by Brandon Smith of Alt Market
Only now, after three years of roller coaster markets, epic debates, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway. Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’).
Alternative analysts have pleaded with the public to take measures to secure their hard earned wealth by apportioning at least a small amount into physical gold and silver. Some economists, though, were silly enough to overlook this obvious strategy. Who can forget, for instance, Paul Krugman’s hilarious assertion back in 2009 that gold values reflect nothing of the overall market, and that rising gold prices were caused in large part by the devious plans of Glen Beck, and not legitimate demand resulting from oncoming economic collapse:
To this day, with gold at $1600 an ounce, Krugman refuses to apologize for his nonsense. To be fair to Krugman, though, his lack of insight on precious metals markets is most likely deliberate, and not due to stupidity, being that he has long been a lapdog of central banks and a rabid supporter of the great Keynesian con. Some MSM economists are simply ignorant, while others are quite aware of the battle between fiat and gold, and have chosen to support the banking elites in their endeavors to dissuade the masses from ever seeking out an alternative to their fraudulent paper. The establishment controlled Washington Post made this clear with its vapid insinuation in 2010 that Ron Paul’s support of a new gold standard is purely motivated by his desire to increase the value of his personal gold holdings, and not because of his concern over the Federal Reserve’s destructive devaluing of the dollar!
So, if a public figure owns gold and supports the adaptation of precious metals to stave off dollar implosion, he is just trying to “artificially drive up his own profits”. If he supports precious metals but doesn’t own any, then he is “afraid to put his money where his mouth is”. The argument is an erroneous trap, not to mention, completely illogical.
Numerous MSM pundits have continued to call a top for gold and silver markets only to be jolted over and over by further rapid spikes. Frankly, it’s getting a little embarrassing for them. All analysts are wrong sometimes, but these analysts are wrong ALL the time. And, Americans are starting to notice. Who beyond a thin readership of mindless yuppies actually takes Krugman seriously anymore? It’s getting harder and harder to find fans of his brand of snake oil.
Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…
Debt Ceiling Debate A Final Warning Sign
If average Americans weren’t feeling the heat at the beginning of this year in terms of the economy, they certainly are now. Not long ago, the very idea of a U.S. debt default or credit downgrade was considered by many to be absurd. Today, every financial radio and television show in the country is obsessed with the possibility. Not surprisingly, unprepared subsections of the public (even conservatives) are crying out for a debt ceiling increase, while simultaneously turning up their noses at tax increases, hoping that we can kick the can just a little further down the road of fiscal Armageddon. The delusion that we can coast through this crisis unscathed is still pervasive.
Some common phrases I’ve heard lately: “I just don’t get it! They’re crazy for not compromising! Their political games are going to ruin the country! Why not just raise the ceiling?!”
What these people are lacking is a basic understanding of the bigger picture. Ultimately, this debate is not about raising or freezing the debt ceiling. This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.
We have two paths left as far as the mainstream economy is concerned; default leading to dollar devaluation, or, dollar devaluation leading to default. That’s it folks! Smoke em’ if you got em’! This train went careening off a cliff a long time ago.
If the U.S. defaults after August 2nd, a couple of things will happen. First, our Treasury Bonds will immediately come into question. We may, like Greece, drag out the situation and fool some international investors into thinking the risk will lead to a considerable payout when “everything goes back to normal”. However, those who continued to hold Greek bonds up until that country’s official announcement of default know that holding the debt of a country with disintegrating credit standing is for suckers. Private creditors in Greek debt stand to lose at minimum 21% of their original holdings because of default. What some of us call a “21% haircut”:
With the pervasiveness of U.S. bonds around the globe, a similar default deal could lead to trillions of dollars in losses for holders. This threat will result in the immediate push towards an international treasury dump.
Next, austerity measures WILL be instituted, while taxes WILL be raised considerably, and quickly. The federal government is not going to shut down. They will instead bleed the American people dry of all remaining savings in order to continue functioning, whether through higher charges on licensing and other government controlled paperwork, or through confiscation of pension funds, or by cutting entitlement programs like social security completely.
Finally, the dollar’s world reserve status is most assuredly going to be placed in jeopardy. If a country is unable to sustain its own liabilities, then its currency is going to lose favor. Period. The loss of reserve status carries with it a plethora of very disturbing consequences, foremost being devaluation leading to extreme inflation.
