Does Gold Outperform Stocks Over the Long Run?

There’s a financial meme out there that suggests gold and silver have outperformed stocks over the past 20 years. The chart looks something like this:

Gold line = gold
Silver line = silver
Blue line = Dow Jones Industrial Average (DJIA)
Red = S&P 500

Looking at this chart, one might come to the conclusion that gold and sliver outperform stocks over the long run. However this conclusion is incorrect.

First of all, the relative performance shown in the chart is very sensitive to start and end dates. For example, if the chart goes back an additional 10 years the outcome completely reverses with stocks outperforming gold and silver:

Alternatively, if I shift the 20 year period to 1959-1979 gold and silver’s out-performance is dramatically amplified.

The point I’m trying to make is that the relative performance of gold and silver is highly dependent on the time period in question. In other words, the performance of precious metals changes with the economic environment. One cannot judge long-run expected returns for gold and silver based on any single period alone.

The next point I want to make is that these memes often make the mistake of comparing gold and silver against the price returns of various stock indices. The charts above use the price returns for the DJIA and S&P 500. Price returns don’t include dividends and therefore provide an incomplete picture of the actual returns from holding stocks.

Below, I’ve re-created the charts and added a black line that represents the total returns provided by large cap stocks (using the Wilshire Large Cap Index back to 1978 and S&P 500 Total Returns Index prior to 1978). While the price return for S&P 500 (red line) was 129% over the 20 year period, the Total Return (black line) was 240%. Gold and silver still dramatically outperformed during this 20 year period.

Like in the previous example, extending the history to 30 years flips the script. While the price indices outperform (as they did in the earlier example) the new total returns line dominates. The added compounding effects of dividends becomes increasingly noticeable as time goes on.

The farther back you go, the more impactful the compounding effects of dividends become. The following chart compares 100 years of returns, with the total returns index being the clear winner, while gold, silver and price return stock indices barely register.

Today, we could be in a period in which gold and silver outperforms stocks. This out-performance is highly dependent on the prevailing economics, such as negative real yields and currency depreciation. There are so many factors that nobody really knows for sure.

I personally believe a strategic allocation to gold can help improve portfolio risk-return characteristics. I also believe that we might be in an economic environment in which gold outperforms stocks. However, to extrapolate the out-performance of the last 20 years to argue that precious metals should provide higher expected returns over the long-run is misleading.

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5 Must See Gold Charts

In over night trading on July 27th, gold broke through its all time high reaching over $1940 per ounce before retreating. We are in the middle of a dangerous monetary experiment and the world is waking up.

Gold could be in the middle of a monster move. I recently wrote an article on Seeking Alpha showing how gold could go as high as $3465 based on its relationship with M2 money supply.

The recent rise in gold is a mirror image of the dramatic decline in the US dollar.

What really drives the price of gold? Real yields. The following chart plots real yields (inverse) against the price of gold. As real yields decline (show by a rise on the chart) gold prices rise. (Read more about it here.)

Annual purchases of gold ETFs highest in 15 years. And 2020 is only half over.

Still think gold is a barbarous relic that has nothing to do with the monetary system? Well, central banks around the world have been accumulating gold reserves since the 2008 Global Financial Crisis.

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Investing Wealth

What Drives Gold Prices?

As a monetary metal, gold has been with humanity for thousands of years. Its role as a safe haven for wealth has been generally understood throughout time. Historically gold was simply another currency – one that couldn’t be debased and could reliably store vast amounts of wealth.

When thinking about gold, one must separate its value from its price. The value of gold is fairly stable. When compared to fiat currency, gold prices will fluctuate over time, but this is not because the value of gold is changing. Rather, it’s because the fiat currencies are appreciating or depreciating. For this reason, it’s important to analyze gold in terms of your home currency, despite it being most frequently quoted in USD. For example, the price of gold in USD might be stable but for a Canadian investor it might be rising because the value of CAD is declining. This relationship to currencies is an important first step to understanding what drives gold prices.

Many people believe inflation drives the price of gold. While this might be partly true (because inflation increases the value of tangible assets), it is inflation’s effect on currencies and investment alternatives that actually makes gold more attractive to investors.

Inflation will cause a country’s currency to depreciate relative to other currencies. As previously explained, in such a circumstance the gold price will rise in relation to a declining currency.

