May 5, 2024

Collapse of Bernanke’s Credit Bubble Will Destroy the Global Financial System

September 20, 2013 by Leave a Comment

collapseBy: GE Christenson

The U.S. stock market is near all-time highs, while politicians and economists are blathering about recovery, low inflation, and good times, but instability and danger are clearly visible in our debt based monetary system. To the extent we rely upon the fantasies of ever-increasing debt, money printing, and credit bubbles, we are vulnerable to financial collapses. Perhaps a collapse is not imminent, but it would be foolish to ignore the possibility. Consider what these insightful writers have to say:

The Fantasy of Printing Money To Solve Problems

Bill Fleckenstein:

“Money-printing cannot solve problems. It doesn’t really give us much gross domestic product growth, as we have seen. It hasn’t really helped on the employment front either, as job growth is meager (of course, it is also hampered by other government policies). What money-printing has accomplished is to push the stock market high enough to cause people to once again become delusional in their expectations.”

Egon von Greyerz:

“Debt worldwide is now expanding exponentially. With absolutely no possibility of stopping this debt explosion, we will soon enter a period of unlimited money printing leading to a total destruction of paper currencies. The consequence will be a hyperinflationary depression in most major economies.”

Andy Hoffman:

“No, Larry Summers won’t be able to save the day… The damage is already done; and thus, NOTHING can turn the tide of 42 years of unfettered, global MONEY PRINTING – which as I write, has entered its final, terminal phase.”

Bullion Bulls Canada:

“So the ending is already clear. The U.S.S. Titanic is about to be intentionally sunk (again), and B.S. Bernanke’s ‘fingerprints’ will be planted all over the crime scene.”

CREDIT BUBBLE IN THE GLOBAL ECONOMY WILL EVENTUALLY COLLAPSE

John Rubino:

“…nothing was fixed after 2008, just as nothing was fixed after the housing, tech stock, and junk bond bubbles burst. The response has been the same each time, only progressively more aggressive and experimental. That the financial, economic and political mainstream think that the system has been reset to ‘normal’ because asset prices are back where they were just before the 2008 crash is, well, crazy. With financial imbalances bigger than ever before – and continuing to expand – the only possible outcome is an even bigger crash.”

Bill Holter:

“THIS is where THE REAL BUBBLE is! The biggest bubble in all of history, (larger than the Tulip mania, South Sea, the Mississippi Bubble, 1929, current global real estate and global stock bubble combined then cubed) is the current and total global financial system. EVERYTHING EVERYWHERE is based on credit. In fact, over 60% of this credit is dollar based and ‘guaranteed’ by the U.S. government. The minor little problem now is that we have reached ‘debt saturation’ levels everywhere. There are no more asset classes left able to take on more credit (air) to inflate the balloon. The other minor detail is that the ‘asset’ that underlies the value of everything (the dollar and thus Treasury securities) is issued by a bankrupt entity. What could possibly go wrong?”

Discussion

Growing and healthy economies mean more people are productively employed. It appears that much of the “growth” in the U.S. economy over the last five years has been in disability income, food stamps (SNAP), unemployment, student loans, welfare, debt, and government jobs – none of which are productive. Examine the following graph of Labor Force Participation Rate – the actual percentage of the populace that is employed. Does this look like a healthy economy experiencing a recovery or a collapse in productive employment?

The damaging effects of 100 years of Fed meddling in the U.S. economy, many expensive wars, 42 years of unbacked debt based currency, and unsustainable growth in credit and debt have left the Western monetary system in a precarious position.

Using common sense, ask yourself:

  1. Can total debt grow much more rapidly than the underlying economy which must support and service that debt? FOREVER?
  2. Can government expenditures grow much more rapidly than government revenues? FOREVER?
  3. Will interest rates remain at multi-generational lows? FOREVER?
  4. Will a fiscally irresponsible congress rein-in an out of control spending system that our fiscally irresponsible congress created?
  5. Is another and larger (than 2008) financial collapse likely and inevitable?
  6. Do you still believe in the fantasies of ever-increasing debt, printing “money” and credit bubbles? Are you personally and financially prepared for a potential financial collapse?
  7. Have you converted some of your digital currencies into real money – physical gold and silver? Is it safely stored outside the banking system and perhaps in a country different from where you live?

Read: The Reality of Gold and the Nightmare of Paper
Read: What You Think is True Might Be False and Costly

GE Christenson
aka Deviant Investor

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , , , , , ,

The Price Has Crashed; it’s Time To Buy Silver

August 8, 2013 by 3 Comments

silver-eaglesA Fun Look at Silver’s Looong Correction and a Positive Look Ahead

By:  Joe (Silverheels) Paulson

I remember it like it was yesterday…

It was the spring of 2011.  It was exceptionally warm and glorious. All was right with the world.   The air was sweeter, the sky bluer, the birds and bees were birdier and buzzier… it was all beautiful, man!  Why? Because those were the weeks that found me becoming wealthier by the day.  All of that bulky, heavy silver that I had purchased over the previous 10 years was turning me into an investing genius.  There was a different look in my wife’s eye.  What was it?…  Joy?  No… Love?  Yeah, sure, of course, but there was something else… it was more like… respect.  I was no longer the crazy man who hoarded silver metal.  I was now that wise investor who was making our family rich… well, rich-er, at least.

