Market Opinion

“Once again I beseech (beg) my subscribers to be OUT of stocks. The outlook for the markets, all of it, is now very bearish. We are watching the greatest debt bubble in history about to deflate, and it won’t be a pretty sight”

also:

“Signs of inflation are now appearing. Super Bowl ads for this year have already sold out at the price of 4 million per 30 seconds a piece. Starbucks has just raised its prices. The prices of oil, silver and gold have surged higher today — all signs of inflation. Almost all commodities closed higher as well.

Amid all the good news, investors took the the bit in their teeth today and pushed the Dow substantially higher. Tomorrow I’ll see how the internals of the market were affected by today’s Dow action.”

My bet — Obama will be will be a one-term president after the next election. The economy, the stock and bond markets — and stubborn unemployment will defeat him.


Posted January 3rd at 2pm PST in Richard Russell’s Dow Theory Letters daily comment . 

About Richard Russell (scroll down for his offer for a two week $1.00 “free” trial)

 

Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics –plus Russell’s widely-followed comments and observations and stock market philosophy.

In 1989 Russell took over Julian Snyder’s well-known advisory service, “International Moneyline”, a service which Mr. Synder ran from Switzerland. Then, in 1998 Russell took over the Zweig Forecast from famed market analyst, Martin Zweig. Russell has written articles and been quoted in such publications as Bloomberg magazine, Barron’s, Time, Newsweek, Money Magazine, the Wall Street Journal, the New York Times, Reuters, and others. Subscribers to Dow Theory Letters number over 12,000, hailing from all 50 states and dozens of overseas counties.

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One of the favorite features of the Letter is Russell’s daily Primary Trend Index (PTI), which is a proprietary index which has been included in the Letters since 1971. The PTI has been an amazingly accurate and useful guide to the trend of the market, and it often actually differs with Russell’s opinions. But Russell always defers to his PTI. Says Russell, “The PTI is a lot smarter than I am. It’s a great ego-deflator, as far as I’m concerned, and I’ve learned never to fight it.”

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“The Perfect Business”

2012 Outlook

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“Those of us who look into a crystal ball end up eating lots of broken glass.”

The finest gentleman I ever met in nearly three decades of being in and around the financial services industry, Mr. Kennedy Gammage, often said the above when asked for his outlook. At best, some of us can make an educated guess. At worst, one would have been better off with darts. In 2011, yours truly fell somewhere in between.

In a world where “what have you done for me lately” is paramount, I begin 2012 with a mixed bag of thoughts and a sense it shall end up better being a live chicken versus a dead duck. Because I derive a living and much of my personal investing dollars are geared towards an industry where failure is the norm, the junior resource market, I believe I’ve become more realistic of my chances and have borrowed an old slogan of “bet with your head, not over it.” Unfortunately, too many people don’t treat it as gambling and are not prepared financially and mentally to lose part or all their capital – a feat all too common in the junior resource market.

Instead of having a very small amount of high-risk capital allotted to the junior resource segment with a true understanding that failure is the norm and losing part or all of one’s capital is very real, they instead plow a large percentage of their monies and then look to blame anybody but themselves when the odds stacked against them play out. The fact that most of the pundits in this arena never note the dark side doesn’t help.

So first and foremost, to any and all readers of my blog I say that when it comes to the junior resource market, failure is the norm and I will have my fair share of it. Don’t fool yourself into thinking a business where 9 out of 10 companies eventually failed to go the whole nine yards is a place where you should place any capital that you’re not fully financially and mentally prepared to lose.

Keeping in mind that while I comment on various markets, this blog’s main purpose is to feature companies I’m compensated by, I shall endeavor to make “guesses” on what may unfold in the following markets:

U.S. Stock Market – Perhaps the best thing I did in 2011 was not to short this market despite lots of suggestions to, and I ended up making my only trade from the long side. While something unforeseen can take it down hard, it continues to look like for the early part of 2012 that the least resistance is to the upside. I think the “Don’t Worry, Be Happy” crowd will make the argument that the market held up despite an onslaught of so-called bad news like the European debt crisis and, with the U.S. economy grudgingly improving, can push share prices higher.

