That governments will want – and will NEED - much, much higher gold and silver prices in the future is counter intuitive, given that they have done everything within their power to throttle back and to keep a lid on bullion prices. Let me explain why. Words: 1300

So says Arnold Bock in an article written for  www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!). Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Bock goes on to say:

Although we have seen eleven consecutive years of gold bullion price rises, such increases have been incremental, measured and at levels which make the remainder of the commodities and equities markets look volatile – and anemic.  Governments have used their preferred bullion banks as agents in the paper futures markets and their central banks, in conjunction with their respective Treasury bureaucracies, to limit the inexorable rise in precious metals prices as much as possible to keep gold – the only ‘real money’ – from drawing unfavorable attention to their own failing fiat currencies and uncontrolled sovereign debt.

Recently central banks have become net purchasers of gold bullion after many years being net sellers.  In 2011 central banks purchased 430 tonnes of gold, five times more than in 2010 and the highest since 1964. Much of this new demand has come from ‘emerging markets’ central banks like Mexico, Russia, Turkey, South Korea and of course China and India.

This makes one speculate as to why governments would suddenly, however quietly, turn into buyers rather sellers of gold.

• Could it be that gold is the only ‘real money’ in a world comprised of paper money backed up only by faith and confidence, or lack thereof? 
• Are ‘paper money bugs’ losing their confidence and swagger? 
• Are governments positioning themselves for a period when paper money loses its value faster than they can create additional digital versions of it?

 COUNTRIES WANT TO CHEAPEN THEIR CURRENCIES

The owners of the globe’s respective currencies, especially the important and freely traded currencies, are constantly, deliberately and competitively devaluing their currencies against those of other nations.  They don’t admit that is what they want and are doing, which is to make their goods and services more competitive in international markets, because voter reaction would be too politically unpalatable, yet they must exploit every opportunity. 

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Even more important, now and in the future, will be the need for governments to be able to meet the promises made to their own citizens for pensions and health care as well as payments for past debt to bond holders.  What better way than to pay debts than with nominal devalued dollars, euros, yen and pounds?

Financial repression (see my article entitled “Financial Repression” May Become Our Worst Nightmare! Here’s Why) is a tried and true public policy mechanism designed to take care of the massive debt following WWII.  It works its magic simply by keeping prevailing interest rates lower than the real rate of inflation.  Well managed, it allows for the imperceptible and inexorable devaluation of the currency.  Implemented with precision and stealth by governments and their central banks, it works magically over a relatively short period. It allows governments to pay for their promises and obligations with constantly devaluing money…almost unnoticed.

Given the role of price inflation in the process, citizens may even think they are getting wealthy as the nominal value of their investment assets increase.  Instead, it is form of taxation and confiscation invisible to the average person.  Government statistics using arcane methodologies such as seasonal adjustments, ‘headline’ and ‘core’ inflation numbers, hedonic adjustments and substitution are all facilitators of this deception.

A NEW GLOBAL RESERVE CURRENCY IS COMING

The US dollar is in the process of losing its special status as the means of pricing and paying for the goods and services traded internationally.  This is happening daily with special bilateral arrangements between trading partners which use something other than the US dollar for political and financial reasons.  Before long:

• the US dollar will be replaced by a basket of currencies, appropriately trade weighted, including International Monetary Fund SDR’s (Special Drawing Rights).
• gold will also be a featured element of this new multipronged global reserve currency.  Given that gold remains the only real money in a world of the crumbling paper variety, a thick veneer of gold is essential.  Member nations of this new global reserve currency, of course, will not want the constraints or discipline of a full-blown gold standard, only its appearance for reasons of credibility.
• the new global reserve currency will no longer be American which will be a big win for the internationalists and globalists who value multinational alliances and who will no longer have to defer to one dominant nation, namely America.
• better yet, any institution comprised of several members will make it extremely difficult to assign blame, which in academic language means responsibility and accountability.  Clearly a global currency used in foreign trade, operated by a committee of nations, will be perfect for dispersing blame.
• all nations will continue with their own faltering currencies for all internal pricing and transactions.  National fiscal and monetary policy will remain with individual nations thereby avoiding untenable constraints currently faced by countries such as Greece and Portugal in the Euro zone.
• interest rates will invariably rise from their current arbitrary, market manipulated and unprecedented low levels in response to the growing concerns of bond holders about risk.
• individual nations will point their fingers accusingly at other nations and especially at the global committee of nations responsible for the new reserve currency. 
• political scapegoating will become national pastimes designed to justify high taxes, lower currency values, price inflation and low economic growth all resulting in much lower living standards of the citizens.  Confused citizens will be inundated with multiple reasons for their deteriorating circumstances.

HIGH GOLD PRICES WILL DEVALUE NATIONAL CURRENCIES SIGNIFICANTLY

National governments almost universally want their currencies to devalue versus those of other nations primarily to protect their competiveness in international markets.  They also want cheap currencies to make good on their obligations to their own citizens for pension and health care promises too.  Cheapening currencies make paying off bond debts easier since the currency today is worth less than when the debt was originally incurred.

Ever higher gold prices, the only real money, have the effect of devaluing national paper currencies in relative terms.  This again is custom made for politicians and governments to point their fingers in blame, rather than assuming responsibility and accountability for their own profligate financial behavior and decisions. (Read a previous article of mine entitled America’s Political Process Guarantees Another Financial Crisis!)

