June 20, 2024

Gold Soars Past $1,700 As Debt Crisis Spirals Out Of Control

Gold soared to a new all time high over $1,700 in Asian trading after the credit downgrade of  the United States by Standard & Poors and news that the ECB would conduct large scale purchases of Italian and Spanish bonds. These two event have escalated the debt crisis in Europe and the United States to a new dangerous level.  Investor confidence has been shattered in both equity and bond markets as events seem on the verge of spiraling out of control.

The European Central Bank has been unable to form a coherent strategy to deal with the debt crisis and the Federal Reserve seems to be running out of policy options.  The governments that “saved the world in 2008” through massive fiscal and monetary stimulus now need to be saved themselves.

The relentless rise of gold since the financial crisis began reflects the increasing risk of sovereign defaults and  the rampant debasement of paper money.  The gold market is effectively a report card on the failed policies of governments and the grade is an F.

Gold - courtesy kitco.com

The response by U.S. policy makers to the S&P downgrade reflects a dangerous disconnect from reality and political posturing.  In a shoot the messenger response, Treasury Secretary Geithner said that S&P used “terrible judgment” and have “shown a stunning lack of knowledge about the basic US fiscal budget math”.  A more realistic assessment of the US debt downgrade came from investor Jimmy Rogers who said two months ago that “America should already be downgraded. It should have been downgraded years ago. These people, the rating agencies, have got it wrong for 10-15 years now. America is bankrupt”.

The Federal Reserve, which could not recognize the housing bubble, has also been at a loss to deal effectively with the debt crisis.  Consider Bernanke Models Prove Faulty:

“We haven’t had any historical event that really would allow us to reliably statistically calibrate an event like the one we’ve had,” David Stockton, director of the Fed’s Division of Research and Statistics, who has overseen forecasting for a decade, said in an interview at the end of June. “There isn’t going to be a simple story here.”

Stockton calls the 2007-2009 period “an unprecedented financial crisis in the lives of almost every economic agent.”

“That had profound effects on people’s balance sheets, on their spending, and their impetus to deleverage,” he said in the interview. “Something beyond transitory factors are at work.”

Suite of Models

The suite of models used by Fed staff to forecast changes in consumption and investment rely to some extent on past relationships between interest rates, income, and profits. Most also assume credit will be supplied and demanded at a given price or interest rate. Without adjustments, they revert to the mean — after a period of slump they begin to point upward, in line with previous recoveries.

All of those tendencies have made the models less trusty guideposts for what is happening in the current recovery. The staff has to venture judgments and explore new analyses.

“Something new and different is going on,” said Allen Sinai, chief global economist at Decision Economics Inc. in New York. “Neither monetary nor fiscal policy is giving us the kind of bang we have traditionally got. The household sector is simply not spending as it has in the past.”

Ordinarily, monetary policy works by making borrowing cheaper so households and businesses can access credit and keep their consumption stable through an economic slump. Now, that channel is less effective.

Banks have raised lending standards, and the private sector’s expectations about consumption may be shifting to a lower path, said Julia Coronado, chief economist for North America for BNP Paribas in New York, who worked for Stockton from 1997 to 2005.

“This is a standard-of-living shock,” Coronado said. “What we thought we could afford, and what we leveraged to, is much more than we can afford at present and in the future.”

In other words, the problem is too much debt, and the Fed’s response has been to encourage more debt by dropping interest rates to zero and printing money.  As long as the Fed continues its failed policies, the price of gold will continue to soar.



Gold Hits New Record High As U.S. Spirals Towards Default

Gold reached all time record highs in Asian trading as legislators in Washington reached an impasse on raising the U.S. debt limit.  Immediate delivery gold soared to $1,624 before pulling back to $1,617.90, up $16.60.

The ongoing fiasco in Washington over increasing the U.S. debt limit has brought into focus the extent to which the United States has become addicted to deficit financing.  Increasing the debt limit to avoid default has become a side issue to worries over the long term ability of the United States to honor its obligations without debasing its currency.

The White House request to increase the debt limit by an astronomical $2.4 trillion, to tide us over for another year and a half, has convinced many investors that a debt downgrade is imminent.

Standard and Poors has already warned that the credit rating of the US might be downgraded regardless of whether a default is averted.  The head of the world’s largest bond fund also predicts that the US will lose its triple AAA rating regardless of how the debt limit issue is resolved.  According to Bloomberg,

“In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,’’ El-Erian, the Newport Beach, California-based chief executive officer and co-chief investment officer at Pimco, wrote in an e-mail.

The highly polarized negotiations going on in Washington reflect the ultimately self destructive nature of democracies.  Voters have collectively elected a political class who have promised benefits that are financially impossible to honor.  The tipping point has been reached and the political will to fix the problem is overridden by numerous special interest groups who demand that their benefits be preserved and increased.  In a collective pact of economic suicide, voters are demanding benefits from a wealth redistribution scheme that will eventually make all of us equally poor.

Writing in the Wall Street Journal, Arthur Brooks discusses whether the welfare state in the US has reached the tipping point.

The Bureau of Economic Analysis tells us that total government spending at all levels has risen to 37% of gross domestic product today from 27% in 1960—and is set to reach 50% by 2038. The Tax Foundation reports that between 1986 and 2008, the share of federal income taxes paid by the top 5% of earners has risen to 59% from 43%. Between 1986 and 2009, the percentage of Americans who pay zero or negative federal income taxes has increased to 51% from 18.5%. And all this is accompanied by an increase in our national debt to 100% of GDP today from 42% in 1980.

