James West's  Instablog

Those who read the contrarian and alternative financial commentators may well be forgiven for wondering why the financial doomsday oft predicted hasn’t quite materialized. The financial crisis heralded by the crash in October 2008, preceded by the demise of Bear Stearns and Lehman Brothers, among others, by all accounts was the tip of the iceberg and the advent of the Great Depression of our age.

Exuberant markets and slap-happy finance ministers, combined with record profits at the investment banks of Mordor, or Wall Street, are supposed to convince us that the worst is over, calamity has been averted, and with sober and moist eyes we roll up our sleeves to prevent the ghosts in the machine from re-emerging. A more masterful symphony of optical delusion has never been conducted, and the invisible puppeteers manipulating the strings of marionettes Ben Bernanke and Timmy Geithner are smug in their continued anonymity.

Meanwhile, unemployment continues to rise, foreclosures and delinquencies ditto, and but for select industries, decline and bankruptcy are the measure of balance sheets, not growth.

The principle tool of deception for this motley crew of G7 finance ministers and the Invisible Hands that control them is currency. With these key economies now flush with capital in the uppermost layers, victory can be claimed by pointing to the balance sheets of those institutions who have averted disaster by capturing the lion’s share of this manna from heaven. That the capital is not filtering down meaningfully into the broader economy in the form of investment and lending is the clearest sign that the worst is yet to come, and we now merely pause in the eye of this economic hurricane.

Keep in mind, if the Great Depression that started in 1929 is a fair analogy, then we are in the autumn of 1930, and the peak of contraction globally did not manifest itself until 1933, when unemployment in the United States reached as high as 25% in some areas. Within that four year overall plunge were several mini-bull rallies that lent solace to the fearful, albeit temporarily.

The major difference between the period from 29-33 and now is that the governments of that era did not have either the ability or the willingness to print money with abandon, because they knew that the outcome of such policy would certainly be future inflation, which would itself handicap any chances of recovery.

Since we now live in an era where its only what is happening right now that matters, the financial overseers seek solutions that immediately repair the illusion of prosperity in perpetuity, even if it means a smaller and smaller percentage of the population is fooled.

The act of printing currency with abandon equates to deferring the financial reconciliation required to achieve balanced budgets into future generations. As long as we print money, and agree to value that money as legal tender, the illusion can go on ad infinitum.

But what happens if, from the bottom up, people start saying “Hey wait a second…this cash is counterfeit!”?

Well that’s what is happening with the price of gold. Even the government of China is hedging its bets that its own currency will suffer devaluation in lock-step with the excess of U.S. currency afloat. After all, China’s foreign reserves are the largest collection of American funny money there is outside of America.

So despite the glad-handing and cheerful sentiment echoed by the mass media controlled by about 7 men, the financial disaster continues to unfold, and the only reason the masks are still on the players in the ersatz performance is to pick clean the pockets of those susceptible to such disingenuity.

For the rest of us, preparations must be made for the next leg down.

There are two things to own going forward. Precious metals and the companies that mine them. The very worst tsunami is a boon only to the surfers crazy enough to catch the wave, and that will exactly be the situation when the fragrant chile hits the fan part 2. Instead of a thrill though, the owners of shares in mines that produce gold will be rewarded with financial security in perpetuity, barring unforeseen acts of foolishness.

Gold producing operations will soon see their valuations increase dramatically. Lifted on that rising tide will certainly be soon-to-be-producers and to a lesser extent, explorers of advanced economic deposits.

The long term deterioration of the U.S. Dollar has been underway for decades. Its days as a viable currency are numbered. History proves this. Buying gold and gold related assets will soon also reveal itself to be the only sound investment of the next 10 years.

SOURCE: http://www.midasletter.com/commentary/091001-1_Deferring-financial-disaster.php

The breaking of the old record high price for gold today is no surprise to long-time critics of American and thus global financial policy. Regardless of how much spin you can generate from a compromised media, the laws of supply and demand re-assert themselves inevitably. Will this bring the mainstream investor crowd any closer to the understanding that the gold standard is precisely that, and has not been diminished but merely obscured by the powerful marketing forces of the United States Treasury and her feckless whoring sister, The United States Federal Reserve?

Not likely. When anything, be it stock, bond, currency or commodity, reaches a new high, the impetus for selling into strength and taking profit off the table are enhanced dramatically. With gold’s new record high, there are plenty of holders of bullion who started acquiring it in the first years of the millennium who are now sitting on profit equivalent to 3 times the money.

The question is, however, sell gold in exchange for what?

Certainly trading gold for U.S. dollars is akin to forward selling gold at an incrementally lower price. Anyone smart enough to own gold since 2001 is unlikely to be so silly.

Renmibi might seem like a good trade. The only problem with that is you can’t easily spend renmibi at Home Depot or Safeway or Nordstrom.

No, there’s really no substitute for gold at this point in the global currency landscape. And so, the normally present impetus to sell and take profit has been castrated by the lack of anything else capable of retaining its value.

Some consideration need now be devoted to the future price potential of gold. Gold began its bullish incline immediately following the dot com bust, and, spurred again by the events of 9/11, has gained, as of today, an average of $87 a year since then. Barring any real change in global fiscal policy, such as an end to the practice of over-leveraging asset bases and bastardizing currencies through sustained deficit spending, it is unlikely this pattern will ease.

Since the United States has forced itself, and by extension, many of its allies, into what would appear to be decades of deficit spending, we can expect this average rate to continue, at a minimum for the next ten years. That puts the gold price closer to $2,000 an ounce in ten years than to $1,000 an ounce.

Those numbers also make the more outlandish predictions, such as $5,000 an ounce and, most improbable of them all, $10,000 an ounce, seem a little less ludicrous, and maybe even likely.

In the absence of anything of equal or greater ability to retain value, all of the holders of bullion have no incentive to sell. If anything, the reasons for acquiring gold in the first place are the very same reasons for hanging onto it. So the normal price suppression effect of profit taking is neutralized.

The reasons for gold’s ascent is universally acknowledged to be the saturation of the global economy with exponentially titanic amounts of U.S. Dollars, which the American government now prints without purchasers of its debt. Indeed, the Federal Reserve, nominally the beneficiary of U.S. debt sales, is now a buyer. So not only has the dampening effect of profit taking been removed, but the fundamental drivers for the northward trajectory of gold’s ascent has been intensified during the last several years.

We know beyond doubt that the mainstream investing public are like so many sheep, following the soiled derriere in front of their noses in the subconscious conviction that there is always greener grass just ahead. We are at the point now where even the alpha sheep leading this wayward flock through increasingly barren badlands is about to experience an epiphany. There is no green grass left. The only grass worth having is the golden straw they left behind in the manger. Upon their return, however, the now starving, homeless and hungry sheep will discover that all the gold has been spoken for, and if they want to survive, they are going to have to pay dearly for a bale of golden straw.

And, since the population of sheep FAR outnumber the population of crafty foxes who have been carefully and judiciously squirreling gold away for the last decade, the effect of this flood of demand is going to see gold blast through $2,000 with ease, in much less than ten years.

So where is the price of gold going?

Much higher.

How fast?

At a minimum rate, it will increase by $87 a year in price, for at least the next ten years. At a maximum, the sky is literally the limit.

SOURCE: http://www.midasletter.com/commentary/091006-1_Gold-price-prediction.php

LONG Gold