Unanswerable questions about money

20251007

Gold has been in my portfolio for two decades now. What I now know to be called Triffin’s dilemma has been obvious that long. The United States has been unable to balance its budget, and has allowed its deficit to continue to grow, averaging 8% per year since the 60s.

Becoming more systematic, two years ago I bought How to Invest in Gold and Silver by a guy named Don Durrett. Since I was already convinced that it was a good idea, I was simply looking for ideas on the best way to go about it. It was a very timely move. Gold and silver have close to doubled over the past two years.

The guys in the gold world are a tight knit bunch. Andy Schechtman, whose company has managed gold for me for two decades, is close to the center. He sponsors Liberty and Finance on YouTube. Their podcasts feature guys like Jim Rickards, Rick Rule, Alasdair MacLeod – and yesterday, Don Durrett.

Durrett’s specialty is researching gold and silver mining companies. He sells subscriptions to an online database of hundreds of mining companies that he has compiled since 2004. As he says in the interview link above, he has ridden precious metals out through thick and thin, at one point seeing his portfolio lose 70% of its value.

Whereas the other commentators in the metals blogosphere talk about the markets in general, charting and timing, Durrett’s specialty has been analyzing individual companies. However, with precious metals on a tear over the past two years, and the HUI index of precious metals miners rising even more spectacularly, he is a bit more willing to generalize.

I’ll start with the note that I concur with his generalizations about the markets today. He observes that in past bull markets for precious metals they have gone up eightfold and more. Based on history we have a lot of room to run. Another fourfold increase.

He observes that metals miners are more volatile on both the up and down sides than the metals themselves. When it takes $3800 to extract and process an ounce of gold that sells for $3900, the profit in doing so is $100. However, when the sales price goes up to $4800 the profit becomes $1000. In other words, where you would see a 25% increase in the value of an ounce of gold in hand, you would be looking at a 900% increase in the profit of mining an ounce of gold out of the ground. Miners have more leverage

All of the men named above, and certainly Durrett and I, agree that world governments are losing control over their finances. Balancing their budgets would result in crippling depressions, certainly bringing down governments, whereas failing to balance them leaves the countries in a perpetual debt spiral. They will choose, as Trump just did with his Big Beautiful Bill, to kick the can down the road by increasing debt.

Increasing debt leads to inflation. Even Joe Biden’s liberal supporters have stopped talking about the Modern Monetary Theory (AKA Magic Money Tree) hypothesis that debts don’t matter. Of course they do. I included this link to This Time Is Different- Eight Centuries of Financial Folly in yesterday’s blog. It is, however, only one of about 20 of my reviews going to the same point.

The only way out of a debt spiral is total collapse. Repudiation of debt or hyperinflation. Weimar Germany, Argentina multiple times, and Zimbabwe provide examples. This time really is different in that there is no country, or group of countries, with stable currencies to bail the debtor nations out when they collapse. No IMF will ride to the rescue. What then? Nobody knows, but many speculate.

One alternative is a return to a metal standard. But – the total value of world gold is about $25 trillion, only a small fraction of the hundreds of trillions of fiat currency outstanding. It would have to explode in value. Besides which, gold is not very practical even today for routine transactions. Bitcoin isn’t even a metal, and its aggregate value is only about $2.5 trillion. Silver only a few hundred billion. There is not even a far-fetched, much less anything approaching a reasonable solution on the horizon.

My conclusion is that because nobody can chart a path out of the debt crisis, nobody can predict how high the price of metals will go. Durrett says that he is has a provisional price target of $5,000/oz for gold, at which point he will start lightening up on both metal and miners. Schechtman does not even talk about when to sell. His advice is in a different realm. He tells you to hold physical metal. Ravenous governments are likely to raid ETFs, safety deposit boxes and anywhere else they might find it. Bitcoin fanatics tell you to get a hardware wallet. “Not your keys, not your coins.” Governments could easily squeeze brokers like Binance and Coinbase.

The wisdom I share with my son is to hang on. It’s going to be a wild ride. Dangerous as well, as there is likely to be quite a bit of societal unrest as broke governments can no longer support 21^st century bread and circuses (viz, fat pensions, universal healthcare, unemployment benefits, and welfare in general). One of the shortcomings of democracy is that it cannot say “no” until the cupboard is bare and it has no choice. Après ça, le déluge. The can-kickers will be gone with nobody left to clean up.

We will stay invested, resigned to the fact that a significant fraction of whatever putative profits we may enjoy on paper will be stolen one way or another by governments. More than that, we may have to recognize such theft as the lesser of evils, the alternative being pure anarchy. I’ll close this gloomy rumination with the observation that at least my family will be part of a community of people like themselves. Ukrainians will at least know what “common” is when we seek the common good.

Graham