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Gold and The Coming Financial Tsunami - Redux

Commodities / Gold and Silver 2010 May 13, 2010 - 06:38 AM GMT

By: Gordon_Gekko

Commodities

Best Financial Markets Analysis ArticleIn light of what’s happening right now (and the fact that I never posted it on ZH before), I thought it relevant to post this article that I wrote in the February of 2009 as a primer for friends and family to help them become aware of what was happening (and prepare for what I saw coming). Remember – this was written for people who were very much enmeshed in the MSM propaganda world and had no clue of the reality behind our economic, financial and monetary system. The idea was to gently introduce them to the truth and give a brief overview, so you won’t find me going into the full technical and gory details; plus I wanted to keep the length manageable so as to not put them to sleep.


If you find it worthwhile, feel free to forward it to your near and dear ones who are still entrapped in The Matrix. Here it is:

What's happening now is just the beginning of the collapse of a multi-decade debt bubble. All the so-called "growth" since the 70's has been based on ever increasing amounts of debt - not just the US, but the entire world. Here is a US Debt (public and private) to GDP percentage graph:

You can see that the debt has increased exponentially since ’71. In fact, the last peak occurred at the time of the Great Depression in the 30’s, and this one is even bigger than that, so you can imagine what the crash this time is going to be like.

A bit of history first. It really starts with the creation of central banking paper-money system in the US in 1913 - the Federal Reserve System, but for brevity's sake we'll just jump onto the story after World War II, as the biggest structural economic imbalances have occurred since then. After World War II, all the major countries decided on the US dollar as the reserve currency for international trade (since the US was the most powerful nation left, and with the biggest reserve of Gold at 20,000 tonnes). All countries would base their currencies on the US dollar, which was in turn backed by Gold. So, in effect, all countries' currencies were backed by Gold. This is also known as the Bretton Woods System. Under this system, all foreign countries could redeem their dollars for Gold. This kept a limit on the number of dollars in circulation and consequently, the debt in the world economy - basically it imposed discipline on all parties concerned. With the Vietnam War, US deficits started to soar and it could no longer afford to redeem dollars in Gold. Its gold hoard was down to 8,000 tonnes from 20,000 tonnes. So under President Nixon, they decided to delink the dollar from gold (Bretton Woods II). From now on, no country could exchange its dollars for gold. They called it a “floating” exchange system, but really, in terms of purchasing power, all currencies started to sink together. What followed was an explosion of money, as the US could now issue (print) virtually unlimited paper dollars for all its purchases. Other countries followed suit, in order to maintain their exports’ competitiveness. This explosion in money fuelled (or rather was fuelled by) an explosion of debt. I shall leave the detailed mechanics of all this for another post, but suffice to say that this explosion in paper money has caused massive misallocation of resources throughout the US, and indeed, the entire world. The stock market boom in (crashing in 2000) and the massive real estate boom (crashing in 2007) were both manifestations of these misallocations. The global boom starting in 2002 was caused by the Federal Reserve printing money and keeping interest rates artificially low (in order to boost consumption and maintain GDP "growth"), and thus injecting massive amounts of money into the economy - which had no basis in the real productive growth of the economy. Since the dollar is the reserve currency used for world trade, this artificially inflated the entire world economy, which is now crashing. This was done to alleviate the fallout of the 2000 crash, but the cure turned out to be worse than the disease. The "Subprime Crisis" was just the tip of the iceberg and, in fact, an effect not a cause of this meltdown. The real cause is unbridled growth of money supply and debt by the Fed and other Central Banks of the world.

At heart, this economic crisis is in fact a currency crisis. Throughout history no paper currency (or "fiat currency", since it is accepted as money by virtue of Government fiat or decree) has survived, and this time will be no different. The average lifespan of fiat currencies has been 16 years*. The present system is unique in that it has survived for 38 years and for the first time ALL countries throughout the world are on a fiat money standard. This means that the resulting crash will be on the scale of something the world has never seen. This will be a time of hardship for many, but for those who are "economically literate" and prepared - they will come through largely unscathed, even prosper. If there ever was a time to educate yourself about financial matters, this is it. And don’t listen to the stock-pumpers and so called “analysts” on television – who really are just a part of the Wall Street sales force. These are the same guys who peddled complete garbage as “AAA” securities and that there was no “bubble” in real estate. The rating agencies (Moody's, S&P, etc.) are in cahoots with these crooks, and in their pay. The same goes for the regulatory agencies in the US such as the SEC (and I think pretty much everywhere), which was caught not only napping, but deliberately ignoring the doings of the biggest "Ponzi Scheme" perpetrator of all time - Bernard Madoff. All they are interested is in making a quick buck off of you. Doing your own research on the internet is the only way of finding unbiased information. Just switch off the TV, and switch on the Internet.

