By Patrick Wood, Editor
Why buy gold (and silver) now when you can wait for the coming crash and buy it for pennies on the dollar?
On 09/09/2009 I wrote,
“… the scramble for cash is on. For three years, I have frequently said that “cash is king” in a deflationary economy. In contrast, debt is anathema.”
I first sounded this alarm in 2006, stating that deflation would destroy wealth faster than inflation could ever imagine. Six years later, this has proven to be exactly the case. Most people equate price declines with deflation rather than the destruction of credit. Price declines come as a result of shrinking availability of credit and cash, resulting in forced liquidations of assets that can drive prices down.
In other words, the forced liquidation of debt depresses its underlying assets, regardless of what those assets are. Bankruptcies, car repossessions, home foreclosures, defaults and write-downs are the means of debt destruction. When collateral assets are reclaimed during the liquidation phase, they are sold at public auction to recoup some money.
Most loans made, but not all, have collateral pledged against the debt. In a normal economy, a few liquidations are easily absorbed by the local market. In a more generally deflationary economy, liquidations increase and cannot be absorbed without affecting market prices. Making this scenario much worse is the fact that the entire global economy is melting down at the same time, meaning that there is no one to stem the freefall.
In the midst of this, investors of all stripes in every part of the world, including banks, are stampeding out of equities and risky debt instruments and into short-term government securities. The net effect of this is to a) shrink available cash available for economic development and b) drive interest rates down. The first part of this virtually guarantees that the global economic contraction will accelerate, exacerbating the deflationary spiral. The second part serves to wipe out investment income for hundreds of millions of fixed-income dependents, like retirees, retirement funds, trust funds, etc.
However, there is another more ominous implication when banks buy sovereign debt. This is pointedly deflationary because the investors are handing cash back to the treasury in return for a paper IOU. This has the opposite effect of any quantitative easing program, shrinking the cash in circulation faster than the Treasury or Central Bank can dish it out.
National Treasuries, on the other hand, are severely limited by an austerity mind-set and are reluctant or politically-constrained from spending the cash to prop up or expand government programs.
You can properly view this as two freight trains accelerating toward each other on the same track.
The typical government argument against a train wreck is that economic growth will bail them out. Um, which economic growth are they talking about? The entire globe is spiraling toward depression.
We see what happens to a national government when global distrust shuts them out of capital markets. Both Greece and Spain are in economic and political chaos because they are isolated and shunned by the global financial community. Both are at risk of complete governmental meltdown and national bankruptcy.
In my opinion, the global financial system is the Titanic and Greece and Spain are merely the tip of the iceberg that has been struck. The ship is taking on water, but the crew still believes that the Titanic is unsinkable. Like the Titanic, there is every certainty that today’s global financial system will be resting at the bottom of the ocean before the struggle is over.
My “titanic” forecast is that when investors ultimately turn in their Treasuries and demand return of their cash, governments will resort to dumping their gold reserves to raise cash to pay debt holders. This will be the last act of the deflationary spiral, causing a major crash in the price of gold.
Economic and political times will certainly be extremely difficult at that stage but this is where you will want to take all the cash you can get your hands on and sell it back to them for gold! For those who have such cash, it will be poetic justice to buy back the precious asset from those who stole it in the first place.
When will government Treasuries and Central Banks ultimately abandon their gold? When investors ultimately demand a return of cash. What will happen to gold when the collapse is over? It will go up in price, regardless of the which currency you deal with.
This is one more reason why I continue to say, “Cash is king.”
Afternote
Former hedge fund manager Raoul Pal is forecasting the “biggest banking crisis in world history.” I strongly suggest that you view the entire slide presentation. He concludes that the entire global financial system will collapse (as early as 6 months from now) and require a “reset” from scratch. Banks will collapse and sovereign governments will default, thus completely vaporizing the fractional banking system.
This would also be the end of deflation and leave the world in a tradeless state.
During the process of government defaults, all government assets will be thrown overboard to creditors. This includes gold that has been literally locked up for decades with no exposure to the free market. The short-term potential for gold to be “cheap as dirt” is very high.
Another conclusion is that holding an increasing amount of actual cash may be desirable.
Unfortunately, any direction we take is fraught with risk, and even if we “make it through” the collapse, the economic landscape will be charred and smoldering for years afterward.
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I see the mechanism of deflation a little differently, but ultimately with a similar effect.
What I believe we will be seeing (fairly soon) is a deflationary spiral in Europe as people pull their money from the banks. Currently, this is happening in some of the PIIGS, where ordinary citizens are pulling all of their money from the banks in Euros and stuffing it under mattresses or opening foreign bank accounts. This will accelerate and exacerbate the crisis.
As the crisis widens to Spain, Italy and France; more and more people will sense the impending demise of the Euro and they will exchange the Euro for Dollars. The response of the ECB will be to crank up the presses. This twin attack will cause the destruction of the Euro and will strengthen the Dollar. When this happens, the price of gold (in dollars) will plunge. This will be the great buying opportunity. It may not be tremendously lower prices than we are currently seeing, because, with all of the turmoil, some people will use gold as a safe haven. If even a smattering of investors choose gold over the Dollar, it will prop up the price somewhat.
