Excellent piece today by Simon Hunt on the state of global growth and likely developments over the next couple of years. The spending-on-debt bubble that has been a mainstay of, first the consumer credit bubble of the past 10 years, and now the sovereign credit bubble of the past 4 years, is now moving into the exhaustion phase. History assures us that all bubbles come to an end. Here is Hunt:
“A limit will soon be reached when central banks will be unable to expand their balance sheets any further and when repeated liquidity injections have diminishing returns. Ultimately the market is bigger that of central banks. The point will soon be reached, if it has not already, when the market will punish further liquidity injections by central banks, whether QE3 in the USA or more LTRO’s in Europe.”
All of which brings us closer to the next more pragmatic phase of the great global deleveraging cycle where debts are written off and down, deficit-spending is reined in, asset prices fall to levels where they are finally attractive for investment, and savings rates build on consumer balance sheets. More from Hunt:
“…the process of deleveraging must be crossed. It has only just begun. The history of credit crisis shows us that it takes about seven-years for the process to complete. Given the global imbalances, the geopolitical overlay to what is inherently a fragile financial base the world has entered a period of rolling recessions. There will be a second and deeper global credit crisis, probably starting to burst around mid-2013 if not sooner. There are just too many band-aids holding the system together; one is almost bound to snap. When that moment arrives there will be a rush for cash.”
The rampant tax-payer funded injections from governments and central bankers tolerated over the past 4 years are necessarily a finite course. Those who maintain that the money printing will never end are almost certainly deluding themselves. Spending that cannot be funded will cease. When the next dash for cash resumes, many of those who have placed great weight in other assets will be looking for buyers. All at the same time. This presents significant downside from present prices in stocks, real estate, commodities, some bonds, art, antiques and yes–precious metals. Which brings us to this next clip from the Daily Ticker. Food for thought:
“For the past decade, gold has been an incredible investment, rising from under $300 per ounce to as high as $1,900 per ounce before retreating to around $1,650 in recent trading.
For the bulls, gold’s recent drop is nothing more than a temporary setback on its inexorable march toward $2,000 and beyond. The case for gold rests primarily on factors familiar to anyone who’s even remotely familiar with the metal: easy money from central banks around the world and rising demand from emerging economies, notably China and India… But all good things must come to an end and Yoni Jacobs, chief investment strategist at Chart Prophet, believes gold’s best days are behind it. In fact, Yoni believes there’s a bubble in precious metals that’s about to collapse.”
Here is the direct video link.
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Gold bugs hiding under their beds….prophets coming out from under the baseboards with books and predictions of doom for the shiny metal. Anything for a buck or two. Gartman says it ‘s over….must be true. He has done so well with his calls.
Right …. Ok….no stimulus needed…..the Bernank is going to relent and say all the QE was an incredible waste of money and the only way for this to end is to allow for a deflationary depression. He’ll throw the Big O under the bus just before the election in a secret plot to replace him with McMittny.
Yes I can see it all now drought…depression…endless lines of poor folk at soup kitchens…..men sleeping on the sidewalks and sipping cheap wine from paper bagged bottles.
Makes me want to turn up the volume on a Tom Waits song…think I will….here’s one for all to enjoy.
http://youtu.be/GNqRqF1E0fc
I have been leaching off bits and pieces of eight and using the proceeds to buy some very interesting, and necessary, commodities.
Shelf stable food. No kidding!
Gold will collapse due to the Medicare Part B’s beginning to skyrocket in 2014. Since most of the bullion/coins are owned by the oldsters, you can bet they won’t give up the free medcare. Stockpile cash. Save. Save. Save.
One buys gold today not as an investment to produce a return, but as the ultimate store of value. It may go down in real terms during a deleveraging induced deflation, but it will go down less than other forms of money. I am with the deflationist camp in that we will certainly go through massive deleveraging in the next few years where real prices measured in purchasing power will fall for almost everything as a result of clearing our massive over-indebtedness. However, I also believe that we will experience a hyperinflation in the dollar, probably after most other fiat currencies have already collapsed. Every hyperinflation on record also began with over-indebtedness and and the resulting deleveraging. The destruction of the currency was a political choice by the government involved caused by the policies implemted to avoid dealing with the economic effects of deleveraging. One policy is seen in particular – debt monetization. I believe that debt monetization will be undertaken by the large majority of the governments/central banks once the bond market rebels at financing further deficit spending and private funds are no longer available to finance their overspending. It is simply to easy compared with the alternatives of draconian spending cuts. I believe the U.S. will go down this route no matter who wins the election in a desperate attempt to maintain current social and military spending and the dollar will eventually be destroyed. Those who believe the Federal Reserve will not be able to cause hyperinflation in the dollar amidst a deflation in purchasing power terms do so because the Fed must lend money into existence (the pushing on a string theory). They fail to take into account the fact that once the Fed is the only buyer of government debt at all levels, all of the currency units they create out of thin air will be injected directly into the economy via government spending. The ultimate willing lender meets the ultimate willing borrower. As tax revenue falls to zero as a percentage of government spending, as happened with Weimar Germany during their deleveraging process after WWI, the amount being injected and the devaluing effect in terms of the dollar will be accelerated until the currency fails. 5 years from now, one ounce of gold worth $1650 today may only buy the real goods and services you could by today for $1000. However, those same goods and services may cost $500,000 in 2017 dollars, if they can be bought at all with dollars. Under this kind of scenario, those who hold gold may lose some wealth, but those who do not hold it will lose more.
