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Recently, UBS analyst, Larry Hatheway, issued a bearish forecast for the price of gold. He thinks that continuing economic recovery will cause lower demand, and that this will cause the price to drop. He is naive. Economic recovery, in the United States and the rest of the world, is being driven by the printing of money and the monetization of government debt.

Newly printed money that has not been earned by the work of society is illegitimate and it is a long run destabilizing factor in the economy. The fact that much of it is being "given away" in near-zero interest in the form of endlessly renewable "loans" to favored financial institutions closely connected to the Federal Reserve and other central banks, increases resentment among the rest of the population and makes matters worse. In the case of the United States, the primary dealers have been using this funny-money to monetize deficits while preserving plausible deniability for the Federal Reserve, which has managed to avoid direct purchases from the U.S. Treasury.

The U.S. fiscal deficit, for example, will run about $1.5 trillion this year, for example. The Federal Reserve is going to print about that number of dollars in the process of buying U.S. Government bonds from its dealers, supposedly in the "open market". Short-term interest rates are being kept artificially low in order to make this trade profitable for banks during the period in which they are expected to hold onto the treasury securities.

The reason deficits have soared so high is that private demand is being temporarily replaced by government demand. The economy is being levitated by an artificial and unsustainable stimulus produced by the less than reputable practice of currency debasement. With a majority of market participants seemingly blind to this, momentum buyers, hedge funds and chart followers are buying in at stock and bond prices that are not justified by the fundamentals, and the intense probability of an eventual crash.

Unemployment is stubbornly high and it is not coming down. It has not responded at all to incredibly high levels of money printing. Most decreases in unemployment rolls are the result of people dropping off the insurance roster, and/or losing the desire to look for work. The proof is in the pudding, you might say. Many state governments, like those in California, Illinois and New York who cannot print money, like the federal government, are close to bankruptcy.

This problem is not limited to the U.S.A. The Japanese and the British have also been printing huge quantities of counterfeit cash and taking on huge levels of government debt. Japanese government debt, for example, is now equal to about 200% or more of that nation's GDP and still rising. If interest rates ever rise on Japanese government bonds, the government would be unable to make the payments without substantially more money-printing.

The ECB is starting to follow in the footsteps of the others. It has now monetized about $80+ billion worth of peripheral Euro-zone bonds, and can be expected to monetize a lot more. Greece, Ireland, Portugal, Spain and Italy are all at risk, to one extent or another, of a debt default. If a solution to the debt dilemma cannot be found, the Euro may eventually cease to exist.

Major western central banks and most establishment economists believe that printing money will somehow save their nations' economies. In spite of the mantra they follow, the fact of the matter is that, if money-printing were a useful method for building long-term societal prosperity, people would have achieved that success long before the advent of Ben Bernanke. Yet, in every episode of history, where nations or groups of nations have resorted to monetary debasement, from the days of Rome to the present, the policy has ended in disaster. The same thing is going to happen this time, and the results may even be worse if central bankers suddenly realize the error of their ways.

The central banks of the world have already printed huge quantities of counterfeit cash, creating bubble markets all over the world, that are primed for a collapse either in nominal or real buying power value in the event that the printing abruptly ends. But let's be careful, now. When I speak of "buying power value", I do not mean "exchange value". If the entire Western World is irresponsible at the same time, exchange values may not change dramatically. The various iterations of fiat currency may not fall much against one another, but will fall against their ability to buy goods and services. We are already seeing this happen, in the form of very high and continually rising commodity prices.

To distract us from perceiving the truth, and to insure that the vast majority of the population is not aware of their incompetence, central bankers and the governments that facilitate them are doing everything they can to lie about inflation.[1] In America, even though we are in the middle of an economic depression, inflation is probably running at about 5-8% per year. When we finally exit the depression, prices will escalate almost overnight until they are equal to the amount by which the monetary base has been incrteased, or by about 3x.

In the short to medium term, therefore, we face an unenviable set of choices created by the bad decisions of the past. If central banks stop the printing presses, governments will be prevented from running huge deficits, primary dealers will not have the money to indiscriminately buy equities and bonds, and the fake economy "recovery" will quickly die. This is because deficit spending and asset price inflation targeted to the stock and bond markets are the twin pillars upon which central bankers have built the artificial economy.

On the other hand, if central bankers do not stop printing, the credibility of fiat money will eventually drop to zero. The bond market will collapse utterly as the currencies become worth, at best, 1/8th to 1/4 of what they are now worth, in terms of buying power, almost overnight. If they continue to print the counterfeits, stock indexes and bonds values will maintain or even see increased nominal values, but they will collapse in real value, as the world suffers hyperinflation.

In either scenario, after the likelihood of an initial pullback in the event of a stock and/or bond market crash, investors will begin to look for more traditional stores of value that do not carry counter party risk and/or which can keep up with inflation. That is when precious metal prices soar. In the long run, gold would rise sharply, whether the future holds asset deflation or hyperinflation, because as equities and bond markets crash (either nominally in deflation or in "buying power value" in heavy inflation), the perceived value of paper investments, like stocks and bonds, will become discredited.

Gold is a very small market, and silver and platinum are even smaller markets. A concerted movement of even a mere 1% of the market cap of U.S. equity markets into gold alone would cause the yellow metal to more than quadruple in price. But, back in 1980, before investors had fully bought into the idea of buying only paper assets like stocks and bonds, about 20% of all market cap was invested in gold. A market crash, in whatever form it takes, is likely to send up to 20% of the nation's equities and bond markets into precious metals. That will cause prices to rise to levels that even the most avid "gold bug" cannot now even dream of, with a similar or greater rise in store for many of the other smaller-market precious metals.

It is nice to think that we can buy and sell things, like stocks, bonds and commodities at just the right time, reaping gains and losses sequentially over and over again. Unfortunately, for the vast majority of market participants, including the trading staff at many large financial institutions, that is impossible. Current markets are driven almost entirely by what central bankers decide to do from day to day, and it is increasingly difficult to trade using technical indicators. Only those firms with a direct line to the Fed, BofE, ECB, etc. will have perfect trading records.

For those who do not have deep and corrupt connections to the central bankers, it is impossible to know what they are going to do ahead of time. In the long run, it doesn't matter, because the handwriting is on the wall. The ill-conceived past actions of western central bankers has one inevitably result, which is to cause deep economic hardship to everyone who is not among their constituents (a/k/a “primary dealers”).

As already noted above, because of what central bankers have already done, m
arkets will eventually collapse. Those who choose to sell gold are forfeiting their protection against this outcome. They are failing to consider the long term picture. Gold sellers are either well-connected short term speculators who know how much counterfeit cash will be released into the financial markets day to day, or they are innocent folks, out of touch with reality, who are putting their faith in a fake and unsustainable “recovery”.

The central bankers will continue to print money, and pump the rally in stocks and bonds until traders closely connected with them have the opportunity to sell out or hedge most long positions. Or, they may choose never to stop, until such heavy inflation occurs that the public hew and cry is so loud that they cannot continue. Long term investors, who wish to preserve the buying power value of their life savings, will buy any big dips in the price of precious metals, including gold.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Long gold.

Source: Should Investors Continue to Buy Gold?