May 23, 2024

As World’s Most Predicted Financial Crisis Approaches Precious Metals Move Higher

Precious metals gained across the board for the third week in a row.  Silver and palladium were the top performers this week with each advancing almost 4%.

July has seen an explosive move in the precious metals group as worries intensify about the twin debt crises in Europe and the U.S.  In both cases, governments and central banks are avoiding the tough choices that must be made when debt levels reach unsustainable amounts.  Common sense dictates that over leveraged borrowers with insufficient income to service debt must eventually default, or gradually reduce the debt through a combination of austerity measures and income growth.

Common sense, however, is a trait sorely lacking in politicians.  Nor does preaching austerity to your constituents enhance the odds of being re-elected.  The preferred solution, which has been employed since the 1980’s, is to add more debt and let the future take care of itself.  What’s different this time is the growing realization that at some point the compounding of debt becomes unsustainable, enslaving future generations and inhibiting economic growth.

The widely discussed study by Rogoff and Reinhart definitively documents that when public sector debt to GDP approaches the 90% level, economic growth slows dramatically – (see This Time Is Different: Eight Centuries of Financial Folly).  Since most of the developed world economies are already at or above the 90% debt to GDP ratio, the prognosis for future economic growth to gradually reduce debt levels becomes a tenuous prospect.

Despite the obvious risks of a growing debt burden, a significant number of the Washington elite insist that the debt limit be raised by another $2.5 trillion which would represent a doubling of the national debt in a little over five years.

Raising the debt limit, which became a routine ritual in past years, has suddenly morphed into a potential default situation as a growing number of responsible political leaders refuse to rubber stamp another massive increase in public borrowing.  As debt limit negotiations broke down today, the odds of a potential default by the United States became a distinct possibility.

Will a temporary default become a seismic event?  Who knows, but if gold had advanced by one dollar per ounce for each time I’ve seen an article predicting financial Armageddon, if the debt limit was not raised, gold would be well over $4,000 per ounce.   If the U.S. does “default”, it will not be the end of the world.  In the best case scenario, a brush with default may convince more members of our EZ spending Congress to come around to the financial common sense of men such as Ron Paul.

Summary of Ron Paul’s comments to Congress:

  • Countries that are as indebted as the U.S. always default.
  • The real increase in the debt this year, counting entitlements, is $5 trillion.
  • In the past 3 years, the dollar has been devalued by 50% against gold.
  • Default will be through inflation.

Gold advanced by $15 on the week and is up $119 since July 1st.  Silver advanced by $1.50 on the week and has gained $5.82 since July 1st.

Platinum and palladium both advanced on the week by $33 and $30 respectively.  Platinum has gained $85 and palladium $57 since the first of the month.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,602.00 +$15.00 +0.95%
Silver $39.67 +$1.50 +3.93%
Platinum $1,793.00 +$33.00 +1.88%
Palladium $807.00 +$30.00 +3.86%

Debt Limit Fiasco Could Push Gold To $2,000

Gold has advanced almost nonstop since the beginning of July.  As measured by the London PM Fix Price, gold has advanced in 10 out of the 14 trading days since July 1st, gaining $118.  London gold closed today at $1,586.00 but soared in late New York trading to end the day at $1,602.90.

Gold has decisively broken out of the two month trading range it has been in since early May at the $1,500 level.  All the fundamental factors driving gold higher continue to strengthen.  The fragility of the paper financial system has been exposed.  Efforts by politicians to solve the debt crisis are only serving to hasten the collapse of the system they are trying to preserve.

The debt ceiling problem in Washington continues to fester as politicians dither and delay.  With every top official in Washington warning of financial Armageddon if the debt ceiling is not raised, the betting is that a compromise to increase the debt ceiling before August 2nd will be reached.  Whatever compromise is reached is likely to be a meaningless “agreement to disagree later” as the debt ceiling is raised but the hard choice of where to cut spending is postponed.  If gold sells off in a knee jerk reaction to Washington’s “solution” to the debt crisis, it will provide another buying opportunity for gold investors.

A solution to the nation’s spiraling debt crisis no longer seems possible.  Neither political party has the will nor the desire to realistically address the basic problem of excessive deficit spending.  There is no upside for those with the courage to call for the austerity measures needed to put the Nation on the path towards sound financial footing.  A majority of Americans favor increasing the debt limit and that majority naturally consists of those who derive all or most of their income from government payments.  Politicians get the message – keep the payments coming no matter what or we will vote you out of office.  The strategy of dealing with too much debt will again be to increase debt.

With debt compounding at rates far in excess of the country’s income gains and with taxes already at punitively high levels, the only option left for servicing the debt is to debase the currency and repay creditors with devalued dollars (see Ron Paul Says US Is Already Defaulting on the Debt).

As long as Washington can keep selling its debt and as long as Ben Bernanke is there to purchase government debt with freshly printed money, the spending and deficits will continue until the entire financial system collapses.  This is what the gold market recognizes and that is why there is  no effective limit on the upside to gold prices.

A brief pause at the $1,600 level should soon be followed by an even stronger advance.  Since 2009, every consolidation in the gold market has been followed by strong advances that lifted gold by hundreds of dollars per ounce.   Gold could quickly get to the $2,000 range as the current rally progresses, given the rapidly deteriorating condition of the global financial system.


Gold - Courtesy

In the final analysis, it doesn’t even matter what the imperial leaders in Washington decide to do – we are already beyond the tipping point – the only matter of consequence is how to prepare for the inevitable collapse of the world fiat monetary system.


