Because govts can. So they will.
Which is why gold and silver are God’s money, real money, honest money, money to have in a crisis like today, money to hold in your own hands secure in the knowledge no embezzling shyster is going to take it away from you or counterfeit it or overprint it.
As Jeff Clark explains here:
Bottom line: after all the bailout programs, housing initiatives, rescue efforts, stimulus schemes, bank takeovers, wars, unemployment benefit extensions, and numerous other promises, the biggest financial deception of the decade is what the U.S. government is doing to the dollar. Nothing else even comes close.
This reckless activity has spooked our foreign creditors, weakened our global standing, diluted our currency, is punishing savers and retirees, and ultimately sets us up for a level of inflation this country has never seen before.
Yet, what is the guardian of our economy and money telling us now?
“Will the Federal Reserve’s actions to combat the crisis lead to higher inflation down the road? The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.” (Ben Bernanke, December 7, 2009).
This is pure rubbish. If inflation could be controlled by just thinking stable inflation thoughts, then Ben should be able to grow a full head of hair by just thinking scalp follicle thoughts. This is so ridiculous, it’s insulting.
Government actions make a mockery of their words; what they say and what they do are diametrically opposed. It’s clear that inflation is not a question of if, but when.
Any level-headed individual has to conclude that there will be a steady – and likely accelerating – decline in the dollar’s purchasing power. It’s inevitable.
The great masses don’t quite understand it yet, but they will. There will be no escape from the cold, hard slap in the face citizens will receive when a high level of inflation arrives. And when it does, it will make a mockery of any opposing viewpoint.
So the question before you is simple: Will you be a prepared survivor for what lies ahead, despite what our government leaders tell us, or will you be a complacent victim of the biggest financial deception of the decade?
For me, there’s only one solution. Don’t kid yourself into thinking a man-made asset will protect your purchasing power. This is the time to be overweight gold and silver. I advise letting them serve their purpose for you.
I don’t like the term “man made”. Everything is man made, and valued by man. I prefer this expression: “Don’t kid yourself into thinking an easily debased paper asset will protect your purchasing power.”
Because in the end, it never has. Ever. In the history of paper currencies every single one has eventually ended up worthless. Every. Single. One.
Think about it.
Let me add an addendum to my Trade of the Decade:
Silver, the longtime poor cousin to gold, is $et to $oar!
The shorting of silver by the bullion banks is insane and unprecedented.
Admittedly, the Makian Distribution predicts massive volatility in commodity prices with increased leverage/debt, and that’s exactly what we’ve had in the silver market over the last 50 years.
But something tells me silver is due to switch across to the right hand side of the bifurcating normal distribution very, very soon.
I would love to see a short squeeze in the silver market. It would be like watching fireworks on New Year’s Eve.
When you see a chart like this, you just know gold’s going to US$1,200 in a matter of weeks. You just know it.
When Bill Bonner talks, I listen. In 2000, he recommended you get out of stocks and buy gold. He dubbed this the “Trade of the Decade”. And he was so right, it’s unbelievable how much money you would have made had you followed his advice.
Now, he’s just issued his new Trade of the Decade. Here it is, hot off the electrons spinning around the internet:
Sell US debt/Buy Japanese stocks.
That’s right – buy Japanese stocks!
Unlike Ambi-Pur below, he still believes Japan will produce good Toyotas and great Lexus models and the Nikkei can’t go much lower than it’s dived already. I had the same thoughts. I’m also unsure of myself, which is when I make the most money, because the investment is fraught with uncertainty which makes everyone nervous and therefore the price appealing.
I might buy the Nikkei today, especially given Ambi-Pur predicts that the Japanese economy faces Armageddon. The only comment I would make is that this Deal of the Decade doesn’t look like it’s going to make as much money as the last Deal of the Decade. And I still like gold, I still like cash, and I don’t think US bonds will collapse just yet.
As long-suffering Daily Reckoning readers will recall, we announced our ‘Trade of the Decade’ in 2000: Sell Stocks; buy gold.
“It turned out to be a good plan,” observes colleague, Merryn Sommerset, in a recent Financial Times story. “In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you about $1,100. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.
“He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. So it made sense to him to hold the only non-paper currency there is – gold.”
So what’s next? What’s the trade of the coming decade? Well, your editor has decided not to double-down on the identical trade. Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan.
Japan went into a slump in 1990. It has come out…and gone back in…and come out again…and gone back in again. In terms of the amount of wealth destroyed – at least, on paper – it was the worst disaster in human history. The value of real estate went down 87% in some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down to the 7,000 range in 2009…their lowest point in 27 years.