Equally important, inflation erodes the real returns provided by assets like stocks and bonds. In particular, safe havens like US Treasuries may provide a very low or even negative real yield when inflation is high enough relative to nominal yields. (Real yield = nominal yield minus inflation.) Importantly, this condition doesn’t require high inflation. Simply, inflation only needs to be higher than nominal interest rates.

Gold competes in many ways to US Treasuries as a safe haven. If investors can receive a positive real return on US Treasuries they are less likely to use gold – which provides zero yield – as a safe haven. The higher the real yield, the worse non-yielding assets look in comparison.

In contrast, when real yields on US Treasury bonds are negative, investors actually lose by holding them. A zero-yield actually becomes more attractive at that point.

Most gold bull markets have occurred when real yields were falling, low or negative. Gold bear markets tend to occur when real yields are rising, high or positive.

The Chart 1 below compares 1yr US Treasury yields (black line), inflation (red line) and real yields (blue line) going back to 1970. In Chart 2 below shows gold prices over the same period. As you can see in the first chart, real interest rates were falling, low or negative during the 1970s, but then began to rise around 1980. From 1980-2000 real interest rates remained positive and relatively high, until they began to decline at the turn of the century. Between 2000-2011 real interest rates were low and negative for most of the time. Leading into 2011, real interest rates began to rise and peaked around 2015. After 2015 real interest rates moved sideways again spending much time in negative territory.

How did gold perform during these periods?

1970-1980: Gold bull market
1980-2000: Gold bear market
2000-2011: Gold bull market
2011-2015: Gold bear market
2015-Present: Gold bull market

Chart 1: Nominal Yields, Inflation, Real Yields
Chart 2: Gold Price

While negative real yields might seem like an economic rarity, they occur quite frequently. As a matter of policy, negative real yields are often associated with periods of financial repression when governments are attempting to climb out from under the weight of oppressive debt levels. Essentially, when yields on government debt are less than inflation governments are able to ‘inflate’ their way out of debt. Because of inflation, the value of government assets and tax revenues are able to rise faster than the value of government liabilities and interest expense.

What does the future hold for real yields and gold?

While the world is currently working through a deflationary shock due to the Covid-19 shutdowns and collapse of demand, the monetary and fiscal response may push up the inflation rate and push down yields.

Note: I realize that the last time policy makers expanded the Fed balance sheet it failed to create any meaningful inflation. Long story short, I believe this time might be different because the US Treasury is increasingly involved, corporate debt is effectively backstopped by the Treasury and private banks are therefore much more willing to lend (thus increasing the money supply) than during previous crises.

Massive – and quickly growing – public and private sector liabilities have cornered policy makers. The only escape is secular financial repression to erode the real value of debts. Another option – default on debts and entitlements – simply isn’t politically palatable.

Therefore, it is reasonable to expect real yields to remain low-to-negative at least until the economy recovers from the current economic crisis. However, since debt loads are growing massively because of the crisis I can’t see any alternative but financial repression for at least a few years. Using the 2008/2009 global financial crisis as a rough guide, we may be recovering from this for years to come. the current gold bull market could last a few more years and gold prices could double from today’s levels.

Important note: I don’t have a crystal ball. Also, forecasts change as economic circumstances evolve. So don’t read this article and think you can set it and forget it. With an investment like gold that is so fundamentally different from the more traditional long-term asset classes, you must track the changing environment and adjust accordingly.

ETFs and Funds

List of All 17 Gold ETFs in Canada (July 2020)

Many investors are starting to get interested in gold again. You can invest in gold by purchasing actual bullion (bars or coins) from a dealer, by buying a fund that holds bullion, by buying a fund that invests in gold mining companies or by buying a fund that gains exposure to gold via the futures market.

Personally, as a strategic holding I prefer to use exchange traded funds that buy and hold fully-allocated gold bullion. I want exposure to the underlying metal, not necessarily to the factors driving the success or failure of individual gold mining companies. However, during a gold bull market both can perform well.

For Canadian investors, below I have listed out the gold ETFs and closed-end funds that trade on the TSX. For your reference, I’ve also listed how they gain exposure to gold, asset size, ticker and fund manufacturer.

Note: This table is best viewed on desktop


Why Gold is Declining

The number one question I’ve received this week: why is gold down with the stock market?

Fair question. Gold is sold as a form of protection against calamity. Were we really sold ‘fools gold’?

Probably not.

    Gold has a tendency to decline during crises. One only has to look at 2008 for a recent example.

    In 2008, gold prices declined along with everything else. However, after the immediate crisis ended gold prices started a dramatic rise, reaching a record high (around $1900) in 2011.