The key question is, can the November presidential election create another “hope” win for either party and therefore postpone until after 2012 the inevitable horrific fiscal crisis that is coming here at home… no ifs, ands or buts? I don’t know the answer, but I do know it’s not a question of if it gets real bad here, but when.

U.S. Bonds – Personally, I think it’s insane to lend anyone (let alone broke Uncle Sam) money for 10 – 30 years for interest rates of 2-4%. You would have to believe in Santa Claus and the Tooth Fairy and think that Elvis and Jimmy Hoffa are alive on an island somewhere to believe inflation is/will be less than these interest rates over the next 10 -30 years. In the end, I think bonds end up the worst bet for the next 10 years.

Screen shot 2012-01-02 at 9.09.49 PM

U.S. Dollar – Its main competition, the Euro, is in horrific shape at the moment and giving some wind behind the dollar’s sail. The problem with that is the Europeans have at least come face to face with the debt problem. Americans by and large still have their heads buried in the sand and have made an already bad problem worse. I don’t know the date or time, but the ability to kick the can down the road is nearing an end. The price to be paid will be enormous and shall eventually kill the U.S. Dollar.

I continue to believe the Canadian Loonie (dollar) is the only currency to own. I love Canada (I’m working on the Canucks part).

Gold – Whatever lows we make in this current correction (worse case is the low $1400s, best case is low being put in very near term), I suspect it shall be well within the 1st quarter and by the time 2013 arrives, we shall be at new highs. The mother of all gold bull markets remains, IMHO.

Base Metals – After a couple years of seriously underweighting with base metals, I think many of them are at or near their lows. I especially like zinc and continue to favor copper.

Oil and Natural Gas – Believing a crisis or a series of crises in the Middle East is inevitable, it’s hard to envision oil much lower and can spike to new highs if and when one or more crises raise their ugly heads.

Much more abundant supply of natural gas has taken the air out of a budding new bull market. However, with natural gas at $3 and oil at $100, a long gas/short oil play for the one in one million speculators/gamblers out there who meet the financial and mental toughness to engage such a play is worth considering.

Please noteNone of these stocks hit price and suggestion has now ended.

Tracking List Updated

My theme for quite some time now is to make tomorrow the first day of the rest of your life. This song helps me focus on that. (Ed Note: What a great version of this song!)

This entry was posted on January 2, 2012 at 7:13 PM. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

Ed Note: In keeping with Legendary Investor Jim Rogers assertion in an article posted here yesterday that there is little reason for optimism in anything but agriculture, this article delves into Potash, a resource used to gain higher crop yields. 

People have to eat. That seemed to be the consensus of the markets in 2011, which saw potash gaining traction as a new kind of safe haven. A resource that promises higher crop yields in a time of exploding global population growth, potash is ripe with potential profits for investors who choose carefully. The Energy Report dug deeper into this sector in 2011, interviewing analysts and industry experts who shared how to gain exposure to this growing market.

Investing in agriculture can take many forms. Bob Moriarty, 321energy.com founder, shared his insights in a March article titled “Food Is Fuel.” He said: “Potash is used to make fertilizer. As food gets more valuable, potash gets more valuable. It’s not necessarily that you’re more efficient in the production of food. If the price of wheat doubles, farmers can afford twice as much potash. It’s not necessarily more efficient; it’s just cheaper in relative terms. The price of food is going to go higher and higher. Potash is around $600/ton now, but it could be $1,500/ton based on the cost of food today.”

The trend will not continue forever, Moriarty cautioned. “Most companies are going to fail. You have to be counter-cyclical. Potash was way too cheap. Companies couldn’t afford to mine it profitably, and now it will overshoot in the other direction. I hope there is a bubble. That will be a tremendous opportunity to get out at a giant profit. We’re not at the top for potash, but everything goes up and everything goes down.”

Moriarty elaborated in a December article titled “Profit from Peak Oil“, making the point that energy and food are directly related. “Potash is a form of energy. Food is a form of energy. To make more food, you need more energy and you need more potash. There are enormous potash deposits, basins of sedimentary deposits—basically a variation of salt—that date back tens of millions of years. We know where they are. They’re easy to drill. A lot of people are going to make a lot of money in potash. 

