More near-term pain needed to re-set the economy towards health

Year to date bonds, US dollars and Gold have been the best performers. But deficit spending is a cancer that is rapidly growing all over the world and US debt is particularly worrisome because America has the world's largest economy and the benchmark currency. Strategist Michael Pento reviews some deficit math with Aaron Task and reiterates a need to cut spending and accept a period of increased economic pain in order to reset the system toward a sustainable path. Pento sees the US Fed cutting rates again in the future in a futile war against worldwide deflation. I have to agree. I think this is why bond yields have broken down again this month.
Pento says gold has to go higher. He may be right. I think certainty about the future in anything including this volatile rock is a dangerous sentiment. My concern is that after nearly quadrupling in value over the past 10 years, there is also enormous downside risk to gold from present levels. Riding a speculative frenzy of fear is not exactly a rational or high probability “investment” thesis. There is no way to tell when a speculative fever will break, but gold frenzy today reminds me of the sentiment around the last peak in 1980. No shortage of dynamite to juggle these days. Don't forget to arm yourself with lots of safety gear. We need a plan that envisions more than one outcome.

“U.S. debt will top $13.6 trillion this year and rise to 102% of GDP by 2015. Moreover, the publicly traded debt (debt excluding intra-governmental obligations) will rise to $14 trillion by 2015, up from “just” $7.5 trillion in 2009.
At $14 trillion, the interest payments on the public debt will total about $1 trillion in 2015, he continues; even assuming solid growth and low inflation, that would equal about 30% of total government revenue.”

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12 Responses to More near-term pain needed to re-set the economy towards health

  1. Anonymous says:

    Thanks Dazzo for posting, great report, I have no certainty about gold's ultimate price target but the trend is unmistakenly up. I'm long until we break the 200 DMA.

  2. Anonymous says:

    Germany Warns US Not to Become 'Addicted to Borrowing',1518,702849,00.html

  3. Anonymous says:

    Evans-Pritchard Announces Fed Contemplating $5 Trillion QE Expansion

  4. Anonymous says:

    Hi Danielle,
    Could you please provide an advice for all of us gold bugs out there on what, in your opinion, will be the sign the recent run up on gold is over? I am suspecting that a fall from grace maybe as steep as September-October 2008 stock market dive. Where would you see the price of gold when the dust finally settles. Would $650 be a good guess?

  5. Anonymous says:

    As I have said, it is very hard to time speculative fevers. History tells us it will break at some point, and the higher the price goes up the greater the risk to those that are passionately attached to holding and/or over-weighted. 650 is the long term secular support range at this point, so yes a test back to there would be huge downside from here but still within the range of a secular bull for gold. Another risk for Canadians is that most gold bugs talk about the collapse of the US $ as the catalyst for higher gold ahead, and yet since gold is priced in U$, Canadians holding gold would not fare well if they are holding gold and the U$ collapses. For us to do well we would need higher gold and higher or stable U$. Not sure how that plays into the rational of Cdn gold bugs.

  6. Anonymous says:

    I hold CGL (Claymore Gold bullion ETF) which is currency hedged. It's 5% of our entire investment portfolio which I think is a reasonable exposure. I bough it at $10.02 in March and today it's at $11.33 so I'm happy 🙂

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