HIGH GOLD PRICES WILL BECOME THE PREFERRED PUBLIC POLICY

Nations which have stocked up on gold will occupy the catbird seat.  Their large foreign exchange holdings comprised of gold place them in a particularly advantageous position.  Is it any wonder that nations such as China, India and Russia, as well as many other emerging nations, are feverishly working to acquire as much gold as they can afford while it is still available and cheap?

A WINDFALL PROFITS TAX WILL LIKELY BE IMPOSED ON GOLD

Private investors, institutional and individual, will become wealthy simply by being invested in gold in this environment.  Stupendous capital gains with gold priced at USD $5,000, $10,000 or $15,000 or more per troy ounce should be expected – but should we assume that hugely indebted governments, whose citizens are struggling with ever lower living standards, will stand idly by while investors reap what will be characterized as unwarranted and unearned capital gains?  Not very likely! I can already hear populist calls for a Windfall Profits Tax to confiscate these unwarranted gains in the name of fairness and equity. Owners of gold, therefore, might be wise to take appropriate evasive action which anticipates this eventuality.

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This analyst sees the perfect storm of converging criteria almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction. 2012 is shaping up to be the blockbuster main event of the ongoing financial crisis. Massive amounts of new debt, vast quantities of additional digital dollars and the spark of higher interest rates will set off version 2.0 of the credit-driven financial implosion. Let me explain. Words: 1443

2. “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why

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3. America’s Political Process Guarantees Another Financial Crisis!

A perfect storm of converging criteria is almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction. Let me explain. Words: 2055

As economic and political matters become more desperate in the U.S., so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation as the Fed’s current money-printing is attempting to do, it will occur via a direct repudiation of obligations or a quasi-surreptitious one such the hypothetical one I present in this article. Here is… a look (not a prediction) at a series of not improbable events that could develop [and which] would change our economic world overnight [ - and your financial well-being too]. Words: 1365

So said Monty Pelerin (pseudonym) (www.EconomicNoise.com) in edited excerpts from an earlier article* which became the most highly read article to appear on www.munKNEE.com in 2011.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) edited the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Pelerin goes on to say, in part:

If just some of the following situations occur in 2012:

1. Official unemployment numbers approach 14% with unofficial estimates of unemployment ranging from 30 -35% – with no signs of a turnaround in employment.

2. The Dow-Jones average hovers around 4,500.

3. Official GDP declines for four consecutive quarters. Independent analysts estimate the true numbers have been declining for two years.

4. Tax collections continue to drop while Federal spending accelerates. The deficit is expected to exceed $3 Trillion. Federal debt exceeds $16 Trillion.

5. The rate of foreclosures double from the previous high…

6. Personal and corporate bankruptcies reach levels thought impossible.

7. Major companies leave or announce intentions of leaving the U.S. [in record numbers] to avoid confiscatory taxes and regulations.

8. College students, unable to find jobs, emigrate to more favorable economies.

9. California, Illinois and several other states plus thousand of municipalities are in bankruptcy court with many states and municipalities using IOUs for payments.

10. Welfare and unemployment checks are two months behind on average.

11. Social Security checks and Medicare reimbursements are delayed.

12. Some private pension funds reduce their payments by 10 – 25%.

13. Hospitals and doctors refuse to see Medicare patients until Federal reimbursements, already eight months behind schedule, are paid.

14. Public unions across the country are on strike. Large areas are without teachers, police, firemen or hospital staff.

15. Food stamps are rejected at grocery stores because of slow reimbursement and government default risk.

16. Martial law has been imposed in several cities to counter rioting and looting.

17. Isolated runs on banks have occurred.  Many withdraw funds from the banking system in fear of its collapse with mattress-stuffing considered less risky than zero interest returns from banks.

18. The dollar is being rejected by local merchants around the world.

19. The price of oil is priced in a weighted basket of currencies of which only 20% represents dollars.

20. Foreign disinvestment in Treasuries has been accelerating as a result of trade wars, concerns of default and the desperate need for funding at home.

21. Gold is selling at $2,800 per ounce.

22. The economy continues to deteriorate despite QE on a scale not even Paul Krugman would have recommended.

23. Treasury and toxic asset purchases have swelled the Fed’s balance sheet from $800 billion in 2008 to $6 Trillion.

24. The deflationary spiral continues despite incredible money-creation.

25. Banks continue to add more excess reserves.

26. Creditworthy borrowers refuse to borrow.

[Bottom line:] People and businesses everywhere have hunkered down, waiting for the next shoe to drop.

… then I can just imagine what might hypothetically unfold politically and what possible (likely?) emergency measures might be imposed to remedy the situation, as follows:

The President of the United States Joe Biden (in office for six months after former President Obama resigned “to spend more time with his family”) appears, along with Treasury Secretary Chris Dodd and Fed Chairman Barney Frank, and issues the following short, terse message:

“The Federal Government, as a result of our national economic emergency, has passed new legislation which will:

• recall all U.S. dollars effective immediately
• replace U.S. dollars with new currency known as the JohnLawDollar
• exchange each old dollar for three JohnLawDollars i. e. 1 for 3
• automatically convert all amounts in checking accounts and savings accounts by 10AM tomorow
• require all currency in circulation domestically be taken to a bank and converted at the new exchange rate into the new JohnLawDollar within the next 48 hours. Dollars in foreign countries will have 72 hours to convert
• All old dollars will be unredeemable and no longer legal tender after the deadlines
• All future contractual obligations will be honored in JohnLawDollars.

