Saturday, June 29, 2013

The Bigger Picture View Beyond The Headlines

Perfect article to sum up the psychological state of the gold market this month from The Atlantic titled, "Gold Was A Horrible Investment From 1500 To 1965." The article goes on to list all the standard reasons why gold should never rise in price: it does not have any earnings, it does not pay dividends, and it costs money to store. The article finishes with two simple worlds using an exclamation point to bring home the point:

"Sell Gold!"

I'm sure I do not need to review this for most of the readers of this site, but there is one very simple reason why gold was a terrible investment during this period: the world was on a gold standard between 1500 and 1965. 

If you know that the paper money that you own can be redeemed for gold then there is no reason to own gold. I definitely wouldn't. From 1500 to 1965 when governments decided to spend more money than they brought in and ran an account deficit with foreign countries, it was ultimately settled with the removal of gold from the debtor country. If the country ran out of gold, they could no longer borrow. Then they would have to re-balance their budget, clamp down, and begin to run a surplus while the foreign country could now enjoy the fruits of their former surplus with additional spending.

In 1971, as gold began to flood rapidly out of the United States due to foreign entities concern that the U.S. could not repay what it has borrowed, the link was broken by Richard Nixon who announced the U.S. would pay only with paper I.O.U.'s. Currencies were no longer backed by gold, but by the trust that the governments would never run deficits too large or print too much money.

I don't need to finish the story on how it played out over the ensuing 4 decades to reach the point where we are today. Governments now run annual trillion dollar plus deficits financed 100% with printed money. The trust today is a legacy psychological state that has the ability to vanish overnight (see U.S. and Japanese government bonds violent sell off during 2013).

If the United States were to go back on a gold standard then I would sell my gold and hold cash. To do this they would just need to revalue the price of gold to account for the new money that has been created since 1971 (otherwise they would face an immediate deflationary crash). Depending on which monetary measure you use, the estimates for this gold per ounce revaluation range between $7,000 an ounce of gold to $57,000 an ounce of gold.

Whether the United States decides to do this first has little relevance. As investors panic around the world and dump paper gold, China is accumulating massive physical tonnes at an incredible rate. Estimates show that during the sell-off last week, China purchased 580 tonnes of gold; an amount equal to to 25% of annual global production; in one week.

As they prepare their currency reserves to have the necessary gold backing, China continues to set up currency exchange systems with trading partners around the world that bypass the use of the U.S. dollar. They continue to accumulate natural resource producers in countries around the world. It is a slow and steady process. The United States thinks about keeping the people happy to get through the next 2 year election. China is working on a strategy to be the largest economic player in the world by 2030.

This current monetary policy that began in 1971 is coming to its grand finale, and it will end in chaos. Central banks, currently considered god-like in their power, will lose control of the markets which dwarf them in size. Right now it appears that they have control but it is just an illusion. Markets had their first taste of this over the past few weeks, which is only a preview of what is to come.

Friday, June 28, 2013

A Discussion On Future Gold Prices

Gold is now trading under $1,190 and falling fast. Bearish sentiment is now beyond any recorded metric in history. 22 months ago at $1,900 an ounce it was the most desired asset on the planet. After a 40% decline in price with much better fundamentals now in place; no one on the planet wants to touch it. Jim Rickards and Tom McClellan discuss the outlook for gold in the years ahead.

Wednesday, June 26, 2013

Bond Prices Falling

Precious Metals Panic Liquidation

The precious metals are in complete panic liquidation mode right now with gold and silver's paper price water falling lower in the overnight session.

Silver has broken down below $18.50 with gold closing in on $1,200.

Sentiment has now reached the exact opposite extreme witnessed during the precious metal's high paper price marks just 20 - 24 months ago. During that period in 2011 as silver was close to $50 and gold touched over $1,900 the Daily Sentiment readings for each metal crossed above 98%, both new record highs.

That meant that 98% of the market felt that precious metals at that point were headed higher, with only 2% who believed they had a chance to fall.

Over the past week we are now witnessing the complete 180 degree reversal in sentiment. Investors now have the opportunity to accumulate physical silver at a 63% discount to the 2011 price and bullish sentiment readings are now hovering between 2% to 4%. 98% of the market now believes that prices are going lower.

Investors that poured into the markets in 2011 are now dumping frantically. Fear has taken control. Physical metal continues to move into the strong hands as the big players, such as China and Russia, continue to accumulate for the end game, not today or tomorrow's paper trading price.

For those dumping precious metals today in panic I would ask; what has changed fundamentally in the global economy to provide a reason why they so desperately wanted to buy metals in 2011 vs. why they so desperately want to sell today?

Governments around the world are now in far more debt than they were in 2011. The economies and tax base used to service that debt have slowed and continue to slow.

Banks, pensions, and insurance companies are far more insolvent today, as they have continued to accumulate government debt paper over the past 2 years.

Since 2011 we have witnessed Cyprus citizen bank accounts emptied by their government. European officials have admitted that the bail-in program would become a model for future crisis.

Central banks, which were printing money at an incredible rate in 2011, have now turned the heat up full throttle. The Japanese nuclear QE program was announced in late 2012. QE to infinity was announced in 2012 in the United States, with a large and ongoing QE program taking place in the UK. Europe's Central Bank, the ECB, has announced a backstop to purchase every piece of toxic government paper across the Eurozone should it be needed.

We continue to operate in a global fiat money system where since August 1971 the paper currencies in every country around the world are backed by nothing. They are just pieces of paper or electronic transactions.

We saw the first major crack in the great central bank experiment over the last 60 days where the bond markets in both the United States and Japan fell dramatically during periods where central banks have kept the throttle on full blast. This has shaken up the markets because for the first time investors are starting to ask the question which was formally unthinkable:

What would happen if central banks lost control of the markets?

This is not a question of if, but when. The bond markets around the world are far bigger than central banks and when they turn, which may have already begun, then the final endgame to the 70 year debt super cycle will have arrived. Then the real crisis, not the warm up we saw in 2008, will commence.