Why such a bad performance? As we keep saying, if you really want to make a mess of things you need taxpayer support. The Japanese put more taxpayer money into the effort to prevent the correction than any nation theretofore ever had. The result: the correction was stalled, delayed, and stretched out over more than two decades.
And now, US economists are looking at Japan…not with alarm, but with admiration. They are beginning to believe that the Japanese model is the way to go…because it prevented widespread unemployment and a deeper slump.
Here’s our best guess:
Now that the US economy is caught in the same sort of de-leveraging process that gripped Japan, the same sort of “remedies” will inevitably be employed…leading to the same results, more or less.
We’ll skip the details for this morning. You’ll hear plenty of them in the days, weeks, and months ahead – promise!
Instead, this morning, we’ll turn to our Trade of the Decade for the next 10 years. There are, of course, two sides to this trade…the long side and the short side. We had no trouble finding things to put on the short side. In a de-leveraging period almost everything goes down. We could have stuck with US stocks, for example. They’ll probably continue to come down…just as they did in Japan.
But who knows? US stocks just had their worst decade since the ’30s. What are the odds that they’ll have another bad decade? We don’t know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever…something that has been going up for so long people think it will go up forever…something that everyone wants.
What does that describe? Well, the thing that comes closest is US Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What’s more…if our analysis of the US economy is correct…the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1 trillion to $2 trillion per year are going to become commonplace.
How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation…or a debt default…sends investors running for cover? We don’t know…but it seems a likely bet that it will happen sometime in the next 10 years.
So, on our sell side…we’ll put US Treasury debt.
How about the buy side? Ah…that is something we’ve struggled with. While there are many things that seem likely to go down, there aren’t many that seem destined to go up. Let’s see, what has been beaten down, dissed, battered, and abused for the last 20 years or more? What is it that people don’t want? What is it that they expect to go down…possibly forever?
Of course…Japanese stocks!
So there is our Trade of the Decade:
Sell US Treasury debt/Buy Japanese stocks.
Maybe not. Treasury debt has been going up for the last 27 years. Japanese stocks have been going down for the last 20 years.
Does this mean we’re giving up on gold? Not at all. We’re sticking with gold. Aurus eternis, or something like that. The yellow metal is what you buy when you think the financial authorities are making a mess of things. We have little doubt about it. So we’ll continue to buy and hold gold…until the financial system blows up.
But gold at $1,100 an ounce is fully priced. It is not cheap. It’s been going up for the last 10 years! At this level, it is insurance against a monetary catastrophe and a speculation on when and how the blow-up will finally come. It is definitely worth having. And holding. And using to protect your wealth.
But the trade of the decade is a way of making money…by buying/selling two opposing assets that are at extraordinary valuations. It is not a speculation on what MIGHT happen. It is merely a bet on the phenomenon known as “regression to the mean.” Things that are out-of-whack tend to go back into whack…
If we’re right, over the next 10 years, the most popular investment of 2009 – Treasury debt – will go out of fashion. The least popular investment of 2009, on the other hand – Japanese stocks – will surprise everyone by finally showing signs of life.
In any event, the trade is fairly low risk. What are the odds that US Treasury debt will go up? What are the odds that Japanese stocks will go down? Of course, we don’t know…things that are out-of-whack can get farther out-of-whack. But we count on time to sort it out. And hope we live long enough to be able to say, “we told you so.”
As you begin to appreciate the gravity of the situation Charles lays out in a most eerie fashion what the most likely scenario awaits us and builds a strong case for why he believes the dollar will collapse. At this point most readers not familiar with economics or America’s history of debt may begin to panic and pass out from fear, as Charles’ arguments are extremely convincing. From a long term perspective there is very little to argue about, our fiat pyramid of debt has to and will eventually collapse – the only question is of timing. This question is crucial to properly answer as it will spell out the direction of the next several years. While Charles attempts to answer the question with an open mind, his views can be best described as inflationist and he firmly believes that the forces in charge of our destiny will turn to the only tool available to them - currency depreciation. Once again, in the long run this may be true, but for the time being America finds itself in a unique situation where our dollar is still the reserve currency and is still trusted around the world. Certain technical reasons also suggest that the dollar may strengthen in the coming months not so much due to any internal policy, but the systemic failures in other parts of the world. Still, as Charles poignantly argues our status as the reserve currency is on borrowed time and can change with a blink of an eye. For this reason the book’s last section presents advice valuable for every American regardless of what one’s prognostication may be.
