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.”
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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