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Climbing The Wall Of Ruin – America The Bell Tolls For You.



-- Posted Tuesday, 23 August 2011 | | Disqus

As the financial storm begins to intensify there is one paramount reality investors need to remember

Physical gold and silver are the only port for wealth protection.

Americans in general and Wall Street in particular will surely deny this as they have in the past but this lesson comes straight from the annals of history. The week that was saw gold and silver hold up well into the financial stress.  Could gold pullback soon? It seems a likelihood as rumors of a 2nd gold margin increase in less than a month swirled through the markets. Let’s all hope we get that selloff in gold to buy into, but don’t expect it to be long or deep – There are simply too few ounces in the world to protect investors who are beginning to awake to history.

The week marked the 40th anniversary, the measure for one generation, since America delinked from gold.  For all intents and purposes, Americans should chalk up the dollar as the latest currency over the millennia to fail in the span of one generation. Seem an exaggerated claim? With its purchasing power decimated by 90% and our debts incurable, it is obvious to virtually all foreigners who can view the reality without emotion.  What will you need, a 99% reduction in purchasing power to accept that the dollar has been destroyed by our politicians before our eyes? (But don’t despair, this transition back to our constitutional currencies of gold and silver will mark the dawn of an exciting new chapter in American financial history and political leadership-- just be sure to own some before the announcement is made.)

The week saw Venezuela disengage from financial markets as an entire nation decided it was not in the interests of its citizens to trust Western paper gold promises.

Specifically Venezuela converted over 200 tons of its gold from paper into physical and recalled their metals to their shores.  The potential ramifications of this could mark a run on the gold banks. Americans would be well served to consider the litany of central banks that have called home their physical gold, rejecting Wall Street’s mantra that “paper gold is just as good as physical gold if not better”. 

Ignoring the way these hyper-informed central banks are voting with their gold would be akin to standing on the floor of the New York Stock Exchange before the era of upstairs or online trading when invaluable information existed at the posts.  If you believe your gold ETFs or futures are as sound as the real physical, you are rejecting the insights of central banks to convert from paper to physical gold. Do you really think you are better informed than these institutions?  The decision to keep only paper gold in your portfolio with such knowledge is  akin to standing at the post of Merck on the NYSE and deciding that even though massive institutional investors were lining up as sellers, you would step in front of that freight train and buy with your limited capital. These institutions are voting with their wallets that they are concerned with paper gold!

In the case of physical gold, supplies are already tight and if indeed a run on the bank commences we may see the game of musical chairs for physical gold move to center stage.  Recall Thailand, South Korea, Kazakhstan, Mexico and Russia added to their gold reserves this year as central banks braced for depreciating fiat currency reserves.

You may sneer at highlighting Chavez and Rolling Stone in more detail as we do this week, but the words of Al Pacino’s line in Godfather III are appearing true:

All my life I've kept trying to go up in society. To where everything higher up was legal, straight. But the higher I go, the more crooked it becomes.

Tragically America it certainly appears that we have to prepare that this possibility is reality.

Two sources spoke of the changed reality of our markets this week.  JP Morgan’s Colin Fenton highlighted a new macro regime – his description for what we have called the new paradigm in our corporate tagline. He wrote:

Global markets have entered a new pricing regime characterized by large, policy-driven uncertainties and high volatility. Transit into this new regime in early August was sudden and sharp. The primary catalyst was S&P’s downgrade of the US sovereign credit rating, but this event is itself more symptom than cause. The real driver of the downgrade and the shift into the higher volatility environment is a rapidly approaching day of reckoning for America’s unfunded entitlement obligations, which are now at least $65Tn, in addition to the $14.6Tn in national public debt. Evidence is mounting that Congress has not accepted the scale or urgency of its debt problem--gold will likely riot until policymakers address the totality of all US debt.

As Ron Hera so articulately said, gold is climbing the wall of ruin.  Hera summarized the broader issues facing investors today from the changed paradigm:

What is more important than the economic failure of globalization, however, is its imminent political failure.  The bailout of large multinational banks by Western governments in the face of the financial crisis that began in 2008 illustrates that the well being of sufficiently large multinational corporations preempts national interests. The European Union, for example, has been described as a centrally planned economic union where unelected, unaccountable bureaucrats make decisions in place of democratically elected national leaders. If Plato is right, then the more excessive the centralization of power becomes, the more forceful the reaction against it will ultimately be. When economic mismanagement threatens the survival of individuals, the probability of revolt greatly increases.

The political duopoly in the United States is dominated by large, corporate sponsors that fund political campaigns and that, through professional lobbyists, write many of the laws passed by the U.S. Congress. The U.S. Federal Code contains tens of thousands of pages of laws and regulations written by lobbyists that certainly benefit their employers more than the public. At the same time, American politicians are accountable to corporate sponsors that can, in effect, dismiss them from their posts by withholding campaign funds.

While the economic failure of globalization is already evident, its political failure is only just beginning. Civil unrest in Greece and rioting in England, for example, are only cracks on the surface of a much deeper and more complex problem. In the best case, the foreseeable future holds greater, more widespread and increasingly severe economic and political volatility. In the worst case, any number of civil conflicts or international wars might erupt.

