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THE COLLAPSE OF THE DOLLAR
HOW REALLY BAD ARE THE ECONOMIC
FUNDAMENTALS?
The economic situation looks under control
currently, that’s because we are now in the eye of the storm. The longer this
unbalanced situation goes on, the faster and more severe the eventual
collapse will play out.
The main theme is that governments in the US and Europe have lost complete
control over their spending and borrowing, which must ultimately result in a
catastrophic crisis. Soaring debt accumulation, along with Europe Japan and
USA race to devalue will continue until some kind of crisis arises; either
internally or globally and when the markets blowup, it will bring about an
abrupt END to this charade. The 2008 crisis was not the final collapse. The
final chapter of the 2008 – 2009 meltdowns is still ahead of us. The same
trend is forecasted for the rest of the world and up until now it is playing
out almost exactly the way I have expected it to. Worldwide debt stands at $220
trillion, a figure that when compared with world GDP of $62 trillion, shows a
debt to GDP ratio of 350% and still growing exponentially. Common sense
should tell you that it is not sustainable.
THE CARDS HAVE BEEN DEALT
There is no stopping the Euro’s demise - are you
protected? History tells us that "Nationalism will emerge. Healthier
countries will not see fit to spend ALL their hard earned RESERVES to bail
out their less responsible neighbors who to this day refuse to make any
adjustments to their spending." And money will flow out of paper assets
into gold and silver as debt creation continues to gain momentum and spread
to the public. (Gold and silver are the only forms of money that governments
cannot debase by creating additional units of it.)
Treasury Bonds: They have always been and for the time being, still are
functions of a general flight to safety. An ever shrinking part of the world
is still looking at US Dollar denominated assets as safe havens even though
the US government is taking on an ever increasing amount of debt. However, it
is imperative to understand that the purchasers in the treasury market are
mostly the central banks themselves. Their intention is to prop up fiat
currencies by buying sovereign debt. What this really means is that
governments are taking on too much debt and turning it into currency. Most
people don’t see this process; it also remains unreported by the mainstream
media. This process, historically, is the final stage of a country destroying
its currency. Unfortunately, it is taking place on a global scale, so it will
undoubtedly result in an implosion of the whole fiat currency concept.
Unfortunately I cannot tell you the exact timing of the coming debacle.
Where do we stand today? The number of people with jobs (actually working) as
reported by the Government is up 2%, while the number of people on disability
is up by 15%. And yet the percentage of the population with jobs is fast
approaching the lowest figure in history: People living on food stamps are up
44%, standing at 46 million currently. One in four households lives on
less than $25,000 a year.
Total debt has gone from 1.5 times GDP in 1980 to 3.5 times GDP today and
climbing. 2012 was the 4th consecutive year in which the US ran trillion
dollar plus deficits, with over $1.5 trillion projected for 2013 and
continuing as far as the eye can see: When unfunded liabilities are included
in the calculation (Medicare, Medicaid, Social Security which are nonetheless
debt), the debt per family stands at over $2 million. The Government and the
“Don’t Ask Don’t Tell” Media are trying to convince us that things are
improving. The path to the final collapse has been slowed down by human
nature. It takes a long time for people to change their beliefs on something.
Our global society still believes that paper currencies still hold their
value over time as they keep on accumulating and saving fiat based money.
A stanch Left Wing compliant media is a phenomenal tool for fooling people.
Governments seem to be able to create as much currency as they want. But
COMMON SENSE tells us that there are limitations. Yes, they can set interest
rates at levels that signal to the market that economic conditions are fine:
Even when underlying conditions are deteriorating. Lending at a very low
interest rate gives the impression of a good creditworthiness. But that is a
false premise. Nobody in their right mind lends money at ¼% to 0 % interest.
WE ARE IN A GOVERNMENT DEBT / BOND
BUBBLE
Markets and people tend to go with the flow during a
bubble. However, history has shown that as awareness slowly but surely sinks
in; people suddenly wake up (usually triggered by a Black Swan event and move
extremely quickly (witness the LEMAN BROS. affair). We also saw this in the
last two bubbles. One year before the tech stock bubble imploded, everyone
expected the future to be better than the past, but in the blink of an eye,
the world was staring at a global depression. The same thing happened with
the housing boom in 2008. Everyone was convinced that housing prices could
only go up in 2007, yet one year later, the whole global financial system was
on the verge of collapse. But the world still had full faith in the US Dollar
and its Bond Market. Today, everyone believes in the safety of government bonds
and they are parking their money there, even though they are not receiving
any interest. Go figure. It is unknown when exactly the coming crash will
take place (but it will) and the world will wake up suddenly, as their dreams
become a nightmare… again!
