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400: Greece is a smokescreen - inflation, US default and gold prices

11-03-2011 team

Greece – Ridiculous Little Mess:  The incredible focus Greece is getting is in our view rather ridiculous. Markets are being dictated to by which side of the bed a failed politician from a failed economy gets out of. Greece has a tiny GDP compared with Europe as a whole – accounting for just 2.7% of the Eurozone GDP. Granted everyone is worried about contagion spreading to Italy and Spain – two countries with such large economies that they could not be meaningfully bailed out in a real crisis. But the day to day shenanigans’ of Greece – and the shear arrogance of their political and negotiating posturing deserves them being booted out of the Eurozone. To think of all the European money that has been used to subsidize and build infra-structure to integrated the country in the last twenty years, and this is the return the Eurozone get’s for that investment.

US – Elephant In The Room: But let’s switch to the real elephant in the room – the USA. Bernanke and Obama are probably quietly rather pleased they are getting an easy life at the moment. After all – the US deficit at 11% of GDP is bigger than Greece’s. The problems have given a temporary boost the the US dollar – considered by some as still a "safe haven". Now the reason why we describe this is pure and simple – there is a money making opportunity in all of this. You see, as confidence grows in the US economy and more money is printed – the stock markets might rise into another mini-bubble and the bulls with think the next bull stock run is getting underway. But they will be so wrong. Let us explain.

US Already Bankrupt: To all intense and purposes, the USA is already bankrupt. Take a look at the hard numbers:

·         The annual US deficit is 11% of GDP and growing

·         Tax receipts during this growing period is $1.5 Trillion per annum

·         The deficit is $1.6 Trillion per annum

·         Public spending is $2.5 Trillion per annum

·         Deficit reduction measures announced recently only add up to $0.4 Trillion per annum

·         The deficit is projected to grow by ~15% per annum over the next five years

·         Despite interest rates set by the Fed being 0.5%, banks loan at 5% - a 4.5% mark up – but they are still barely making money because of all the bad loans

·         $3 Trillion of money printing failed to increase growth any more than to the below average of 2% per annum

·         The dollar continues its decline

·         Despite official inflation of 2.5%, real inflation for the average individual is more like 7% - food, energy, gas, taxes and rentals

·         Unemployment continues to rise – it’s certainly not dropping by any substantial amount

·         It’s now 4 years since the 2007 recession began – we are now due for another recession – despite the $3 Trillion of printed money, the poor are getting poorer, savers are losing their savings and growth remains very low - the middle classes are being destroyed

Will It Get Worse? It’s a fairly bleak picture at present. But its actually going to get worse. The reason is that the only thing the Fed and US President know to do is to print money. In all its shapes and forms – whether they call it QE2, Twist of other buzz term – it all boils down to the same thing – adding digits to dollar numbers on a computer. Is this likely to end? No way. It will continue – because they have reached a point of no return. You see, about a year ago, if they had drastically reduced government spending, put up interest rates and boosted the dollar – they might have staved off bankruptcy. But they are not able to do this partly because the current Administration is socialist – and almost all socialist government like printing fiat money to prop up economies and create an impression of growth. Meanwhile the Fed and Ben Bernacke know the only way he will survive will be if he helps keep President Obama in power – and this means printing money. To put some perspective on how desperate these political figures are about clinging to power – we only have to refer to the Greece Prime Minister’s unilateral announcement to hold a referendum, then his humiliating U-turn, and he still survived a confidence vote – and has still not resigned over this debacle or any other failed Greek policy. The money printing in the US will not stop. And these people will cling to power as best they can by printing money - a short term ploy to keep the masses happy.

Print To Pay Interest: The other reason why the USA needs to keep printing money is to pay for the interest on their gigantic $14.5 Trillion debt. Just imagine if interest rates rose to 10% - like they really should have done a long time ago. That would mean the USA would spend 100% of it's tax receipts on interest on this loan.  Regrettably – we will probably not need to "imagine" much longer because when the Bond markets crash, interest rates will sky-rocket – then the USA will have to default. The markets will decide one day – and move against the dollar and bonds because of all the money printing being manufactured. They will move just like they have against Italy, Greece and to a lesser extent Spain and Portugal. But there will be no-one to bail them out – not even the Chinese. The USA cannot be saved by anyone - its far too big.

Money Making Opportunity: This brings us on to the making money piece of this Special Report. How can one make money out of the US printing of money and dollar debasement?  It’s simple really – the more money they print, the higher gold and silver prices will rise. Stock markets might also rise, but then crash as mini-bubbles develop then deflate again. But underlying this turbulence, gold prices are set to continue a gigantic bull run as the dollar is debased, financial and economic turmoil spreads and investors get out of cash and into the safe haven of gold and silver.