This action is necessary in order to revive our economy from a downturn nearly as severe as the Great Depression.

Your new dollars are triple what your old dollars were. With your larger amount of money, we encourage you to go out and buy stuff, lots of it. Your cooperation will revive the economy.”

The Intented Solution – and Reality – of Such an Emergency Measure

[Such an] announcement [would] represent a (undeclared) U.S. default on 67% of its contractual obligations – including Treasuries, Social Security, Medicare and welfare payments [effectively reducing] all debt…by 2/3rds. The debt problem (public and private) is what is killing the economy [and] with one short proclamation [as put forth above,] the debt problem [would be] reduced dramatically.

Tripling the money supply would eventually triple prices and wages. Home prices would soar while mortgage obligations would remain fixed and payable out of incomes that would be three times what they are now. The government would have cut its obligations dramatically and be able to pay its bills.

The government’s gain would come at the expense of Social Security, Medicare and welfare recipients. Borrowers would gain only what lenders lose…There would be no net value added. Every gain would be someone else’s loss. Only the amounts “stolen” from foreign investors might be claimed to help the U.S. The rest would be nothing more than a redistribution of wealth.

The Likelihood of Such An Emergency Measure

Many believe that the government would never do such a thing. The reality is that this has been their proposed solution for the past couple of years. It is exactly the policy they have tried to implement. There are only two differences between the current policy and the hypothetical one – effectiveness and timing.

Fed Chair Ben Bernanke has clearly been trying to inflate the economy. He and other supposed experts regard inflation as the way out. It is only Mr. Bernanke’s ineffectiveness as to why we don’t have inflation. The hypothetical measure [outlined above] is nothing more than the preferred strategy compressed in time. The effects, other than timing, would be identical. Lew Rockwell’s thief analogy is appropriate. What is the difference between a thief that breaks into your house every night and steals a little versus the one who backs up a moving truck and takes everything? Eventually you end up with an empty house. Only the timing differs.

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As economic and political matters become more desperate, so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation, it will occur via a direct repudiation of obligations or a quasi-surreptitious one like the hypothetical one presented. Viewed from this perspective, I don’t think such a move or something approximating it is out of the question.

The political class’ survival is at stake. Eventually anything that extends their rule will be tried. It is not concern for you or the economy that is driving policy, but the preservation of power of an increasingly wounded power elite. Their survival is now driving policy. Unfortunately what benefits them is generally harmful for the economy.

It is improbable that Bernanke’s strategy will gain enough traction, i.e., inflation fast enough…[and, as such,] a home-run somewhat like the one discussed becomes more likely. It will be a surprise when it comes.

Conclusion

Nothing discussed here or tried by the Administration will solve the economic problems of the country. What I have suggested is what I think could happen. It is not to be confused with good economic policy. Both the hypothetical measure and the more conventional inflationary strategy will lead to hyperinflation…

Protect yourself, your family and your wealth in that order. Do not expect any help from Washington. The political class is not your friend, especially when their survival is at stake.

*http://www.economicnoise.com/2010/08/10/desperate-economic-action-ahead/

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Since the fundamentals still point to gold’s long-term viability… why [are] investors responding by selling gold…? I was always told not to look a gift horse in the mouth… [so] take advantage of the dip. Words: 962

So says Peter Schiff (www.europac.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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Schiff goes on to say:

Unchanging Fundamentals

It’s important to understand the fundamental reasons for owning gold, and those reasons have not changed. The U.S. government embarked on a decades-long spending spree of historic proportions. To finance the resulting debt, the Federal Reserve is printing money furiously. Because most every central bank governor appears indoctrinated in the Keynesian economic philosophy, foreign central banks are simultaneously printing euros, yen, francs, yuan, and pounds to “keep up.” Of course, this competitive devaluation actually represents countries shooting themselves in the foot.

Don’t expect any abrupt changes [in the abovementioned approach], either. The Fed’s philosophy – a resolute faith in central planning and debasement – has been unchanged since Paul Volcker stepped down as Chairman in 1987. Rather than considering any change of direction, the Federal Reserve Board is likely asking itself: “Should we print $50 billion or $500 billion in our next round of stimulus?Can the ECB bailout Greece now or do we first need to bail out the ECB? Should we call our money-printing ‘liquidity assistance’ or ‘quantitative easing’?” Or perhaps, “Do we have enough ink refills for all those printing presses?” You may think I’m joking, but this is quite serious. While monetary policy was bad under Greenspan, Ben Bernanke has literally instituted a revolutionary devaluation program for the dollar – and gold is the only way to avoid his guillotine.

True-value vs. Spot Price

Let’s remember that it is the fundamental value of an asset which dictates its long-term market price. Yet for some reason, many see this relationship backwards – they use the short-term market price to extrapolate the fundamental value. Consider a car on the dealer’s lot: if the price of the car falls tomorrow, it becomes a better deal. If the price rises tomorrow, the car has becomes less attractive. This principle is equally true in long-term investments. I believe that gold’s fundamental value is far higher than $1,600, and far higher than $2,000. So, while it may be unsettling for some of those who own gold to see steep short-term price declines, remember to focus on the fundamental value of the asset, not the spot price on the market today. Has the fundamental value of gold fallen in these past two weeks? Quite the opposite.

A Debt-laden House of Cards

The Fed is still trying to find ways to manipulate the bond market with…[its]  “Operation Twist.” This is yet another plan to suppress yields, encourage spending (as if too little spending was America’s problem), and paper-over the untenable interest payments hanging over Washington. The manipulated US bond market is perhaps the greatest bubble in existence. Further manipulation only makes it more unstable in the long-term, and when that bubble bursts, gold should skyrocket.