HOW THE NEXT COLLAPSE WILL PLAY
OUT
The structure of our financial system is a
fascinating topic to explore. It gives us insights to describe the anatomy of
the coming collapse. The best analytical framework explaining today’s system
is described in “Currency Wars” by Jim Rickards,
published in 2011. The author explains how complexity in our system has risen
to the point where it shows unique characteristics, the most important one
being that the propensity for catastrophic failure is an exponential function
of complexity. In simple terms, it means that, when the system doubles in
size, the instability goes up tenfold. It means as well that it requires
exponentially increasing amounts of money (debt) to keep the system growing.
The framework is revolutionary in that it perfectly describes today’s
reality. Today, governments need more and more debt to generate the same
amount of GDP. We need to borrow more only to stay in place but at the cost
of a huge (almost certain) collapse of the system. But more importantly, the
problems have become so huge that there is no longer a Lender of Last Resort
big enough to bail anybody out.
The longer this process goes on, the faster and more severe the collapse will
be. Suppose the final collapse strikes in 2013/15. By then, the system will
have grown so complex, and the amounts of debt will be so huge that there
will be no way to control it - the crash will take on a life on its own.
THOSE DEADLY DERIVITIVES
As early as February 2005, I warned about both the
size and the exponential growth of derivatives, growing without any
collateral. In fact, they are the “complexity story”. What most people do not
realize is that banks report their net derivatives position (their long
versus short positions) and only the net position is shown as their risk.
However, the gross position is the real relevant number. To put things into
perspective, the earlier mentioned $62 trillion global GDP should be compared
with the gross derivatives figure which stands at more than a Quadrillion
dollars of notional value. (How much is a Quadrillion?)
A derivatives meltdown will play out almost instantaneously, which is why
they keep pouring money into Greece because a default of even one small
insignificant country, no matter how small, could be the Black Swan (
Lehman Bros.) that everyone fears, because it sets off a chain reaction of
defaults. When one big bank faces some kind of trouble and fails, the banks
with the largest exposure to derivatives (think JP Morgan, Citigroup, Goldman
Sachs etc.) will realize that the bank on the other side of the derivatives
trade (the counterparty) is no longer good for any of their obligations. All
of a sudden their hedged positions become naked positions. The gross position
becomes their net positions. The risk explodes instantaneously. Markets
realize that all hedged positions are in reality not hedged anymore, and all
market participants start bailing almost simultaneously. (Bail to where or to
whom?) The whole banking and financial system freezes up. It might start in
Asia or Europe, in which case Americans will wake up in the morning to find
out that their markets are not functioning anymore; stock markets remain
closed, money at the banks become inaccessible, etc.
It is really impossible to forecast the exact trigger that will cause the
bubble to burst. What we clearly see today is that the fixed income (bond)
market will be the epicenter of the coming shock. A lot of derivatives are
hedges against bond portfolios, but most are against Sovereign Debt so the
crack could start with trouble in Treasury Bond markets for example as US
interest rates start rising or as no one except the Fed shows up for the next
Bond Auction. The first reaction will be the Fed buying up all bonds that the
US government is issuing, which would spook the markets instead of calm them
down. This would set off a chain reaction as all bond holders try to dump
their bonds.
Complex systems do not allow us (me) to determine things ahead of time. One
of the few things we know, however, is that the mother of all bubbles will
burst and that we created the conditions for this catastrophic failure.
You will then thank your lucky stars (and maybe me) that you have been
accumulating Gold Eagles and Maple leafs for the last 12 years..
TRENDS FOR 2013 & POTENTIAL
TRIGGERS FOR A TRUST CRISIS
POSSIBLE
TRIGGERS:
- The erosion of the
Petrodollar: Oil producing countries start dealing their oil in other
currencies (mostly gold) with huge purchasers (think Iran, Russia,
China, Brazil), resulting in a lower demand for dollars and a huge
increase in the demand for gold. If central banks decrease their demand
for US dollars, it would lower the value of the dollar and make
inflation and interest rates explode. We have already witnessed the
first sign when we forced Iran to start trading oil for gold and their
major clients jumped at the chance to continue trading with Iran using
gold to settle all trading.