    So why does gold fall during severe market stress? There are a few possibilities:

    1. Forced selling to cover margin calls.

    As markets collapse, anyone who bought stocks on margin (i.e. borrowed from their broker) will need to put up additional collateral or sell their holdings. Those who don’t want to sell need to add cash to their accounts. On way to do this is to sell holdings that have performed well. Up until last week, gold was performing exceptionally well.

    2. Sell winners.

    Investors sell their winners not only to fund margin calls. They might sell winners so they have cash to redeploy into cheaper stocks. Or they may simply want to increase their cash buffer. Investors tend to sell winners because it is psychologically easier to lock in a gain than a loss.

    3. Rising dollar.

    Most financial crises are accompanied by a dollar shortage. One reason is because investors are reallocating to US Treasuries (which require dollars to buy). The US dollar (and the dollar-denominated Treasury market) is viewed as a safe haven in times of crisis. This causes the value of the dollar to rise. When the value of the dollar rises, the number of dollars required to purchase any asset priced in dollars declines. Gold is priced in US dollars.

    What’s next?

    If this crisis plays out like the last one, central banks will eventually inject massive liquidity into the financial system, which is ultimately good for gold.

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    ETFs and Funds

    4 Gold Bullion ETFs in Canada for 2020

    Dig gold? Gold is hot again and the number of supporters is quietly on the rise. Famously, billionaire investors Ray Dalio and Jeff Gundlach have both recently announced their support for the metal but there are many others coming out of the woodwork. After a multi-year hiatus it seems like the case for gold is strong again.

    According to Dalio:

    “…the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash). I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

    I have also illustrated the case for holding gold in my article “The 60/40 Portfolio is Dead“. In this article I looked at various portfolios (some including gold, others not) across different investing paradigms.

    The past 40 years benefited from the tailwind of declining inflation and interest rates. Clearly, with interest rates near zero today, what worked over the past 40 years won’t work over the next 40 years. So I examined these portfolios going back to 1970 when inflation and interest rates were rising. When examined across both investing paradigms, Gold exposure was shown to stabilize returns and reduce downside.

    Canadian investors looking to buy gold first have to decide whether they want to own gold mining stocks or gold bullion. My preference is gold bullion since it is a pure play on the price of gold. In contrast, gold mining stocks are influenced by extraction costs, equity risk premiums and management decisions, in addition to the price of gold. However, gold miners can be used as a leveraged play on gold since they tend to rise and fall faster than the actual metal.

    For my portfolio construction purposes, an allocation to gold bullion makes the most sense.

    There are a number of ETFs in Canada that buy and hold actual gold bullion stored in vaults. There are also ETFs that gain exposure by purchasing gold futures contracts. I prefer a fund that owns bullion to gold future contracts because I don’t want exposure to the added complexities introduced by the the futures market (e.g. counterparty risk, negative roll yield).

    What Gold Bullion ETFs Exist for Canadian Investors?

    Below I have identified 4 low cost gold bullion ETFs available on the TSX. Note that some are hedged and some are not. For a Canadian investor, owning an unhedged gold ETF, in my opinion, is the purest way to own the metal:

    1a) iShares Gold Bullion ETF CAD Hedged: CGL (MER = 0.56%)

    1b) iShares Gold Bullion ETF Unhedged: CGL.c (MER = 0.55%)

    2a) Purpose Gold Bullion Fund CAD Hedged: KILO (MER = 0.28%)

    2b) Purpose Gold Bullion Fund Unhedged: KILO.b (MER = 0.28%)

    3) Sprott Physical Gold Trust: PHYS (MER = 0.48%)

    4) Canadian Gold Reserves Exchange Traded Receipt: MNT (MER = 0.35%)

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    Money Is Debt, Gold Is Money

    “In numerous years following the [civil] war, the Federal
    Government ran a heavy surplus. [But] it could not pay off its
    debt, retire its securities, because to do so meant there would be
    no bonds to back the national bank notes. To pay off the debt was to destroy the money supply.”

    — John Kenneth Galbraith

    In the investing world, you can take a 3 month view, a 3 year view or a 30 year view. One person looking at one asset class might have a different forecast depending on the time horizon he is considering. In this article, I will look at gold through a 30 year lens.