 Meanwhile, the European debt crisis…[has] spread to Italy…The ECB may be able to keep Greece afloat, but Italy is the eurozone’s third largest member. That’s a load too heavy for the ECB to bear. This is especially true in the wake of Moody’s downgrade of two of the largest French banks – Societe Generale and Credit Agricole. As reported in the Wall Street Journal, “[Moody's] said its decision to downgrade the banks included the assumption of debt restructuring that would cost investors up to 60% on Greek sovereign debt, 50% on Portuguese and Irish debts, 10% on Spanish debt and 7% on Italy’s debt.”

In other words, the Western financial system is a debt-laden house of cards. This is the root of the current market panic… What’s harder to explain, [however,] is why investors are responding by selling gold and buying dollars and euros. Then again, I was always told not to look a gift horse in the mouth.

Keep Calm and Carry On

Do not get caught in the exuberance or pessimism of short-term movements, even if they’re sharp. Observe the fundamentals:

• the events in Europe,
• the looming budget calamity in the U.S.,
• central bankers’ steadfast strategy of debasement, and
• emerging markets’ continued diversification into precious metals.

These are the main drivers for gold’s long-term appreciation.

To my readers who may have purchased metals just before this pullback, your concern is understandable but I believe this bull market has a long way to run, and the rise up ahead looks even steeper from these levels.

*http://www.thedailybell.com/3016/Peter-Schiff-On-the-Recent-Gold-Pullback

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Sooner or later I think everyone will have an epiphany about money that pushes them to buy gold - even if it’s at levels that would seem expensive today. When that time comes, we won’t be focused on the price of gold but on the absolute need to acquire a more lasting asset. If I’m right, the plus $1,700/ozt. price today is not too high a price to pay. [Let me explain further.] Words: 874

So says Jeff Clark (www.caseyresearch.com)  in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Clark goes on to say:

Imagine the condition of our world if gold reached $5,000 a troy ounce – and kept soaring. We would likely be in a mania if that happened – but what kind of mania would it be? There would be some greed, to be sure, but I think…a deeper reason would be at play and it’s the same reason that will drive you to keep buying gold [even] at $2,000 an ounce: you’ll have to.

There are 101 reasons to own gold right now. You might buy because of the debt turmoil you see around the globe. You may think it wise, like the Chinese and others, to keep some of your savings in gold. Negative real interest rates may draw you to gold. You might buy because of the mere fact that demand is overwhelming supply or that you fear inflation or deflation, but most of these factors are missing one critical element: They are not yet personal.

Most reading this have not had to flee their country, been the victim of hyperinflation, or watched helplessly as their currency went poof! Longtime investors have made money on their gold investments, to be sure, but most of us bought the yellow metal as an investment and not because of a do-or-die situation.

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It’s doom and gloom to say this, but I think it’s possible and perhaps even probable that at some point we’ll all feel forced to buy gold, almost irrespective of price, due to a sudden and rapid depreciation of the U.S. dollar.

How do we get to that point? Simple: You go to buy something and realize you’ve just been priced out of the market, not because the item is too expensive, but because you suddenly realize the money in your hand no longer has purchasing power. Your reaction to that event is predictable: you feel cornered, maybe even scared, and the urgency to seek an alternative takes over.

This is obviously an inflation scenario, but it’s not exactly a stretch to get there from where we are today. Here’s why.

(Click to enlarge)

The above chart tracks the dollar and gold adjusted by the CPI from 2000 to present. It catches many people off guard, once they realize its implications. Look what’s happened to the greenback in the past 11+ years:

Since the Y2K scare, the U.S. dollar has lost an incredible 25% of its purchasing power. Even adding the measly interest one would earn in a traditional savings account doesn’t make up for this loss. This isn’t a picture of the dollar since the creation of the Fed or since Nixon took us off the gold standard. This is what’s happening right now – a gross devaluation of your dollar-based savings. Gold, on the other hand, has not only preserved but increased our purchasing power.

Now, imagine this scenario on fast forward. Instead of a 25% loss in 11 years, what if it occurs in, say, two years? That’s what can happen in a highly inflationary environment. At some point, given the baked-in consequences for our currency and the unwillingness of politicians to effectively deal with the problem, you one day instinctively realize, as you hand money to a cashier to buy milk and she asks for more, that it is a depreciating asset and no longer a stable form of exchange.

In other words, you won’t buy gold at $2,000 a troy ounce because you think it’s going to $6,000; you’ll buy gold because you fear the dollar will continue losing its ability to meet basic monetary requirements and you’ll need a substitute, something that will retain its value.

Regardless of whether the downward trend with the dollar continues at the same pace or speeds up, one thing is clear: it will continue. You must portion some of your savings in gold.

