-- Posted Monday, 1 December 2008 | Digg This Article | Source: GoldSeek.com
The indiscriminate printing of paper money coupled with the crippling of the World’s financial system is the “perfect storm” setting for gold and silver investors. Current conditions in the financial markets should be more than enough proof to convince even the most stubborn of financial pundits of the necessity to own precious metals. The vast majority of people who visit the websites where articles like mine are posted recognized this a long time ago. The time has now come where the rest of the world is about to wake up as well.
The demand for physical gold and silver has reached all time record levels where delivery for fully bought and paid for bullion is weeks away. If my thinking is correct the demand and price for physical metal will set new record highs each year until the physical supply is exhausted. Your guess is as good as mine as to the price of gold and silver when there is none to be delivered.
The absolute irony to this is buried in the fact that during this resurgence in popularity the price of both commodities has been hammered while the prices of the common stocks in this sector have been decimated. The imbalances created by this growing demand and dwindling supply has created opportunities for those who have both the courage and the funds to take advantage of this death spiral.
HOW CLOSE ARE WE TO COLLAPSING?
The real question investors need to ask themselves today deals with the timing of future events. Does the “rubber band” snap today or is there enough elasticity to put another artificial leg on the world’s economies?
The creation of trillions of Dollars, Yen, Euros and the like are practically guaranteeing the future demise of the current world’s financial system and most likely some of the governments behind them. If the creation of this “Worth Less or Worthless” paper makes its way into the economies of the world I believe the possibility exists that there is still elasticity left in the rubber band. The resulting consequences of this pumping will be hyperinflation. The ensuing fix could last 3-6 years before the rubber band snaps.
I find it pathetic that those who are in charge of distributing the proceeds from this newly created piggy bank coincidentally happen to be the ones responsible for the mess taxpayers share today. If the real truth of this fiasco ever comes to light in a book a reader will find it in the “fiction” section of the library because no sane person would ever believe that the “intelligent” politicians of the world would have sat back and allowed this delinquent party to go on for as long as it has.
Countries like China are in the unfortunate position of having accumulated too large a reserve of dollars. They have no choice, at this time, but to sit back and allow countries like the US the luxury of creating trillions in new paper with no accountability. Objections and protest would place high risk on their own massive reserves. There is no doubt that the creation of this paper destroys the buying power and worth of what they worked so hard to accumulate. You might say that they are silently stuck between the “rock and the hard place.”
Those who have accumulated all this worth less currency will do everything they can to unload it. This liquidation becomes obvious when one takes notice of China spending $600,000,000,000 to build new infrastructure. I believe that any country, who is not a debtor nation, will, in the end, take extreme measures to protect the value of the reserves they have built. I expect to see a world wide spending spree where countries use this toilet paper to buy real assets trading at pennies on the dollar.
The disposal of currencies coupled by spending programs in countries like the US, in an attempt to reboot their economies, could very easily create an extreme shortage in base metals. Take special notice of all the marginal and high cost base and precious metals projects being shut down or put back on the shelf. There could be a very heavy price to pay for this downsizing as production which was expected to come online in 2010 and beyond will simply not be there.
Do not kid yourself with the mistaken belief that the recipients of these worthless dollars are happy and content with the US attempting to bail itself out by devaluing their currency.
THE NEXT ARCHAIC RELIC!
For years gold bugs have had to listen to pundits refer to gold as an archaic relic. After all, “what good is it; you can’t eat it?” The shoe is now on the other foot and the archaic relic will soon be the dollar; you can’t eat it either! This may be a little difficult to comprehend at this point in time, particularly when the dollar has just exploded to the upside. The panic to seek safety by those who recognize the potential collapse of the Worlds financial system is the event that has led to this explosion.
The deleveraging of hedge funds coupled with the forced selling from margin and panicked investors devastated the portfolios of all those who own stock. Losses in the financial community were so widespread that even money market funds were incurring losses which drove net asset values below $1. The last thing investors ever want to concern themselves with is the safety of their funds in a money market account. Outside of being short the market there has been absolutely no place to hide.
Throughout history short term treasuries have been viewed as the safest and most liquid of investments. Panicked and forced margin liquidations left the “traditional thinking” investor with no options. The traditional investor feels they had no other choice than to flee to the historical safety of short term treasuries to protect their funds.
THE ECONOMIC END!
