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| Huge Gold Action and Earth Shaking
Change Imminent |
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It’s been several weeks since my last
public article, and man, what a few weeks for gold!
I just got finished with my latest subscriber
edition, and said that the precious metals would probably
correct as much as $100 this week, and lo and behold, Monday
it drops $40 already.
Since January, gold rose over 200$, something
that is really out of the box for gold’s price action
in the last 30 or more years.
I was talking with a subscriber about the gold
action and the probable sources of the huge price swings.
I will outline some of that discussion here. My conclusion
is that we are in for earth shaking changes politically and
economically. Hold on to your hats.
First of all, I have to point out that these
kinds of price swings in gold indicate that major change is
on the horizon for the world. The changes are going to affect
everyone’s life on this planet. If gold was not moving
so strongly up and down, my prognostications for the future
would be more sanguine.
Because gold is the historical money par excellence,
it has a singularly unique tendency to telegraph any major
change for better or worse. Gold reacts directly and immediately
to world political developments, economic developments, social
developments, war developments.
In my work, I have focused 100% of my gold study
on macroeconomic trends and world political developments.
I have found this method very fruitful in understanding precious
metals. I have not used charting, mathematical modeling of
price activity, Fibonacci ratios, or other methods. This,
even though I am a mathematician myself.
Rather, being a student of history as well,
I have found that macroeconomic news, and political developments
are the primary drivers of the precious metals markets. The
study of charts and other methods are very secondary ways
to forecast where metal prices are going.
One of the most significant benefits of my approach
is that I get a very good idea of what is happening in the
world politically and economically as a direct benefit to
my study of precious metals. And this leads me to make the
following observations about gold’s price action this
year:
The world is about to change radically...
in every way, and you and your life are going to be directly
affected, and soon too.
So, let me get down to brass tacks and explain
myself, and, gold’s heavy price activity this year.
First of all, let me begin with a specific example.
Typically, the US fiscal and trade deficits are given as reasons
for the gold spike since 2000. And this year, the two hundred
dollar gold price increase has come amidst the usual discussion
of the US deficits.
However, these deficits have been out of control
for over 5 years. Why is it that, all of a sudden in 2006,
gold prices rise over $200, or about 30% in a few months?
Answer: this year we face the imminent demise
of the USD system combined with a world energy war brewing
in the Middle East. When I say the USD system, I mean the
fact that it is the world’s reserve currency. The demise
of the USD system will have apocalyptic economic consequence
for YOU.
The typical answer for gold’s price rises
in the financial press is the twin US deficits. Certainly,
the twin deficits are a prime driver of the case for gold
price increases. However, I have a particular problem making
this correlate specifically to a recent $200 upswing in gold
prices. There have to be other very serious factors out there,
and there are.
The US fiscal deficits are serious, but we have
had these for years. The very recent price swings of gold
are being driven by fear of a US dollar collapse that will
kill the USD SYSTEM. This, coming at the same time that there
is a world energy war brewing in the Middle East. The fact
is, since January, 2006, the two impeding events driving gold
are a world energy war brewing and the impending collapse
of the USD system, not just a US economic crisis. Things are
much worse than that. Fear is driving gold prices.
Regarding Iran and the controversy over their
nuclear program, the fact is that Iran sits all across one
side of the Persian Gulf, where much of the Middle Eastern
oil flows out to the world. The Middle East has about 2/3
of the world’s known oil reserves.
The tension in the Middle East in a major reason for gold’s
price rises, and there are many reasons for this.
I am going to delineate how Middle East tensions
are affecting gold, but first I will jump ahead and say that,
we are looking at a major war brewing there, and probably
China and Russia are going to be siding with Iran, against
the US and its few allies. The war is going to be all about
oil and natural resources.
This is one factor driving gold dramatically
this year, and I would hazard a guess that this war fear is
a $150 reason for gold’s price increases.
Another factor driving gold in 2006 is the imminent
change from the US dollar system as a world reserve currency.
The fact that the US has twin trade and fiscal deficits are
really only part of the reason that gold is rising VSVS the
USD. The real reason gold is rising so rapidly this year is
because the world is looking at the probable demise of the
whole USD SYSTEM. The fiscal deficits are a side show to this
potential sea change for world economics.
As a matter of fact, the impending demise of
the USD system is so serious that there is actual fear among
world central banks as to the implications. There is not just
concern, there is fear.
The last time the world saw a major change in
a world reserve currency, it had no less than the great depression
of the 1930’s. Right after that depression which enveloped
the world, there was a world war that decimated Europe, much
of Asia, the Pacific, Russia.
That war had well over 100 million casualties and changed
the world forever.
We are now looking at a similar situation to
the events just preceding the Great Depression of the 1930’s
followed by World War Two. Gold is specifically reacting to
fear in many parts of the world. Not just fear of a depression
or recession or unemployment, or just a USD crisis. It is
fear of two things.
The two fears
The fear that is evident in the gold market
is about a coming war in the Middle East, combined with an
imminent collapse of the USD system. The effects of a war
in the Middle East will collapse oil shipments to 2/3 of the
world. The effects of a collapse of the USD system will also
collapse 2/3 of world economic activity for probably 5 to
10 years.
In other words we are looking at a world war
coming and also a great depression due to the collapse of
the USD system. Your life is about to change radically.
