Thursday, July 28, 2011

July Update

The European Union has again tried to contain the debt crisis in Greece, and their most recent measure has, for the time being, staved off default. Further integration is required to keep the Euro (as we know it today) together, and again the tax payers and to the 'soundness' of the Euro has been sacrificed. The EFSF (European Financial Security Facility) will issue more bonds to paper over the problems, more debt to solve debt problems. The conclusion that I have come to is that Euro nations are going to try and further integrate by setting up their own version of the U.S.'s Treasury, this will mean more Euro 'printing' and bailing out, which is inflationary and will depreciate the Euro (against hard assets gold/oil/silver). The market does not seem to be buying into the deal, as the interest rates on most Euro nations debt has continued to climb, and Euro falling against dollar/yen. The problem is strucutal in nature, and can't be fixed by these band-aid solutions. For example here is a graph showing the debt that Greece will mature over the next 5 years;

And that graph shows only Greece, each of the worlds developed economies have huge debt burdens. The main fear by politicians around the globe is the CDS market (Credit Default Swap), which if a Euro sovereign default occurred would trigger contractual payments, and no one knows how much counterparty risk there is. --As the meltdown by AIG showed. These CDS's can be written by any financial institution, they can write naked positions with risk lying with the issuing financial institution, or they can have a buyer and a seller lined up and earn a commission on the buy/sell spread. At present there is no open exchange for CDS, and since it has been most the most lucrative source of income for these writers, they ( the ISDA & Banks ) have lobbied hard to protect it. They take the profit and the tax payers of the world take the risk when they go bust with bailouts. Here is an older graph from May which shows the inter-connected nature of the Eurpoean debt, the real reason that France & Germany are trying 'help' Greece (and the PIIGS nations) their own banks could not stand the writedown;

Across the pond the U.S. 'debt ceiling' crisis continues, Obama and democrats are trying to get a bill passed that will fund beyond the 2012 presidential elections. Obama has threatened seniors with being unable to send out Social Security checks and other entitlements if there was a default. The fact is that the U.S. won't default (yet), with their income they can pay off the interest on their debts, but like someone who has maxed out their credit card they just won't be able to take out new loans, and will have to prioritize payments with remaining income. The 'default' to come will most likely be a stealth default, by continuing to depreciate the currency. Freshman Republicans recently elected to the house of representatives were sent there a on specific mission to reduce the size of government, stop bail outs and bring some fiscal sanity to D.C. ideological this is opposite of what the democrats want to do, which is 'share the wealth' (redistribution through taxes) and continue to grow government. --but raising taxes have a negative multiplier through out the economy, and we have reached the saturation point of debt;

so all this threatens to derail this modest 'recovery'. The U.S. economy will at some point restructure without the heavy influence of government, the path it is on is simply unsustainable;

the restructuring of the economy will be painful, it will effect everyone, it may lead to social unrest, but this probably won't happen until all other options have been exhausted; when the value of the dollar is all but destroyed and productive elements of society have a hard time operating and expanding business. An agreement on raising the debt ceiling means more debt, which is in inflationary, a 'Default' would painfully force the restructure immediately and may create a backlash to sound government finances so......roll out the bread and circus. The FED FOMC minutes came out as well, and they discussed 'QE3' if the economy worsens, which by the looks of it may happen before the end of the year, this has sent the USD down, and sent gold up in all fiat currency prices, and if you haven't seen this enjoy;

The yen, comparatively speaking, has not had many problem this month, and has risen. Part of this is 'safe haven' trade, along with a reparation of funds from Japanese investments, and further unwinding of the carry trade. The post-earthquake intervention to lower the yen has been thrown on its back, Japanese finance minister Noda is threaten to do more to lower the yen, but the BOJ has been leery of outright monetization of the government debt for rebuilding, which is probably where we are headed. Another opportunity for those of us who live/work in yen to continue to transfer out of paper into tangibles

Meanwhile Gold & Silver are being treated as the currencies, gold making all time highs, and silver moving up once again. The new Hong Kong metals exchange opened this month, and a new China exchange will be opening up as well, and with Chinese inflation running high there are great expectations for huge inflows into the metals.

I continue to and suggest to accumulate silver/gold, but still silver over gold, demand for silver remains very strong even for this seasonally weak period, I believe the end of the year we should be back up to near or over $50, next year probably considerably higher. The major revaluation of the metals is still on the horizon, gold north of $5000 and silver around $300, this will re-liquefy the worlds financial institutions, and give a foundation for sound money supply growth and solid expansion of economies, the restructuring will be painful, those dependent on governments for checks & hand outs, will find their promises fulfilled in nominal terms but lost in the depreciated purchasing power of the currency units received, we are coming to this inflection point.

Silver inventories at the COMEX warehouse are falling, and as can be seen in the chart below the Long Commerical Short position (Major banks that have pre-sold) has fallen to levels not seen since 2009, when the price was well below $20. As can be seen clearly in the chart below the price increase seen until May 2011 was on the back of huge liquidation by these same commerical sellers, this fall in price has been a godsend to them allowing them to continue to liquidate.

It comes back to supply and demand, there will be continued amounts of currency units (paper & digital) being created to service debt and bailout those that are connected, the supply of the worlds metal on the other hand is limited, see the graph below. AG is silver, and AU is Gold on the periodic table,

If you've got time to look at any of these links, please watch this one, full of truth interview Jim Rickards


The Swiss parliament to discussing a Gold Franc

Jim Rickards talking about re-evaluating gold

After Getting Smoked On Treasuries, Bill Gross Joins The Ranks Of Silver Market Conspiracy Theorists

Lee: Gold, silver should be treated like currency

A First Step To Sound Money

Interest rates must rise worldwide, says BIS

Cost of war at least $3.7 trillion and counting

St Louis Fed's Neely: QE Boosted Exports,

Obama’s Economists: ‘Stimulus’ Has Cost $278,000 per Job