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When the ball dropped on New
Year’s Eve, 2011 ended not with a bang, but with a soft ticking sound.
Despite the fireworks and the merriment of joyous revelers ringing in the new
year, a hidden clock continues its countdown. Tick, tick, tick. At the
fateful hour, the bomb, buried deep under the global financial infrastructure
will detonate, bringing down economies one after another. If you listen, you can hear the tick,
tick ticking right now.
It is the sound of European sovereign
debt interest rates ticking up, the sure sign that the European debt crisis
has not been contained by the new EU financial regime.
The forces of economic meltdown in the
European welfare state simply overpower the last minute rescue measures by
the ECB. Sooner or later Greece will default, then maybe Spain and Portugal.
By then even Italy could succumb as its bonds also are rendered worthless as the
bottom drops out of the debt market.
The bond market is showing several EMU
countries are facing interest rates of 7% or more on their long term debt
instruments, a level deemed unsustainable. The market is also signaling that
the Greek default is imminent. The price of Credit Default Swaps on Greek
sovereign notes is spiking.
 
The rating agencies recognize the coming
financial storm in the Eurozone. Friday, Standard and Poor’s downgraded
the credit ratings of nine of the seventeen Eurozone nations, including
France and Austria to AA+.
Monday, S&P downgraded the AAA rated European Financial Stability
Fund (EFSF) one notch, based on the downgraded status of its major guarantors.
The major destabilizing force in Europe
is the belief that the public sector is font of prosperity. Indeed, the
European welfare state supports more than half of its citizens directly. The
problem is, today there are fewer and fewer workers to tax and the costs of
government supplied services continue to rise, particularly healthcare and
retirement costs. In Italy, for example, Italian women have on average 1.2
children, putting the country's birth rate at 207th out of 221 countries.
And, 20% of Italy’s 60 million citizens are 65 or older; they make
expensive claims on state-paid pensions and other entitlements. It’s a death spiral that cannot
be solved by hiking tax rates or imposing strict austerity measures. In fact,
these “cures” produce precisely the opposite effect by removing
the incentives for productive economic growth. To make matters worse, the ECB
debases the common currency with every bailout it hands out.
The question now is: “How do I
protect my wealth against the coming economic storm?” Many investors are moving out of
European assets and into US Treasurys in an effort
to preserve their capital. Is this a wise move?
But the facts show that there is a
better safe haven available to investors. We can see that gold has
outperformed Treasurys over the last few years,
even as many investors fly to Treasurys in periods
of risk-off trading. As we can see, Treasury prices have been much more
volatile than gold prices over the last several years. Treasury prices have
bounced up and down while gold has marched steadily higher since 2009.
Today’s market is characterized by
negative real interest rates for Treasurys. That
is, Fed monetary policy has kept near-zero interest rates for bank-bank
borrowing, which has driven the yield curve down to the point where the
10-year coupon rate (nominal yield) is 2% or so. The real interest rate
accounts for inflation, which is reported to be 2.5%, which pushes the real rate
into negative territory. The Fed policy distorts the market for money, which
distorts the natural interest rate that reflects the demand for money. This
type of distortion drives investors to other instruments in the search for
yield.
The central bank also creates inflation
by printing more and more paper money. More dollars chasing the same goods
drives prices up. As we know from Uncle Milton, inflation is always and
everywhere a monetary phenomenon.
But the Fed cannot print gold, so it is
powerless to control its price directly, as it controls the value of paper
money. Printing more fiat currency actually boosts the price of gold. Gold is
a store of value. Paper money is not.
It should not surprise the prudent
investor, then, that gold has outperformed dollar-denominated assets.
Technical analysis of the gold charts now shows that gold is preparing for
another major move. Will you be prepared to benefit from it?
Investors from around the world benefit
from timely market analysis on gold and silver and portfolio recommendations
contained in The Gold Speculator investment
newsletter, which is based on the principles of free markets, private
property, sound money and Austrian School economics.
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