- Expansion of the police
state. The response to terrorism and public riots and instability is an
increased control by the government; its
happened all before (think Hitler Stalin and Chavez today) (think
internet monitoring, surveillance systems, etc).
And most important - an attempt to confiscate all the public’s guns. It
creates conditions for domestic turbulence via civil unrest, resulting
in an outflow of money and Rich people to other countries. The
acceleration of this trend has already begun to be visible in 2013. Look
for a possible government seizure of citizens’ gold and silver.
- State and local pensions begin
imploding. States and localities cannot pay off their obligations
anymore and could go bankrupt in 2013, resulting in a tanking municipal
bond market.
- Threat of cyber war and cyber
terrorism. The internet being an insecure system, the next war could
result in a breakdown of the electronic system, which would spook the
markets tremendously.
GOLD & SILVER – THE BEST STORE
OF SAFETY AND PROTECTION OF WEALTH
Precious metals are where we hide when we do not
trust the rest of the world. When things start really spinning out of
control, everything could potentially be destroyed, but the only things that
cannot be destroyed are gold, silver, platinum, food, oil and probably the
mining stocks, among other tangible assets. With a limited supply and
availability, a massive demand for precious metals will translate into
exponentially rising prices. The ongoing destruction of fiat currencies will
become increasingly apparent in 2013 -15. An increasing number of investors
will understand that precious metals are holding and increasing in value
while other assets are not.
Central banks have already reversed their 30 year penchant for selling gold
and are already moving back into gold. China as the best example, imported
800 tons of gold in 2012. To put that figure into perspective: Their official
reserves were 1,000 tons. The same trend is taking place in other countries
(although on a smaller scale) like, for example, Russia, Brazil and several
Asian countries. This increasing demand will be a main driver for higher
prices beginning in 2013.
Downwards suppression of gold and silver prices (manipulation) can be the
only explanation for all the strange price action in 2012 and before. In
December for instance, huge amounts of short selling took place during the
most thinly traded moments (during overnight trading sessions when the major
markets are closed.). That is not how a market participant closes out a large
winning futures position because all the subsequent trades are happening at
lower prices. Commercial banks, together with western central banks, actively
try to depress gold and silver prices to validate the existence of their fiat
currencies. It has resulted in a controlled price rise, instead of an
exponential one. But their end is in sight. People and investors need to look
at these selloffs as an opportunity. A slow and steady bull market makes it
possible to accumulate the metals in a steady way into weakness. At the start
of 2013, the fundamentals justify much higher gold and silver prices.
Another respected hedge fund, the Pacific Group, has decided to convert one
third of its hedge-fund assets into physical gold. The Pacific Group Ltd.,
which manages assets of over $100 Billion, believes that gold will continue
to rise as governments print more money to pay off debt. Thus, continues the
trend of some of the smartest money in the world diversifying more and more
of their holdings into physical gold.
“The way I look at it, gold is anywhere from being seriously undervalued
to being grossly undervalued,” We’re in the early stages of what in my
judgment will most likely turn out to be the world’s largest short squeeze in
history.”
“Trust in central banks by other central banks is in great danger.”
ZERO HEDGE
The big news this past month was the initial
announcement by Germany that they would be repatriating their gold back to
Germany and the political rhetoric that followed.
“In what could be a watershed moment for the price and future of physical
gold, not to mention the stability of the entire monetary regime based on
rock solid, undisputed faith and credit in paper money, German Handelsblatt reports in an exclusive interview that all
official 3,396 tons of it is about to be partially moved out of the New York
Fed, where the majority, or 45% of it is currently stored, as well as the
entirety of the 11% of German gold held with the Banque
de France, and repatriated back home to Germany.” Andreas Dobret, member of the Executive Board of the German Bundesbank, adding that, “The Bundesbank
will remain the Fed’s trusted partner in future, and we will continue to take
advantage of the Fed’s services by storing some of our currency reserves as
well as gold in New York.”
Seems to me like an attempt to calm the waters.
When Venezuelan President Hugo Chavez ordered the repatriation of 85% of the
country’s bullion reserves from European Banks, most of which was held with
the Bank of England, the move was dismissed as “unnecessary and expensive,”
with others accusing Chavez of acting out of paranoia.