    I believe that structural forces will support gold and other hard assets over the long term. While current forces may be bearish for gold in the immediate term as investors panic and liquidate everything, there are a number of underlying currents that demand a strategic allocation to the metal. While the sophisticated gold investor is already familiar with these concepts, I think it is important to re-introduce them to a broader audience who may have zero allocation to gold, other precious metals and hard assets.

    The Origins of Money

    Throughout history, money has always held an important position as a means to facilitate transactions, thus creating massive efficiencies within an economy. Sometimes money was issued by governments. Other times a common means of transacting arose organically within a population.

    Many historians suggest that fractional reserve banking and private money creation started when gold owners stored bullion within the vaults of goldsmiths for safe keeping. As proof of deposit, goldsmiths issued paper receipts that could be redeemed in exchange for gold. Seeing an easier way to transact, when buying goods and services gold owners would simply hand over gold receipts as forms of payment instead of redeeming for gold and delivering the metal.

    Eventually, enough people were doing this that some enterprising goldsmiths, who noticed that the gold in their vaults was rarely reclaimed, started lending (with interest) new paper receipts that weren’t tied to a specific gold deposit. After making these loans, more paper existed than gold in the vaults, resulting in an early example of expanding money supply and credit growth. Of course, any goldsmith that manufactured receipts far in excess of gold reserves risked a run on deposits and existing receipt holders may have experienced a loss of exchange value.

    Money Creation Today

    In the US today, many believe that the Federal Reserve is the primary source of money supply growth. Many also believe that the Fed creates money and simply pumps it into the economy somehow. This assumes the Fed has some sort of authority over how money is spent, but this is untrue. Monetary policy is the handmaiden of fiscal policy, but both are quite distinct.

    Through open market operations, the Fed adds to the money supply by purchasing assets such as US Treasuries and mortgages. Effectively, each dollar injected this way is the mirror image of someone’s liability, giving rise to the concept that money is debt.

    Think about it this way, the massive fiscal response to the 2008/2009 recession and sluggish recovery has added trillions to the Federal debt. Much of this debt was indirectly financed by the Federal reserve (although they’d never admit it) via open market operations. So instead of simply printing and spending its own money, the US government has granted an independent entity (the Federal Reserve) the right to print and lend to the government and its citizens. Some might see this as ‘checks and balances’ while others might argue that it grants unnecessary power and profit to the banking cabal that controls the Federal Reserve. In the end, the US government has added $trillions to its debt.

    I digress…

    The truth is that while the Federal Reserve can add to the money supply the biggest driver of money growth is the private sector. And this is where it gets especially important for the gold investor.

    The monetary system does not stand still – it operates on a treadmill of debt. The majority of money in the economy is created when private banks make loans. One might think that these loans are based on deposits, but the reality is that – much like the goldsmiths of days past – in a fractional reserve system far more loans are made than deposits on hand.

    Modern Money Mechanics, a publication by the Federal Reserve Bank of Chicago in 1968, states the following:

    ” For example, if reserves of 20 percent were required, deposits could expand only until they were five times as large as reserves…Under current regulations, the reserve requirement against most transaction accounts is 10 percent…Of course, they [the banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created…The deposit expansion factor for a given amount of new reserves is thus the reciprocal of the required reserve percentage (1/.10 = 10).”

    They further illustrate this with the following diagram, showing the initial deposit and the cumulative expansion via additional loans.

    Fractional Reserve Banking

    Fig. 1: Cumulative expansion in deposits on the basis of 10,000 of new reserves and reserve requirements of 10 percent, from: FED, 1968. Modern Money Mechanics – A Workbook on Bank Reserves and Deposit Expansion. Federal Reserve Bank of Chicago, Revised Edition, February 1994, p. 11

    In essence, the banking system has the legal power to create money out of thin air

    The Debt-Money Conundrum

    Here’s the kicker: whether the money is created by the Fed or by the private banks, the money must be paid back with interest. Because only the principal amount is loaned, only the principal amount exists in circulation. In aggregate, enough money doesn’t exist throughout the economy to pay both principal and interest on all debts.

