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James West is the publisher of the Midas Letter (http://www.midasletter.com/), a subscriber-driven financial newsletter covering emerging companies with 'Best-in-Class' potential across all sectors.
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  • Here Comes The Hyperinflationary Bailout Endgame

    In 2009, I wrote that the stimulus, tarp, and zero interest rates were going to result in a rally in the stock market, but that the fundamental causes of the 2008 financial crisis, of which the housing bubble collapse was only one outcome, were still present, and that the financial stimulus, which is effectively a tax on future generations, would compound those symptoms.

    As our markets slowly melt down again, and we head back towards the 2008 lows in market values, there is no consolation in being correct. Portfolio values continue to degrade, and disinvestment en masse is incrementally moving the world economy back into the state paralysis it entered in September 2008. The TSX Venture market - in my opinion, the purest indication of risk sentiment there is on the planet - is now within 500 points of its 2008 record collapse, and the only question is: "How fast will we blow through that record?"

    The fuse that will ignite the hyperinflation of G20 currencies is smouldering, still damped by the suffocating effect of mass disinformation replicated and broadcast from the centrally owned mainstream financial media. But ignition is approaching, and that is the event that will catalyze the coordinated collapse of all currencies currently labouring under the duress of excess.

    Some people think that the idea of the mainstream financial media being a mouthpiece for illegal activities by government and banking is ridiculous. Harry Markopolous, the gentleman who tirelessly pursued the truth behind Bernard Madoff, knows very well how willfully ignorant we can choose to remain in the face of overwhelming evidence. I'm not going to try to change any minds in that regard here. The thing about willful ignorance is its resolve hardens in direct proportion to the evidence with which it is confronted.

    As predicted, Greece has led to Spain just as certainly as Spain will lead to Italy, and the half-baked bailouts that are insufficient because the sums they seek to alleviate are themselves wishful thinking on the parts of government.

    George Soros on June 24 called for the creation of a European-backed bond fund that would stand as lender of last resort against any and all union debt crises. He suggested that the yield would be 1% percent because the entire region stood behind them.

    Billionaire investor George Soros called on Europe to start a fund to buy Italian and Spanish bonds, warning that a failure by leaders meeting this week to produce drastic measures could spell the demise of the currency.

    Policy makers should create a European Fiscal Authority to purchase sovereign debt in return for Italy and Spain implementing achievable budget cuts, Soros said in an interview in London yesterday. Funding for the purchases would come from the sale of European Treasuries, which would have low yields because they would be backed by each euro member, he said.

    This would essentially be the equivalent of the Fed buying its own Treasuries, which it does as a self-awarded license to print money ad infinitum. That's why the U.S., despite its unsustainable debt and anemic economy, can still hold yields well below 2%. All the banks they bailed out are obliged to hold treasuries as Tier 1 capital to some degree, while the sovereign buyers are forced to participate in the ruse just to keep the value of their sovereign reserves buoyant. - Bloomberg Businessweek, June 24, 2012.

    With the United States approaching another debt ceiling in the last quarter of this year, and with Spain and Italy pointing the way firmly to France, Germany, the U.K and the United States, its time to stop pussyfooting around and make a big statement. The only options at this point are either 1) A massive global stimulus package and bailout fund that will unequivocally mitigate any sovereign debt crisis (even the U.S.), or 2) An orderly "restructuring" of the entire global financial system.

    Since the immediate past demonstrates a predilection towards the easiest path regardless of long term negatives, mightn't one of these summits conclude with a $10 trillion IMF-BIS administered Global Credit Facility that will put the markets back into the gleeful end of their natural bi-polarism? That way, we meaningfully defer the burden of repayment until a distant future date, instead the perpetual near-term date. Then at least, all that fresh capital can stimulate a market rally that will broadcast the perception that everything is okay again…for a while.

    There is a high potential for congress and/or the president elect (assuming its Romney) to cancel the automatic spending cuts that were the solution to last year's debt ceiling date, as a measure to soften the blow and likelihood of default after the election in November. But we have observed that the debate on whether or not to raise any such limit is really just political theater, and when it comes right down to it, there is never any doubt that it will be raised. Its this pattern, both in the U.S. and in Europe, that needs to be decisively ended, to bring a measure of confidence back to markets.

    If Obama prevails, he can't really cancel the automatic cuts without appearing a waffler. But in the current climate, nothing is impossible. We permanently entered the fairy tale realm with the issuance of trillions in new capital by global central banks to perpetuate that feel-good delusion.