*http://www.caseyresearch.com/articles/when-buying-gold-becomes-life-or-death-question

Related Articles:

1. Update: These 90 Analysts Believe Gold Will Go to $5,000/ozt. – or More!  http://www.munknee.com/2011/06/update-these-90-analysts-believe-gold-will-go-to-5000ozt-or-more/ 
2. Gold Will Drop to $1390 By Year-end and $1000 by 2013! Here’s Why  http://www.munknee.com/2011/07/gold-will-drop-to-1390-by-year-end-and-1000-by-2013-heres-why/
3. The Future Price of Gold and the 2% Factor  http://www.munknee.com/2011/06/the-future-price-of-gold-and-the-2-factor/
4. Richard Russell: Get Prepared – A Gold Tsunami is Coming  http://www.munknee.com/2011/05/richard-russell-get-prepared-a-gold-tsunami-is-coming/
5. Gold to Repeat?  http://www.munknee.com/2011/07/gold-to-repeat/

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

4 Ways U.S. Might Reduce Current/Future Liabilities

Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet “A” for budgetary “Abuse,” that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. [That being said, what options does the U.S. government have to reduce/eliminate its current $10 trillion of outstanding Treasury debt and an unfathomable $66 trillion of future liabilities? I have identified 4 likely courses of action all of which will lower the standard of living of every American.] Words: 1374

So says William H. Gross (www.pimco.com)  in edited excerpts from his original article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Gross goes on to say:

Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit…The Office of Management and Budget (OMB) estimates that future deficits will be reduced, at most, by .5%… but that .5% comes with no new taxes and a continuation of the belief that we don’t have to pay for our trespasses. Like many a Banana Republic, we may one day be invoking the Lord’s Prayer, pleading – “Forgive us our debts, as we forgive our debtors,” yet at the same time looking towards the heavens á la Saint Augustine with a fervent “let me be chaste, but let it be tomorrow.”

Treasury Secretary Tim Geithner noted last week that it would be unthinkable that the U.S. would not meet its obligations on time. Now that the timeliness [issue] has temporarily been put aside, an investor must logically ask how we will meet our obligations, and how much they really are…

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As shown in the following table from a Mary Meeker “USA Inc.” study, and validated by the Department of Treasury and Congressional Budget Office (CBO) calculations, the combined present cost “payment due” from Medicaid, Medicare and Social Security is over six times our current obligations of Treasury debt…

1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates

Let me address each of them in brief:

1. Spending Cuts, Tax Hikes, GDP Growth – The current Congressional compromise is but one small step for fiscal solvency. There is no giant leap for mankind anywhere on the horizon. Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our “official” debt/GDP ratio of 90% or so. One important detail to keep in mind: projected deficits in 2012 and 2013 of 7-8% of GDP rely on OMB growth estimates of 3%+ in the next few years. Recent trends give pause to these estimates as does PIMCO’s New Normal, which believes 2% not 3% is closer to reality. If so, deficits move right back up to near-double-digit percentages of GDP. Likewise, should interest rates ever rise from current 2% average levels, a 100 basis point increase raises the deficit by 1% and erases any hoped for gains. Sisyphus would be familiar with this seemingly unsolvable dilemma. [This article (1) addresses the liklihood of higher taxes.]
2. “Unexpected” inflation – While markets are global these days, figures sometimes lie and policymakers often figure. Focusing investors’ attention on statistics emphasizing “core” or “chain-linked” methodologies can entice investors to stay home, or in the case of foreign nations, to “invest American.” Central bankers, not just in the U.S., but the U.K., have long been arguing for a reversion of headline 3% CPI numbers to the 2% or lower “core” standard expectation. “Patience,” they argue, but “prudence” might be the better watchword. If so, then the expected “unexpected” inflation would mimic the old Roman custom of coin shaving or its substitution with base metals instead of silver or gold. Inflation is the result no matter how you coin it, which puts more money in government coffers to pay their bills and less money in your pocket to pay yours. [Future inflation is hardly "unexpected as these articles here (2) and here (3) attest.]
3. Currency depreciation – High deficits, both fiscal and trade, combined with low interest rates for extended periods of time produce declining currency valuations against more prosperous, and more policy conservative competitor nations. Few Americans are aware that the dollar’s recent 12-month depreciation of over 15% is an explicit tax on their standard of living. Uncle Sam, the government overseer, benefits enormously: one rather clever way for the U.S. to pay its bills to foreign creditors is to pay them in depreciated dollars. The Chinese and other offshore holders wind up getting not only .05% interest on their Treasury Bills, but 12 months later – voila! – their Bills are worth only 85 cents on the dollar in global purchasing power. The Chinese should be reading Shakespeare, not Confucius – especially the second half of “neither a borrower nor a lender be,” when it comes to U.S. dollars. [See here (4) for an excellent article on just what the government has planned for you in the years ahead.]
4. Financial Repression via low/negative real interest rates – I have commented on this Carmen Reinhart, commonsensical technique in prior Outlooks. If the Treasury is borrowing money from you or PIMCO at .05% for the next six months and CPI inflation is averaging 3%, then lenders/savers are being shortchanged beyond even rather egregious historical examples. The burden of “sixteen tons” of debt á la Tennessee Ernie Ford is considerably reduced at 5 basis points of annual interest. “Loading” coal or debt in this case at near 0% yields doesn’t make the borrower another day older, nor deeper in debt. Actually it’s a shot of Botox for the borrower, but a shot of lead for the lender. Duck! [See here (5) for an excellent article on just how future "financial repression" will adversely affect your standard of living.] 

By using these four life rafts available to U.S. and other AAA sovereign borrowers, one can almost imagine a half century from now, that they remain solvent – although chastened perhaps with a lower credit rating.

How Best to Preserve Your Purchasing Power

Based on historical example at Moody’s and Standard & Poors, it just might take 50 years for them to downgrade U.S. credit, but be that as it may, you and PIMCO as savers and savings intermediaries can take precautionary or even retaliatory measures to preserve purchasing power [by doing the following:]

• Favor countries with cleaner “dirty shirts” and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind.
• Shade equity and fixed income investments away from dollar based indexes towards those of developing nations with stronger growth prospects.
• Purchase commodity based real assets before reserve surplus nations do and, above all,
• Don’t be lulled to sleep by Congressional law makers that promise a change in Washington.

