wall is energy.
ENERGY DRIVES THE WORLD’S MARKETS… NOT FINANCE
There seems to be an illusion that finance runs the world’s markets, it doesn’t — energy is the driver of the global economy. The chart below shows the relationship between the world oil supply growth and world GDP growth. If we subtract inflation from the global GDP figures we have the following:
(graph by Gail Tverberg)
In the article, Evidence that Oil Limits are Leading to Declining Economic Growth, Tverberg states that the real down-trend of global GDP growth may indeed be understated. This is due to countries understating true inflation rates as well as adding increasing amounts of debt.
So, in a nutshell there is no way to tell what is the true global GDP growth rate. Moreover, I believe the manufacturing of derivatives, the printing of money and repurchasing of Treasuries and Bonds by central banks have destroyed the ability for the market to correctly value goods, services and commodities.
As the world’s global oil supply peaks and starts to decline, global GDP growth will turn negative putting more pressure on all the trillions of dollars of global conventional assets under management described in the beginning of the article.
The majority of analysts fail to understand that the $85.2 trillion in global conventional assets are actually not assets but rather debts and liabilities that need to be repaid in the future. I call these supposed assets ENERGY IOU’s.
GOLD & SILVER ARE STORES OF TRADE-ABLE ENERGY VALUE
The reason why gold and silver have been excellent stores of value in the past several thousand years is due to their nature of being stores of TRADE-ABLE ENERGY VALUE. This holds true even today… actually more so.
The difference between the global conventional assets and physical gold and silver, is that one is an ENERGY DEBT, whereas the latter is an ENERGY ASSET VALUE. Now, I am not saying there is energy contained in an ounce of gold or silver, rather it is in a form trade-able energy value.
Each ounce of gold and silver are paid in full energy value that can be traded for energy values contained in goods and services. When supply and demand forces are in equilibrium, the overwhelming value of a good or service is determined by all the forms of energy in all stages. This is complex concept that will be explained in future posts and articles.
However, if we think about all the complex stages in bringing a good to market, the majority of its value is derived from the different forms of energy whether that be oil, coal, electricity, human or animal labor.
I realize this Energy Theory of Value will stir up a lot of debate, but I believe as more individuals understand the whole complex energy system of providing goods and services to market, the theory will gain favor. If we think about it, competition between the large corporations today have done a pretty good job in balancing the forces of supply and demand. I am not saying in all cases, but in the majority.
As these large corporations compete in the market place and the result is a balancing of the supply and demand forces, what is left over is their margins of profit or loss. If we were to take the time to add up all the costs in energy in all forms and in all stages that were consumed into providing a good or service, we would find the overwhelming value came from energy.
THE BEST FUNDAMENTAL REASON TO OWN GOLD & SILVER IS DUE TO THEIR STORE OF ENERGY VALUE
Most gold and silver bugs believe in the precious metals because they have no counter-party risk. Once an investor purchases an ounce of gold or silver, they own the asset outright which behaves like a store of value.
However, I believe most of the precious metal investors fail to grasp that it is the energy value component in gold and silver that make them such an excellent store of value. As I mentioned above, the $85.2 trillion in global conventional assets are not assets but rather ENERGY IOU’s that need to be repaid in the future.
In addition, a great deal of the supposed wealth wrapped up in commercial and residential real estate will evaporate as future energy constraints destroy the ability for mortgages to be repaid. This will cause a negative feedback loop that will make real estate values decline for years to come.
As the world oil supply peaks and then declines, there will be less available energy to repay those holding pension plans, insurance funds and mutual funds. Thus, managers of these funds will be forced to switch to holding physical assets such as gold and silver that guarantee a store of value rather than holding increasingly worthless financial products that no longer provide a rate of interest or behave like a store of value.
I believe this transition will likely occur much sooner than most realize.