“You can bet on some things in the short term and others in the long term. I don’t think anyone would conclude the cost of energy is going to go down over the long term, because there are no cheap energy sources. There is no magic bullet. So the cost of food is going to go up. I think any potash company would be a good investment right now. Real safe investments for 5, 10 or 15 years would be food, potash, water, oil and natural gas. Good shorter-term investments would be anything real—gold, silver, platinum and anything that you can actually hold in your hand.”

Moriarty is not alone in his assessment of the agriculture industry. In a May story titled “Potash Prices Heading to $750,” Richard Kelertas said: 

“We believe the upward price pressure started after the economic crisis in 2009, and it could remain a substantial bull market until stocks:use ratios (carryover:total use) in most major food stocks—grains, corn, soy beans—can be brought back up to 10-year averages. Currently, the ratios are well below those averages. There doesn’t seem to be any reprieve in sight, unless we have two to three years of bumper harvests in all grains around the world.

“In retrospect, 2009 was a tough year for a lot of fertilizer producers. Farmers had to delay applications, even though they started to see crop shortages followed by slowly rising crop prices. We didn’t really see fertilizer-price recovery until 2010. Around March/April, or mid-2010, we started to see a pickup in fertilizer stock prices. It was slow at first and, in some cases, it has been muted; but at the beginning of 2011, it started to surge dramatically. Now it’s come off again on the expectation that all commodity prices, including that of oil, will come off as the global economy slows down (especially in China). But our view is that this is just temporary, and that these stock prices don’t really reflect anywhere near the fertilizer prices we are looking at in 18–24 months. So, these current stock prices are only reflecting mid-cycle, but nothing near peak prices.

“We won’t see $1,000/ton. I don’t expect the type of hoarding experienced back in 2007 and 2008 will happen again to the same degree. We certainly will get speculation; but, typically, the amount of cash that’s available, the lending requirements and margin calls are more stringent than they were three years ago. You will probably see one-half of the speculative run-up in potash that we saw back in 2007. This time it is coming from actual supply/demand dynamics, not speculative investors gobbling up contracts. So, $1,000/ton?—I’ll never say never, but I think the next peak we’ll see is probably more in the $700–750/ton range. . .in the next 24 months.”

For investors looking to get closer to the farm, Kevin Bambrough, founder of Sprott Resource Corp., suggested two private equity deals in a February article entitled “Fiat Currencies Are Worthless“.

“We have two entities that are the hardest to value but potentially the most exciting assets. Right now, very little value is being given to them in the Resource Corp. share price but, eventually, their value could be very large. These are the One Earth companies—One Earth Oil & Gas Inc. and One Earth Farms Corp., both of which are private. One Earth Farms is something we started working on in 2007. It’s taken a few years to get there, but we’re very pleased that it’ll be the largest farm in Canada and one of the largest farms in North America in 2011. It’s also positioned to be one of the largest farms in the world in the coming years. 

“One Earth Farms has synergistic cattle and grain operations. Its real goal is to change the typical farming model, wherein the average farmer buys retail and sells wholesale. By that, I mean he buys his equipment, fertilizer, etc., from a local dealer or store, and then sells his crop as a commodity at harvest time based on wholesale prices. With the size and scale we’ve already attained, we’ve established that we can buy wholesale. And now we’re working on the model that can allow us to capture some of the retail margin by partnering with food processors or retail outlets. It’s almost impossible to find good investments in the Ag sector, and there are very few corporate farms in which to invest around the world. We’re building one that, hopefully, will provide inflation protection, as well as food security for potential investors and partners. 

“By the way, One Earth Farms is, in our minds, the only way you can invest in Canadian farming in a large way. That’s because it is in partnership with the First Nations groups of Canada, which are federally regulated and permitted to allow public companies and foreigners to lease land. Typically, non-First Nations lands in Manitoba and Saskatchewan are restricted under provincial law from public company ownership or leasing or foreign participation.

“I think that One Earth Farms is a company that ultimately will be highly valued and coveted by three different types of investors. First, large pension funds might find it very desirable for the inflation protection it could provide pension fund holders. Also, I think that the sovereign wealth funds and the Ag ministries of the world that are trying to get food security for their nations would find this to be very strategic. Lastly, we feel it would be valued by ordinary institutional and retail investors if it were publicly listed.”