    The fact that the only option is to fabricate money in one way shape or form is fundamentally positive for gold, but unfortunately, due to the high degree of government-sponsored manipulation in precious metals markets, a rising gold price cannot be expected until the apparatus that supports such market interference is somehow defeated.

    Let's be clear: the mainstream financial media has failed to accurately portray the level of desperation that characterizes each country's successive bailout requirement, whether they are Euro zone countries or not. Starting with the United States who tops the list of unsustainably indebted countries, and including Iceland, Ireland, Portugal, Greece, Spain, Italy, France, and through the process of financial osmosis, Germany - all these nations turn out to have been in far more desperate circumstances than have been reported in mainstream financial media. As a result, we can deduce that even now, the level of reporting should be discounted.

    The result is value destruction as disinvestment, deleveraging, and flight to cash, since all of the real asset markets are so thoroughly compromised. There is no longer a sense that the markets operate in anything remotely close to freely, and their regulation is so tremendously partisan that unless you're in with the Too Big To Fail institutional or sovereign club, you can't possibly use technical or fundamental analytics to invest safely or successfully.

    The very coincidental confluence of the Mayan end-of-days misinterpretation that according to some versions will see the world come to an end on December 12, 2012 and the next moment when the United States will once again confront a debt ceiling is eerie. The world is coming to some kind of inflection point, to be sure, but it is unlikely that an aligning of celestial bodies is going to be our undoing.

    More likely, the synchronized collapse of our financial system will catalyze a new era. What exactly that entails is unknown. Its not going to be dull though.

    Jun 27 3:35 PM | Link | Comment!
  • Gold Price Correction Consistent with Bull Market Continuity

    With technical indicators today suggesting gold could dip as low as US$1,322 an ounce in the current corrective phase, bears and bugs are deploying opinions in-line with their interests. The drop by nearly $100 in ten weeks is nothing new, nor is the strident tone growing in both camps. Its all consistent with the bull market in gold and silver that has been underway for the last decade.

     

    In a pattern that is as clear as the four seasons, the tone in the media presages market sentiment, which segues into market action, then market re-action, classically followed by market price adjustments for over-reaction, which itself engenders a reversal of market sentiment, and a subsequent reversal in media tone. Metaphysical economic ping pong at its finest.

     

    To detail and exact example would render this an unreadable article, because the micro-focus on step by step events could cause migraines. Far better to recognize the pattern from a 10,000 foot viewpoint without zeroing too closely on the details – you risk missing the core message and opportunity.

     

    That is the classic problem with the mainstream financial press, which can only report what is happening right now. Drawing conclusions about future performance from current data departs the realm of journalism and enters that of opinion, and we know how common those are.

     

    That being said, it is nothing short of remarkable how vast the quantity of high paid experts in vaunted positions yielding  astronomical pay are so consistently wrong, and yet retain their overpaid posts.

     

    In an article published by Bloomberg on October 23, 2006, after gold had lost 20% of its value after touching what at that point was a 26-year high of $732 an ounce. John Reade, a UBS analyst and one of the generally most incorrect predictors of metals prices in the last ten years stated then, “There seems little sign of investors and speculators wanting to rebuild long positions.”

     

    Another analyst quoted, David Thurtell from BNP Paribas said, “`The inflation outlook is fairly benign. Investor demand will not be as strong as it has been.''

     

    CIBC World Markets analyst Stephen Bonnyman said at the time that it expected metals prices to remain volatile. "Barring a major contraction in global economic growth, we see little risk of collapse in metals prices but expect a gradual decline from existing levels," said analyst  in a note to investors.

     

    CIBC revised its price outlook for gold for 2006 to $580 an ounce from $675 an ounce, while the price for silver was unchanged at $12 an ounce.

     

    Gold has corrected in price in excess of 20% no less than 46 times since the onset of the bull market in 2001. Each time, the analysts and money managers come marching out of the woodwork to proclaim and end to the bull market, only to be sent slinking back in silence as the price of gold powers to new highs.

     

    What is most important in understanding the long term price direction of gold is not listening to analysts at banks whose opinion is a reflection, in general, of what has already happened as opposed to a thoughtful analysis of what is unfolding. It is the fundamental realities in the global economy that instigated the bull market in gold, and continues to drive it higher, in the macro sense.