Charles is partial to value, a concept easy to grasp when you realize just how worthless the dollar can become. Therefore common sense approaches involving gold, silver and oil are presented. Charles makes a deliberate effort to provide options for any would be investor regardless of experience and if you are under the impression that you must build a ten ton safe and start hoarding gold ingots then you are mistaken, it is easier than you could ever imagine. Several sections are also devoted to address other popular investment strategies like equities and treasuries and why you should think twice before you invest in these increasingly risky asset pools. A rather amusing analogy between America’s credit strength and a shady uncle constantly looking to borrow should be reprinted and distributed all over the Internet.
The Dollar Meltdown is a unique and valuable book, offering the complexities of economics in order to explain where we are and how we got here while presenting investment strategies for those people interested in taking control of their financial feature. If you prefer eating glass over reading economic text or think Wall St. is a prerequisite before making investments, then this book is a must read for you and your family.
China replaces India as the numero uno buyer of God’s money.
Why fight a tidal wave? Why not surf it?
The typical Chinese New Year gold rush has already begun (thanks in part to 3% discounts at major retailers), and robust demand looks likely to continue through 2010 if not beyond.
Full-year 2009 private demand in mainland China could outstrip India, the former No.1 buyer, by one quarter if not one third. Short of a (very unlikely) collapse in Q4 demand, full-year private gold buying – including jewelry and retail investment – is set to have grown 10% from 2008’s record in volume terms, rising 26% by value to equal $13.5 billion or more.
On recent trends, that would equate to more than 2.0% of China’s famously massive household savings (up from 1.0% ten years ago) and account for almost one ounce in every eight sold worldwide.
Basis the GFMS consultancy’s data (published by the World Gold Council), physical gold purchases by mainland Chinese households in 2009 was already running 19% ahead of India’s private demand for Q1-Q3.
Given China’s continued economic growth (certain to hit Beijing’s 8% target according to the Chinese Academy of Social Sciences) – not to mention the surge in money-supply and credit growth over and above GDP (put at 23 and 27 percentage points respectively by Deutsche Bank) – private gold consumption in Q4 most likely remained very robust. Whereas India’s private gold off-take during Oct-Dec. continued to shrink in the face of record-high prices. Indian bank and wholesale dealers have reported below-market bids from their clients throughout the autumn. Comments from the Bombay Bullion Association put Q4 imports 54% lower from 2008’s already disastrous finish.
Fourth-quarter Chinese consumption should be in the range of 116 tonnes (if it adds 37% to Q1-Q3 volume, as per the 5-year average) to 128 tonnes or more (if Q4 tops Q3 by volume, as it has each year since 2004). The running total to end-Sept. was 315 tonnes. It is likely to finish full-year at 431-443 tonnes.
India’s private demand, in contrast, ran 45% below 2008 levels during the first 9 months of the year, most notably depressed during Q1 (down 83% from Q1 08, with Indian investors becoming physical dis-hoarders on GFMS’s data; overall, India was a net exporter of gold for the first time since the Depression according to market historian Timothy Green). Applying the 5-year average ratio of Q4 demand to Q1-Q3 figures (27% added to 264 tonnes), full-year private off-take would come in at 336 tonnes, the lowest total since at least 1991 on GFMS’s data.
India’s full-year imports (it has virtually no domestic mining output) are forecast at 370-380 tonnes says the Bombay Bullion Association. They have not been below 400 tonnes per year since at least 1997 according to the Indian Bullion Market Association.
It is impossible to predict the outlook for gold-buying in mainland China next year, but this decade’s drivers for Western gold investment – credit excess and miserable returns to cash – also apply in China, with bells on.
The People’s Bank cut its benchmark rate from 7.5% to 5.3% in Dec. 2008, and has left it there since. Inflation in the cost of living was officially reported at minus 1.1% across the first 3 quarters, but real rates were negative in H2 2004 and again in at the turn of 2007-8. Some analysts are forecasting 4.0% inflation for 2010, and either way, commercial rates have been so attractive this year that new credit growth was CNY295 billion in Nov., equal to $43 billion. That was down from 2009’s monthly average of $130bn, but took full-year credit growth to the equivalent of $1.35 trillion, equal to 27% of GDP.