As more analysts and investors lose confidence in the dollar, marketproof alternatives are even more in demand. As Bambrough said at the end of his interview, “I think that we’re going to come up with different monetary instruments that are reflective of precious metal or other holdings. Sooner or later, I envision we’ll have a currency that may be reflective of a basket of commodities that we may trade in units tied to something tangible. Ultimately I think we could have an energy-based currency.”

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Michael Platt, CEO and founder of BlueCrest Capital, a $30 billion hedge fund, states the case in an interview on Bloomberg for being totally on the sidelines in short-term US Treasuries and German Bonds.

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Michael Campbell:  I just love this chance to Martin Murenbeeld,  Chief Economist of Dundee Wealth because of course there is so much drama that is impacting directly the investment markets, Greece, Italy,  Spain and the bond rates etc. . What does that mean to investors and why should we care about these stories?

Martin Murenbeeld: Oh gosh! The big issue is if Europe goes into a very significant recession, or heaven forbid a mild depression,  we are going to have ramifications right around the world. Certainly companies in Canada and the United States that have an exposure or are selling into Europe are all going to be affected. You also have the bank side, the exposure of the US banks to Europe is not very high when you compare it with the exposure of European banks to Greece and Italy but there will still be linkages there and there will also be some very minor linkages between the Canadian banks and the European financial sector. Bottom line, nobody will really escape an implosion in Europe.

Michael:Let me just say I have not been this pessimistic in quite a while. In terms of societal dislocation, a lot of disruption and I think its going to be with us for a while. I don’t see a way out of the Italian problem that doesn’t spell some pretty negative consequences, some worse than others, and I’ve looked at their numbers. Can you manage the dislocation or is it just sort of jump all over us?


Martin: Well yes, the solutions that are being presented are sort of coming down to two, and probably the second one is not a solution. The first one as you are probably aware the French have began to insist that the European central bank should step into the market in massive amounts to buy Italian debt, Greek debt, French debt, Spanish dept and so forth to keep those interest rates down some what because as you know, the higher the interest rates get for those countries, the more it taxes and the government fiscal position and a larger amount of money in the budget ends up debt servicing and it gets to the point where the the countries cannot support it.

Michael: It’s a pretty straight forward thing. Nobody wants to lend those countries any money. I mean the major private clientele around the world would think you are nuts if you said, ‘Hey I got an idea. Let’s go buy some government debt out of Italy or Spain. Nobody who has a choice wants to lend these people money so hence, they’ve got to go to other bodies like the International Monetary Fund, the European central bank or some other entity,  hey just simply won’t get private investors interested at this point.

Martin: Well that what the rise in interest rates is all about, the higher the interest rates go the hope is of course the more it encourages the private sector invest, but you’re absolutely right the private sector is balking.  I overheard somebody saying on business network the other day, the fellow said ‘you know I think Italy will make it’ and then pause ‘but not with my money.’ That’s the situation we are in. Somebody has got to buy the debt otherwise interest rates just keep rising and rising and rising. Greece is already putting a haircut on the debt it owes and at some point Italy will say ‘listen, we cannot pay these interest rates, we cannot pay the debt.’ It comes down to somebody having to buy debt, if it isn’t the private sector its going to be the ECB which is what the French proposal is. The Germans are aghast to this proposal, they do not want the ECB to go in and buy debt from these various governments so if we follow the German model which is the model we are currently on, I have almost no doubt at all that we are going to have a breakup of the Euro.

Michael: One of the things I love about your research is you always put out probability scenarios of which way we are going. If the euro breaks up and it’s a sudden shift, you know how fast it can overcome us like bottom line is that if the European central bank doesn’t want to lend any money and individual investors don’t want to lend any money then you get the Greece like situation that is not doable. So with the euro, what would it look like and what are some of the scenarios if the euro just can’t keep going the way it is.

Martin: Well there are different ways that the euro could split up. My preferred way, lets start with the nicest way,  is where the northern European countries, the triple A rated countries, the countries that don’t have these massive debts, the countries that can service their debts they leave the euro. Not that Greece leaves, but the Germans and the Dutch leave. And the reason for that is what is left is what we call the Latin block or the Southern European block and that block retains the euro. So that Southern Block keeps all the debts of those countries, denominated in euros which they by in a large owe to the northern half of Europe.

