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Commentary on Precious Metals

Other commentaries:

  • (YouTube) Silver is The Achilles' Heel to the Entire Economic System. Posted 3/21/2012. David Morgan commentary. See also: Global Silver Taxes Part of Global Agenda to Dissuade Individuals From Buying Silver which lists the high taxes on gold and silver purchases in Europe. This is in contrast to China, India, and Russia where taxes on gold and silver are minimal to non-existent.
  • GATA: 'Financial repression' is gold price suppression. Posted 12/30/2011. What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets....as a mere high school graduate remarked a few years ago, "There are no markets anymore, only interventions."
  • Money supply explosion will lead to accelerating inflation. Posted 12/17/2011. Singularity or the point where the gold price goes to theoretical infinity, is in February 2014, only 26 months away. Unless this long-term trend (since the 1900s) is somehow broken, gold is also telling us the dollar is heading for hyperinflation.
  • Kyle Bass on the Fate of the World. Posted 12/16/2011. Must watch video.

Debt Crisis

Reggie Middleton

Commentary:

(Posted 12/28/2011.) Bank runs. Most think the final resolution of Fiat and ZIRP is through expansion of the MB (Monetary Base) or a governments inability to sell bonds. I don't believe this is the case. We are at a point where the CB (Central Bank) and governments are "all-in" to protect the status quo. The ruling class can effectively increase MB to infinity and they can become the only buyer of debt. Rates can be zero and those not at the table (individuals) no longer matter. The end-point comes from a different mechanism. It comes when flight of demand deposits ruin the reserve banking system.

MB and CBs balance sheets can expand to infinity - it doesn't matter! What matters - IMHO - is deposits. While these are a tiny fraction of the numbers involved in global debt they support the reserve banking system which supports a countries currency. Focusing on monetary base and central banks expansion of balance sheets is barking up the wrong tree. Now that individuals are close to being out as buyers in the debt market, increases in MB does not effect their purchasing power of deposit or currency. "Money" is already now effectively valueless other than as a medium of exchange.

I have been tracking what I think is the key - the ratio of currency per capita to non-institutional deposits per capita. When this grows it is the signal that belief in money as a medium of exchage is eroding. This is what sets off hyper-inflation. When countries finances are widely disparate such as Argentina in the 90s or Germany in the 20s it comes when currency flees one country to another and like a fever breaking the currency is destroyed.

Also read: Europe Bank Run Underway, Why You Should be Worried

(Posted 12/28/2011.) Why is the price of gold and silver declining? It's a reflection of the flight from the Euro to the Dollar, the selling of assets to raise fiat, and the threat of deflation. Gold is going down in dollar terms but rising in terms of Euro. But rest assured. The more purchasing power the Dollar has the more expensive it makes our goods to the rest of the world to purchase. Thus slowing down our GDP growth which is already nearly flat. The Fed. will be forced to print even more. Although maybe not announced as QE but printing none-the-less. Trying to time the bottom is impossible. Just pick an entry point you can live with and keep enough cash on hand to make sure you don't have to panic sell to raise cash. Also,

  1. You can't get physical metal off Comex. It's a paper casino where the rules change as the house decides.
  2. Stolen money if you used MF Global as a clearing house.

People fleeing Comex because it's a rigged market...open interest is down 9% since the MF Global failure. Ann Barnhardt and Jim Willie recently had some great insight on that. See here. Bottom Line: Expect the phoney paper prices to keep declining, but the real physical price in the market will stay steady and then rise.

Gold price set for hyperbolic increase. There are five apocalyptic engines pushing the growth in US money supply: they are the government’s budget deficit, its debt trap, the financial condition of the banks, the delusion of Keynesian solutions, and lastly simple compounding arithmetic.

  1. The US government collects only 55c in taxes for every dollar spent. It is relying on economic recovery to reduce welfare payments and increase tax revenue to close the gap. This prospect is receding and establishment economists advise against cutting government spending.
  2. The US government’s debt trap is concealed by the exceptionally low interest cost of funding. The only reason this cost is not higher is the Fed maintains a zero interest rate policy. However, as surely as night follows day, price inflation will start rising as monetary inflation feeds through, forcing the Fed to allow interest rates to rise long before any economic recovery occurs. The rise in interest costs will escalate the budget deficit, which will be financed, directly or indirectly by further monetary expansion.
  3. The banks’ balance sheets are considerably weaker than stated, because of unrealised losses on assets, loan collateral and write-downs on their own debt. Real estate collateral write-downs alone probably exceed bank equity of $1,400bn. On an honest analysis the US commercial banks are collectively bankrupt. To simply survive the banks have no alternative other than to reduce loan exposure while requiring continuing monetary support from the Fed.
  4. Keynesian economists, aware of the banks’ difficulties are terrified of bank credit contraction. For this reason, the macroeconomic establishment strongly promotes the expansion of narrow money to buy off a deflationary depression.
  5. As the purchasing power of the dollar falls, the result of past monetary expansion, yet more dollars have to be issued to cover increased government costs. Past inflation becomes a compounding factor behind price rises.