Pitched against this rampant credit excess, gold’s quasi-religious and auspicious appeal in Chinese culture – as a solid, tangible, intrinsically valuable store of wealth – will only have grown. Most significantly, and in sharp contrast to Indian demand, private Chinese buying has grown as the price has risen (gold has than tripled against the Yuan since retail price controls were lifted in 2001).
That might suggest gold is just another bull-market asset for China’s increasingly wealthy and capital-rich middle classes. But owning the metal is most often viewed more as an end-in-itself than as an investment vehicle; it’s the aim of accumulation, not the means.
Given this last decade’s average 15% annual gains for US-Dollar investors – plus the outlook for sub-zero real interest rates, struggling equity dividends, and the danger of sharply higher bond yields (i.e. falling bond prices) as the Treasury attempts to finance a new record deficit – might the Chinese approach to gold investment start to take hold in the West…?
It’s possible. Here’s why (from Porter Stansberry):
It’s one of those numbers that’s so unbelievable you have to actually think about it for a while…
Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion.
Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That’s an amount equal to nearly 30% of our entire GDP. And we’re the world’s biggest economy. Where will the money come from?
How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then “rolling over” the loans when they come due. As they say on Wall Street, “a rolling debt collects no moss.”
What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that’s when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.
When governments go bankrupt, it’s called a “default.” Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. The formula is called the Greenspan-Guidotti rule.
The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world’s largest money-management firm, PIMCO, explains the rule this way: “The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support.”
The principle behind the rule is simple. If you can’t pay off all of your foreign debts in the next 12 months, you’re a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.
So how does America rank on the Greenspan-Guidotti scale? It’s a guaranteed default.
The U.S. holds gold, oil, and foreign currency in reserve. It has 8,133.5 metric tonnes of gold (it is the world’s largest holder). At current dollar values, it’s worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that’s roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether… that’s around $500 billion of reserves. Our short-term foreign debts are far bigger.
According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we’ve been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.
Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.
So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we’re still going to come up nearly $3 trillion short. That’s an annual funding requirement equal to roughly 40% of GDP.
Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.
So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.
One thing they’re not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.
I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry’s Investment Advisory. Coincidentally, the New York Times repeated my warnings – nearly word for word – a few weeks ago. They didn’t mention Greenspan-Guidotti, however… It’s a real secret of international speculators.
My readers know that Greenspan-Guidotti means the U.S. is likely to have a severe currency crisis within the next two years. How high will gold go during this crisis? Nobody can say for sure. We’ve never been in the situation we are now. The numbers have never been so large and dangerous. But I wouldn’t be surprised at all to see gold at $10,000 an ounce by 2012. Make sure you own some.
To those readers who have tolerated my rage against the machine, thanks for sticking with me.
As the Buddha stated just before his death, “Everything is Change” – so I am quietly confident things will get better in 2010 (they could hardly get worse).
I leave you with Lew Rockwell’s sage words regarding God’s money and the connection between faith, truth and sound money:
Fiat money with central banking… tempts corrupt politicians and bureaucrats, and it also further corrupts them. It is the great occasion of sin of our public life. The tragedy is that their use of the printing press not only corrupts them; it imposes dreadful and intolerable costs on the rest of society, in the form of price inflation and business cycles.
We’ve seen the corruption grow worse over time. We are living now in the 37th year of fully fiat money with central banking. The politicians of the past were a bit reticent to use all the power they had. They are becoming ever more brazen. The sense of shame seems to be gone forever, their consciousness completely papered over by the ominous power they possess. The pundit class is following them, believing that there are no limits.
In truth, all these bills must be paid. To realize that is to realize the necessity of radical reform. It can be overwhelming to contemplate the glorious results of a full gold standard reform. Inflation would stop eating away our purchasing power. The business cycle would be tamed. International trade would not be disrupted by wild swings in currency values. But of all the benefits, this one is the greatest: it would stop arbitrary rule, dead in its tracks. It would force the government to curb its ways. It would shore up our freedoms.
For this reason, the policy of sound money is very much linked with morality. The Hebrew scriptures, in the nineteenth chapter of the book of Leviticus, warns “you shall have just balances, just weights…” The twenty-fifth chapter of Deuteronomy issues a similar warning: “You shall not have in your bag differing weights, a large and a small.” Proverbs says the same: “A false balance is abomination to the LORD: but a just weight is his delight.” Another passage says: “Diverse weights, and diverse measures, both of them are alike abomination to the LORD.”