     

    The number one catalyst in the birth of the gold market was the broad perception that the U.S. was printing too much money relative to its GDP and tax base in order to finance its military and political ambitions in the middle east, where it has historically had a vested interest in maintaining instability thanks to that jurisdiction being the primary source of energy for the United States.

     

    After World War 2, the U.S. learned that the most strategic resource in maintaining military superiority was control over fuel supply. From that point forward, it set about covertly destabilizing regimes in  jurisdictions where the political climate was not conducive to its own interests, i.e. continuous supply of relatively inexpensive oil. Venezuela, Saudi Arabia, Iran, Iraq and Egypt have all seen the history of their political leadership influenced by the machinations of the CIA.

     

    What the U.S. discovered subsequent to that period was that it could not afford to finance a mult-faceted military presence without going deep into debt, which it then proceeded to do with the blessing of economists of the era who espoused deficit spending as the path to economic prosperity.

     

    The fast-forward result is $14.7 trillion U.S. dollars in debt held by the rest of the world who can now ill afford to either buy more or sell any lest they cause a panic for the exits. The only reliable hedge against the U.S. dollar devaluation strategy now underway by the Americans is the monetary metals.

     

    China, the biggest holder of U.S. debt, is acutely aware of this, and this is one of the reasons why it has become the biggest producer of gold in the world. It will foil America’s attempts to dominate the world with the dollar by replacing it with the yuan backed by gold and silver, platinum and palladium.

     

    This fundamental reality has not altered one iota since manifesting itself in the early part of the last decade. If anything, the willingness of the U.S. to debase the value of its currency and impoverish its general population is seen to be increasing, as it purchases an average of $75 Billion of its own treasurys with its own checkbook, i.e. the Federal Reserve.

     

    These corrective windows are opportunities for those seeking to preserve net worth to buy gold, and for speculators to accumulate gold, silver, platinum and palladium producers and explorers.

     

    The only global fundamental change that will alter the direction decisively of the price of monetary metals is a revaluation of the U.S. dollar on an official basis – a move for which the political power and moral integrity are both thoroughly absent.

     

    I am not a gold bug. If the U.S. dollar were to be a correctly valued and unencumbered monetary unit, there would be no need to own gold and silver. But that is not the case, and so, in gold in silver we have no choice but to place our trust. For the long term, that will not change.

     

     



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 25 9:03 AM | Link | Comment!
  • When Will Gold and Silver Go Down?

    Gold and silver are in a bubble, if the bulk of economists and financial pundits are to be believed. With no dictionary definition of what exactly a financial bubble is, we are left to our own devices to interpret the significance of such a proclamation according to our own experiences.

     

    Lets say we consider a bubble the phenomenon whereby the prices paid for a given commodity, be it homes, coffee, copper, rubies or tulips, rises rapidly relative to an average market history timeline as a result of sudden and irrational investor demand, and then shortly thereafter sees a price collapse to a point lower than when the bubble started.

     

    Consistent with all commodities that can have been categorized as recipients of bubble phases over the last 200 years is that at that onset of the bubble formation phase, the utile value of the commodity in question becomes the subject of elevated speculation in anticipation of an increase in demand as a result of a predicted rise in utile consumption.

     

    In the bubble phase price curve, the steepness in the growth phase is exacerbated when the predicted increase in utile demand materializes, or is exceeded, which in turn fuels speculative demand for the commodity and its derivatives (ETFs, Futures, Options, etc).

     

    Without exception, when speculation combined with enhanced utile demand take prices for the commodity to such high levels that they start to negatively impact utile demand (as replacements are sought and/or fresh momentum forms in supply to capture the advantage of elevated prices and margins), the demand curve weakens, which generally triggers a massive bolt for the exits of the specs who are most on top of that data, which in turn starts a chain reaction whereby successively more distant speculators from the negative data source panic and sell as the price drop accelerates, precipitating the proverbial popping of the bubble.

     

    That, in essence, is the bubble life cycle as it applies to commodities.

     

    Bubbles were once more or less the result of natural market forces, the cyclical essence of markets driven by supply and demand. With the advent of Massive Capital Concentrations (multi-billion dollar investment funds, mutual funds, hedge funds, sovereign wealth funds, private wealth trusts etc), the effect on commodity prices from these speculative positions far exceeds, in many cases the potential effect from fluctuations in utile demand.