Ron Paul – The U.S. Is Already Defaulting On The Debt

Ron Paul, the embodiment of common sense and classic American values, spoke today about the U.S. debt crisis in an interview on The Daily Ticker.

Rep. Paul made the point that few people see any real value in U.S. government debt securities and are holding them only as a temporary place to keep their money.  “That’s why people are going to gold as a reserve and a place to put their money”.

Ron Paul said that Washington does not understand how dangerous a situation the Country is in and that “nothing will change”.  Default on the debt would be “a big deal” and Paul thinks that Congress will raise the debt limit and that all payments on U.S. debt will made.

Ron Paul noted, however, that governments like our “always default, the default is we pay our debts with money with less value.  Bernanke is actually working very hard at this, he wants the price inflation to go up so that the dollar goes down in value.  So we get to the point in two years or so that you can take the national debt of $14 trillion and turn it into $7 trillion or real value.  They want the dollar devalued – that’s how countries default.  So the default is ongoing and that is very dangerous…”.

Meanwhile, President Obama said “America is stressed out”.  Yes, Mr. Obama, the country is stressed out – by failed economic policies propagated by the elite political class and special interest groups in Washington who serve Wall Street and the Big Banks rather than the American public.

America has reached the tipping point from policies that have given us a crash in housing values, no job gains over the past decade, zero return on our savings, higher inflation, dollar debasement and a decline in real incomes.   Middle class households who have not allocated a substantial portion of their savings to gold or silver have seen their wealth decimated.

In a rare display of candor, Treasury Secretary Geithner admitted in an interview this week that  “It’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”  Now if only the politicians would be honest with us,we might be able to establish a better plan for a path to recovery other than unlimited money printing.


Steve Forbes Joins Ron Paul’s Call For Gold Backed Currency

Steve Forbes, CEO of Forbes Magazine, said the U.S. should return to a gold backed currency to prevent further debasement of the U.S. dollar.  Mr. Forbes joins a growing chorus of intellectually honest Americans who view the Federal Reserve as the greatest danger to the American economy and way of life.

The quest to preserve the value of the U.S. currency and rein in the Federal Reserve has long been championed by Rep. Ron Paul.  Apparently, Ron Paul’s message is beginning to make sense to more and more Americans as they watch the purchasing power of their dollars decline daily.

Bloomberg is reporting that the public approval rating of Fed Chairman Bernanke has dropped to the lowest level in two years. Bernanke has an approval rating of only 30% compared to 41% in late 2009.  Bernanke’s response to every problem has been to lower interest rates and print money, which have done little to improve the fundamental financial health of consumers or the government.

According to Bloomberg, the public has grown increasing skeptical of increased debt and money printing since unemployment is still near 10%, home values are still in a free fall and the declining purchasing value of the dollar has lowered the standard of living for most Americans.  The Bloomberg Poll showed that a resounding two thirds of Americans think the country is on the wrong track, with 55% expecting their children to have a lower standard of living.

Professor Bernanke can wax eloquent on the benefits of “quantitative easing” but the average American is smart enough to know that a country that needs to print money to pay its bills is in desperate financial condition.

Steve Forbes noted that the ability of the government to print money encourages reckless spending since money can be created out of “thin air.”  According to Mr. Forbes, if the country returned to a gold standard, unlimited spending could not occur.  Ironically, the ability to expand credit and print money is exactly why the government abandoned the gold standard.  The concept of a Federal Reserve and a gold backed currency have become almost mutually exclusive concepts.


Russia Joins China In Rejecting U.S. Debt, Buys Gold Instead

China, the largest foreign holder of U.S. debt, has been concerned about the safety of its U.S. treasury debt holdings for years.

In March 2009, Chinese Premier Wen Jinbao warned Washington that “We have lent a huge amount of money to the U.S.  Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Premier Jinbao’s  was right to worry about the safety of China’s U.S. debt holdings.   Since March 2009, the U.S. debt has increased by more than $3 trillion and Congress is now being pressured by the Federal Reserve and the Treasury to increase the national debt limit by another $2 trillion.  The parabolic increase in U.S. debt, along with recent downgrade warnings on U.S. debt from the credit rating agencies, must be keeping the Chinese up at night.

On Saturday, the Wall Street Journal reported that Russia also decided that holding U.S. debt has become too risky.  In comments to Dow Jones, Arkady Dvorkovich, chief economic adviser to Russian President Medvedev, said “The share of our portfolio in U.S. instruments has gone down and probably will go down further.”  According to the Wall Street Journal, Russia has already reduced its holdings of U.S. debt from $176 billion last fall to $125 billion in April of this year.

Besides diversifying into other currencies such as the Canadian and Australian dollar, Russia has also been substantially increasing its purchases of gold.  Recent reports from the World Gold Council and IMF show that Russia recently bought 50 tons of gold bringing its total gold holdings to almost 670 tons.

If Russian economic advisor Dvorkovich looks at the above chart of U.S. debt, he may well decide to run to the exits and dump all of Russia’s U.S. debt holdings.

The United States has truly entered the Bizarro stage of national finance.  As the exponential increase in U.S. debt moves the Nation ever closer to a debt crisis, Fed Chairman Bernanke and Treasury Secretary Geithner are predicting dire consequences if Congress does not increase the U.S. debt limit.  Should it really be a surprise that two of the world’s biggest holders of U.S. debt are heading for the exits?