All of these relate in some degree to the need for sound money and condemn the act of fraud and monetary debasement. The consequences of monetary sin cannot be contained to the sinners only. They are spread out all over the whole of society, destroying its economic basis and corrupting the morals of society. They foster crazed illusions that we can magically generate wealth through the act of printing money, and the attempt to do so has catastrophic consequences. As Mises wrote: “Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.”
I find it sickening that there are so few voices outside the Austrian School that will stand up to this policy. And I fear that the consequences of this policy will be felt for many decades into the future. There is still time to reverse course. There is nothing inevitable about despotism. We are not being forced down this road. We can embrace freedom. If we understand that freedom is inseparable from sound money, we can embrace that too. Until then, we will continue to place our trust in the political establishment to do what is right. Call me a gold bug if you will, but I trust hard money far more than our rulers. And that, ultimately, is the choice we must make.
Merry Christmas and Happy New Year. Let us pray for sound money to return in our lifetimes.
Gold has been in a bizarre unnatural slump for a generation. Gold has been money for 6000 years. Gold is solid. It’s not subject to wild swings in supply (subject of course to the paper machinations of the bullion banks).
Fiat paper currencies and govt bonds have been in a bubble for a generation. That bubble burst in 2008. The powers that be are trying to patch it up. But like Gorbachev discovered, the most dangerous period for any oppressive regime is when it tries to reform itself.
Gold will continue to climb because it is God’s money. God, ultimately, will not be denied.
According to reports, some central banks have been duped into buying gold-plated steel.
This is incredible for two reasons.
First, that a central bank would be duped at all.
Second, that they could be duped into thinking steel (so much lighter than gold!) weighed as much as gold! You should be able to tell just by holding it in your hands.
Tungsten, OK, I can understand.
It always worries me when an establishment rag like the Financial Times touts for anything (that’s generally the time to sell!), but this article is too good to pass up.
This graph alone is worth the read (click on this ft.com link to see in full size):
Richard Cook labels Ron Paul’s proposal for currency competition (and a return to commodity currencies) unworkable, principally because Cook doesn’t believe gold and silver could support all the trade that “needs” to be conducted.
Unfortunately, there is not enough gold and silver in existence to fund the monetary requirements of modern economies. Trying to restore a metallic currency that never really existed in sufficient quantity since this nation was founded would only replace control of the economy by the banking system with control by gold and silver speculators.
Why wouldn’t there be “enough” gold and silver? All that would have to happen is that the gold and silver price would rise sufficiently to cover all trade in the economy. And we wouldn’t need to haul bags of gold around. A currency backed by gold would perform exactly like today’s currency except that it would be non-inflationary (or deflationary). We could measure prices in micrograms of gold if we had to.
The problem with any fiat currency solution (be it Ellen Brown’s or Richard Cook’s) is that it relies on the integrity of the central govt agency issuing the paper currency. It relies on you trusting govt (however small. however local that govt may seem to be).
But govt is the very corrupt, self-serving, monopolistic, unresponsive institution that got us into this mess in the first place!
Gold and silver are God’s money because they don’t require govt to enforce it. They are real money - the anarchist’s money. Money that can self-regulate, self-insure, self-monitor. Let the market decide what money it wants and it will return to gold.
Murphy sees destruction of the currency and a new Amero emerging from the wreckage.
MISH, the Rothschilds, Steve Keen (and I) vote deflation.
Someone’s gonna be wrong.
Fortunately gold and silver are the answer in either case.
Truth lies in the physical gold market. Paper lies. COMEX lies. Banks lie. Physical gold sits there, not giving a f*ck what lies are told.
I trust the physical gold market. Let’s get physical.
Simple question: If all gold bugs are crazy and gold is “just another commodity” why don’t the bullion banks want to sell it at the market price?
As the year comes to an end, let me list my predictions for 2010. Note: Anyone who says their predictions are based on modelling is an idiot or a liar.
As was clear from our experience in 2009, politics, connections, favours, and plain old everyday third world corruption play a major part in any economic outcome today.
The “logical” prediction for 2009 would have been the bankruptcy of AIG, the bankruptcy of a number of major US and UK banking institutions, deflation, a continued stockmarket collapse, a spike in long-term interest rates (caused by a decline in demand for T-bonds due to US govt deficits), a collapse in the value of the US dollar and a spike in gold. Almost none of these happened because of the multiple, trillion dollar interventions of the Fed and the US Treasury. AIG was saved, US and UK banks received hundreds of billions in bailouts, swapping toxic trash at the discount window 100 cents in the dollar, the stockmarket was artificially supported, the long end of the bond market was (allegedly) supported by the Fed, and gold was shorted relentlessly by the primary dealers.