 As those weeks passed, and I did my mental calculations several times a day in front of the computer, or CNBC, or anywhere else I could get my quote, I realized that price was going vertical and that it would be wise to sell a portion of my stack because I, and everyone else in the world, knew that the correction was coming. (pause for reflection and dramatic effect here)  I won’t go into how or why I didn’t sell some of our precious, and I won’t say it’s been the most pleasant two years of silver holding.  I will say, though, that the look in my wife’s eye is long gone.  In case you haven’t been following the silver news, price has experienced a bit of a setback.  “How much of a setback?” you ask.  Well, (mumbling) it went from almost $50 to $18 or so.  “What’s that you say?  You’re mumbling.  Speak up, please.”  I say it crashed from $50 to $18.  (pause here)  When you are finished laughing and wiping your eyes I tell you that now is the time to buy.  (yet another pause) When you get up from the floor from your ROTFLMAO’ing and you catch your breath you ask me how I can say that.  Why is now the time to buy?  I reply it’s because the price crashed from $50 to $18.

Maybe you’ve heard this one before, but there’s an old saying that goes “Buy low; sell high.”  Well, my friends, relatively speaking, the price is low.  Doesn’t that mean it’s time to buy? Well, the thing about that saying is that it’s not very clear how high is “high” or how low is “low.”  Could the price go lower?  Sure it could; in fact, it might.  But if it does, it probably won’t go much lower.  And even if it does, it’s gonna’ go up, and up, and up.  How do I know?  Well, I am not a financial advisor.  I am not a silver salesman.  I am merely looking around at this world of ours; at the shaky governments and economies; at the bail outs and imminent bail ins; at the real inflation around us (not the inflation rate that the government offers us); at the incessant printing of dollars and euros and most all currencies world-wide, and I know that we cannot continue like this.  There are some rough times a’comin’ and when there is instability, people seek stability.  In financial-speak, that means precious metals – silver and gold.

If my “gut instinct” isn’t enough for you.  Check out just about any article written about the fundamentals of silver written over the last 10 years.  Review some of the excellent articles written on the Gold and Silver Blog.  When you look at them, ask yourself what has changed?  I’ll tell you the one thing that has changed:  The price of silver has gone down.  That means that it’s even more of a screaming buy than it was back in 2011.  If that’s not enough (and it probably shouldn’t be), here’s some more for you (in case you’ve forgotten):

  • The demand for silver is high and growing every day; at the same time silver stockpiles are being depleted and there is much talk about an imminent financial and industrial silver shortage
  • Silver is a very small market; when a few “big players” get involved, price will move rapidly upwards
  • Silver typically follows gold;  and the fundamentals for gold are outstanding right now
  • Many countries around the world, including China and India, are importing large quantities of silver and gold
  • The silver/gold ratio is abnormally high (~60:1); it’s more traditional level is more like 15:1.  That means that silver is probably a much better investment compared to gold right now.  (But they’re both going to go up!)
  • Many silver analysts are claiming that the bottom is in for this correction.  Many claim that the next stop is in the $60 range; after that comes the $100 range.  Some even claim that if our government keeps printing $85 billion every month, we may even see four-figure silver.

And If that’s not enough for you to go out right now and buy some silver, then I encourage you to stop for a moment, check the news, and do some more research; breathe for a minute and listen to your gut.  The signs are all around us that challenging times lie ahead.  Even if you’re not convinced, purchasing at least a little bit of silver or gold – maybe 5%-10% of your savings – would probably be a good idea.  Personally, I’m looking forward to seeing that look in my wife’s eye once again… soon.

Joe (Silverheels) Paulson is a husband, father, teacher, and an avid silver follower and investor (for over 30 years – !)  You can click here to find out more about different types of silver investing.  Get more of his unique and fun perspective on silver investing at tobuyandsellsilver.com.

Filed Under: Currency debasement, Featured, Silver Tagged With: , , , ,

The Price Correlation Between Silver and Crude Oil

July 25, 2013 by Leave a Comment

1881-CC-Morgan-DollarBy: GE Christenson

Crude Oil bottomed (weekly data) about 12/25/1998 at $10.75. It rose erratically for several years, hit another low on 8/24/2007 at $68.70, and then rallied dramatically to an all-time high of $147.20 on 7/11/2008. Subsequently, crude collapsed to $35.35 on 12/26/2008.
High to Low Ratio: 147.20 / 10.75 = 13.69
Total time: 12/25/98 to 7/11/08 = 9.55 years
Final blow-off Ratio: 147.20 / 68.70 = 2.14
Time for Blow-off: 8/24/07 to 7/11/08 = 0.88 years
Collapse Ratio: 35.35 / 147.20 = 0.24
Collapse time: 7/11/2008 to 12/26/2008 = 0.46 years

Silver bottomed (weekly data) about 11/23/2001 at $4.01. It rose erratically for several years, hit another low on 2/5/10 at $14.78, and then rallied dramatically to a nearly all-time high of $48.58 on 4/29/2011. Subsequently, silver collapsed to $18.53 on 6/28/2013.
High to Low Ratio: 48.58 / 4.01 = 12.11
Total time: 11/23/01 to 4/29/11 = 9.44 years
Final blow-off Ratio: 48.58 / 14.78 = 3.29
Time for Blow-off: 2/05/10 to 4/29/11 = 1.23 years
Collapse Ratio: 18.53 / 48.58 = 0.38
Collapse time: 4/29/11 to 6/28/13 = 2.17 years

So What?