Okay now obviously what will happen when the northern half breaks away, they will have their own currency, will call it the Deutsche mark or the North Euro it doesn’t matter and that currency is going to rise against the southern euro. But from an accounting point of view, everything kind of stays the same, the debts that Italy owes to the German banks and so forth and to the French banks will all remain denominated in euros. A German Bank operating under the north Euro block now, will obviously get paid back in Euros which will be less than north Euros, so they loose but they are going to loose anyways.

At this point and time, the northern countries are going to loose big time no matter what happens, that’s the nicest way. The worst way things will break up is that you get some kind of a rogue withdrawal of Greece and possibly even Spain and Italy and that will then immediately shock the system. You and I will do exactly like the fellow I just quoted, we are not going to lend any money to anybody over there because we don’t know where the rot will go. Remember after Lehman went under general electric had trouble rolling over its short term paper and you wonder what the heck is general electric got to do with Lehman? But the point is, you and I will not be lending and that then spells a disaster.

Michael: With all the uncertainty that’s in Europe about who can pay their debts, whose going to do it, if they can resolve it. Do you see this as a scenario though that could be very positive for gold or for the US dollar as examples.  

Martin: I think generally speaking yes. I mean it will be, at the moment as we speak you know that the gold market has been a little bit rocky because you know there is always the other things at play in the gold market. Suppose we go into recession or God forbid a mild depression in Europe that’s going to shock the international economy and so the international economy gets dragged down a little bit so that’s the other side. That could pull gold down a little, down somewhat. But you know if the world goes in that direction then there is no doubt in my mind that within relatively short order you are going to see a significant amount of fiscal and monetary stimulus certainly in the United states. In Canada too,  I mean the bank of Canada has said a number of times it stands ready to put liquidity in the system if and when its needed. However it happens in Europe, whatever currencies are working in Europe the central banks behind those currencies will also be printing to curtail the negative drag in economic activity and all of that will be very, very beneficial for gold. In fact I could see gold breaking the $2,000 barrier in that sort of a scenario.

Michael: I could see a scenario where major pools of capital that don’t have a lot of choices to move to go the the US Dollar,  or the Yen, especially on the short term.

Martin: Yes absolutely, I mean there has been some attempts for money to move into the Yen, and you saw the bank of Japan did. They basically said hey we don’t want the Yen to go up and they started intervening heavily. The same thing was happening to the Swiss Franc which probably if you are sitting in Europe that would be your first move. You’d move your Euros over to Switzerland and you probably wouldn’t keep it in Euro’s because you are not entirely sure that there is going to be a Euro a year from now. So you convert them to Swiss francs. and the Swiss franc was going crazy against the Euro so the Swiss national bank has come into the market and said “hey enough is enough” and it’s time to suppress the Swiss franc. So you are right in that regard that large money you know will move to the US dollar.

We are also getting reports that there is quite a bit European buying of high priced property in London. I mean basically money is moving to where it can go, where the markets can absorb it and its driving the prices of those things up and that includes the US dollar. You  know I’m gold friendly but frankly if you want absolute safety,  you buy US treasury bill. That’s the only thing that I can guarantee you are going to get exactly your full amount of money back. You put a $100 in US treasury bills you are going to get a $100 back.   

Michael: If money is going to be flooding in to the US and Canada does this mean that interest rates will stay low in our neck of the woods for quite a while?  

Martin: Oh absolutely yes there is no doubt in my mind and for several reasons. First off the fed is more or less promised that they are not going to raise interest rates before the middle of 2013. I don’t see the bank of Canada raising interest rates in fact there is a reasonable probability the bank will be lowering interest rates a little bit. Interest rates here are going to stay low. If I were to think outside the box a little bit on this one you could conceivably come up with a scenario where by the Chinese are encouraged to support European paper.

So let’s say the Chinese start to buy Italian debt because they have, 3.2 trillion in reserves right so they could do that, but then the question is where does that money come from because it isn’t sitting around, its invested. So then the Chinese would have to sell off US treasuries to go and buy Italian paper,  but those are very low probability sort of scenarios.  

