We know that people are concerned about precious metals investing in their self directed IRA due to the recent selloff in metals and commodities in general. Its easy to get concerned when you see corrections all the way day to mid 1500s for gold. But, you have to ask yourself why would gold suddenly just fall out of favor? We know the markets can be volatile, but the economy just does not take sudden turns, for the better, in just a matter of days. In fact, it takes months and years for noticable changes in the economy to be measurable and noticable. So, this sudden proclamation that gold is over, seems without sound basis and fact.
Let’s take a look at some basic global, economic fundamentals in order to make some sound decisions about precious metals in your self directed IRA.
- The European Crisis continues. We can’t tell you how many times the media is on again and off again about what is happening in Europe. the situation has not gotten better since the first of the year, but all of the sudden, Greece and Spain are back in the news with the same problems that we say 6 months ago. These countries have serious, massive debt and deficit issue with a culture that is married to government care taking and support of its people. This attitude does not change in a month or two. It takes multiple years or even a generation. They are not going to make this problem go away anytime soon. They will continue to print money and prop up the system before they let everything crash. These countries have and are seeing shrinking consumer demand, lower imports, lower spending. This is going to aggravate the deficits and put more pressure to print.
- Gold prices continue to hold at record highs. We know gold can be volatile and unnerving, but if you look at it in the context of where it was and has been it still relatively high. Let’s look at the gold mining stock Barrick Gold Corp. (ABX). This stock currently boasts a profit margin of over 30%, better than twice that of IBM and almost ten times that of Walmart. While ABX sells for just 1.6 times its book value, IBM sells for 10X. This has no logical basis or rationale. The point here is that the price of gold is still relatively high, and attractive for metal mining companies to the point that they are still very profitable, yet, the market has magically decided that profits and balance sheets are out the window.
- Central banks continue to print. The Europeans are meeting, again, in another attempt to fix the unfixable. The current consensus is that they will have to accelerate, not decelerate the money printing. The same is true here in the US, where a fiscal cliff is coming (see prior blog) due to the trifecta of the expiring Bush tax cuts, mandated cuts in government spending from the last debt-ceiling debacle and the new debacle soon to begin as the latest debt ceiling is approached. The problems in important economies such as China and Japan are as bad, and maybe even worse. We should mention that China is showing some serious cracks in their economic shell (we’ll cover that topic later).
- Debts are still at all time historic highs! We’ve commented on this a couple of times in the last week or two. Total debt for the US, Europe and other countries has not changed. No one came in from another, fiscally sound, well run planet, and gifted the countries of earth Trillions of whatever to get rid of their debt. Its still there! to get an idea of the debt problem, look a recent article written by Standard & Poor’s titled,The Credit Overhang: Is a $46 Trillion Perfect Storm Brewing?
“Our study of corporate and bank balance sheets indicates that the bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate borrowings between 2012 and 2016 in the U.S., the eurozone, the U.K., China, and Japan (including both rated and unrated debt, and excluding securitized loans). This amount comprises outstanding debt of $30 trillion that will require refinancing (of which Standard & Poor’s rates about $4 trillion), plus $13 trillion to $16 trillion in incremental commercial debt financing over the next five years that we estimate companies will need to spur growth.”
So the point here, optimistically, is that corporations around the world are likely to see, at best, mediocre growth due to their voracious need for infusion of new capital to refinance debt. A more concerning impact is where will these companies and institutions be able to get such massive amounts of new capital in this economic environment? The answer is they are probably not going to be able to do this, hence the reason for very moderate growth over the next 3-5 years.
So, let’s wrap this up. What does all of this mean to you and holding precious metals in your self directed ira? It means EVERYTHING!
- We are looking at a national and global economic environment in which the major central banks of the world (including the USA) are printing money and stand at the ready to print more when needed;
- We have debt of corporations and countries at all time highs with little ability to refinance that debt without default, or government assistance;
- You have metals and stocks being ignored and incorrectly valued relative to other assets classes;
- You have the world continuing to be in turmoil without any real solutions.
Bottom line we are still faced with incredible global economic problems, and uncertainty. We have central banks printing money at will. Holding precious metals in your self directed ira seems to be a very important component of your portfolio.
The information provided is for educational purposes only and are not a solicitation or offering of an investment, investment advice, or tax advice. You should consult with your tax, legal or financial advisor to determine the suitability of any investments made with a self directed IRA account.