Both crude and silver took about 9.5 years to rally from a significant low to an important high. The high to low ratios were similar – over 13 and over 12. Both collapsed after their blow-off highs and fell 76% and 62% from their highs. Crude rallied during the next four years and is now over triple its crash low. Silver, a much smaller and more volatile market, seems likely to do something even more dramatic.

Questions

Assume market prices for crude oil are based on supply and demand of physical crude oil. Do you think supply and demand for physical crude oil changed sufficiently between the crude low in August of 2007 to the high in July 2008 to the low in December 2008 to justify a rise from $68.70 to $147.20 and then a fall to $35.35?

Answer one: Obviously it did; the market price changed and the market price is always correct.

Answer two: Perhaps politics, High Frequency Trading (HFT), and derivatives also affected the supply and demand of paper contracts for crude such that the price of crude more than doubled and then collapsed by 76% in about 1.3 years.

You choose the best answer.

Assume market prices for silver are based on supply and demand. Do you think supply and demand for physical silver metal changed sufficiently between the silver low in February 2010 to the high in August 2011 to the low in June 2013 to justify a rise from $14.78 to $48.55 and then a fall to $18.53?

Answer one: Obviously it did; the market price changed and the market price is always correct.

Answer two: Perhaps politics, High Frequency Trading, and derivatives also affected the supply and demand of paper contracts for silver such that the price of silver more than tripled and then collapsed by 62% in about 3.4 years.

You choose the best answer.

Why Discuss This Parallel?

Sentiment for silver and gold was (June 2013) exceptionally low – at multi-year or multi-decade lows depending on who is measuring sentiment. As of the end of June 2013 there seemed to be “no light at the end of the tunnel” for silver bulls and there was no joy in “silver-ville.” Most people I know wanted nothing to do with silver or gold.

It was about the same with the crash low in crude 4.5 years ago in December of 2008 and the S&P500 crash low in early 2009. But the world economies demanded crude oil while the supply was flat or declining. Consequently the price rallied back to over $105 this month – about triple its collapse low price.

I think it is quite reasonable to expect that silver will also rally substantially from here. In fact an explosive rally would not be surprising. What seems likely is a multi-year rally (that culminates in another price blow-off) to four or six (or ten) times the low price in June, the inevitable price collapse, and then some months or years in a trading range at prices that make sub-$20 silver look like an absolute bargain. I suppose that if the US congress balances the budget AND world peace is confirmed, then silver prices are unlikely to rally… but I would rather bet on higher silver prices.

How are crude oil and silver similar?

Both had a nine plus year rally to a blow-off peak, collapsed, and rose again. Crude began its rally about three years before silver, and peaked about three years earlier. Both are essential for modern economies and their prices on the paper exchanges are heavily influenced by politics, HFT, and derivatives. The supply of crude is probably declining and the supply of silver is growing quite slowly. The world-wide demand for crude is likely to increase, even with slowly growing economies. The world-wide demand for silver is likely (my opinion) to dramatically increase due to increasing industrial demand and potentially explosive investor demand. There is good reason and good historical precedent to expect the price for both commodities to increase substantially, with great volatility.

Do you remember when crude was priced under $5.00 per barrel and silver was priced under $2.00? Given the penchant for governments around the world to run huge deficits, amass unpayable debt, and increase the money supply (monetize bonds) in seemingly unlimited quantities, do you think either $250 crude or $100 silver is unlikely in the next several years?

Neither do I!

We will see $250 crude, $10 gasoline, and $100 silver, unless the world’s economies and governments become responsible and accountable.

Have you purchased your Silver Eagles today?

Read: Silver – Keep It Simple
Read: Gains In Silver Will Be Historic

GE Christenson
aka Deviant Investor

Filed Under: Currency debasement, Featured, Silver Tagged With: , , , , , ,

“Sentiment on Gold and Bonds Incredibly Negative” – Marc Faber Predicts Endless QE

June 22, 2013 by Leave a Comment

Liberty-EagleIts hardest to buy at bottoms since you never know where the bottom is.  Equally hard to do is to buy when the sentiment is incredible negative as it was in early 2009 for stocks and 2000  for gold and silver.

Marc Faber, editor of Gloom Boom & Doom Report discussed the current status of the global markets and investment strategies on Bloomberg Television.

Faber said that the sentiment on gold and bonds in incredible negative and that the Fed, regardless of who winds up replacing Bernanke, will be forced to engage in endless monetary stimulus.   According to Faber “as I said already three years ago, we are going to go with the Fed to QE99.”

Faber notes that the cost of living continues to increase  on a global basis and the benefits of QE are mainly benefiting the richest members of society who hold large amounts of assets.  As money printing destroys the purchasing power of the middle class there will be worldwide social unrest which has already erupted in numerous countries.

As to what the price of gold will be at year end, Mr. Faber declined to speculate saying that “I am not a prophet but I will continue to buy gold.”

