I’m often asked, “Why should I own gold and silver?” I could list a dozen reasons including geopolitical events like North Korea, inflation, lack of trust in paper money, and devaluations of global currencies. But two reasons that concern me the most and should have every investor taking notice is our increasing national and world debt that continues to grow exponentially and the very significant pension liabilities of our local, state and federal governments.
Bloomberg recently reported that 186 of the 200 biggest pension plans of the S&P 500 are underfunded. In other words, they don’t have enough money to pay current and future retirees what they expect to get. It’s the same with government pensions. Local, state and federal pensions are massively underfunded. It’s a ticking time bomb that I believe most people are not informed about.
It’s like the parable of the frog in the water—unaware of its demise, as the water temperature gradually gets hotter and hotter.
Marketwatch summarized the issue well. It noted that the money to pay the future benefits to government workers comes from two sources: contributions by governments (i.e. our taxpayer money) and investment growth. The trouble is that “most developed countries, including the U.K., Canada, the Netherlands, Sweden, and France assume a conservative return, as on government bonds. Their pension plans are very well funded. In the U.S., the assumption is not at all conservative. U.S. funds assume an average return of 7.6%. If they were to assume the return on a low-risk U.S. government bond, it would be only 2.5% or 3%.”
So what we have right now is massively underfunded pensions to the tune of trillions of dollars. What the public doesn’t realize is that using an unrealistic 7.6% is disguising the true liabilities that exist. If they used a lower more accurate percentage then the liabilities would more than triple, causing pensions to appear severely worse than they are reporting now. And those in charge don’t want to do that so they continue to use the pie in the sky, bogus discount rate of 7.6%–estimated investment returns which we haven’t seen in years.
Now this calculation is coming under increased criticism because it is vastly understating the true pension liabilities. As Marketwatch noted, “the conclusion of many political and economic commentators is that public pensions and their public employer plan sponsors are facing a “tsunami” of unrecognized debt that will eventually swamp state and local governments.”
The state of Minnesota illustrates this well. It just adjusted its discount rates to a more realistic level…and saw it’s underfunding more than triple! The state dropped from one of the best funded state systems to the seventh worse in the country, according to Bloomberg, because it started to be realistic with its assumptions. Or, as ZeroHedge summarized it, “some pension administrators finally decided to stop lying to their retirees and report reality.”
When you start applying more accurate discount rates…what was already an escalating situation, quickly becomes a disaster. Governments can’t make up the shortfall without applying unrealistically large percentages of their tax revenues to slow down the exponential increase of unfunded liabilities.
Governments are going to have to deal with this, as more and more boomers are retiring every minute. How and when they start telling the truth and using the right calculations and determining how to lessen the devastation of this tsunami is uncertain. At some point, through increased taxes or a devalued currency (because they will have to print a bunch of money to pay for this disaster)—WE end up bearing the burden.
When you think about this issue among others like our unsustainable national debt, social security debt and the astounding student loan, credit card and household debt, it is quite overwhelming.
It is clear these skyrocketing debts can never be eliminated without drastic financial measures that will certainly be felt in your wallet, investment portfolio and retirement account. I believe some won’t be able to recover from it—especially the retirees that lose not only their expected pensions, but also their purchasing power.
I know this is a huge investment risk that all investors need to be accounting for in their portfolios.
It’s also clear that the old way of investing—i.e. buy a home, invest in a few stocks, put some money in your company’s IRA, save some cash, and buy a CD, doesn’t work anymore. It is a wildly volatile and fragile financial time. The days of holding lots of paper assets (stocks, bonds, cash, CDs etc.) and being assured of nice returns are over. If you are counting on your pension, an expected loss of buying power and inflation—which will be part of the negative impacts of these big issues—will make it worth far less than you may be anticipating.
Like me, you should consider creating more diversified portfolio. Taking a different approach. Devising a plan where you move some of your wealth into more reliable hard assets. Determining which assets are going to generate sustainable wealth.
I’ve diversified my financial portfolio to include gold and silver. And it’s not just because I’m the CEO of a precious metals company. It’s because precious metals have retained their intrinsic value throughout time–even in the midst of recessions, depressions, devaluations, stock market crashes and currency collapses. Not only can I hold the physical metals in my portfolio, but I can also hold gold and silver in a self-directed IRA. I’ve become a strong proponent in holding from 10-20% of one’s wealth in precious metals, over the long term.
When the government has to issue bonds or print money to deal with these huge liabilities, the assets that perform the best are hard assets like gold and silver. And that is why now is a critical time to have gold and silver in your portfolio. You have to consider the long game in these uncertain times. You don’t want to try to adjust for this when the problem becomes so obvious.
Only you can decide how to protect and preserve your wealth. Your situation may be different than mine, but the issues we face are the same. Just don’t be like the frog in the boiling water that did nothing until it was too late.