Hera recalled the  damning words of Roman Senator Gaius Cornelius Tacitus who 2,000 years ago spoke words apt for America: “the more corrupt the state, the more laws.”

Is it too late to buy gold America? Again history’s emphatic answer is no. 

Gold relative to the S&P has just now moved above its long term average dating back to the 1920’s and still has a threefold gain just to get back to its comparative valuation in 1980.  A triple is certainly good enough on a relative basis,  but do you really think that with the pending stress of debasement we won’t eclipse ratios seen from the placid 1970’s?

Physical market premiums in the US remain close to record lows, an indication of how anemic American physical demand has been. Asian premiums are notably wider, yet another indication that the engine of future economic development is converting to physical gold.  While still less that 1% of Americans have converted into physical gold backwardation stands on the threshold of the gold market. This unusual development where near term futures contracts trade at higher prices than longer-dated paper suggests near term pressure to find inventories as more institutions look to take delivery of the physical. According to MF Global backwardation in total has occurred for less than one trading day in the entire history of gold futures.

Further evidence of markets shifting to a new paradigm was on display in currencies as the yen hit a new post World War II high. We also caught a glimpse of what Japan may do in the near-term as the week saw continued persistence on the part of Switzerland to cheapen its own currency. Just like twenty other nations cheapening their currencies to get to the land of export recovery, Switzerland is willingly tarnishing its reputation as a safe haven currency to play the export game. Japan almost surely will feel the same pressure from its industrial firms to cheapen the yen for ease of export.  Remember we only need a small percentage of Japanese or Swiss investors to see how their government’s moves torpedo the value of their savings. If just 1% of those nation’s populations awake to the understanding that gold and silver are the only currencies that can’t be debased, the supply/demand imbalance on the metals move further in the direction of the bulls.  Someday in the not-too-distant future more than 1% of those nations will look to protect themselves vs. government printing presses and gold will be notably higher.

On an economic level the week that was showed inflation above the bastardized expectations from CPI while jobless claims again crossed the 400,000 number.  The Philly Fed Index crashed from expectations of +2 to a reading of  -30, a haunting reminder of how little QE has done to improve our position despite mortgaging our future.  And speaking of mortgages, applications for new purchases declined 10% with the most recent data and has declined three of the past four weeks registering in at the lowest level since July 2010. Spanish-like unemployment numbers now exist in Britain as 20% of the youth are unemployed and the numbers are rising. Unrest broke out in Germany where 26 luxury cars were torched.  As Caritas asked, what will happen when they get hungry and actually have something to riot about?

The Fed began lending to the Swiss National Bank suggesting that the PIIGS may not be the end of European turmoil.  Being off the media radar this has probably not been discounted in the markets. Europe may require $1 trillion in short term debt.  And as Europe’s problems persist America, the bell tolls for us who will also be impacted. As Europe’s problems mature, buying wealth protection through gold and silver will be much more expensive.

What is ahead for this week?

Indeed at some point this week it seems likely we will see a selloff in gold, perhaps triggered by news of the next margin hike.  If that comes before August 26th we would use the weakness to quickly step up and begin building or accelerate your metals purchases.

The 26th is expected to bring comments from Bernanke at Jackson Hole where a year ago he single handedly and unintentionally launched a metals rally (See our note The Fed Declares War on America from last year).  Bernanke has nowhere to go but to promise easy money in some form – virtually all economic indicators are weakening and several are portending a severe slowdown around the corner.  When Bernanke speaks of  QE3 in some form, we expect metals will continue to strengthen as the urgency to exit the fiat cash markets intensifies.  Supply /demand are such that we only need one major investor to balk at Bernanke’s financial gaffes and the next chapter in the physical gold transition may begin.  Look for successive Fed injections to have  less desired impact and only serve to accelerate the metals advance. 

Ironically gold stocks may be the catalyst to turn the media away from its uber-bearish state.  Gold miners seem poised to enter into the unusual realm of being both endearing EPS momentum names to growth investors with strong Q3 earnings ahead while gold mining valuations screen attractive to value buyers. 

Are you still part of the 95%+ of America kicking yourself for having missed physical gold’s move?   Are you still planted in indecision about how to protect yourself with gold at $1,800?   

Consider this: Two weeks into the debt ceiling compromise Andy Hoffman highlighted the national debt “has already reached $16.615 trillion, or just $77 billion from the new ceiling!  In other words, we're on a pace to hit the $16.692 trillion ceiling in just a matter of weeks!”

Are you ready for the return of our politicians in-fighting on prime time? What a nauseating thought. And what do you really think will happen as the next debt ceiling debate returns?

The answer - Nothing will happen politically or legislatively to really solve our problems, but gold will scale the wall of ruin because it is the only port in the financial storm.

Below please a find more detailed review of topics alluded to here. Please call with any questions or if you are ready to protect your family’s wealth by owning physical gold and silver.

 

Drew Mason is a principal with St. Joseph Partners (StJosephUSA.com), a precious metals boutique that assists clients in sourcing physical gold and silver globally. St Joseph’s uses precious metals as the cornerstone of wealth protection planning to diversify against currency debasement and stock market risk to investors. Previously he worked on Wall Street for fifteen years after graduating from Wharton.
-- Posted Tuesday, 23 August 2011 | Digg This Article | Source: GoldSeek.com

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