If the debt ceiling is raised yet again, we may prolong the above mentioned problems for a short time, but, there are no guarantees. Ratings agency S&P in a recent statement warned of a U.S. credit downgrade REGARDLESS of whether the ceiling was raised or not, if America’s overall economic situation did not soon improve. The Obama Administration has resorted to harassing (or pretending to harass) S&P over its accurate assessment of the situation, rather than working to solve the dilemma:
Ratings company Egan-Jones has already cut America’s credit rating from AAA to AA+:
Many countries are moving to distance themselves from the U.S. dollar. China’s bilateral trade agreement with Russia last year completely cuts out the use of the Greenback, and China is also exploring a “barter deal” with Iran, completely removing the need for dollars in the purchase of Iranian oil (which also helps in bypassing U.S. sanctions):
So, even with increased spending room, we will still see effects similar to default, not to mention, even more fiat printing by the Fed, higher probability of another QE announcement, and higher inflation all around.
This period of debate over the debt ceiling is liable to be the last clear warning we will receive from government before the collapse moves towards endgame. All of the sordid conundrums listed above are triggers for skyrocketing gold and silver prices, and anyone not holding precious metals now should make changes over the course of the next month.
What has been the reaction of markets to the threat of default? Increased purchasing of precious metals! What has been the reaction of markets to greater spending and Fed inflation? Increased purchasing of precious metals! The advantages of gold and silver are clear…
European TARP?
The MSM blatantly glossed over the EU decision on the latest Greek bailout, as many pundits heralded the plan as decisive action on the part of Europe. But, what was the EU solution to the possibility of Greek default? In the end, their solution was to LET GREECE DEFAULT! Brilliant!
EU proponents of the plan for Greece are calling the solution a “selective default”, which I suppose, is meant to make it sound less default-ish. However, this is, indeed, a default, and many Greek bondholders are going to lose substantial sums of money as the Greek government decides who they are going to pay back, and who they are going to give the finger. Strangely, this plan also includes the creation of a kind of European Monetary Fund, or a European TARP. This means a broader strategy is being put into motion that involves continuing bailouts and fiat injections of Euros, not just into Greece, but into other countries as well, including Ireland, Portugal, Spain, and even Italy:
Extended printing of Euros means devaluation, and devaluation means greater international interest in gold and silver. The EU Council plan is a blinding flashing neon sign telling us to BUY PRECIOUS METALS, while we still can.
Stock Market Facade Is Over And Inflation Is Here
The “great bull run” over the past two years has been somewhat successful in fooling a certain percentage of Americans into believing all the recovery talk was real. The fundamentals, though, show that this run is entirely fabricated. Besides a static real unemployment rate of around 20%, housing market hellfire, and crushing inflation in commodities, trading volume in stocks is also at a three year low:
This means that the overall value of the Dow is being driven by a much smaller pool of investors. A smaller pool of active investors means a more volatile market, with a greater chance of wild swings or inflated values. This lack of stock participation also leads one to question the validity of the bull run as a whole. What, we might ask, has really been holding the markets up for so long, if so few people are feeding the machine?
We must keep in mind that since the credit crisis began the Fed has held interest rates at near zero. That’s almost 3 YEARS of near zero interest rates; far beyond the predictions of many mainstream analysts. The reason? Easy fiat from the Fed is the only thing keeping markets alive. Without it, they would crumble. We hear only of the fiat pumped into the system through bailouts and quantitative easing, but rarely do we hear about all the printing that goes on in-between these public events. The extent of Fed currency creation is made more apparent by the St. Louis Fed’s Adjusted Monetary Base:
According to the Fed publication ‘Monetary Base In An Era Of Financial Change’, the AMBSL is an index measuring the central bank balance sheet, including open market operations, statutory reserve requirements, and foreign exchange market interventions. The index, though, includes only what is reported by the fed, and without an audit, it is impossible to determine its accuracy. In all likelihood, it actually under-reports the amount of fiat being flooded into markets.
Can the Fed prop up the markets forever? No. The volume versus value conflict is too revealing, and I believe we have reached a point at which the weight of negative data is preventing any further significant climbs in the Dow even in the face of manipulation. A kind of critical apex is created; a point at which two forces once balanced meet and derail each other. Stocks, at this time, are very vulnerable, especially when they are supported by a central bank induced fiat framework.
When investors realize that the bull run is fake, not to mention over for a very long time, that dollar devaluation is a certainty, and that bonds are a deathtrap, where will they turn to protect their savings? That’s right…gold and silver. The price potential for metals going into the final half of 2011 is extremely high. Lows can strike abruptly, and they do often under such volatile circumstances, but unlike MSM talking heads, we look well beyond week to week progressions. The long term trend is really what matters, and the long term trend for gold and silver has been impressively positive.
To those who chose not to take my advice over the past three years, or the advice of countless other alternative analysts and economists, I can only say we stand by our record. Our purpose is to help you secure the safety of your buying power as much as possible in these dangerous days. That is all. It is not too late to establish a foundation in precious metals, and it is not too late to accept the reality of our country’s quandary. Warnings, though, are just a small window in time, and they are only useful, so far as they are heeded.