The last change I believed in was on Election Day 2008, and that turned out to be more fiction than reality…

1. Get Ready: More Taxes/Less Tax Breaks are Coming!  http://www.munknee.com/2011/07/get-ready-more-taxesless-tax-breaks-are-coming/
2. These Indicators Say Inflation to Go to 4% Soon – and 6% by 2014  http://www.munknee.com/2011/06/these-indicators-say-inflation-to-go-to-4-soon-and-6-by-2014/
3. Understanding Inflation: It’s Here – and It’s Going to Get Worse, Much Worse!  http://www.munknee.com/2011/03/understanding-inflation-its-here-and-its-going-to-get-worse-much-worse/
4. “The Great Dollar Devaluation Disaster” is Only Just Beginning – and the Intended Victim is YOU!http://www.munknee.com/2011/01/the-great-dollar-devaluation-disaster-is-only-just-beginning-and-you-are-the-intended-victim/
5. “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why  http://www.munknee.com/2011/06/%e2%80%9cfinancial-repression%e2%80%9d-may-soon-become-our-worst-nightmare-heres-why/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

You think the problems are bad now? You wait until we don’t have any more credit. You wait until the currency is collapsing. You wait until interest rates are going through the roof and inflation is going through the roof. It’s not going to be a pretty picture. There will be social unrest. [See below for the link to the interview.] Words: 477

So says Jim Rogers in an interview* with Lucy Kafanov (Russia Today) about the pending US debt ceiling issue and what all this really means for the future of the U.S. economy and for the average American in general. The following transcribed excerpts** of some of the interview by www.TheDailyBell.com have been  further edited ([  ]), abridged (…) and reformatted by Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Kafanov asks Rogers, “When you say that even if we do reach this [debt ceiling] deal everthing [will] look good for a little while but [that] six months to a year [from now] it [will] get worse, what do you mean when you say it gets worse? I mean it’s easy to talk about these abstract terms but if you look at the facts, 14.1 million Americans unemployed, over half of all American families living from paycheck to paycheck, more than 44 million on food stamps. What is it going to look like for those of us who can’t afford to move to Singapore [where you live]?”

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Rogers replies, “We are all going to continue to get deeper and deeper into debt. … The overall situation is getting more and more serious. America is now the largest debtor nation in the history of the world. This cannot go on forever. …

You think the problems are bad now? You wait until we don’t have any more credit. You wait until the currency is collapsing. You wait until interest rates are going through the roof and inflation is going through the roof. It’s not going to be a pretty picture. There will be social unrest. It’s going to be a mess [so] the sooner we deal with it the better.”

* An actual video of the interview can be seen here

**http://www.thedailybell.com/2738/Jim-Rogers-Americas-the-Largest-Debtor-Nation-in-the-History-of-the-World-and-Its-Just-Getting-Worse

Related Articles:

1. Financial Life in America is Dire! Where’s the Moral Outrage?  http://www.munknee.com/2011/07/wheres-the-moral-outrage-regarding-financial-situation-in-america/
2. America: The 42nd Most Unequal Country in the World!  http://www.munknee.com/2011/03/america-the-42nd-most-unequal-country-in-the-world/
3. Are America’s Wealthy Unpatriotic?  http://www.munknee.com/2011/03/in-this-time-of-economic-crisis-are-americas-wealthy-unpatriotic/
4. “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why  http://www.munknee.com/2011/06/%e2%80%9cfinancial-repression%e2%80%9d-may-soon-become-our-worst-nightmare-heres-why/
5. Get Ready: Economic Hell is Coming!  http://www.munknee.com/2011/06/get-ready-economic-hell-is-coming/
6. Americans Are Hurting And It’s Going To Get Worse – Here’s Why  http://www.munknee.com/2011/02/americans-are-hurting-and-its-going-to-get-worse-much-worse-heres-why/
7. Sovereign Debt Defaults = Social Unrest + Much Higher Gold and Silver Prices  http://www.munknee.com/2010/11/sovereign-debt-defaults-social-unrest-much-higher-gold-and-silver-prices/

Editor’s Note:

1. The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
2. Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

The U.S. dollar is in a classic dead cat bounce as it appears to fight desperately to avoid dropping below the much watched ‘72′ level. We say fight, but the real situation is not a fight at all; it’s a managed decline by the United States to lower the value of its currency and ultimately inflate away the mountain of debt that it realizes is impossible to ever re-pay… [and that will be of major benefit to future gold and silver prices  and even more so to the stock of companies that mine the metals. Let me explain.] Words: 1100

So says Bob Kirtley (www.gold-prices.biz) in an article* which Lorimer Wilson, editor of www.munKNEE.com,  has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Kirtley goes on to say:

[Before we go any further with this article let's define exactly what a "dead cat bounce" actually is. According to Investopedia it is "a  temporary recovery from a prolonged decline or bear market, after which the market continues to fall."]  The difficulty in getting the value [of the U.S. dollar] down, [however,] is that just about all of the other major currencies are in the same race and are also hoping to inflate away their debts. The penetration of ‘72′ lies just ahead of us and once a meaningful break through has been achieved, then the fall will be calamitous to say the least, as those who are holding dollars will battle to get through the exit with great haste… [go to stockcharts.com and type in $USD for daily updates of the ongoing performance of the USD.] 

