By Richard (Rick Mills), Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

Institutional investors tend to prefer investments that are thought to contain the potential for growth, growth = sprouts. An investment has to produce a growing revenue stream - if it doesn't

Silver and gold are rejected as investments because they don't produce sprouts, meaning the steady income and systematic growth so sought after by institutional investors just isn't there.

John Exter was an American economist and a member of the Board of Governors of the United States Federal Reserve System. Exter is known for creating Exter's Pyramid - useful for visualizing the organization of asset classes in terms of risk and size.

When the credit system is expanding most money flows to the top of the pyramid - the increasingly speculative and illiquid investments. When the credit system comes under pressure and debt cannot be repaid, the items at the top of the pyramid get sold and money flows towards the bottom.

"In order to make use of it though, we must first make the distinction between real wealth and claims on wealth. Real wealth is represented by actual items that people want or need. This can be food, land, natural resources, buildings, factories etc. Financial assets, shown as layers in the pyramid, represent claims on real wealth. In a fully developed financial system, in good perceived standing, there is a high ratio of claims on wealth to actual underlying real wealth. In this environment the average buying power of the financial assets is lower. This can best be observed by looking at the purchasing power at the bottom of the pyramid. Gold is at a minimum here. It is competing with all of the other claims on wealth for a relatively constant amount of underlying real assets.

According to Exter's theory of money, when economies get into trouble through the accumulation of too much debt, the levels of the pyramid disappear in order from highest to lowest. As the pyramid contracts downward, the remaining layers represent a proportionally higher claim on the real underlying wealth. In other words their value increases. Using gold as our reference point, it's relative purchasing power increases as the pyramid contracts. Gold finds itself in a secular bull market.

In the extreme hypothetical case where all other asset classes are destroyed, including the currency itself, only gold remains. In this case the holders of gold compete with no other financial assets for claims on the underlying wealth. This scenario represents the ultimate clearing of the economy. All currency denominated debts have been wiped clean.

If a market economy remains in place then the pyramid begins to expand and grow again. The wealth claims represented in gold will be deployed as investments and a new currency will emerge that garners the faith of those who use it. As this new economy grows and expands, the previous instruments of credit and financing will appear again. Layer upon layer are added back to the pyramid. From the perspective of gold, its relative purchasing power decreases as it competes with these new financial assets for claims on the underlying real wealth. Gold is in a secular bear market as the newest levels of the pyramid are in their growth phase. This model provides a useful intuitive understanding of the alternating secular bull and bear markets of commodities vs. equities." Trace Mayer, The Paper Empire

In the first part of 2013, the world's most popular safe havens are the dollar, US treasuries, stocks and Government bonds ? yet all are fiat assets.

In today's current economic and political climate central banks control much of the money supply by their use of quantitative easing (QE).

According to the Organization for Economic Co-operation and Development, the combined government debt held by the world's advanced economies is at its highest point since the Second World War. In 1945, the debt topped out at 116 percent of GDP; at the end of 2012 it hit 114.4 percent. The OECD says we'll hit a new high in 2013.

There are currently four options for governments to manage debt:

  • Default
  • Inflate the debt away
  • Sustain faster real economic growth
  • Keep interest rates unusually low for many years

"Policy actions speak louder than words. Governments engaging in large-scale quantitative easing, such as the U.S., U.K., Switzerland and Japan have at least cracked open the window to a scintilla of extra inflation. Central bank mandates are beginning to shift. The U.S. Federal Reserve now seems more interested in unemployment and has articulated a greater tolerance for inflation. The Bank of Japan has just increased its inflation target. The Bank of England continues to conduct policy in a manner that seems willing to accept the trade-off of higher inflation in exchange for additional growth. Consciously or not, central banks are starting to take their eyes off the inflation ball. Meanwhile, the current competition to devalue currencies provides a further window into the soul of policymakers, revealing where their priorities lie on the inflation file." What To Do About Public Debt,RBC Global Asset Management

With continuing QE, low interest rates, budget deficits, increasing inflation and the specter of default ever present its likely confidence in government-controlled paper assets will continue to be undermined.

So where should my money go? Well, stock markets are hitting records every day. Silver and gold have backed off highs and seem range bound to weak. Are investors buying silver and gold right -the holders of gold compete with no other financial assets for claims on the underlying wealth - or are investors buying into the stock markets right, whose really buying dead flowers?

To answer that question we need to find out if there is a real economic recovery underway.

The Federal Reserve's monetary experiments in the U.S. have not worked, yes Gross Domestic Product (GDP) is up but:

  • Medium household income has declined
  • Inflation is climbing much higher and faster than officially reported statistics
  • Few Americans own any significant amount of financial wealth
  • Housing has not recovered
  • U.S. Employment rate is not recovering

As for global economic indicators:

  • World GDP shows no global recovery underway
  • Global trade has slowed

While medium household income has declined consumers struggle with a Consumers Price Index (CPI) over 200 percent.

Few Americans own any significant amount of financial wealth. Consider:

  • The top one percent of the American population controls 42 percent of all financial wealth in the country
  • The top 20 percent control roughly 90 percent of all stock ownership and financial wealth
  • The bottom 80 percent of Americans control less than 10 percent of all stocks owned
  • The bottom 80 percent of Americans hold roughly 5 to 8 percent of all financial wealth (non-housing related)

Most Americans have their wealth in home equity.