Michael: Low probability but it’s a reminder for investors that one of the reasons we have such huge volatility today is because of these major pools of capital and what if they move. It’s a level of uncertainty because I agree with you it’s a low probability that the Chinese decide to bail out the Italians but it is possible and they sure aren’t going to be phoning me or any other analysts before they make the move.

Martin It will be an announcement and that will change the whole ball game.

Michael: Lets go to back to volatility, as an investor we are sitting trying to determine if its a buy day, a sell day,  you know there such major moves.

Martin: You know for an economist it’s a great time.  On Monday my left hand is right and on Tuesday my right hand is right,  I mean it can get better. I can have whatever scenario and I’m likely to be right one or the other day,  it’s that kind of a crazy world at the moment.

Michael: But tough for an investor.

Martin:  Its very, very difficult for an investor so you play this very safely. I encourage investors to have some gold exposure because at the end of the day no matter how this all unfolds there will be loose money printing, in other words central banks buying government debt. That’s what we call money printing. There will be some of that going on and gold is very sensitive to that. So I’d want investors to have some gold in the portfolio, Obviously we have some products at Dynamic that we think we are interesting but you know don’t want to make a plug for that.  that, I think Other stuff that I like are very good companies that are good dividends payers.

Michael: That’s great advice and I think again people want it to be simple but its not, its complex.  I’s uncertain out there. So I think your money has got to reflect that, that’s something I’m always saying Martin,  is when uncertainty raises I’m worried about preserving my capital. Also I couldn’t agree more with you if you got some high quality companies that pay off some dividends.

Martin Murenbeeld chief economist of Dundee Wealth Management always terrific to talk to you.

 

With the worsening Eurozone crisis and the failure of government to manage the U.S. debt responsibly, markets are fearful of a meltdown. Traders are driving prices down in the knowledge that many positions are geared [leveraged] and exposed to margin calls. Other positions are protected by ‘stop loss’ instructions, so can be triggered by prices moving down through support levels. Potential buyers are in no hurry to enter the market, either because they feel there is further to fall or because the volumes dictating price moves are too thin to get the sort of positions they want. Overall, the investment climate is very wintery from the bottom of the financial structures right up to the markets themselves.

In this investment climate, the market forces that should prevail are not doing so. The rational approach has been sidelined as markets are blown this way and that by emotions, fears, and knee-jerk reactions. This has always proved to be short-lived with investors kicking themselves afterwards because they did not act rationally. Falls become too extensive just as price ‘spikes’ do so too. Hindsight is an exact science but useless when looking forward. Now, we have to look forward. The way we do that is to look at the forces in play beneath the surface and see their direction. Take a point in the future and see what should happen if these forces keep going in that direction. What place are they taking us to?

The ‘Big’ Picture

The long, slow process of the globe’s wealth moving from the west to the east has been going on for years now. There is no sign that this will change in the next decade. China and India have low-paid, highly intelligent people who will continue to do the job cheaper than, and as well as, in the west. Capitalism, by its nature, takes work to the lowest cost place it can. So the west is directly helping this process along. The first to suffer from this process is the developed world workers who are seeing their jobs go east. The U.S. and European (with the exception of Germany, so far) unemployment figures testify to that.

With growth fading fast in the developed world, the days of live now, pay later have come to an end. Now it’s pay now and live later as the developed world looks at the debts it has incurred and the falling cash flow with which to repay them. As with individuals, when you have to repay debt, you don’t spend, so the economy must lower its performance levels until the process is over. It is naïve to think that you can have growth and repayments when economies rely so heavily on consumer spending. It’s with horror that the developed world sees just how much their borrowings have overshot acceptable levels.

Hence the traumatic situation the U.S. and the E.U. find themselves in. We may well be looking at a battle to save the euro itself as France as well as Greece, Spain, Portugal, Italy and Ireland see the yields on their government bonds shooting up to unacceptable and unsustainable levels. It’s a little better across the Atlantic where the U.S. has the advantage of fiscal union (which we do not believe the E.U. will be capable of achieving) and one overall government supposedly capable of correcting debt levels. The single government and federal financial structure was supposed to have relieved much of the trauma in the U.S., but the failure of the super-committee to lower debt voluntarily bespeaks a deeper malaise that goes to the heart of the mix of democracy and financial management. It’s becoming apparent that the U.S. government will not be able to function properly until the next election in a year’s time and then only if the elections produce a government with a dominant majority.