The reaction to Germany’s decision to do almost precisely the same thing is
likely to be more muted so as not to start a stampede of other countries
seeking to mimic the Bundesbank actions. Germany is
the second largest gold holder in the world.
“This is a momentous development, one which may signify the end of mutual
assurance and solidarity among central banks because if the central banks
don’t have faith in one another, why should anyone else? Without trust the
system falls apart. In the end, the criminals always turn against each other.
This could be a sign that this end process is already underway.” I would
have to agree with this assessment by Zero Hedge, especially on the heels of
the “gold is money” announcement two months ago regarding the Basel III
Accord, which should have gone into effect as of the first of the year
(2013). Yet we haven’t seen or heard of any official announcement regarding
this Why?
Taking into account the timing of these two events, how close they are in
proximity to one another, it appears to me to be very bullish for gold. Yet
the gold price for the moment seems to be caught in a very boring but tight
trading range with little in the way of news to drive gold or silver
significantly one way or the other. But this can and will change very quickly
especially once the charts give a definite buy signal. So far, just as gold
seems ready to break out to the upside, there is a sharp selloff into the
close of trading. DON’T LET THAT SCARE YOU. I would use any follow up selling
at the morning opening as a BUYING OPPORTUNITY.
I try to keep a balanced perspective on where precious metals prices and
everything else I own are heading and why. I try to think of everything I can
for each case and then look at which argument is more compelling at any
particular juncture. At the moment, the odds are stacked in gold’s favor for
moving higher in the bigger picture, but lower in the immediate to short term
due to governmental interference, which appears to be excessive as of late. When
this happened in the past, it was a sure sign that all the precious metals
would soon go higher. Especially as large holders (think China) who buy in
the money options and then demand delivery instead of just cashing in their
profits.
To think that the government intervenes in the precious metals markets should
come as no surprise as they lie and manipulate on just about every piece of
economic and financial data they report. To really understand the specifics
on how this is done, you should follow John Williams at his
www.shadowstatistics.com. I don’t talk much about government rigging of
markets because in the end anyone who tries to manage a market always loses,
but it is important to understand this is part of the process of being an
investor in an asset that is despised by the government.
When you are running a fraudulent fiat currency scam, a rising gold price
exposes the fraud and signals investors and citizens to protect themselves
from government devaluation by owning the metal itself. Politicians typically
hate gold or the thought of backing a currency with gold because it keeps
them accountable to the people. Ah, what a concept, keeping these thieves
accountable to us and not their puppeteers!
John Williams is one person who I trust completely in his analysis of the
precious metals markets and governmental statistical reporting. His
newsletter ShadowStats.com is worth every penny in bringing to light
government fraud on many levels. Once you read his newsletter, you begin to
understand you can’t trust anything that comes out about government
statistics in the mainstream media. It’s all just a pile of lies and grand
deceptions to keep the people in the dark.
Matt Taibbi, the reporter from Rolling Stone
magazine said the following:
“The public has been lied to so shamelessly and so often in the course of
the past four years that the failure to tell the truth to the general
populace has become a kind of baked-in, official feature of the financial
rescue. Money wasn't the only thing the government gave Wall Street – it also
conferred the right to hide the truth from the rest of us. And it was all
done in the name of helping regular little people and creating jobs. "It
is," says former bailout Inspector General Neil Barofsky,
"the ultimate bait-and-switch."
The bailout deceptions came early, late and often. There were lies at the
very outset, and others still being told four years later. The lies, in fact,
were the most important mechanisms of the bailout. The only reason investors
haven't run screaming from an obviously corrupt financial marketplace is
because the government has gone to such extraordinary lengths to sell the
narrative that the problems of 2008 were all president’s Bush’s fault and
have now been fixed. Investors may not actually believe the lie at first, but
they been overwhelmed by how totally committed the government, Wall St. and
the Media have been, to selling it” Besides where else can the little people
go?
Another item in the news is a series of statements that came from Boston University
Economics Professor Laurence Kotlikoff. He is
worried about America’s dire financial situation. “The situation is
getting worse and worse and worse. We are running a massive six decade
Ponzi scheme, and it’s fast coming to a real breaking point.”
Dr.Kotlikoff calculates that the real
government deficit is enormous and growing exponentially. “It’s $222
trillion. Last year it was $211 trillion. We grew the deficit by
$11 trillion in one year,” He also says, “We are actually in worse shape than
any other developed country. “Ben Bernanke is playing with fire here because
we could easily have a tripling of the INFLATION level.”