Now the impending demise of the USD system is
nothing new particularly. Many writers have discussed this
issue, to include the notable book about a coming USD crisis
by Richard Duncan.
Since this issue has been so widely discussed,
why is it that gold is somehow rocketing skyward just now?
Surely the price increases in gold since 2000
are due to the US fiscal problems and the well delineated
US dollar crisis issue. But why the all of a sudden explosion
in gold’s prices now?
Answer: a consensus
has just formed in 2006.
The consensus is that the USD system is now
going to collapse, and even though central bankers don’t
know how to replace it, it will collapse anyway.
A very key idea here is what a consensus is,
and how it forms. A consensus forms after events prepare themselves
over time. Suddenly, what was discussed now becomes an imminent
fact in many minds. Understanding this is key to showing why
just now, the world now is acting to prepare for a USD system
collapse.
IF it is true that the danger of a collapse
of the USD has been known for some time, why just now are
central bankers world wide publicly discussing this fact?
Because a consensus has now formed among them. No less than
the BIS, the EU central Bank, the Bank of Japan, and the Chinese
central bankers are all now simultaneously talking of a radical
change from the USD system.
The consensus has formed and gold is telegraphing
this. Then central bankers start making preliminary moves
to react, and for example, Chinese central bankers start discussing
buying 2000 tons of gold to add to their 500 tons of gold
reserves.
European central bankers start talking openly
about being in crisis mode, ie, what will they do if the USD
devalues rapidly this year, because then world markets will
collapse. If the USD collapsed rapidly there will be flight
out of markets and selling of USD assets and bonds.
Middle Eastern bankers, seeing an impending
war with Iran, and the collapse of their bubble markets start
buying tons of gold for flight to safety.
The US government publicly calls for a lower
USD to deal with the trade deficit and the world realizes
that the USD will very possibly have a disorderly decline
in value because there are trillions of dollars of foreign
reserves overhanging the world markets.
A consensus has now formed. The consensus is:
the fears we have all had about economic Armageddon are now
at hand in 2006.
Now, Japan is having an economic resurgence.
The US is having some decent economic growth too. So, how
is gold to portend that all is definitely not well, and so
energetically in 2006? Because the fact is, if the USD system
collapses, the economic growth in Japan and the US will disappear
in about one month.
China cannot tolerate this. China is very concerned
that there are two China’s emerging after their economic
reformation since 1990. There are now about 200 million wealthier
Chinese and about 1 billion poor Chinese who are angry that
their lands in the country are being expropriated by the wealthy
and corrupt officials.
Last year, China had over 50,000 public demonstrations
about these inequities, and China is very afraid of the chaos
that can happen there. China cannot tolerate an economic collapse
of the West.
Japan has just emerged from ten years of mild
deflation that left their government with the highest indebetedness
of the developed world. Japan’s government bonds are
classified in the Junk category… did you know that?
Japan cannot tolerate a USD systemic economic
collapse either.
Europe is hopelessly stagnating economically.
France tried to create employment reform for their industry,
and got a million student rioters for their trouble and had
to relent. France last summer had a month of out of control
rioting by Muslims all over the country, and Europe almost
got dragged into their own Muslim riots. Much of the reason
for these riots are economic inequality.
France and Europe cannot tolerate any major
economic disruption, and, if the USD system collapses it will
be curtains for the political and economic security of Europe.
The problem is, no one can now stop a collapse
of the irreplaceable USD system.
Now let us look at gold in this 2006 picture;
• Every time there is bad news about the
Iran situation gold rises from 20 to 50$ in price.
• Every time China mentions that they
are considering a change in their 1 trillion US dollar foreign
reserves gold rises $20.
• Every time there is social chaos in
Europe gold rises $20.
• Every time Japan mentions that they
will raise interest rates gold jumps $20 because of the chaos
that an unwinding of the Yen carry trade will inflict on world
markets. Trillions of dollars value of Yen have been borrowed
and invested in every world market for the last ten years.
• Every time the US mentions that they
are considering a pause in interest rate increases gold rises
$30, because the US positive interest rate differential of
about 3% over the rest of the world is the only thing keeping
the USD system from collapsing.
In 2006, a consensus has now formed that all
of the above events are about to happen, and gold has risen
$200 as a result.
The correction in gold this week is merely speculators
taking money off the table and is not going to continue. Rather,
gold will continue to rise in 2006, and worse, we are going
to have a world energy war and very probably a collapse of
the USD SYSTEM and all the economic collapses that would follow
that.
If I were to say one thing it is this: being
in any market today is hugely risky. Be in precious metals.
I would not necessarily be in USD positions either, or in
USD cash.
The last time there was an economic depression,
there was flight INTO the USD in the 1930’s. This time,
there is probably going to be flight OUT of the USD. But I
think that our economic woes are going to be the smaller worry…rather
war and huge energy disruptions are the biggest problem we
face in 2006.
The PrudentSquirrel Newsletter is a gold
and economic commentary. It tracks macro trends and is not
stock specific. My readers have written that they find it
a unique source of economic big picture analysis that drives
precious metals prices. Stop by and have a look.
Christopher Laird
Editor-in-Chief
www.PrudentSquirrel.com
****
The Prudent Squirrel newsletter
is a gold and economic commentary. It is a big picture analysis
of markets and gold that looks for new strategic trends. It
is more sector analysis than stock specific. It is a commentary
and is not investment advice specifically.
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