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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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