    Bernard Lietaer, who helped design the Euro and has written several books on monetary reform, explains the interest problem like this:

    “When a bank provides you with a $100,000 mortgage, it creates
    only the principal, which you spend and which then circulates
    in the economy. The bank expects you to pay back $200,000
    over the next 20 years, but it doesn’t create the second $100,000
    – the interest. Instead, the bank sends you out into the tough
    world to battle against everybody else to bring back the second

    The debt-money conundrum results in two conditions:

    1. Systemic Competition. Like rats in a cage, society is provided too few resources. In this case, the money required to repay debts plus interest is short. This means that if one person or company is able to repay their debts another is not. This raises the level of competition within society. Arguably this has been a positive economic characteristic since the industrial revolution, however one must wonder what the world would be like if debt-fueled competition didn’t exist. Competition goes far beyond the healthy – many wars and crimes can be traced to the competition for the resources required to indirectly repay debts through economic growth. Right or wrong, money loaned into existence has created systemic competition. On an individual level, many refer to this as the ‘rat race’. On a macro level some refer to this as the New World Order.

    Lietaer continues:

    “The problem is that all money except coins now comes from banker created loans, so the only way to get the interest owed on old loans is to take out new loans, continually inflating the money supply; either that, or some borrowers have to default. Lietaer concluded: [G]reed and competition are not a result of immutable human temperament . . . . [G]reed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using. . . . [W]e can produce more than enough food to feed everybody, and there is definitely enough work for everybody in the world, but there is clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity.

    The direct consequence is that we have to fight with each other in order to survive.”

    2. The Ultimate Ponzi. If money was lent into existence on a single occasion only, the first condition would lead to a deflationary outcome and shrinking total credit. Lenders would take haircuts and, knowing this in advance, potentially would have never lent the money in the first place. Or lenders would have priced the defaults into interest rates and covenants, paradoxically making it even harder for all loans to be repaid with interest. The banking system simply would no longer exist in its current state.

    In reality, new money supply begets new money supply. To reduce the number of defaults caused by the competition for money, the banking system must continually lend more money into existence. As new money is introduced it helps money flow to past borrowers enabling them to repay their debts. To adequately offset the number of bankruptcies in the system, money must continually be created. This is precisely why modern industrial economies have a implicit ‘normal’ inflation rate of 1-3%. In good times and bad, money supply simply must expand for the system to survive. Normally that money is created by banks; however, sometimes the lender of last resort (i.e. Federal Reserve) – as the only lender that can continually accept losses – steps in to offset private loan destruction in periods of extreme financial distress, such as the 2008/2009 crisis.

    The Growth Imperative

    When inflation must be maintained at 1-3% for the system to stay solvent, many other areas of society are significantly affected. Companies must continuously raise prices, salaries must continuously increase, economies must continuously grow, populations must continuously increase, food supply must continuously rise, and so on.

    Over the long run, continuous monetary expansion leads to the destruction of the value of the dollar relative to stable assets. While continuous monetary expansion can provide a tailwind to many businesses with pricing power, I think most investors are already set up to benefit from this through the equity portion of their portfolios. Where I think many investors are deficient is in a strategic allocation to gold.

    Gold is Money

    Many investors have a 3 month or 3 year view on gold, but few have a 30 year view. While I agree that intermediate forces could send the gold price down, I believe that structural monetary expansion means that all long-term investors should have some strategic weight to the yellow metal, which can serve as stable money while fiat currencies around it are devalued.

    While equities (and other assets) can benefit from these same structural forces, gold has different risk-return characteristics and can help to diversify a portfolio. I am not saying that investors should dump half their portfolio into gold bars. What I am saying is that, as a stable currency, gold can help mitigate the effects of never-ending monetary expansion, and most investors are significantly underweight.

    Gold can provide factor exposure not obtained through traditional asset classes and may be a valuable tool in the preservation of long-term wealth in a world in which money is debt and gold is money.


    Peak Oil, The New Boom Bust Cycle and Gold

    (I originally wrote this in 2011 for another publication. I recently found a copy and posted it here.)

    The world is experiencing the worst economic recovery since the Great Depression. So why is oil hovering around $100/bbl? And as a gold investor, why should you care about oil?

    Some might point to developments in the Middle East as the reason for high oil prices. However, I believe the root cause of current Middle East angst is the steady depletion of easily accessible oil and, consequently, government revenues needed to quell the population. Everything that is happening across the Middle East — citizen revolts, government crack downs, production disruptions and oil price inflation — tells me the world may have crossed the point of peak oil.

    I don’t think the world will run out of oil anytime soon. However, based on the advice of expert geologists, I do believe that a) the world is running out of inexpensive oil and b) global demand is pressuring oil prices.

    Given these pre-conditions, it is my view that the world has entered a new boom-bust cycle driven by oil prices. Oscillating oil prices — as opposed to credit cycles — will repeatedly stimulate and crash the highly levered global economy. Governments have not recognized this new cycle, and as part of a fruitless effort to retain control over deteriorating real growth and rising unemployment central banks will print more and more money, risking a hyperinflationary depression (stagflation at best). The only respite for many investors is gold.