Gold and the Herd: Ask yourself, have you ever met anyone that owns physical gold – e.g. coins or bullion bars? Almost certainly the answer will be no. This is very important because currently the herd has not even appeared on the horizon – almost no-one is investing in gold. Almost no-one understands gold and silver. Even the Fed Chairman Bernacke things gold is not money - its an asset - completely wrong of course. When the herd finally arrive, prices will go ballistic. They will start to follow a parabolic curve as every man and his dog gets in on the act. You know this makes sense. You must know in your gut it will happen. This parabolic bull blow-off will happen sometime in the next 1-6 years, but it will happen. We don’t know when. All we know is that – in our view – money printing will have to continue and gold prices will sky-rocket because inflation will get out of control, currencies devalue and savings will be destroyed. When the panic really starts, printed money will be almost worthless and the best was to trade will be in gold and silver. 

Inflation-Savings Destroyed: 6% inflation over ten years will reduce any savings to half their value. Of course the same is true for debt. Because there is so much debt – because everyone came off the gold standard years ago, the only way to repay this debt is to inflate out of it. That is what is happening. That is what Central Banks are quietly doing. To make matters even worse, many of these same Central Banks are buying gold – because they know the end game is to go back to the gold standard. Or at least when printed money turns to confetti, they will still hold a store of wealth. So anyone left at the end of the day with gold and silver will be a winner. We are extremely serious about all of this. We are piling into gold investment as fast as we can at this time – the penny has dropped for us – and we can see a gigantic gold and silver bull run developing for the next few years. When we see the parabolic bubble develop - the final bubble blow-off – of course we plan to get out.

China is an interesting example. China are well behind the curve in relation to gold reserves compared to the size of their economy. India as well. Of course they have relied too many years on the US dollar – and have realised this is massively depreciating as the US prints more fiat money. Of course they are not stupid – they are buying gold like there is no tomorrow. And encouraging their population of 1.5 trillion people to buy gold as well. They have gold vending machines. They want to have more gold than anyone else. Eventually – as the US declines into bankruptcy – they might try and raid the gold reserves of the USA as payment against the money the USA owes China. Anyway, the point is – there is a very firm foundation behind the current gold price at $1700/ounce and this is highly likely because China, India and other nations are busy buying up gold stocks – because they know the Euro and Dollar will be trash one day. That’s also why they are buy as much oil as possible at this time – in low value dollars. Again, something physical, valuable, a real asset, energy or a store of wealth – that will help their economy in a crisis. Bottom line is, gold and oil are the things they need the most. Up until 2003, it was illegal for a Chinese person to own gold. Since then, as the economy has massively expanded, 1.5 billion Chinese have started buying gold. China would like to own more gold than the USA.  That’s why the Chinese are buying gold. They also understand gold - wealth most Americans think they understand the dollar as value - and dont even realise gold is money - not even the most important financial person in the USA and on this planet. So why wouldn’t a canny western investor want to get out of the declining dollar and into oil and gold – following the fine Chinese example?

Is Gold Expensive?  If you think gold is expensive at this time, consider the following:

·         Gold was $850/ounce in 1980 at the end of the last major inflationary period – since then, inflation has increased ten-fold – hence gold should be at least $8500/ounce at the end of the next inflationary period (just one example - remember one could buy a detached house in the UK in 1980 for £20,000 - this is now valued at £200,000).

·         If one adds up all the money up in the world and divides it by the amount of gold – e.g. if the world was to revert back to the gold standard, then you would need $60,000 for one ounce of gold

·         In 2003 gold was $350/ounce – many people warn gold has risen to massive new highs - a bubble, but in reality, since 2003, the amount of dollar debt and equity has risen ten-fold, so gold should actually be at least $3500/ounce today compared to $350/ounce in 2003. It's actually lagging far behind where it should be

Oil Price And The Dollar: Another interesting consideration is the price of oil. Back in the 1960s, the oil price was about $3/bbl. Almost all of the oil price rise all the way through to $100/bbl has been because of the printing of the dollars – the debasement of the dollar as a currency and the detachment of the dollar away from the price of gold - this was started in earnest in 1971 by Nixon. Governments want investors to buy their currency – dollars in the US – to prop up their economies and pay for public sector expansions. But in reality – every year the value of these fiat currencies drop. The only things that retain true value are oil, silver and gold. The dollar today is only worth 3 cents in 1915 money – just as an example. Yes, the dollar value has declined 97% in 97 years since the Federal Reserve was created.

