The Gold bugs tell you to buy gold to protect against a debt crisis failure. Last week, we got a taste again of sovereign debt failing. Dubai said they wanted to postpone payment on their debt. They didn’t default, they just wanted a postponement. What if there were several sovereign debt failures? How do you think Gold would perform? On Friday gold dropped over $50 an ounce before recovering some of those losses.
The last thing world economies want is a collapse of world debt. We all depend on everyone to rollover their debt. Our financial crisis of 2008 was another example of what could happen as people stop rolling over debt and ask for their money back. Selling begets more selling and eventually no one has the ability to repay debt. The entire world economy is based upon debt and that it rolls over continually.
Every bank counts on CD rollovers. Every state government depends on investors buying new general obligation bonds of more and more debt. All commercial real estate depends on the banks rolling over new loans every 3-5 years. Corporate debt of our major corporations, even those companies failing, need the banks and investors to rollover their debt. The U.S. government’s trillion dollar debt depends of investors who keep rolling over the debt.
There are two major classifications of debt. One type debt is the collateralized type of debt for real estate. But what if real estate prices fall, there is a lack of collateral and to avoid default, the banks must rollover the debt since they are unable to foreclose and resell the collateral. The other type is general obligation debt that governments and municipalities issue. This is based on the ability to collect tax revenues from the population.
Although it is too soon to know the fallout from Dubai, it would be in everyone’s interest to rollover the debt. Gold will do better under an inflationary scenario than a failure of world currencies. If real estate and values of all assets rise, the banks will be able to have full collateral again.
For more information, contact mark@seleznovcapitaladvisors.com
www.seleznovcapitaladvisors.com
