A)  War in Syria, Ukraine, Middle East, South China Sea and other places seems more likely each month. History shows that wars are inflationary, commodities increase in price, and governments finance wars with debt and fiat currency.  We want higher gold prices and no war, but the “powers-that-be” will do what is necessary to increase their power and wealth, and if that requires war, then expect more war.

When armies invaded other countries throughout history, were they more interested in confiscating gold or paper currencies?  Who wants fiat currency when it is circling the drain on its way toward zero?  In troubled times the preferred asset is gold, not devaluing paper currencies issued by insolvent countries and central banks.

B)  Central banks will lose control over interest rates and that will pose a huge risk to the global financial system. Expect much higher gold prices as rising interest rates force insolvent governments to more aggressively monetize debt and devalue their currencies.

Unless you believe that central banks can hold interest rates low for decades, regardless of what markets, investors, and individuals believe is appropriate, there is significant risk of rising interest rates.

C)  A derivative disaster as a consequence of rising interest rates – is a bomb waiting to explode. The fuse is probably burning at this moment…

• There are over $500 Trillion in interest rate derivatives outstanding. We can safely assume that banks have taken an initial skim for their commissions, and that the derivative contracts are substantially under-margined.
• The current plan is that those derivative contracts will protect borrowers from interest rate risks in the future, just like the previous plan was that derivative contracts would protect from the sub-prime mortgage markets in 2008.
• The plan in 2008 failed, the financial system nearly “froze up” and the Fed cranked out over $16 Trillion in new currency, swaps, guarantees, bailouts, and other paper. Debt has dramatically increased but economies have not recovered.
• The global system is now more leveraged than in 2008, debt is roughly $60 Trillion higher, and the derivative contracts “protecting” borrowers are currently many times larger than in 2008.
• New York, London, Brussels, Frankfurt, and Tokyo – we have a problem.
• The problem is structural, increasing, and highly dangerous. The “snowflake” that will start the “avalanche” of financial destruction could fall at any moment or not for several years.
• Unless the “powers-that-be” allow a highly destructive deflationary depression that will result from such an implosion, central banks are likely to print hundreds of trillions of currency units to “paper over” the problem.
• Currency units will devalue, the purchasing power of savings will disappear, and gold prices will revalue HIGHER.
• Place your trust in gold (and silver) …  or trust that your assets, savings, and purchasing power will be protected by bankers, politicians, and fiat currencies.  It should be an easy choice.

From Daniel Ameriman:

“One could even say that by having created such a fantastically large level of risk the financial firms are effectively blackmailing the governments to make sure they never have to pay out, and the governments are allowing this because 1) so much money is being made by connected insiders; 2) it hasn’t actually blown up yet; and 3) the voters have no clue about what is actually happening.

There is an elaborate vocabulary and mathematics for derivatives that goes well beyond the knowledge of most financial professionals, let alone the general public. They are created by the largest and most prestigious financial firms in the world. Yet, once the veneer of these layers of impenetrable mathematics, jargon, “expertise” and the perception of overwhelming financial authority is pierced – what is left is nothing more than a basic form of insurance scam, i.e. collecting premiums for policies that can’t be honored.  And if something does go wrong with that scam – then it is all of us who are the ones who will pay together, as taxpayers and investors.”

Gold prices will rise …

• Because of war, increasing debt to pay for those wars, and the inevitable destruction of purchasing power of fiat currencies.

• Because insolvent, hopelessly indebted countries owe far more than can ever be repaid in CURRENT dollars, euros, pounds and yen – and therefore central banks will “print” and devalue.

• Because, regardless of the story promoted by politicians and bankers, it is unlikely that interest rates can be maintained at multi-generational lows for several more decades.

• Because the inevitable derivative disaster will make the 2008 crisis look like a summer rain compared to the financial hurricane that approaches.

• Because “if something does go wrong with that [derivatives] scam – then it is all of us who are the ones who will pay…” 

• Because history shows that people trust gold more than fiat currencies. It should be an easy choice.

When gold prices rise in earnest (ask the High Frequency Traders for a precise date) they are likely to rise rapidly and cause financial media comments such as, “Nobody saw that coming…”

Gary Christenson

The Deviant Investor