With all of the turmoil in Europe, many US banks will be at risk due to Credit Default Swaps and other derivatives. This will most likely have a similar effect as the failure of Lehman Brothers. When this occurs the turmoil will be transplanted to this country. This may be nearly simultaneous with the European troubles or be felt as a later echo, but will have a deflationary effect here as well, which could drag down the price of gold as the strength of the Dollar collapses.
Both the FED and the ECB only have one tool that they can employ, which is to print money. As they try to lift the domestic economies, this will result in inflation. They believe that they can control inflation, so that it remains under 10%, but if they fail, the result will be hyperinflation. If hyperinflation occurs then gold, silver and precious metals related stocks will skyrocket.
“IF” Spain, Italy, & Greece have Gold reserves. Why wouldn’t the ECB, or the Germans require them to use the Gold to pay their debts, rather than giving those countries a loan???
I’ve got cash and gold/silver bullion in a bolted down safe that is well hidden. Would it be a good idea to get lots of genuine Chinese Yuan to put in my safe?
Personally, I don’t think the yuan will do well in future years, unless perhaps you live in China. If you want more cash, get greenbacks.
I do not understand the idea of central banks dumping gold. As far as they are officially concerned gold has no value, so they have no ‘official’ reason to keep it in their portfolios, however, they have done just the opposite in recent years. Today central banks are net buyers of gold.
There has been a lot of talk about creating a world-wide currency which uses a basket of currencies including gold as it’s basis. Any central bank dumping gold would lose out if gold is part of that currency. There is even a serious movement afoot to recognize gold as a tier-1 asset, which means that any bank holding it could count it on it’s books as an asset. This is because banks are rediscovering the value of holding an asset which has no other claims against it, unlike fiat currencies.
No central bank would dump gold to create more cash, they would simply print it and deal with the inflation later. Instead, those that have large amounts of gold might lease it to the bullion banks, allowing the bullion banks to short it, thus driving the price of gold down. That way, they can count it on their books and benefit from a lowered gold price simultaneously. The folks at GATA think they’ve been doing this for years.
It is suspected that some of the biggest shareholders of the biggest central banks are actually private parties. If those banks fail, I suspect that the gold that they hold will go to settle specific debts held by those private owners. Thus, the gold will be quietly transferred to those private parties rather than end up on the open market. I think the financial elite recognize the value of gold, even if they sing the praises of fiat currencies by day.
When the dust clears, this worldwide financial crisis will achieve two objectives: Most of the publicly owned gold will find it’s way into private hands and the crisis will be the excuse used to create an even bigger, world-wide central bank system, which will be used to concentrate all the world’s remaining wealth into the hands of that same elite.
It seems to me that everyone here is neglecting the fact that the printing presses in the U.S. are turning out dollars and will continue to do so at an excelerating pace for years of come. Yes, we may initially see some asset deflation but the falling value of the dollars will hide this and cause a slowing in the rise of the apparent gold price, but I would think that actual price will continue up as long as the printing presses are pumping out worthless paper dollars.
“IF” Spain, Italy, & Greece have Gold reserves. Why wouldn’t the ECB, or the Ger mans require them to use the Gold to pay their debts, rather than giving those coun tries a loan???
Why don’t they demand payment in gold? They don’t want the gold; they want all the other hard assets; infrastructure, businesses, homes, property and possessions of the people.
The “debt” everyone is “drowning in” is all owed to the central banking system which produces paper “money” at virtually zero cost but holds it as a “loan” PLUS interest “owed” by the people; the taxpayers; governments have happily sold the People into bondage and raped them of all their wealth. Gold in the bank is already gold in their pockets; they don’t need it to be transferred to them.
Economic collapse never, ever happens by accident. This situation is no different. This has been carefully orchestrated and so far so “good” as the People remain ignorant of the facts.
I would not buy gold. I would buy silver. Unlike gold silver is not controllable; it is both a monetary and industrial metal making it unique in all the world. The silver stockpiles are gone; silver is more rare then gold and more valuable; gold is continuously recycled but silver is used up and gone forever; silver will dramatically outperform gold once the People and industrial users realize what has happened and jump into the market to secure supplies. The USGS has already told us silver is disappearing from the earth itself and will be the first major metal to go extinct… but investor ignorance is not far beyond the Sheeple. Silver will dramatically outperform gold making it a far more desirable conversion.
Dear Sir/Madam,
We are local miners from Accra-Western Region of Ghana. we are reliable and dependable supplier for long term contract agreement with you, to enable us have a look to get a modern mining equipment with your help and advice.
Here is the specification below:-
PRODUCTS: .….….….….… GOLD DUST/ BAR
QUANTITY:.….….….….… ..50KGS (TO BE SUPPLIED AS FIRST TRIAL)
PURITY.….….….….….… .92.5% (Pure Gold)
QUALITY:.….….….….….. 23.69k
ORIGIN:.….….….….…… … GHANA.
PRICE PER KG.….….……$42,500 USD
Payment Terms:
The Buyer will pay 10% value of the of the Gold for the shipment and export documentation cost of the total value of the goods that will be delivered to his/her refinery, then seller will make all the local transit cost to agent office for the documentation before shipment.
Meanwhile I have to inform you that the mine site belong to our royal family which I think you will meet every of my family members on the date and time of your arrival here in my country or you can let us to ship the number of quantity you may ask us to have the contract with.
Kindly Resend to me your mobile number the first one is not correct or you can call me too.email:nanagold91@yahoo.com
Thanks.
Koffi Mensah