I am no financial adviser or any kind of expert, but an ideal portfolio in my opinion would be majority in Gold (strictly physical – no ETF’s or any kind of “paper” gold), some Silver (again, physical) and some cash for day-to-day needs. As you must be aware, more and more banks are failing every day, so it’s not advisable to keep an amount over and above that insured by the FDIC in any single bank. If you are not sure about the solvency of your bank (which can be said of pretty much every bank these days), you can also park your cash in short term Treasury bonds. It is also advisable to keep some cash at home in case there is a “bank holiday” or withdrawal restrictions are imposed by the government. Why the bias towards gold, you may ask. Well, gold is a long and complicated subject so I can’t explain it here (although I do urge you to explore it on your own), but suffice to say that not only will it protect your assets in case of Financial Armageddon, but is sure to rise manifold in value as this crisis progresses. It has retained its purchasing power for thousands of years, and this time will be no different. The record of paper currencies on the other hand is quite dismal, to say the least. This is a once in a 100 year crisis, so you really need to have a historical perspective about this. I reiterate - NO other asset is safe, not even the dollar itself. If anything, gold is a sort of insurance for your portfolio that you will not regret buying. And beware of people who tell you that gold is just an "asset" or "commodity", for they don't know what they are talking about. It's not. It's a currency - the best there is.

At some point, after a huge crash has occurred, the stock market will rise. In fact, it may rise tremendously. It will rise not because of strong fundamentals of the economy, but because of the depreciation of paper currencies (hyperinflation). Hence, any steps that you take to retrieve your investments from the stock market will only prove useful if you invest the proceeds in Gold, as Gold will rise much, much more than the stock market at that point. In fact, in such a scenario, it may even become impossible to obtain physical Gold in exchange for paper currency.

There is a lot more to this than what I have just mentioned, so I urge you to do your own research and take the steps necessary to protect yourself and your family financially. We are heading towards a global currency crisis and it will affect everybody throughout the world.

[Update 13th May, 2010: I originally provided a list of blogs/websites, books and people to follow as a starting point for their research, but some of them have since become dated/irrelevant in my mind. Feel free to provide them with your own list]

And if you think the Government can get us out of this mess, think again. They had a major role in screwing things up so far, and what they are doing now will only make a bad situation even worse. This crisis was caused by excessive money printing and debt, and guess what the Government's solution is - more money printing and more debt. The best they could do in this dire situation was to come up with a budget full of pork randomly throwing money - our money - here and there without any rhyme or reason. All it will do is ensure that the ensuing collapse is even more severe than it otherwise would have been. The Government and the politicians will keep mouthing lies such as it's going to get better next quarter, next year, ad infinitum even as thing get worse and worse everyday. Don't believe them. All they are interested in is preserving their own power. Read a bit of history and know that it's every man for himself now.

As you may or may not be aware, Gold recently hit $1000 an ounce for the third time in history. It started rising from 1999 onwards when it was priced at around $250 an ounce. This is the proverbial "canary in the coal mine" telling us that the international monetary system is at risk of collapse. I can't put a finger on when this is going to transpire - it may happen next month, next year or in a couple of years – but happen it will and the risks today are greater than they ever were. As I am writing this, another crash is brewing in the global stock markets (it may not happen now, but it will - sooner or later). On Friday, the US stock market closed at its’ lowest level since 1997 - over a decade of gains wiped out. Gold has receded in price a bit, presently undergoing a correction after a quick rise from $900 to $1000 an ounce within a span of ten days in February. It has become pretty volatile in the short term (although the long term trend remains up and away), so I am not sure how long this correction will last. It may continue moving a bit downwards or sideways for a while, but it may just be the last chance we have to get it at such low prices. America's - and indeed the world's - disastrous experiment with paper money is about to end in a catastrophe.

*I’m not sure where I got the 16 year figure from.


Brief Opinion: Massive PM Demand in Europe


As an aside, ZH just reported that bullion dealers in Europe were sold out, with many such as Kronwitter having to shut shop temporarily due to their inability to meet the massive demand [sure, they might open back up ala 2008 with or without massive premiums above the spot price, but they just as easily might not if there starts a real run on the PM’s with unlimited demand (i.e. the beginning of hyperinflation) - which WILL be the case at some point in the not too far off future].

 Here is what a potential run on bullion looks like:

Kronwitter Sold-out page (translated using Google translate)

Here is one of the bigger dealers Proaurum:


(Translated using Google translate)

Another one Westgold sold out:



(Translated using Google translate)

h/t JJ McApe, unky

Tell me, what good is the paper price if you can’t buy the real metal at it? The only thing providing credibility to the paper/futures price is its link to the physical metal. If there is no metal available at that price then it’s just a worthless paper ticket with the words Gold/Silver printed on it. You think that was silver you just bought in the futures market? Nope. More likely a WORTHLESS contract to deliver and it’s not even paper, just some bits in a computer somewhere! (This is practically true even right now for certain corrupt exchanges like the COMEX, considering how hard it is to obtain delivery there).

If there is no metal available at the “displayed” price, then it’s just a government dictated price level (ala price controls), with an illusion of free trading thrown in to draw the retail suckers into the casino – just like the stock market. What’s more, due to these hidden price controls created by massive government interference in various markets, we have no price discovery in ANY market right now.

Got Gold?

By Gordon Gekko

http://gordongekkosblog.blogspot.com

© 2010 Copyright Gordon Gekko - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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