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , ,

An Audit of U.S. Gold Holdings Last Done Over 50 Years Ago

June 18, 2013 by 1 Comment

Fort KnoxDoes anyone really think that gold is unencumbered, unleased, and actually physically there? Yes, I know…

  • They would not lie to us, right?
  • The official numbers must be true, right?
  • They seem like trustworthy people, right?
  • Why wouldn’t it be there?

The official gold holdings ( rounded numbers) of the US Treasury Department are as follows:

Fort Knox 147,000,000 ounces, West Point 54,000,000 ounces, Denver 44,000,000 ounces, Federal Reserve of NY 13,000,000 ounces, other 3,000,000 ounces –  Total – 261,000 ounces.

Glad you asked that question. Why wouldn’t it be there? Gold is a bit like an “anti-dollar.” The Federal Reserve creates new dollars by the trillions – dollars are their product. Wal-Mart sells snow shovels and a few other things, Wall Street sells stocks and everything paper, Hollywood sells dreams and entertainment, but the Fed sells dollars, and they don’t like competition. Gold has been real money for 5,000 years world-wide. Federal Reserve notes have been passed off as money for a few decades, and in that time they have lost most of their value as measured against commodities such as wheat, gasoline, and cigarettes.

It could have been worse! Western central banks (officially) and governments sold a considerable sum of gold during the 1990s to help repress the price of gold and to slow the apparent decline in the value of paper money. They also “leased” an unknown amount of gold to bullion banks who also sold that gold into the market. The leases are still “on the books,” so the central banks officially still own the gold, even though it is probably long gone – likely to China, Russia, India, and the Middle East.

Yes, central banks and governments have motive, means and opportunity to suppress the price of gold. They want to support their product (dollars, euros, etc.) and to defeat the competition – gold. If you were a central banker or treasury official who was inflating his currency and consequently reducing its purchasing power, wouldn’t you want to suppress the price of gold to delay recognition of your involvement in the devaluation process?

So why not just do an audit? This is a simple question with a complex set of answers. Here are a few.

    • The US gold has not been audited in over 50 years. This must seem strange to any thinking person, but it appears unlikely to change.
    • If the Treasury agrees to an audit and the gold is not there, the result will be much unpleasantness – possible indictments, damaged reputations, social unrest, chaos, disillusionment, and destroyed trust – and there is plenty of disillusionment and destroyed trust already.
    • If the Treasury performs an audit and the audit claims the gold is actually there, will anyone believe the results of the audit? Is it truly unencumbered – not sold, leased, or hypothecated? Would we even believe an audit had been actually performed?
    • If the Treasury acknowledges the lack of a credible audit for over 50 years and then says “we don’t think it is necessary,” will anyone take them seriously?
    • The Treasury might claim an audit would be too expensive, but the US government probably wastes the cost of an audit every few hours, so that explanation is likely to sound hollow and stupid.Bottom line: The whole subject of an audit is fraught with potential trouble for both the Treasury and the Fed. The simple solution is to stonewall the audit question and “extend and pretend.”

The problem is that the questions just won’t die. GATA has researched the subject thoroughly and suggests that much of the Treasury gold is probably gone. Eric Sprott has examined the export numbers (official US government export data) and concluded that somehow the US exported about 4,500 tons of gold more than can reasonably be accounted for.

Germany asked for their gold back – a measly 300 tons – and was told it would take seven years to return their gold. It the gold was physically in the vault and unencumbered, it should have taken a few weeks at most. Seven years – really? This must seem strange to any thinking person.

From Bill Holter: “I would like to address the biggest (in my mind) conspiracy theory (fact) of all. It has been “said” for nearly 60 years that the U.S. has 8,400 tons of gold left. First off, there has been no audit done since 1956, not even Senators or Representatives (except for one time in the ’70?s for glance) have been allowed to actually see the gold. “Trust us” is what the population has heard, “trust us” is what foreigners are told…trust us, trust us, trust us. The problem is that so much anecdotal evidence has been dug up by GATA and others. Eric Sprott just last month looked at the U.S. gold export numbers going back 10 years or more and found that 4,500 tons OVER AND ABOVE what are reported as production has been shipped out. Where did that gold come from? When looked at with your 3rd grade mind in gear, there is no way that the gold is really there.

… Forget about all of the past official memos uncovered. Forget all of the evidence that GATA has uncovered over the last 15 years. Forget that Germany asked for their gold and were told “wait 7 years.” Forget that gold and silver prices have not acted like any other market since the mid 90′s and those prices have now crashed 3 times in the face of massive demand. Forget that 2 of the smash downs occurred WHILE the CFTC was supposedly “investigating” the silver market. Forget that 40% of the world’s total gold production was sold in reckless fashion in less than 12 trading hours (who would, could, do this?) FORGET IT ALL! …trust us. … All of this “conspiracy stuff” when put together rather than separately makes sense.”

I don’t know how much gold is left, but I have two (only slightly serious) suggestions:

A very large number of readers on the Deviant Investor site have voted over the past several months regarding what % of the gold they think remains in the US Treasury. The choices were all of it, most of it (>75%), about half (40% to 75%), some (20% – 40%) or very little (<20%). Readers clearly do not believe the official story – about 60% believe very little remains and another 21% believe less than 40% remains. Only 3% think it is all there. A weighted average suggests that the voters on this site believe approximately 20% of the gold physically remains and is unencumbered.