Weimer Germany: Also consider when Germany was forced to print money to pay it's debts from 1920-1923, it's currency dropped by 97% versus gold. It was really just a gigantic transfer of wealth from the poor and middle class to the wealthy owners of gold - many headed to Switerland. Sound familar? 

Blame It On Oil:  Of course the politicians love to blame the oil companies for high energy prices – but essentially – if the dollar had not been devalued, the oil price would be $3.50/bbl. If we were still on the gold standard, oil would be at $3.50/bbl. You can buy 17 barrels of oil for 1 ounce of gold. That ratio is about the same as in 1970 before Nixon took the USA off the gold standard. Hence the only reason why oil prices increased is because the US and other governments have printed money - creating a credit line of $30 Trillion and a stimulus package of $3 Trillion in the last few years. No wander oil is at $100/bbl. 

Commodities Bull Market: As we play out this last devastating period of the stock bear market and commodities bull market – that started in 2000, we will see oil, gold and silver shortages and these prices will sky-rocket as they are viewed as a hedge against inflation. You need to be long oil, gold and silver – short almost everything else. Property – with its debt – is a great inflationary hedge – one reason why so many rich people buy property. At least it cannot be seized, is a physical asset, one can use it and the debt will deflate away as more money is printed – if property prices rise with inflation, of course equity increases over time as well.

UK Silver Investment:  Also, if you are in the UK – and buy silver Britannia and gold Britannia coins, you don’t have to pay capital gains tax. Not bad at all. They are legal tender money. Hence no CGT. On silver, you will have to pay 20% VAT, but frankly – with silver prices likely to go up between 2 and 5 fold, 20% initial tax is not a massive give on a stellar investment. Also, gold and silver coins are the least likely to be seized by government – simply because they are legally money. Bullion bars are probably slightly more risky – but very unlikely to be seized either – no gold has every been seized before in Europe. Its certainly far lower risk than losing cash in a failed bank, or having your savings destroyed over time by inflation. Both the latter two scenarios are between "quite likely" and "almost certain to happen".

Silver is a screaming bargain Silver is currently $35/ounce. It's a screaming bargain for the following reasons:

·         65% of silver is consumed in industrial processes

·         The volume of silver stock is only 65% of gold stock on the earths surface (compared to 1000% 30 years ago)

·         Silver will run out in 10 years – unless there is an explosion in new mining activity

·         Most silver is mined close to the surface – and these have all been depleted because they have been easy access

·         Silver is normally a by-product of mining gold – and most mined gold cost ~$700/ounce to extract

·         Gold is so expensive that silver might be required to make coins if the world reverts back to the gold standard (e.g. a silver coin could be minted at $200, whilst a gold coin could be minted at $2000)

·         The ratio of silver to gold is 40:1 – historically silver has been 16:1 – hence with gold at $1700/ounce, silver should be $105/ounce – three times higher than its current $35/ounce

·         At the end of the gold bull commodities market in a few years time – the Dow should equal the gold price. If the Fed keeps printing money as is certain, then inflation will take off. The Dow may stay close to 12000, but decline in inflation adjusted terms by 50% over 5 years. At such a time in the future, gold would be at $12,000/ounce. If silver was then priced at a 16:1 ratio, then silver would be $750/ounce.

Upside:  As you can see – there is a gigantic upside to both gold and silver. We cannot see any reason why they will not explode in price in the next few years.

Western Decline:  Developed nations in Western Europe and the USA are in decline. It will be very hard for these countries to grow. Part of the reason is Peak Oil. We are at maximum capacity for oil production. Shortages of metals, food, rare earths, fertilizers, wood, water, coal, gas and oil mean import costs rise like a tax. But instead we have socialist governments that continue to added regulation, get more involved, increase the public sector and borrow more money. Their only way to survive is to print money. As taxes rise to pay for this, business and capital leave these countries and start-up in lower cost deregulated environments.  Governments blame the bankers, but they are the ones that bailed them out. And remember the Fed is a private bank - that pays dividends to foreign investors. Just like a Wall Street Bank - except run by an academic.  Protesters protest against the bankers – but it’s the government that bailed them out, gave them easy money and let them pay themselves huge bonuses. Then taxed the public to pay for the bail out. Then it’s the governments that will start to default. It will only get worse over a long period. Every time they run short of money - and cannot pay someone, they will just print more money. We continue to borrow, spend, keep rates low, and keep print money. But as QE3 and QE4 kick-in, oil, gold and silver prices will go ballistic as the USA floods the world with worthless money. If you live in one of these declining countries – we think the best investment is silver, gold and oil – period.