As a consequence, the currencies of the developed world have a time limit on their global dominance. It is unavoidable that if China continues on its path to power and wealth, that its currency will become a global reserve currency with the dollar and the euro moving into second place, or alongside it. When it suits China, the Yuan will be thrust into the global scene and bring tremendous uncertainty to the monetary system. It is unlikely that China will cow-tow to the developed world then. Whatever the pressure placed on the monetary system in the future, the level of uncertainty in values will grow. The current climate of volatility will worsen as the current accord between the E.U. and the U.S. on currency matters will diminish as another global power brings far less cooperation and much more self-interest to the system.

By extrapolating these currents, we see a picture of greater uncertainty and instability than we see now. Along the way we will see dramatic casualties, which may undermine the ability of the E.U. and possibly the U.S., to influence matters. We may well see either minor or major financial accidents before China shares monetary power with the west.

The Present Situation

The current market falls are not just the result of a single event, such as Spain’s debt costs moving above 7% or the super-committee’s failure to cut spending agreeably. These are symptomatic of the big picture. Fears of the collapse of the euro and the eventual E.U. are very real now. If Greece gets its bailouts, then other nations cause fear to remain high. France has now joined the ranks of nations having to pay to borrow. It’s the underlying undermining of the value of the monetary system that’s causing one symptom after another to burst on the scene on an ongoing basis.

Tragically, the governments of the developed world are looking to protect their power. Junker of the E.U. put it this way, “We know what to do, the problem is being re-elected after doing it.” The fear not growing is that democracy is not capable of putting financial matters right because of the unpopularity it will bring. This is equivalent to taking the rudder out of the water. The drift towards financial accidents appears inevitable.

The interconnectedness of the global banking system – It appears that the debt events of the last 18 months in the developed world are moving almost osmoticaly to a banking crisis as banks fear to lend to one another, uncertain of the sovereign debt values and the holding of those debts by the banks they would normally lend to. This is threatening to freeze up the banking system and not simply that of the E.U.

The fall in the gold and silver prices may well appear inconsistent with its preserving qualities, but when one takes into account the need for immediate liquidity to protect the investor, it is consistent. Once the immediacy of finding liquidity is satisfied, then we see investors returning to the precious metals as they did after the first strike of the credit crunch in 2007. This time round, liquidity needs are not so pressing as then.

The threat of a fall in the gold price to $1,500 appears real at the present moment. Because the fall is being driven by short-term traders and the triggering of stop loss positions with buyers waiting for new support, the situation is a short-term one not affected by the fundamentals of the precious metals markets, which remain excellent. Just as we can have a ‘spike’ to the upside, so we can have a ‘spike’ to the downside. Right now we have see falls from the $1,900 area back to around $1,677 a fall of around 12%. A fall to $1,500 is a fall of 21%, which would be justified if the market fundamentals had deteriorated. But they haven’t. If investor meltdown becomes severe in the precious metal markets to the extent of a fall to $1,500, then it implies the same to the entire global financial markets. Investor meltdown will affect all markets as it has done recently and in 2007. This would paint a disastrous picture for global equity markets for sure. This is possible!

But in the last few days, we’ve seen good buying of gold into the U.S.-based SPDR gold ETF as well as a flight to U.S. Treasuries as last resort paper –if the U.S. bonds sink then everybody’s bonds will sink. Russia has just reported an 18.6 tonne purchase of gold in October as part of its ongoing gold buying. Several other central banks are following their path. This confirms the excellent fundamentals of gold. Even in the current deteriorating global financial scene, expect investors to soften their flight to Treasuries with expedient buying of gold as we are currently seeing. Will this hold off the fall from reaching $1,500? We feel it would be foolish to specify a specific price having seen so many such forecasters prove wrong when they do this. While it is possible, if it does go there it will be only briefly, but more likely by then the tide of investment into gold that we have seen in the last decade will return to gold before it does. But we will have to wait and see.

 

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.  Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warrant