     

    Now banks, and their very close and incestuous relative, hedge funds, are generally in a position to occupy two distinct advantage points over Joe Blow investor on the street. A), they have greater access to capital, and B) they have superior access to data. In speculation, information is everything.

     

    Up until the age of computers and internet, which changed data and information transfer, as well as data and information analysis and strategy extraction, from long timeline processes to near instant timeline processes, MCC’s used their large capital positions to clumsily influence bubbles great and small by distributing data selectively and manipulating market volumes and price movements sloppily.

     

    Now in the era of instant data flow and algorithmic decision processing, not only can MCC’s encourage bubbles with surgical precision, they can very deftly manage the curves associated with the bubble phases. Profit is maximized when you can buy your entire position at the low, and then sell all or as much as possible at the high. Then, if you are in a position to control markets, you go massively short at the high, knowing that your influence and your capital resources will both drive the bubble pop phase into a nosedive, but you will be able to suck up all the shares all the way down, or at least half way down, covering your short when all the Joe Blow suckers sell you all their stock in utter desolation, not understanding that they’ve been played like a tiny little fiddle.

     

    The two commodities on the planet that are the exception to qualification for this scheme now, is gold and silver. And that’s because they have an intrinsic monetary value that all other commodities lack.

     

    A thing can only be said to have monetary value if it is universally (globally), or nearly universally, accepted as a medium of exchange for goods and services. There are very few people on the earth who would not take gold or silver as payment for a service or good they were interested in selling. But only very specialized traders will take a barrel of oil off your hands or a skid of copper cathodes or a house or equities as a form of immediate payment for anything they might want to sell. This is the primary fallacy in the mainstream financial media’s categorization of gold and silver as mere commodities. They are not. They are disqualified from that definition because of their intrinsic monetary value.

     

    And it is precisely that monetary value that prevents MCC’s from participating any longer in the precious metals markets. The transactional volume in the physical gold and silver markets is puny. ETF’s generally preclude manipulation because they need to take delivery of the physical gold and silver, unless they are ETF’s based on derivatives, which are intrinsically worthless and most likely to collapse if they incorporate any kind of short/hedge strategy.

     

    The prices of both gold and silver have long been subject to price manipulation for various reasons.

     

    Most recently, silver has been the target of ebb and flow bubble manipulation schemes that have more or less been caught red-handed by serious market analysts who scream and shout from their hilltop epicenter embodied in the Gold Anti-trust Action Committee.  Gata has been stridently screaming to anyone who would listen (which was mostly no one for the last decade) since 2000 that gold was being methodically price suppressed to impart the perception to the market by the largest criminal enterprise on earth, the U.S. Federal Reserve and the United States Treasury, that the U.S. dollar was a well managed and healthy currency.

     

    As we now almost universally know, that is not the case.

     

    One must be diligent not to buy the pure propaganda that emanates from the top universities on down to the Wall Street Journal that the Fed is an independent private enterprise. It is only private and independent in that it is not subject to the oversight and laws governing Federal Financial Institutions. Its influence, abuse, and fraudulent manipulation of markets and global economic public perception while using the public coffers of the United States citizenry makes these two institutions unequivocally a single criminal enterprise operating as public institutions.

     

     

    The now famous manipulation of silver prices in an effort to “corner the market” by the Hunt Brothers in the 80’s, and JP Morgan’s incrementally growing infamy as perpetrators of the latest fraudulent silver market manipulation, share as their motive only profit.

     

    Gold, on the other hand, whose motive for participation in a scheme perpetrated by the Fed, the U.S. Treasury, certain banks, and possible a certain major gold producer, were in the past initiated for profit, and I suspect that the value of the enterprise in orchestrating confidence in the U.S. dollar throughout the past decade was initially a serendipitous discovery that was promptly deployed as a weapon.

     

    In any case, the CFTC’s increasing metamorphosis into a serious regulator from a puppet facilitator of such schemes has resulted in JP Morgan exiting the scheme largely as credible class action lawsuits from fleeced investors are empowered by the CFTC’s own statements and findings. The outcome of that is decreasing macro and micro volatility (week to week) in both markets, and increasingly steady incremental price increases – especially in the macro view of the last decade). The ability to influence supply remains fixed at substantially less than 5% per year, thanks to the unavoidable difficulty in sourcing and extracting new supply. Therefore, the possible market, and potential bubble, cannot reach a sufficient size in terms of volume to accommodate the requirements of MCC’s. They need massive volume of the physical commodity, and more importantly, an exponentially larger derivative market, that they can control and influence by virtue of the fact that they own the clearing houses and up until recently, the regulators who helped these markets stay ‘dark” or non-reporting.