Social Spending and Big Government = High Gold Prices: Regrettably the general publics are not prepared to have cuts in benefits, entitlements and rights – and the governments are not prepared to tell them the bad new – Greece is a classic example – so the whole charade will continue and the government know they have to keep inflating and printing money. Otherwise they will never stand any chance of getting back into power. Probably the only government that is trying – albeit rather half heartedly – is the UK government. The IMF has acknowledged their efforts and maintain their AAA status. But essentially almost all western governments that have large deficits are socialist leaning, interventionist, inclined to raise taxes, raise public spending and keep printing money. This is the perfect combination for a flight from cash to gold and silver. Smart investor will not tolerate the currency debasement much longer. And hedge funds, investment banks and other financial people will start getting wind that they need gold and silver in their portfolios – this is only just starting. We have years left of this bull run. Most Wall Street bankers firstly do not understand gold, secondly have never invested in it, and were probably in nappies in 1980 when gold rose from $85 to $850/ounce in 3 years.

Farming: Farmland and food will also skyrocket.  If you are going to buy real estate, just make sure you can farm it or mine it – but don’t buy land to build on – you’ll be wasting your money. Farmland prices will skyrocket. Investment bankers will be getting the sack, farmers will be retiring. In five years time, some of the richest people on the plant will be farmers. If you have kids – better they do agricultural engineering than finance. In a few years time, food, agriculture and farming will be like investment banking was in 1997 - wealth, prestigue and cudos.

Inflation: How can inflation be at 7% in the USA, interest rates stay at 0.5% and the Fed continues to print trillions of dollars. It’s absurd and crazy. Inflation will sky-rocket. Too much money chasing too few commodities.      

Governments Killing Investment - Driving Investors Away With Tax To Gold and Abroad:  A classic example for killing supply and investment is the gigantic North Sea tax increase in oil and gas production that the Tories-Lib-Dem coalition recently enacted without any dialogue or warning. Oil production has crashed 8% since March 2011 since when it was introduced. Drilling has halved. Billions of pounds in investments have been cancelled. And it will of course lead to more unemployment, more oil imports and higher oil prices – crazy government intervention – just one classic example of killing the goose that lay the golden egg. Then when the oil prices rise even further after more printed money, the government will blame the oil companies.   

Chinese Propping Up The USA: We often wander why China continues to prop up the US economy by buying Treasuries, Bonds and investing in the dollar. Obviously the USA is an important export market. But eventually – there will become a tipping point when China will become so economically powerful and own so much gold, that it will dump the USA and dollar and focus on their own internal market and Asia Pacific. The timing of the move is difficult estimate, but we think it will happen either suddenly or gradually over time. Like a stealth collapse. Pretty soon the Fed will be buying all its own Treasuries – and when this happens – it will just be 100% printing money and this will surely lead to hyper-inflation. Bonds will collapse, the dollar will collapse and interest rates will sky-rocket.  

Value of Gold: In 1980, the total gold and gold mining company value was 20% of the value of the total stock market in the USA. Now in 2011, despite people saying gold is in a bubble, the total value of gold and gold mining companies is worth just 2% of the total US stock market. This means the upside on gold is ten-fold. If gold is to get back to the ratio of 1980, it would need to rise ten fold from $1700 to $17000/ounce.

Shake Out: The mini-crash of 50% in silver and 20% in gold in July-August 2011 shook out many investors – thinking the bull-run had come to an end. But they were very wrong. It was just a minor correction in an overall massive bull market in gold and silver. Gold and silver prices have now built a solid foundation at gold $1700/ounce and silver $30/ounce – and its waiting for a big break-out.   Normally after such a correction, the market would rise about 3 fold. So we expect to see silver at $100/ounce and gold at $3000/ounce within the next few years – with the upside being the final parabolic blow-off.

Summary: Overall – market volatility will stay high for many years. Gold and silver will undoubtedly sky-rocket – but this will happen in fits and starts. Oil will rise sharply – but again on an erratic upward trend. Each leg up then down will shake out some investors – until the final parabolic blow-off attracts the herd late in the day before a final severe crash. This could be many years off. But until then – its inflation, gold, oil and silver prices rising all the way. This bubble will expand dramatically as people shift out of cash, out of the stock market and into gold and silver as currencies are debased and crash. In 5 years – we will have dipped out – and be financially free and retired.  And we’ll have used our brains and logic to make massive returns beyond our wildest dreams.

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