Nixon temporarily closed the “gold window” almost 42 years ago. Since that time, the official CPI shows that the dollar has lost about 83% of its value. For simplicity, let’s assume that 17% of the dollar’s purchasing power remains and assume that 17% of the gold remains.

We don’t know how much of the gold remains. Does it really matter?

Do any of the following matter?

  • Government promises
  • Central bank promises
  • Integrity of politicians
  • Integrity of hundreds of present and past Treasury employees
  • Backing for $Trillions in debt besides “full faith and credit”
  • A possible solution to the massive debt problem of the US government. If the gold is still there, value it at some large number, say $15,000 – $30,000 per ounce, and then back the dollar with gold. This is not my idea – some very intelligent people have advocated it. If the gold is mostly gone, this option is less likely.

Summary

  • Fort Knox: Per the voting and dollar devaluation “method” – assume about 20% of the official gold remains – physically in the vaults, unencumbered, not hypothecated or leased to bullion banks. Yes, I know, this is not defensible, scientific, statistically significant, or verifiable. But it sounds about right to me.
  • Denver: Assume about the same
  • West Point: Assume about the same
  • Federal Reserve Bank of New York: Ask the Germans! Assume very little remains.

How much physical gold do you have? How much do you want when you contemplate nearly $17,000,000,000,000 in official US government debt, another $100 – $200 Trillion in unfunded liabilities, and nothing backing that unbelievable amount of debt except the “full faith and credit” of what is clearly a government that won’t balance a budget and must resort to printing dollars to pay its bills?

How much gold do you have stored in a secure (off-site) facility?

GE Christenson
aka Deviant Investor

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , ,

Is The Decline In Gold Predicting Deflation?

May 2, 2013 by Leave a Comment

bernanke's paperBy GE Christenson

We all know that our cost of living in increasing, but how much?

The official government statistics assure us that inflation is running around 2% per year. It reminds me of the line attributed to Groucho Marx, “Who are you going to believe, me or your own eyes?”

But, your cost of living increase – your personal inflation rate – may be much larger or smaller than that of the person next door. Your spending choices matter a great deal in determining your personal inflation rate.

  • I think we can all agree that some items are increasing much faster than others. A few that come to mind are college tuition, medical care, hospital costs, and health insurance. Several that increase more slowly are postage and milk. If you spend more on medical care and health insurance than on postage, your cost of living increase will be much larger than the person who buys more stamps than health care.
  • If the official CPI goes up, then social security payments increase and total government expenses increase. Hence, government has an incentive to want low CPI inflation statistics. The US government has changed the process and the formula several times since the 1980s. The result, of course, is that the official CPI is low. Maybe it is fair, maybe not, but it is the official story, and it helps keep social security payments low.
  • The various statistical measures used to calculate the CPI have been discussed and criticized in detail in many other publications. In the opinion of many people, they don’t reflect economic reality for most people.
  • Other writers disagree and assure us the inflation rate is low.
  • John Williams, a competent economist and statistician, computes the annual inflation rate at about 9%. He uses the statistical calculation process that was used by the government in 1980.
  • Dennis Miller did an inflation rate survey. It was not intended to be statistically robust – just practical. His readers responded with an average inflation rate of 8%, but 23% of the respondents thought their personal rate of inflation was over 11% per year.
  • The Deviant Investor did a similar survey and received a large number of responses. Our readers thought their average inflation rate was nearly 8% per year, while 39% thought it was higher than 9% per year.
  • Rex Nutting thinks it is close to 3% per year and that most of us are “CPI Deniers.” Mainstream media mostly agrees – but I can’t find anyone (in casual conversation) in a grocery store who thinks food prices are only increasing 2 – 3% per year.

I estimate my personal inflation rate at about the average found in the surveys – around 8% per year. I am one of those “CPI Deniers.” Most people I know are “CPI Deniers.”

So How Important is a Few Percent Per Year?

A few percent seems unimportant, but over a decade it becomes very important. Let’s assume in this very simple example that your expenses increase 8% per year, and your income increases 3% per year. In year one your income was much larger than your expenses, and you saved the difference.

Sample Inflation Calculation

Year Income Expenses Net to
Savings
1 80,000 60,000 20,000
2 82,400 64,800 17,600
3 84,872 69,984 14,888
4 87,418 75,583 11,835
5 90,041 81,629 8,411
6 92,742 88,160 4,582
7 95,524 95,212 312
8 98,390 102,829 (4,440)
9 101,342 111,056 (9,714)
10 104,382 119,940 (15,558)

By year 8, in this simple example, the cost increases overwhelmed your income, and you were forced to withdraw from savings. Of course, in the real world, there are more variables and adjustments. We cut back on expenses, increase credit card debt, take a second job, win the lotto, file for bankruptcy – whatever. But the critical point is that your personal inflation rate is important, and a few percent over a decade can make a huge difference.

What to Do?