In my opinion, I feel the difference that separates the economic markets of today from the economic markets of the future lies in the fact that it is getting much more difficult for the Fed to play the same games that gave the appearance of being successful in the past. The Fed still believes that lowering interest rates coupled with exponentially increasingly larger infusions of cash will give them the future results they desire. Unfortunately someone forgot to tell them homeowners have blown all the equity in their homes and there is no pump to prime.
Lowering interest rates are an effective way of stimulating the economy only when the consumer has room in their budgets, or in the end “thinks” he has room to afford more debt.
When the day comes that the rubber band snaps the Fed will have no control over the outcome. Foreign countries will have divested themselves from their dependency on undesirable currencies. Payment to them will be made in assets that cannot be printed and devalued at the will of the debtor. Treasury bond prices will collapse and interest rates will skyrocket. At this point in time gold and silver will be the only game in town; just ask any cab driver or shoe-shine boy. Gold bugs should make sure these latecomers have some bullion to buy. Precious metal stocks will be trading at prices even gold bugs will find hard to believe; this will be the exact opposite of today’s equity environment.
Markets always move in extremes. I always knew the Fed would choose inflation over deflation. I never dreamed the American people would allow these clowns to create trillions in debt without any plan or accountability. Who would have guessed in the confusion of this insanity that gold, silver and precious metal stocks would fall victim with everything else.
WHAT THE GOLD MARKETS ARE TRYING TO TELL US!
As investors it is imperative that we understand what the markets are telling us. At this point in time you literally have two completely opposite markets in the precious metals sector. The first market deals with precious metal stocks and the second market deals with the purchase of physical gold and silver bullion.
Unfortunately most of us currently own or owned precious metal stocks that were trading at multiples of 5-10X the current price just a few short months ago. If you wanted to add to your position or reestablish a new position in a company that is now trading for a fraction of its old value all you have to do is put in a low “stink” bid. In a falling market you would have no trouble getting the shares for the price you want to pay. Most of the time you would still be paying too much simply because, in a falling market, prices usually fall to levels far below what we think is a bottom.
The reality of the physical market is the exact opposite of the equities. With the spot price of gold and silver being creamed over the last several months; why is it that;
1) Physical delivery takes weeks to receive, if at all; and
2) Premiums over spot range anywhere from 10%-50% to get a fill;
These two points speak volumes about what is actually going on behind the scenes in the physical market. In a falling market, common sense would dictate that any buyer should be able to buy all of anything they desire at prices very favorable to their wishes. In the physical market gravity does not seem to exist.
With the price of gold falling from over $1000/oz. and silver collapsing from above $20/oz. a buyer of physical bullion should be able to do so at prices close to spot with no trouble taking receipt in a timely fashion. A premium of 10%-50% is a very clear signal of the future direction prices will head. I have stated many times in the past that the physical market will dictate the direction of future prices. I think that this could be an understatement as financial events worldwide continue to unfold.
Any equity investor, in a falling market, would love to be able to sell shares at 10%-50% above the current depressed levels. Unfortunately, not only can investors not sell shares at premiums but they are lucky to have liquidly to sell any shares at all. If the end for gold was at hand the same set of circumstance would exist in the physical market.
There is a huge war being fought between paper gold and physical gold. This war has been going on for years. I believe there are only a few battles left before physical triumphs over paper. Physical gold is true wealth and has been since the beginning of time. Paper on the other hand is a game designed to accommodate the gamblers and those with a lot to hide. In the end only a few will survive and the inventories of gold will be gone exposing the true worldwide damage of debt creation run amuck.
I think there is a strong possibility that if we fast forward ten years from now, on a technical basis, we will look at a set of charts and recognize this last year as a massive consolidation in the precious metals and possibly the base metals sectors. Shares have been dumped by weak and panicked investors. If this is true there will never be a better time to take advantage of the opportunities that have been created from the nightmare circumstances of today. In my opinion the economic circumstances of today have created “THE PERFECT STORM” opportunity for precious metal investors.
In my next article I hope to share with you the logic that I would incorporate, in today’s market, in the selection of stocks I would want to own for the market I feel we have going forward.
I hope to share a few of my own personal favorite stock selections to anyone who is on my FREE E-MAIL LIST. Anyone can sign up and it is free. All you have to do is click on the e-mail link below and ask to be added to the list. You also have the assurance of knowing that I have never sold or shared any name on the list.
As always folks, these are my own personal opinions and it is important for each of you to do your own homework as in the end your thinking may differ from mine.
-- Posted Monday, 1 December 2008 | Digg This Article | Source: GoldSeek.com