Danielle, please.
Gold in a bubble, yeah right……sure no problem! The only gold bubble is in the heads of guys like this, give me a break! I agree that one day gold will be in a bubble, but that day is years away at much higher prices. Europe is melting down, China is coming in for a hard landing and well the U.S. loves to spend into oblivion! I heard this nonsense since I started purchasing Gold at $375. Once the western world becomes financial responsible is the day gold starts heading down to $500 per once. That day is still far away!
Yoni Jacobs is talking his book. Beware.
There is an easy way for the USA to honor their debts – if gold is valued at $11,000/oz. Rest assured, this will happen.
There is no technical limit as to how much liquidity central banks can pump into the system. Their “supply” of money is virtually infinite. The only limiter of monetary expansion is confidence in the currency. And yes, there is a limit. But how many analysts and economists would have ever fathomed that the world’s central banks would have been able to take their money-pumping operations as far as they have? Most had anticipated a revolt in the bond markets long before this point.
However, finance and economics are not games of absolute metrics, but relative ones. Add to that a whole host of other factors, including geopolitical ones, and forecasting the breaking point is damn near impossible.
Whatever happens to gold prices, people should own some gold, especially today, given how fragile the system is. How much depends on many factors.
The most compelling reason I can find for owning gold is because central banks own gold. If the fiat, debt money masters of the world, who supposedly abhor gold, still hold it, then they must know something most of us don’t. What could that be? Perhaps they know that when all else fails, gold is always the money of last resort. In fact, some argue that the foundation of our money even today is still gold. Whether that ultimate reality is reflected in the price is another matter.
Fiat money systems have come and gone many times throughout history. But gold has always been, over the long haul, at least a good store of value, and for most of history, a true circulating currency (even if we used paper certificates to represent it, as the US did until about 40 years ago).
Until the money masters give up their gold, I will hold onto mine.
I am hoping we have another 2008-type downturn and that gold goes to 700 or lower, and (here’s the tricky part) that the cash in my bank account still exists and doesn’t go “POOF”, and that I can buy a LOT of that shiny stuff and a LOT of other goodies (stocks, land, etc.) that will help tide me over thru my old age which is approaching quickly.
I suspect there are many people with the same plan. Will this plan work? Who knows.
Sadly there would be some advantage to an all-out collapse that eliminates all government, all bank accounts, throws us into total chaos and survival-of-the-meanest mode. It would be ugly, but in the end we’d probably be better off. Seems like there are too many of us, and that too many of us are too soft, both physically and mentally.
It’s amazing that any mention of the ‘shiny yellow metal who’s price is based on FEAR’ gets so many responses…time and again. No one knows what the price of gold will be at year’s end….no one. Try me. Lets’ all guess and place those ‘guesses’ right here. We will all be wrong. My guess is 2,225 on Dec. 31…but I bet nothing but ‘thin air’.
That said, I feel the current management at VP is extremely prudent if they deem cash is not trash, but viewed as a super-weapon to be kept ready and waiting. Deploy such weapon when its usage would have the greatest effect.
Besides, at ZIRP…it’s difficult. I do not wish to be homeless and in dire poverty. I guess that’s why I own gold.
I do own some gold stocks and a bit of silver bullion . Too much of both it seems, as of late. The stocks do appear to be cheap but then commodity stocks always do before the commodity falls off the cliff. My neighbour ,who is a daytrader type, back before the collapse was pounding the table on a particular copper stock. It was trading at 3 times earnings and growing to the ionosphere. Copper was over 4.00 your crazy not to own this he said. I told him he was going to get his head handed to him but he said I was crazy and bet large. When the price of copper “collapsed”…actually didn’t collapse at all just droppped down to it’s former breakout point….the point in time where the Bernank came to power, of course the stock went no bid. He went back to drywalling after that.
So for the die hard tin foil crowd a lesson is about to be delivered. A test of your metal. It will not be pretty and most will sell at the bottom and go back to GIC’s with whatever they have left….about the time Gold restarts it’s final and parabolic move to the ionosphere.
A word of caution to the gold bugs…
While I certainly believe that holding some gold bullion is smart (especially when there is a looming threat of a change in monetary regimes––thank you, the Beard at the Fed), gold is not a good inflation hedge. The tax rates on capital gains from gold bullion can be quite high. In fact, high inflation (which many gold bugs pray for) actually hurts you. And the higher the rate of inflation, the more you will be hurt from the sale of your gold. In fact, it has been shown that, at a sufficiently high rate of inflation, selling your gold can actually erode your net worth (i.e. make your poorer, not richer) even though the gold price may be much higher in nominal terms than what you paid. Actually, the higher the spread the worse off you will be.
The best reason to hold gold, is as insurance against a monetary collapse. Therefore, don’t sell it unless you will need the gold to pay your bills.
The best inflation hedge during a period of high inflation is a self-liquidating debt, such as you get with an income property with a big mortgage. This of course has its own risks and challenges, but when done prudently, responsibly and at the optimum time, the results can be very accretive to your net worth. And you make inflation and taxes work for you rather than against you.
Yup, you will lose money with PMs no matter what and here is the proof: (Please write your elected dumba$$ in Washington and tell them to get this injustice changed.)
http://www.silverbearcafe.com/private/04.12/hiddentax.html
Sooo, you’d best sell now while the getting is good. Tell the goobermint you bought it in August 2011. 😉