It is said that nothing goes down in a straight line and, as…[is the case] with the bounce by the USD, it is also capable of generating small rallies from time to time, which is quite normal…

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The main beneficiaries of weaker currencies are both gold and silver, both of which cannot be printed and therefore the supply is limited by the skills of the mining sector to find and mine these precious metals. Now, as a form of exposure to precious metals the mining sector offers the possibility of leverage to the underlying product.

[Below is a] look at…the HUI which consists of 14 major gold mining companies which mostly do not forward sell their product and, as such, offers exposure to metal prices. [Go to stockcharts .com and type in $HUI for daily updates to watch developments unfold.]

[You can] note [from the above chart] that stock prices have returned to take tea with the 200dma, a correction that we have seen many times before… The technical indicators are still oversold [but] they are on the turn, suggesting higher prices ahead. With gold [around] $1500 per ozt. [see here (1) for the significance of the term "ozt."] and silver at $35 per ozt., the quality miners are in clover, as evidenced by the results which are headlining with record production, record profits, etc. They are operating in the right sector at the right time and as [future] all time highs are made by both gold and silver we should see this index take off in spectacular fashion [Goldrunner could not agree more as these articles here (2), here (3) and here (4) illustrate.] Why it hasn’t done so already remains a bit of a puzzle, however, there are other distractions for the investment dollar such as the metal itself, the ETFs, futures trading and options trading – and so the tug of war continues.

One day a government with its head screwed on will turn their backs on the fiat currency system and convert to an asset backed currency whereby its paper is exchangeable for some sort of hard asset. It could be a mixture of gold, silver, oil, uranium, etc, the details are anyone’s guess. However, if the currency is big enough, the Chinese yuan for example, then the rush would be on for one and all, to trade in that currency. Implausible! Well cast your mind back to the start of the banking crisis, just when all the European banks were trying to hold the line, Ireland stepped up and guaranteed bank deposits. This action saw billions of Euros emigrate to Irish banks in a matter of hours, forcing the rest of the banks to also guarantee their deposits. A case of the tail wagging the dog and China is longer a small time player, it is getting bigger and stronger by the day and they are capable of going it alone. However, as they hold the thick end of three trillion dollars in their reserves, they will no doubt do everything they can to transfer out of dollars and into the hard assets before contemplating such a move.

Conclusion

For now…we will stick with gold, silver, a few quality producers and some well thought out options trades. We will try hard to avoid the blather and the white noise that accompanies every event regardless of its importance or magnitude.

The year will end with much higher gold and silver prices, so will the year after and the year after that [see here (5) for 128 other analysts who concur with this opinion of which 88 believe gold with achieve and/or exceed $5,000 per ozt. and see here (6) as to the affect such high prices for silver will potentially have on the future price of silver], so get into position and hold on tight [as] it will be a white knuckle ride.

RIP: USD.

Titles and Links to Articles Referenced Above:

1. What’s the Difference Between 1 Gold Karat, 1 Diamond Carat and 1 Troy Ounce? http://www.munknee.com/2011/03/whats-the-difference-between-1-gold-karat-1-diamond-carat-and-1-troy-ounce/
2. Your Gift For 2011: The HUI Is Going Up 70% In The Next 5 Months! http://www.munknee.com/2010/12/your-gift-for-2011-the-hui-is-going-up-70-in-the-next-5-months/
3. HUI Stocks About to Kick Up Their Heels! http://www.munknee.com/2010/12/hui-you-aint-seen-nothin-yet/
4. Goldrunner: Charts Say PM Stocks, Gold and Silver Are About To Rebound: http://www.munknee.com/2011/01/goldrunner-this-weeks-outlook-for-pm-stocks-gold-and-silver-and-beyond/
5. Take Note: These Analysts Believe Gold Will Go to $5,000 – or More! http://www.munknee.com/2011/04/take-note-these-analysts-believe-gold-will-go-to-5000-or-more/
6. Why Silver at $398.52 is a Realistic Parabolic Peak Price: http://www.munknee.com/2011/05/silver/

*http://seekingalpha.com/article/270289-classic-dead-cat-bounce-rip-u-s-dollar

Editor’s Note:

1. The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
2. Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
3. Sign up to receive every article posted via Twitter, Facebook, RSS Feed or our FREE Weekly Newsletter.

Gold

“Golden Parabola” Update

The Golden Parabola is continuing to follow the cycle of the 70’s Gold Bull as the U.S. Dollar is further devalued against Gold to balance the budget of the United States at this point in the “paper currency cycle” where Global Competitive Currency Devaluations rule. As discussed in a recent editorial this point in the cycle suggests that Gold will soon enter into a more aggressive higher rise in price to $1,860 – $1,920 per ozt. as it starts to project the higher Vth Wave characteristics of this new Golden Parabola.  [Let me explain.] Words: 1403

So says Goldrunner (www.goldrunnerfractalanalysis.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com,  has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Goldrunner goes on to say: 

Much of the debt that must be devalued by the U.S. government has not yet been moved to the balance sheet of the U.S. Government. As such, from a fundamental standpoint, we won’t know the true height that Gold will achieve until that has been accomplished although we can gauge the progress of today’s Gold Bull off of the 70’s Gold Bull to a large extent.