    The 2008 Financial Crisis was the First of Many

    During the last thirty years debt has spread like a cancer throughout the developed world. Today’s consumption was financed by tomorrow’s higher revenues, creating a vicious cycle between growth and the need for debt. This system worked as long as growth needed to repay expanding credit could be subsidized by inexpensive energy.

    Unfortunately, rising oil prices have stealthily and persistently chipped away at the foundation of our heavily indebted financial system. Ultimately, in 2008, oil prices and total debt passed the threshold beyond which the economy could not operate, and the financial system came crashing down. With collapsing demand, oil prices fell.

    Many mistakenly point to sub-prime mortgages and CDSs as the cause of the 2008 crisis — I believe they were merely the transmission mechanisms. In reality, rising oil prices eroded the weakest links in the increasingly levered global economic system.

    Enter the Central Banks

    As we’ve witnessed repeatedly since Richard Nixon suspended dollar convertibility into gold, the Federal Reserve solves all economic problems with the monetary cure-all. Either by using the proverbial helicopter or the Treasury as an intermediary, central banks have repeatedly pumped liquidity into the economy and bought bad debts from the private sector. This effectively transfers the bad debt to the taxpayer by way of liability and currency debasement. In addition, fiscal policy (which is often the hand maiden of monetary policy) adds additional public sector debt in the name of stimulus. In whole, debt burdens and money supply rise. Of course, all this is done under the assumption that the economy will somehow be able to repay these new debts through future growth.

    In the new boom-bust cycle driven by oil prices, the central banks are unknowingly impotent. As the economy crashes, they print money to stimulate economic activity, but it is short-lived and inflationary. More stimulative is the lower oil prices caused by the crash. However, any renewed growth and inflation sends oil prices back up towards another threshold, once again breaking the weakest links of the economy…and the default-bailout-growth cycle repeats.

    Right now, oil price inflation is most noticeable when we fill up our gas tanks. But as high oil prices become pervasive throughout the economy the destruction of aggregate wealth will intensify. This will increase the number of weak links throughout the economy. It will also increase the sensitivity of those weak links to higher oil prices — another vicious cycle.

    Consequently, as the default-bailout-growth cycle repeats and rising oil prices become more omnipresent, periods of economic growth become weaker, and periods of economic bust more frequent and persistent. Eventually, as the cycle repeats, the sharp economic contrasts of boom and bust blend together becoming a permanent shade of economic grey.

    In a world of economic grey, defaults become more frequent, bailouts to support financial infrastructure and the growing mass of unemployed cause monetary growth to spiral out of control and economic ‘successes’ are characterized as periodic episodes of stabilization.

    Assuming current policies persist, and until we find an alternative economic subsidy to inexpensive oil, over the long-run this cycle would turn into a hyperinflationary depression, as central banks print, the economy shrinks and the masses suffer.

    The reversal of the cheap energy dividend would spell the end to middle class society, as the limited number of ‘haves’ hoard their wealth, food and weapons. What little wealth and property the middle class controls would be sequestered by the elite as the middle class citizens lose their jobs and default on their debts. Eventually the middle class become serfs living a life of subsistence, providing the labor to toil on the land they once owned – a less punitive alternative to debtors’ prison.

    Those that are able to escape the drudgery of indentured servitude will be the middle class citizens who default while the system still works in their favor or who have nothing to default on. Unfortunately, the defaulting unemployed also cannot pay rent so to avoid the unfortunate trade-off between serfdom and homelessness one must own land that isn’t mortgaged or own enough assets to buy a home or pay rent indefinitely. In other words, to survive or thrive in this grey economic future one must either reduce their dependence on income or have a large enough asset base to generate cash flow.

    Saved by Gold

    As they did in 2008, central banks will print money to bail out collapsing financial infrastructure and support a growing mass of unemployed. While each cycle may begin as a deflationary shock, causing gold prices to decline, the eventual monetary response will destroy currencies and send gold prices soaring. This has already started to happen.

    Unless high ROI replacement energy sources are found, over the long-run this cycle could turn into a hyperinflationary depression, as central banks naïvely fight a losing battle. Savings could be wiped out as the value of paper currency plummets, and in the new boom-bust cycle one of the few ways to protect wealth over the long run may be to own gold.