In the other scenario, our welfare state slowly collapses under its weight, and we get some kind of permanent austerity after the rest of the world finally comprehends the depth of our national spending disorder and stops lending us money at low interest rates. (Think Greece.)

John Sununu, writing in this week’s Time Magazine, makes a similar point.

We all know the nation’s budget is huge, but nothing drives the point home like the number of Americans receiving financial support. Add Medicaid, farm payments, housing subsidies and others to the list, and roughly 47% of all Americans are receiving at least one federal benefit. Tax preferences, like the deductions for mortgage interest, retirement savings and health care, bring the number closer to 75%. The dirty little secret about America is that being on the dole is no longer an exception but the rule.

Voters are characterized according to the programs from which they benefit.  Instead of Americans, we are retires, veterans, farmers, teachers, investors and students.  We have become a nation of spending constituencies.

The entire developed world has taken on financial obligations that are impossible to meet and no longer possible to finance, as we have seen in Greece, Portugal and Ireland.  The relentless rise in the price of gold reflects the desperate efforts of social welfare states to meet their obligations through currency debasement and ballooning deficits.

Jim Rogers, in a Bloomberg podcast, said it best – “I have not sold any gold, I have bought more gold.  If gold goes down I’ll buy more. The price of gold is going to go much, much higher over the next decade.”


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 stockcharts.com

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.


Gold and Silver Rocket Higher As Bernanke Oils Up The Printing Presses

The precious metals group continued higher this week, with standout performances by gold and silver.

As politicians continue to engage in reprehensible scare tactics in order to increase the debt limit by another $2.5 trillion, it has become increasing clear that the policies of more debt and dollar debasement will continue.  In an interview today, Ron Paul said that he expects “nothing will change” and that the U.S. is already defaulting on the debt via the devaluation of the dollar.

Gold and silver, which had already been strongly advancing in the prior week, soared after Fed Chairman Bernanke spoke before Congress on Wednesday.   Mere days after the end of QE2, Bernanke said that he stands ready to rescue the American economy with more accommodative monetary measures.   Although the exact mechanism by which future monetary easing  will be deployed remains to be seen, the end result will be the further debasement of the U.S. dollar.

As measured by the London PM Fix Price, gold hit new highs, soaring by $45.50 on the week, putting its two week gain at $104.00 per ounce.  Gold prices continued higher in New York trading with gold closing at $1,594.30, up another $7.30.

Gold has become the currency of last resort as it becomes clear that money printing is the only option left to prevent massive sovereign debt defaults by world governments.   Accordingly, there is really no upside limit for gold and silver prices.   Legendary trader Jim Sinclair told King World News that the stage has been set for gold to move up to $12,000 per ounce.

Silver has been the standout performer in the precious metals group.  After basing in the mid 30’s range after the May correction, silver has exploded upwards.


Silver - courtesy kitco.com

After rallying by over 7% last week, silver tacked on another 5% this week.  As measured by the closing London PM Fix Price of $38.17, silver has advanced by $4.32 or 12.8% over the past two weeks.   After the close in London, silver continued to gain in New York trading, closing at $39.37.

Silver is in a long term super cycle advance backed by fundamentals that guarantee higher prices. The accelerating exodus from paper money will quickly push silver prices to new highs – see For Silver , This Time Is Different.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,587.00 +$45.50 +2.95%
Silver $38.17 +$1.89 +5.21%
Platinum $1,760.00 +$20.00 +1.15%
Palladium $777.00 +$1.00 +0.13%

Platinum advanced by $20 on the week after a $32 dollar advance in the previous week.  Palladium ended essentially unchanged on the week after an advance of $26 last week.

Silver ETF Holdings Decline Again As Gold ETF Holdings Gain

Holdings of the iShares Silver Trust (SLV) declined again this week by 106.14 tonnes after a decline of 248.69 tonnes in the previous week.  The year to date decline in silver holdings by the SLV now totals 1,362.19 tons.

The decline in holdings of the SLV from its all time high of 11,390.06 tonnes on April 25, 2011 now totals 1,830.68 tonnes, or a decline of 16.1%.  There is not a direct and timely correlation between the price of silver and the holdings of the SLV as evidenced by the fact that silver has declined in price by a much larger percentage than holdings in the iShares Silver Trust.  From its high of $48.70 on April 28th, silver has had a price correction of 35.6%.

The holdings of silver by the SLV are structured in a complex manner.  The trust is set up so that the SLV price correlates closely to the price of silver.  This is accomplished by allowing Authorized Participants to arbitrage against a premium or discount of the SLV to the trust’s underlying net asset value  (see How Wall Street Made Huge Profits On Silver ETF Crash As Small Investors Sold).

As measured by the closing London PM Fix Price, silver closed today at $35.91, up slightly from last Wednesday’s close of $35.26.  Silver has been consolidating in the mid 30 range after the early May sell off.

As of June 22, 2011, the SLV held 307.3 million ounces of silver valued at $11.0 billion.



Silver seems to be building a base in the mid $30’s and presents a buying opportunity for long term investors.

GLD and SLV Holdings (metric tonnes)

June 22-2011 Weekly Change YTD Change
GLD 1,209.14 +9.09 -71.58
SLV 9,559.38 -106.14 -1,362.19

Holdings of the SPDR Gold Shares Trust (GLD) gained by 9.09 tonnes on the week after a decline of 11.52 tonnes in the previous week.   The GLD currently holds 38.88 million ounces of gold valued at $60.3 billion.

As measured by the closing London PM Fix Price, gold closed on Wednesday at $1,552.50, a new closing high on the year.  The price of gold remains in a solid uptrend supported by huge physical demand from investors and central banks.