Independent economist John Maudlin recently said it this way “the newest
changes to the tax codes are full of pork barrel spending:“These giveaways of taxpayer
money make my blood boil. We're not yet at the endgame of the government's
wasteful spending, as they have yet to even address the problem “Washington's
debts are going to explode and crush us; they're also going to distort the
free markets for years to come.”
Overall, we have to consider the fact that government and their central banks
are very adept and convincing us that their way is the only way: But the fact
remains, THAT IT WILL AT SOME POINT BECOME NO LONGER TENABLE–
In my mind, the long term reasons why precious metals will go much higher
continue to grow on a daily basis. The idea that governments and their
central banks will reign in their wanton ways and actually balance a budget
or tell the truth is beyond believable at this point. We know what they will
do at each and every financial hurdle they face, which is to lie, cheat, and
steal and blame everyone else but themselves, while creating more and more
Fiat money and deny any negative effects of their own behavior.
Historically this has been done by many different groups of politicians and banksters throughout the world, always with the same sad
results. I know that in investing, timing and patience is everything, but
trying to pinpoint the exact timing of this disastrous conclusion to this
ongoing financial calamity and debacle is not necessary, as long as you take
possession of your precious metals and keep them out of the grasp of the
Banks.
You should notice that although I have been calling for a rally to new all time highs for the last several months, I recommended
building up you cash and buying gold into2 or 3 day 100$ Selloffs. I also
only recommended a very few special buys such as DDD at 40 now at 70. Once
the PM’S are safely in your possession, just sit back and enjoy the ride as
much as you can while the circus show of smoke and mirrors continues. In the
end, you’ll be very right and a lot richer than you are today. Plus you will
have built up your cash to take advantage of the coming crash when the timing
is right.
HOW NOW DOW?
The uncertainty around the Fiscal Cliff continues to frustrate markets,
keeping moves mild with a lot of back and forth daily moves but with steady
progress to our anticipated new all time highs.
Stocks should see vertical trends that are significant. I am still expecting
the Jaws of Death pattern to be completed sometime during the first half of
2013. My best estimate at this time would by the middle to late March 2013 -
we should see that final top maybe as high as 15,000. Volatility should then
rise dramatically and a long stair step decline should begin the multi-decade
BEAR MARKET.
GOLD & SILVER
Rush to Safety: Americans buy half a billion
dollars of gold and silver in January. There are no fundamental drivers for
the almost daily and intraday back and forth wild swings, except for the
market manipulation by the Bullion Banks, which they cannot seem to maintain.
The Bank of Korea increased gold reserves 20% last month to diversify
investments, boosting holdings for the fourth time since June 2011 and
underscoring increased demand by central banks. “Gold is a physical, safe
asset,” the Bank of Korea said in the statement. The precious metal “is a way
of diversification, which helps reduce investment risk in terms of our
foreign-exchange reserves management.”
Russian Finance Minister Anton Siluanov speaking to
reporters said that gold is seen by Russia’s central bank as a “rather
stable” asset amid global monetary easing. The world’s biggest energy
exporter saw gold and foreign exchange reserves rise to $524.3 billion in the
week to Nov. 23. Central banks in South Korea, China and Russia realize that
gold bullion is a safe haven asset, one that the western world does not yet
seem to appreciate.
The HUI's Weekly Full Stochastic is now at oversold levels, which has
happened only 6 previous times in the past 5 years. In each instance, the HUI
rose at least 100 points. Once we get a new upside breakout in the HUI the
next strong rally should also begin for Gold. There is also a strong
possibility that Gold has bottomed. If it has not, the next strong support
level would be around 1,640ish.
DO YOU HAVE THE COURAGE OF YOUR
CONVICTIONS?
GOOD
LUCK AND GOD BLESS
We are into the most trying times in our nation's history. We can
either succumb to our Government’s folly and go down with the ship or
personally prosper. As always, the choice is yours.
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Aubie Baltin CFA, CTA,
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Please Note: This article is for education purposes only and is designed to help
you make up your own mind, not for me to make it up for you. Only you know
your own personal circumstances so only you can decide the best places to
invest your money and the degree of risk that you are prepared to take. The
Information and data included here has been gleaned from sources deemed to be
reliable, but is not guaranteed by me. Nothing stated in here should be taken
as a recommendation for you to buy or sell securities.
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