Price Inflation and the Price of Gold

We saw price inflation, in general, track Gold in the late 70’s, although much of the rise in general price inflation tends to lag the rise in the price of Gold because Gold’s rise is directly related to the rise in Dollar Inflation that eventually creates general price inflation.  General price inflation lags the rise in the price of Gold since it takes time for Dollar Inflation to work its way through the pricing environment of the various markets.  Thus, not only are Gold and Silver great hedges against price inflation, but owning Gold and Silver is a great way to pre-empt the ravages of price inflation that are headed our way over the coming years at this point in the paper currency cycle.

THE GOLD CHARTS

Chart #1 Suggests a Potential Price of $1860 for Gold into Mid-year

The first Gold Chart is one I created for the original Golden Parabola editorial that showed my expectations at the time for Gold to bottom at the 34 week EMA with a potential target for Gold into mid-year per the 1970’s Gold Bull up to around the $1860 level.  On the chart, below, I have now added a blue line off of the tops since the 2008 Deflation Scare low showing a potential for Gold into mid-year to around the $1860 price level, which appears to confirm the earlier chart.  The chart also shows that Gold has busted out to new historic highs with no horizontal resistance above and with no real angled resistance on the chart until much higher price levels are reached. 

Frankly, I expect the price of Gold to rise fairly rapidly up to the $1620 to $1640 area on the chart before going up to at least $1860 by mid-year.  The TA indicators which simply monitor the health of price movements are all a “go.”

Larger Image

Chart #2 Suggests Potential $1920+ Gold Into Mid-year

The second chart shows Gold rising up through the same angled dotted line that it rose through back in 2006 on its way to the upper black solid line of the channel top which will be around the $1920 level into mid-year.  This chart also includes a black dotted line above the channel line that mimics the extent that Gold overshot the channel on the down side into the Deflation Scare Bottom into late 2008.  Since the necessary Dollar Inflation to deal with the larger current level of debt is so much larger today versus the late 70’s, is it possible that Gold will overshoot the upper log channel on the upside to the extent it overshot the channel bottom on the downside?  If so, then a higher target for Gold might come into play.

 
Larger Image

Chart #3 Suggests Vth Wave For Gold Unfolding

The third Gold chart shows a distinct channel for each “Phase” or Elliott Wave rise in this current Golden Parabola.  We can see that Wave I was basically held in the smaller flat blue channel into late 2005.  After Gold broke out of that blue channel it moved into a higher sloped rise into the green channel that approximates Wave III in the current Golden Parabola.  We can see on the chart that Gold has now busted up through the top of the Green Channel firmly into the Red Channel which appears to approximate the higher sloped Wave V advance. 

Larger Image

I had suggested some weeks ago to the subscribers to my service (see here for details) that a rise above the black dotted line on this arithmetic chart might herald in a very sharp rise in price into mid-year, and that appears to be in motion.   We can see a similar bust out of the Wave I Channel into the Green Wave III Channel back in late 2005.  That move in late 2005, up and out of the Wave I blue channel, was basically “phase transition” into Wave III if you want to use that term.  Similarly, the current bust out of the Green Wave III Channel into the Red Wave V Channel appears to be the phase transition to Wave V in progress – a transition to a true higher priced slope of rise for the Golden Parabola. 

Chart #4 Suggests Gold Likely to Rise Into Armstrong’s June 13^th Turn Date

The final chart for Gold is “Fractal Gold Vs Armstrong’s Economic Confidence Model.”  I have placed a dotted red line to the right of the sold red vertical line in the coming period to denote the actual June 13^th turn date that Mr. Armstrong has proposed.  We can see that the Gold price is running hard and higher toward his turn date as it did into the last 2 similar turn dates represented by the solid red lines on the left hand side of the chart.  We can see that the TA Indicators which are simply tools to measure the health of the rise of Gold suggest that higher Gold pricing into the June 13^th turn date appears probable.

Larger Image 

CONCLUSION: Current Golden Parabola on Track

The current Golden Parabola has been tracking the Golden Parabola of the 1970’s almost perfectly for over a decade.  Today’s Golden Parabola is driven by the parabolic growth of the U.S. Dollar Inflation in response to the massive backdrop of debt that exists, today.  We can project price targets as the Golden Parabola grows, but its final height will be determined by the necessary price level for Gold to balance the U.S. budget once all of the liabilities of the U.S. are eventually placed on its balance sheet.  Many of those liabilities will not be transferred to the U.S. balance sheet until late in the Golden Parabola’s rise in an attempt to compress the level of discomfort in terms of time that the Dollar Devaluation will create.  Thus, it appears that at this time the terms “Bubble” and “Gold” do not belong in the same sentence. 

If you take a look at the chart for Silver you will start to get an inkling of what is to come for the Gold price.  It appears that we are just entering the higher sloped rise in Gold that has already begun in Silver; and Silver still has a much higher path to climb into the future.  There is no doubt that Gold has made a nice run since the original Golden Parabola article, but I expect the run to continue into mid-year.

PM Stocks

As a quick note on the PM Stock Indices, this analogous break-out of Gold ushered in higher valuations for the large cap PM stocks in the late 70’s.  The PM stocks tend to be re-valued higher in short dynamic spurts, and I am looking for one of those spurts higher for the PM Stock Sector to commence with this break-out in Gold.  I hope to return with an article on the PM Stock Indices in a few days. 

*Goldrunner is a frequent contributor to www.munKNEE.com and maintains a subscription site (go here) at www.GOLDRUNNERFRACTALANALYSIS.COM  where he focuses on the Precious Metals Sector in general including the Precious Metals Stock Charts.