      • Cut back on expenses.
      • Get out of debt, and stop paying interest.
      • Increase your income.
      • Start a business, or take a second job.
      • Make investments that pay more than the minimal interest provided by savings accounts and certificates of deposit.
      • Invest in real things – gold, silver, diamonds, land, rental property.
      • Invest in “ABCD,” which for David Stockman is “Anything Bernanke Can’t Destroy.” We Have Been Warned!

According to the surveys, real people think their personal inflation rate is around 8% per year with a significant percent of the responders claiming 9 – 11% or more per year. Are you going to believe what the government is telling you or your own experience?

GE Christenson, aka Deviant Investor

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , ,

Explosive Gold Rally Is Imminent Based On Bearish Sentiment and Fundamentals

February 4, 2013 by Leave a Comment

You know the world is changing when the head of the world’s biggest bond fund recommends gold as his first asset choice.

In this week’s Barron’s Roundtable, Bond King Bill Gross affirms his bullish view on gold due to his assessment that central banks will continue to suppress interest rates by purchasing vast amounts of government debt with printed money.  Gross notes that the financial system is now longer operating under free-market capitalism when the Fed is buying a “remarkable” 80% of debt issued by the U.S. Treasury.  Massive deficits are being funded with printed currency on a global scale never attempted in the past and sooner or later, according to Bill Gross, inflation will blow past the central bank’s targeted rate of 2.5%.

The really big risk comes when huge holders of U.S. debt such as China and Japan become disgusted with U.S. fiscal and monetary policies and decide to dump their treasuries as inflation decimates the value of their holdings.  Bill Gross tells Barron’s exactly what could go wrong and which gold investment he likes the best.

The big risk is that the Chinese would rather own something else. Investors can choose between artificially priced financial assets or real assets like oil and gold or, to be really safe, cash. The real risk to the financial markets is the marginal proclivity of investors to put their money in real assets, or under the mattress. Thus, my first recommendation is GLD — the SPDR Gold Trust exchange-traded fund. It has a fee, but it is an easy way for investors to buy a real asset.

Lots of things go into pricing gold, but real interest rates [adjusted for inflation] and expected inflation are two dominant considerations. Gold probably won’t move much from current levels unless real rates decline more or inflationary expectations rise from the current 2.5% to 3%, or higher. That’s what gets gold off the dime. It is a decent hedge. It doesn’t earn anything, but not much else earns anything either.

Pounding the table even harder than Gross, Fred Hickey, editor of the High-Tech Strategist, tells Barron’s that an explosive rally in gold seems imminent based on the massive bearish sentiment towards gold.  Long term, Hickey sees gold hitting at least $5,000 per ounce, a target that Gold and Silver Blog also sees as a very reasonable future price target.

Hickey: I am recommending gold, as I have done for many years. I will continue to do so until the gold price hits the blow-off stage, which is nowhere in sight. I am excited about gold because sentiment is so negative. Gold could have a sharp rally at any time. The Hulbert Gold Newsletter Sentiment Index went deeply negative last week, indicating that gold-newsletter writers are recommending net short positions. When that happens, gold almost always rallies. The daily sentiment index for gold is at a 12-year low. Short positions by large speculators have doubled in the past few months. Sales of American Eagle coins hit a five-year low in 2012. Yet, the environment for gold couldn’t be better. We talked today about massive money-printing by all the major central banks. Real interest rates are negative. These are the best possible conditions for a gold rally.

Felix said gold could rally to the $1,800-an-ounce level, and I agree. If it breaks that, it will go to $2,000 or more. As long as we have unlimited quantitative easing, we have the potential for unlimited gains in the gold price. Gold could go to $5,000 or even $10,000. You can buy gold through the GLD or IAU, as we discussed. This year I recommend physical gold. You can buy American Eagle coins, or gold bars. Everyone should have some physical gold, and almost no one in the U.S. does.

Hickey also says that the price of gold is nowhere near a “blow off stage”, despite constant mainstream press reports of gold’s imminent collapse.  For further discussion on this see The Gold Bubble Myth and Why There Is No Upside Limit For Gold and Silver Prices.

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , , ,

Nine Reasons Why You Must Own Gold

February 1, 2013 by Leave a Comment

By: Deviant Investor

american-gold-eagle-coins

    • Gold has been real money (medium of exchange and a store of value) for over 3,000 years. It is still real money.
    • Gold has no counter-party risk. It is not someone else’s liability. It has intrinsic value that is recognized around the world.
    • ALL paper money systems have eventually failed. The intrinsic value of paper money is effectively zero; and all paper money has, throughout history, eventually devalued to zero.
    • Paper money is a liability of a central bank or a government that may be insolvent. The money issued by a central bank or government has value based NOT on its intrinsic value, but only upon people’s faith, trust, and confidence in that money. Occasionally that faith and confidence is misplaced. For example:

zimbabwe

    • The price of gold in US dollars since the year 2001 has been strongly correlated with the ever-increasing official national debt of the United States. Read $4,000 Gold! Yes, But When? Does anyone believe that the national debt will decrease or even remain constant over the next several years? NO! The national debt will increase even more rapidly over the next four years and so will the price of gold. Skeptical? Then look at the chart of national debt and the nearly parallel price of gold. Still skeptical? Do you remember gasoline selling for less than $.20 per gallon and gold selling for about $40? They have increased in price because there are currently many more dollars in circulation than in the 1960s – hence, it takes more dollars to buy an ounce of gold, a gallon of gasoline, a loaf of bread, a cup of coffee, or a fighter jet.