Essentially, money will be printed at an accelerating rate to buy time rather than face the three realities of government default, an over-indebted private sector, and a bankrupt banking system. The Keynesians are belatedly aware of the dangers and see no alternative to printing as much money as is required to defer these problems. The monetarists in the central banks are hesitant, torn between Keynesian fears of outright deflation and worries about the rate of monetary expansion so far. However, the history of monetary inflation confirms that once it enters a hyperbolic phase, it is almost impossible to stop. Armchair critics have derided the stupidity of central banks and economists in past hyperinflations, such as in Weimar Germany, Argentina and Zimbabwe. The truth is that when hyperinflation has become visible at the price level, it has already gone past the point of no return at the monetary level.

Financial Panic Sweeps Europe As The Head Of The IMF Warns Of A “1930s Depression” (Posted 12/17/2011). Right now, financial panic is sweeping across Europe, but most Americans are not too concerned about it because they simply don't understand how important the EU is. The truth is that the EU has a much larger population than the United States does. The EU has an economy that is nearly as large as the economies of the United States and China combined. The EU has More Fortune 500 Companies that the United States does, and the banking system of Europe is substantially larger than the banking system of the United States. Anyone out there that believes that a massive financial collapse in Europe would not dramatically affect the rest of the globe is being delusional. The European debt crisis is one of the biggest stories that we have seen in a long, long time and the coming financial meltdown is going to permanently change the global economy.

Italy Is Finished: "Mathematically Beyond Point Of No Return": (Posted November 9, 2011):

  1. At this point, it seems Italy is now mathematically beyond point of no return
  2. While reforms are necessary, in and of itself not be enough to prevent crisis
  3. Reason? Simple math--growth and austerity not enough to offset cost of debt
  4. On our ests, yields above 5.5% is inflection point where game is over. See Italian 10-year Govt Bond Yield here
  5. The danger:high rates reinforce stability concerns, leading to higher rates
  6. and deeper conviction of a self sustaining credit event and eventual default
  7. We think decisions at eurozone summit is step forward but EFSF not adequate
  8. Time has run out--policy reforms not sufficient to break neg mkt dynamics
  9. Investors do not have the patience to wait for austerity, growth to work
  10. And rate of change in negatives not enuff to offset slow drip of positives
  11. Conclusion: We think ECB needs to step up to the plate, print and buy bonds
  12. At the moment ECB remains unwilling to be lender last resort on scale needed
  13. But frankly will have hand forced by market given massive systemic risk

State of the U.S. economy:

  • Unemployment rate is 9%. That's the "official" (U-3) rate. Everyone knows that the rate is much higher (see Alternate Unemployment Charts).
  • Real wages are falling
  • Income advances go to the wealthy
  • Middle class is shrinking
  • Jobs hard to find. Minimal job creation and historically low investment. Also, globalization is precluding the hiring of domestic labor due to cheaper alternatives in developing countries.
  • Approval ratings of Congress and Obama at record lows
  • Consumers have high debt ratios
  • Home prices are still falling
  • Homeowners are trapped in their homes, unable to refinance
  • Boomers need to save for retirement. Consumption is now turning into savings.

Selected from: Norcini - Central Banks Collapsing the Financial System.

Right now the trading markets have become electronic battlefields. Much of this volatility is being created by a lack of stability in the Western hemisphere. If the current monetary system were a train, the engineer’s in the front would be the heads of the various central banks and they are certainly leading us to destruction....This tremendous volatility and lack of stability is being fueled by the reckless behavior of central banks....The volatility and the instability of the markets is a mirror image of the current monetary system. At some point the sheer volume of debt will carry us to a day of reckoning which is going to bring the system to its knees.

Selected from: Bizarre Love Triangle by Jim Rickards.

The world is now in a beggar-thy-neighbor phase, last seen in the 1970’s and before that the 1930’s, where countries steal economic growth from neighbors by currency depreciation to cheapen exports. The main event is the three-ring circus of the U.S., Europe and China and their respective currencies, the dollar, euro and the yuan. The dynamic is straightforward – all three would like a cheaper currency, relative to the others, to help exports. The U.S. devalues against yuan and the euro – it gets all of what it wants. China revalues upward against the dollar, but keeps a peg to the euro – it gets half of what it wants. And the euro remains strong against the dollar and pegged against yuan – so it gets none of what it wants. This has been the prevailing paradigm since June when the Chinese finally let the yuan appreciate against the dollar in a serious way.

There’s only one problem with this neat solution to the currency wars. Germany may be able to survive with a strong currency but the rest of Europe cannot and parts of Europe, especially Greece, are facing insolvency. Up to a point, the Greeks have to accept the fiscal austerity forced on them by the Germans. But beyond a certain point, either the Greeks or the Germans balk, and the crisis goes critical and threatens the stability of the global financial system.

If the euro weakens and China re-pegs to the dollar as a result, that is the signal for more QE. It’s hard to know how this will play out, but at least we know what to look for. If you want to see QE3 ahead of the market, watch the euro.