So predictions for 2010 are really political predictions and these cannot be taken very seriously. Nevertheless, it’s fun to speculate, so here goes:
1. A CRE and housing bust in Oz in the second half of the year due to (a) wholesale funding costs jumping for Cth Bank and Westpac in particular and a fight for deposits (b) APRA liquidity requirements kicking in (c) high $A killing exports and local manufacturing, combined with a generally slowing economy due to a fall in Asian growth and a crisis in Japan (d) pullback of the FHBG and other handouts from Rudd Bank (e) pull back on the govt backing of Oz banks, exposing them to “market” rates for wholesale funds especially for LT debt (f) housing prices already being ridiculously too high, as Steve Keen has pointed out many times in the last 3 years. It should be a bloodbath in CRE in 2010.
We’ll see whether the govt and the desperate Oz banks can hold back the receding tide. Unlisted funds with illiquid assets were massacred in 2009 by the govt’s bizarre, indiscriminate bank guarantee (thereby predictably and savagely killing off the supply of liquidity for unlisted CRE trusts). This should mean that the marginal players in the finance industry have simply had their executions stayed, not commuted. Will this now infect the whole CRE market, as supply continues to overwhelm declining demand due to liquidity tightening for the dumb Oz retailers of debt? Bank guarantees should have engendered moral hazard in the marginal lenders. This should have made the problem worse. This problem may be deferred until 2011, but something tells me this Ponzi-scheme can’t be sustained throughout 2010. We’ll see.
2. S&P 500 down for the year, with a “crisis” in early and/or mid 2010 due to (a) the fallout from the bubble being delayed this year – meaning that the bust will be even bigger and flow into 2010 (b) a significant portion of consumers (70% of the US economy) being bankrupted in unsustainable debt (c) debt levels threatening the long-end of the US bond market (d) unemployment continuing towards 15% in official terms and 25% in unofficial terms (e) a possible US dollar/bond crisis, with an unprecedented volume of bonds being needed to be flushed into the market (f) the banks being supported, but the bulk of US industry being left to die. The S&P 500 includes much more than just Goldman Sachs (which will continue to perform well, given they print their own profits).
3. Gold up – for all the reasons in (2) above, plus the fact that the Fed will continue to pour e-dollars out into the market in the trillions, without any effect (see Japan over the last 15 years). So gold will be the only place for the e-dollars to go.
4. Silver to go up more than gold – for all the reasons in (3) above, plus the fact that silver is a tighter market with the massive short positions in silver finally having to be unwound on reality.
5. Oil higher. Inflation’s got to go somewhere. And Peak Oil has arrived.
6. Food and food inputs higher. Possibly significantly higher.
7. Fed Funds Rate probably around where it is now. The big story will be everything BUT interest rates. Interest rates will stay low (to save the banks) but chaos and volatility with be a tempest around stable, low rates. The debt load is massive and people will be killing themselves to extract themselves from this killer debt-load by repeatedly trying – and failing – to spark a new bubble in the stockmarket. Then in desperation they’ll spark a bubble in oil, food, gold and silver. Currency volatility will be unprecedented. There is the real prospect of a US dollar meltdown. If so, gold will soar on its angelic wings.
The overall theme for 2010 will be continued unprecedented volatility. Price swings, especially in the stockmarket, will be violent as liquidity sporadically dries up due to the unsustainable debt loads and banks desperately juggling debtors to stave off insolvency – both in their clients and themselves.
The Makian Distribution predicts increased volatility with increased debt. We have increased debt. So, according to the theory we must have increased volatility.
“Philip” asked the following on Steve Keen’s DebtWatch Blog site:
Why should money be linked to gold as opposed to cadmium, hafnium, zinc, tungsten or any other element?
I responded thusly:
Google “Austrian School and gold” or “gold as money”.
(1) Malleability (gold and silver, but gold in particular, is the most malleable of metals – great for coins) (2) relatively stable supply and relatively rare (3) resistant to decay/oxidization (4) easy to work with at relatively low temperatures (again for coinage) (5) easy to identify as gold or silver (they shine) so difficult for counterfeiters to counterfeit (unlike banks counterfeiting through embezzlement of paper savings) (6) history – gold is already a monetary unit (XAU on foreign exchanges around the world).
How long before everyone gets it? Gold at $1224 tells me more people are “getting it” than ever before!