Click on image to enlarge.
  • Because governments and central banks issue paper money backed by nothing but faith and credit, they are in competition with gold which is real money. Should we be surprised when they discount the importance of gold and discourage ownership? Should we be surprised when the “Oracle of Omaha” denigrates gold ownership? (Berkshire Hathaway holds huge positions in banking stocks and Goldman Sachs stock.) Should we be surprised when news stories are heavily slanted against gold ownership?
  • Groucho Marx once said, “Who are you going to believe, me or your own eyes?” Who are you going to believe – the history of gold as valuable money while paper money failed, or the pronouncements of politicians, central banks, and the owners of bank stocks?
  • Who and what do you believe? It will be important to your financial well-being if (when) paper money accelerates its journey toward an intrinsic value of zero.
  • Are you going to believe history and current facts or less reliable information from politicians, central banks, and the owners of bank stocks?

GE Christenson
aka Deviant Investor

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , ,

Gold and Silver Will Protect You From The Looming Financial Hurricane

January 17, 2013 by Leave a Comment

By: GE Christenson

What Storm?

  • A hurricane of digital money created by central banks to purchase government debt and other dodgy assets from banks.
  • A tidal wave of deficit spending by governments around the world. It continues, regardless of whether you call it business as usual, stimulus, payoffs, or bailouts.
  • A perfect storm of derivatives – the weapons of mass financial destruction that continue to plague our financial system – but make $Billions (Maybe $Trillions) in profits for the huge banks.
  • A tornado of bailouts, giveaways, loans, and currency swaps from the Federal Reserve to backstop banks, politically connected individuals and corporations, European governments and others.
  • An approaching thunderstorm of new and higher taxes – perhaps a carbon tax, a VAT, and a wealth tax. We hope most of these will be downgraded to a hot air disturbance.
  • A tsunami of Japanese Yen based on the election of Prime Minister Abe and his avowed intention to weaken the Yen.

Why Do We Need Shelter?

  • Derivatives involve huge counter-party risk. The international financial system seems increasingly shaky. Those derivatives might be triggered by a Greek government default, another Lehman-like implosion, or a “black-swan” event that causes derivative contracts be paid. Will the counter-parties be able and willing to pay as required? Was sufficient margin set aside to protect all those derivative contracts? Doubtful!
  • It seems that the $700 Trillion in derivatives is largely based on $70 Trillion of sovereign debt, much of which is of marginal quality. When the collateral is worth less than face value, the derivative is worth considerably less than face value, or perhaps nothing.
  • Medicare and Social Security costs to the US government are huge and increasing. More deficits and accelerating national debt will be the result.
  • Will the dollar weaken against other currencies? Will the bond bubble finally burst?
  • Consumer price inflation is here and increasing.

Where Is The Shelter?

The problems are unbacked paper assets, excess debt, too much government spending, massive government deficits, derivatives that could implode, and lack of political will to correct the problems. We need a shelter that will minimize these risks.

One shelter is to divest out of paper assets and into gold and silver bullion and coins, land, farms, hobby farms, diamonds, and other physical assets. If you must stay in paper, consider using ETFs for crude, grains, sugar, gold, silver and other commodities. Read Ten Steps to Safety.

Conclusions

The investment world is increasingly dangerous. Few understood in late 1999 that an epic crash in the NASDAQ was about to occur. Housing crashed despite a wide-spread belief that real estate always goes up. There are several candidates for another crash – sovereign debt, derivatives, and the dollar.

We can depend less upon the safety of paper assets. We can depend less upon 1′s and 0′s on a financial server that claim we have assets in a brokerage account. When your government is seeking revenue, your assets are less safe. As Doug Casey says, your government currently sees you as a milk cow but may eventually view you as a beef cow.

Give your savings and retirement a chance to preserve their purchasing power. Minimize currency risk, find an alternative to a CD that pays 1% per year or a 30 year bond that pays about 3% per year for 30 years and is guaranteed to be repaid with increasingly depreciated dollars. Gold from 1/1/2000 to 1/1/2013 (13 years – from $282 to $1,655) has increased at a compounded rate of 14% per year. You have choices!

Doug Casey believes we are currently exiting the eye of the financial hurricane that started with the financial crisis of 2008 and that the next phase of the financial storm is imminent. Assets could be “blown away,” and supposedly safe structures might collapse in the financial winds of change.

If the financial hurricane is downgraded to a minor storm, you will still be sheltered in gold, silver, and other physical assets and have lost nothing. However, if the hurricane destroys many paper assets, then gold and silver will shelter you until the storm wreckage is cleared and financial life begins anew.

