May 29, 2024

Major Buy Signal For Gold And Why Stock Markets Are Ignoring Predictions Of Economic Collapse

Predictions that the global economic system will collapse have been coming at an accelerated pace lately.  Usually, many of  the most extreme scenarios are from sources more interested in gaining publicity rather than offering a balanced analysis.

What’s unusual is that lately, many of these apocalyptic predictions are coming from some of the most normally sedate institutions in the world such as the IMF and the World Bank.

Central bankers and the heads of world financial organizations usually speak in oblique and obfuscated terms designed to convey confidence.  Either the financial powers are writing a new book of rules or we are all headed for some unimaginably horrific scenario of financial and social chaos.

Here’s a small sample of the latest warnings from the sedate and not so sedate.

IMF Chief Warns Europe Must Fuel Growth

BERLIN—The head of the International Monetary Fund warned that in addition to cutting yawning budget deficits Europe needs to do more to promote growth and stop the crisis from spreading to the world economy.

“It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand,” IMF Managing Director Christine Lagarde said before the German Council on Foreign Relations. “A moment, ultimately, leading to a downward spiral that could engulf the entire world,” she said.

World Bank Projects Global Slowdown

“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply.

“An escalation of the crisis would spare no-one. Developed- and developing-country growth rates could fall by as much or more than in 2008/09” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report. “The importance of contingency planning cannot be stressed enough.”

Feliz Zulauf Sees More Trouble Ahead

Felix Zulauf: Yes, I believe the peripheral nations have entered recession territory, and I believe it will get worse.

So, the situation in Europe will get worse before it gets better. Moreover, the ECB, which has its roots in the German Bundesbank, will see to it that the ECB does not become the lender of last resort until they are absolutely forced into it by the market. For investors, this is very important to understand. The new leader Mr. Draghi may leave Trichet’s conservative path, however, as since he is in power he has talked one way and acted in another way. This is delicate as the credibility of the ECB could be lost quickly.

Euro Breakup Would Cause Global Meltdown

In his speech at Davos, Soros will say it is “now more likely than now” that Greece will formally default in 2012, Newsweek said. Soros nevertheless thinks the euro will survive, according to Newsweek.

The world is facing a period of “evil,” Soros said, adding that he foresees Europe descending into chaos and conflict, while rioting in the streets of the U.S. will lead to a curtailment of civil liberties and the global economic system possibly collapsing altogether, Newsweek reported.

All of the risks to global prosperity mentioned above have been well known by investors for months now.  The day the IMF Chief warned of a global depression worse than the 1930’s, the Dow Jones yawned and drop by 10 points.

Is there a major disconnect from reality by U.S. investors or has the worst already been discounted after the steep stock market sell off last August?  Ever since an inside out day on October 3 of last year, the Dow Jones has powered higher, ignoring all the bad news and warnings of Armageddon.  Exactly what is going on?


Dow Jones - courtesy

The answer is positive for both stocks and gold.  The “collective wisdom” of the markets saw a resolution to the imminent threat of the European debt crisis last fall, and that resolution is known as quantitative easing.  As previously noted in this blog last December, Every Solution To the Euro Crisis Involve Printing Money, which is exactly what happened.  Both the European Central Bank (ECB) and the Federal Reserve stand ready to print whatever quantity of money is required to paper over the European and U.S. debt crisis.

The massive first phase of the ECB’s Long Term Refinancing Operation advanced about $780 billion to Europe’s insolvent banking system, buying time and postponing the day of reckoning.  The ECB will hold a similar operation in February.

Long term this does little to solve Europe’s fundamental problems, but is short term bullish for stocks and extremely long term bullish for gold and silver.



Every “Solution” To The Euro Crisis Involves Printing Money

Attempts by central banks to blatantly manipulate the price of gold lower should come as no surprise to long time gold investors.  Market News International reported on Thursday that the Bank of England, the Federal Reserve and the Bank for International Settlements mounted coordinated selling in an attempt to drive the price of gold lower. After advancing to $1,757.80, gold reversed course, ending the day in New York trading at $1,706.80, down $51 from the morning high.

The reported attempt to crush the price of gold coincides with the growing perception that every “solution” offered thus far to resolve the potentially catastrophic debt crisis in Europe revolves around the creation of vast amounts of new fiat currency.

European countries that have piled up ruinous levels of indebtedness are quickly discovering that they have run out of options. The limits on imposing new taxes have been reached, bond markets won’t finance additional borrowing, austerity won’t work and debt costs are spiraling out of control as Euro zone economies grind to a halt.

Here’s a rundown of some of the bizarro world “solutions” that have been offered by European rulers to prevent an economic collapse in Europe.  Try to figure out which option does not, at its core, involve the printing of new Euros.

European Central Bank (ECB) President Mario Draghi insists that the central bank will not finance government deficits by purchasing new government debt with freshly created Euros.  The amount of government bonds already purchased by the ECB exceed €200 billion and the ECB continues to buy billions of additional euro debt each week.  In addition, the ECB is currently lending European banks as much money as they ask for.  Although the ECB’s charter prohibits it from financing governments by buying their debt directly, the ECB has no qualms about buying government debt in the secondary market.

-Financial assistance from the International Monetary Fund is another option being discussed.  Where would the IMF get the money to lend to debt stressed European governments?  The IMF would be funded with money created by Europe’s central banks which the IMF would then re-lend to the same European nations whose central banks created the money in the first place.

-The European Stability Mechanism (ESM) was established to bail out insolvent members of the European Union.   The amount of ESM funding was grossly inadequate to address the debt crisis.  The proposed solution – grant the ESM a banking license (read license to print money) which would allow the ESM (as a bank) to borrow unlimited amounts of money from the European Central Bank.

If you correctly guessed “none of the above”, you probably are already invested in gold although probably not to the extent that you should be.

Printing money is the last desperate attempt of failed governments to keep the lights on.  Allowing the price of gold to soar would expose the extent to which the Euro, in particular, and all paper money in general have been debased by insane monetary policies.  The Central Banks cannot hide this truth anymore.  Nor can they prevent the price of gold money from ultimately reflecting its true value priced in paper currencies.  Any retreat in gold prices should be viewed as a buying opportunity, courtesy of central banks.