     

    The one downside as far as MCC’s are concerned with the new instant world is that with comes increased transparency, whether they want it or not. The bigger an organization becomes, the more it must cannibalize itself to continuously evolve efficiently. People get fired, bumped, overlooked for promotion, shut out of deals, not invited to parties – all these things have the effect of originating new competing MCC’s as resentment causes former members of MCCs to take their contacts with them and form new MCC’s. The seeds of destruction of MCC’s are thereby built into them in the form of egos. The one time the ruthless efficieny required from within MCC’s gets trumped is when somebody’s ego gets bruised. Thus Wikileaks. Thus Black Swans. Thus Bear Stearns and Lehman Brothers.

     

    Wending our way back to the gold and silver issue, the underlying commodity markets for gold and silver are limited, and now, thanks to the whole idea of position limits and transparency and reporting for derivatives markets, the size of any given derivative market must needs be directly proportional to the possible size of the underlying commodities market.

     

    Gold and silver exempt themselves from that manipulation because of their monetary aspect. They are complicated by their dual function designations. They are each money, and an industrial ingredient that is consumed. Because they are in growing demand as monetary stores of value as a direct result in the appropriately crumbling confidence in the U.S. dollar, the pound sterling, the Euro, the yuan, and the yen, which collectively constitute the 5 major currencies of global trade, they are sought increasingly (and somewhat ironically) by MCC’s whose primary mandate is value preservation (Sovereign wealth, private wealth) as opposed to more speculative MCC’s (private equity buyout funds, hedge funds, investment funds) whose continued existence depends more on their ability to generate profit in some risk/reward ratio configuration that attracts their investors.

     

    What is happening then, is gold and silver have left behind the human evolution point where they could be easily manipulated, and are increasingly resuming their primary roles as the primary medium of exchange for global trade. MCC’s are holding gold, silver and their derivatives, bought only as cash equivalents because they are now the lowest risk currencies to hold out of all the global currencies. ETFs are, in essentially, a return to the original form of banking, whereby a certificate was issued to the bearer on whose behalf the bank was storing a quantity of gold equal to that stipulated on the certificate.

     

    Gold and silver are re-asserting themselves, in fact, as the only real money,(in terms of the definition of a globally accepted medium of trade) whose supply cannot be arbitrarily influenced by any single government, MCC, or special interest group. The more this awareness permeates the global general consciousness, the more that awareness will drive demand. Fringe pundits are absolutely right when they predict an exponential explosion in the prices for gold and silver. Never mind $2,000 an ounce, or $5,000 an ounce. I’m increasingly convinced that $30,000 to $50,000 per ounce for gold will be seen in this lifetime, especially as fiat currencies based on nothing are abandoned for mediums that more directly represent a real monetary asset, like gold and silver bullion.

     

    Why? Because when the five major currencies, currently embroiled in a competitive devaluation strategy that is the only weapon in the global competitive economic marketplace as a means to attract that all important commodity and manufacturing production base…when they all collapse as is absolutely inevitable, the only viable alternative will be gold and silver, and a currency pegged sharply to both and as transparently monitored as a Nuclear Weapons program. The only other alternative is war. War for the now finite and known resources of the planet.

     

    Since the only component of the human condition that outdoes the drive to compete fiercely for the ability to survive is the ability to co-operate fiercely with the same outcome in mind, it is my hopeful deduction that war will be seconded to this cooperative unified global cooperation economy approach.

     

    The opponents to such an evolution, who would opt for survival of the fittest over a cooperative preservation of a general and therefore less rich lifestyle (lets call them “Madoffs”), are the very same Madoffs who control the fed, who run Goldman Sachs and JP Morgan, who occupy strategic roles within federal regulatory bodies. And they’re justification for this thinking comes from a despicable sense of entitlement by which they view themselves as superior, and therefore deserving, of such a world, and of such a horribly imbalanced standard of living between New York and Darfur.

     

    But again, I digress. This time from the purely economic into the moral philosophic??...hmm…good thing I’m not a journalist or this would be much tidier.

     

    To summarize and answer the titular question posed at the outset, gold and silver will not likely ever go down in any meaningful way, in my opinion. At least, not in my lifetime.

     



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 08 7:25 PM | Link | 1 Comment
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