GE Christenson
aka Deviant Investor

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , , ,

THE ONGOING COLLAPSE IN THE PURCHASING POWER OF THE DOLLAR IS IRREVERSIBLE – TEN STEPS TO PROTECT YOURSELF

January 8, 2013 by 1 Comment

By GE Christenson

  • Our financial system, as it currently operates, is unsustainable. Unproductive debt cannot exponentially increase forever. I assume this is obvious to almost everyone. Jim Sinclair says, “The financial system is simply FUBAR. It is that simple. The reason to own all things gold is that simple.” FUBAR has several meanings, but my interpretation of FUBAR is: “Fiscally Unbalanced Beyond Any Reconciliation.”
  • The U.S. government deficits are, on average, larger every year. This means that the total (official) national debt is not only increasing each year but also that the rate of increase is accelerating. Since 10/1/2000 the national debt has increased about 9.1% per year, but since 10/1/2007 it has increased 12.2% per year. Worse, this is only the official debt and does not even consider the net present value of unfunded Social Security, Medicare, Medicaid, and government employee pensions and liabilities. Depending on who is calculating the liabilities, the total unfunded liability is approximately $100 Trillion to $230 Trillion and the annual increase is perhaps $7 – $11 Trillion. (The entire U.S. GDP is about $15 Trillion per year – for comparison.) This will not end well.
  • In essence, the above two facts are incompatible – hence an economic train wreck is in process. What could happen? Follow the logic here.
  • When there is too much of something, it loses value. If we have too many eggs, the price drops. If too many autos are for sale, there will be lower prices for autos. Central banks around the world are currently producing amazing quantities of dollars, euros, yen, and most other unbacked paper currencies. Hence, their value will decrease against the commodities we need for survival – food, energy, and so forth.
  • There is too much debt in our financial system, whether measured in nominal value or as a percentage of GDP. Hence the value of that debt will decline. Some debts will default, bonds will decline in value as interest rates inevitably rise, and other debt will drop in value and purchasing power.
  • Politicians have made excessive guarantees for future benefits to Social Security recipients, Medicare recipients, government pensions, and others. Those guarantees cannot all be delivered as promised, hence they will decline in value and purchasing power, or the promises will not be fulfilled.

Why are the following ten steps necessary?

  1. The best time to start preparing was about a decade ago. The second best time is today. Make a plan and act. Start by reducing living expenses and eliminating credit card debt.
  2. Expect sweeping changes! I hope the inevitable currency collapse is slow and gentle, not rapid and destructive, but history suggests rapid and painful are more likely.
  3. Phase out of paper assets and into something real. Gold, silver, diamonds, farm land, rental property, and buildings come to mind.
  4. Perspective – Perspective – Perspective! It is better to be early than late. It is better to trust yourself than to depend upon a government agency for your food and shelter. To whatever extent you can, take charge of your own financial affairs, savings, and retirement.
  5. Plan on huge inflation in consumer prices for food, energy, transportation, medical costs, and more.
  6. The middle class will be hurt the most. Those who plan and prepare will, as always, survive and prosper. Make a plan!
  7. Government control over the economy will increase. Surveillance on individuals will increase; there will be much less personal and financial privacy. Act accordingly!
  8. Social change will follow a currency collapse. It might be violent. The government is preparing in many ways for social violence. Are you?
  9. Currency induced cost-push inflation appears inevitable. When? As a guess, well before 2016. Gasoline costing $8.99 or more per gallon is a distinct possibility. Don’t discount this just because it sounds extreme. It might be a low estimate.
  10. Economic manipulations, mal-investments, and unsustainable policies will self-correct. Plan on corrections and adjustments that will bring painful consequences. The bigger the bubble, the more catastrophic the collapse and the larger the collateral damage. The sovereign debt and paper money bubbles appear VERY large and ready to pop.

Summary

Unproductive government debt cannot increase forever, but our financial system currently depends upon ever increasing expenditures and debt. There are far too many dollars in circulation, more debt than can be repaid, and massive unfunded liabilities have been created by the promises made by politicians. The purchasing power of the dollar must decline, many debts will not be repaid, and many promises for future benefits will be reduced in value or will simply disappear. Hence, the FUTURE income stream from debt-based assets is increasingly risky. A few to consider are:

  • Social Security benefits. The government must borrow or print to pay current benefits. The value (purchasing power) of future benefits will almost certainly decline.
  • Municipal and state bonds and pension promises are increasingly risky. Will more cities and states default on their bonds? Why are their pension plans, on average, increasingly underfunded? Will your pension plan remain safe? Consider moving your IRA into physical gold and silver safely stored outside the banking system.
  • US government 30 year bonds and 10 year notes will decline in price as interest rates rise, and will also decline in purchasing power as the dollar devalues. Why would you lend money (long-term) to an insolvent government at less than 3% interest per year when that government has assured you it will debase the currency and reduce the value of the debt you bought? Is this a financial train wreck in process?
  • Mutual funds and money markets based on bonds and other debt are at risk. If the underlying debt defaults, the value of the mutual funds and money markets will decline. Counter-party risk is real.

Why is debt based future income increasingly risky? The payoff will be delayed, defaulted or executed in mini-dollars after inflation and counter-party defaults have ravaged the purchasing power of those paper debts. We have Been Warned!

Would you prefer hard assets with no counter-party risk? Reread the Ten Steps To Safety, and then take charge of your financial life to whatever extent you can.

GE Christenson
aka Deviant Investor

Filed Under: Currency debasement, Featured, Gold, Silver, US Debt Crisis Tagged With: , , , , , , , ,