The world's financial system died in mid-September of
2008. Since then it has become something out of Night of the Living Dead, in other
words, a zombie. Central banks around the world came up with an interesting
new concept that you could somehow borrow and spend your way to prosperity.
Great concept but it seems to have failed utterly.
We have a zombie financial system now and the world owes
more than at any point in history. Most governments are functionally bankrupt
yet they want to borrow and spend more in the hopes that if it didn't work
before, maybe it will somehow work if they do more of it. Our grandchildren
and their children are going to be paying for this monumental stupidity.
In my opinion we began a correction in gold and silver
last week. As Tom McClellan has observed a number of times, full moons tend
to mark either reversals in the metals or acceleration in the direction they
were moving before the full moon. On the 18th of August we had a
full moon and I think silver and gold have turned down. I'd love to see a
full-blown correction. The boat is getting way too crowded with everyone on
the same side of the boat. Gold shares, silver and gold are leading the
correction lower. The XAU (Philadelphia Gold and Silver Index), the HUI (NYSE
Arca Gold BUGS Index), silver and gold all set at least a short-term high in
the first week of August.
I've sold a couple of thousand copies of my book. Many
readers feel that the chapter on taking a profit is the single most valuable
chapter in the book. Lots of my readers have made hundreds of percent on gold
and silver shares. Have a plan. If we are going into a massive correction, it
will be the single best time in your lifetime to invest in resource shares.
But the XAU and HUI could be down 40% or more. Have a plan. Either sit on
your hands until it ends and ride it out or take some money off the table.
Now would be a good time to be cashed up. Remember, nobody ever went broke
taking a profit.
I follow a lot of different indicators to give me a feel
of where we are. One is the ratio of the number of ounces of silver it takes
to buy one ounce of gold. When I was writing Nobody Knows Anything the ratio was about 83-1 and I talked about that being an
especially safe trade.
Since anyone with any "cents" is holding some
physical gold or silver or both, if the ratio goes above 80-1 you should sell
your gold and buy silver. That ratio dropped to below 66-1 in late July,
early August before heading higher. As I write, the ratio has climbed to
about 71-1. That is an important sign of stress in the financial system. If
it goes above 80-1 the system will be on the verge of an implosion.
We have flocks of black swans circling and no one knows
which will land first.
I was warning of the dangers of derivatives as early as January of 2002. After the financial system collapsed
in 2008 I followed up with another good discussion of derivatives. In 2002 derivatives were about $100 trillion. By late 2008 they
were nearing $700 trillion. Today they are about $500 trillion.
As a measure of just how important gold is to the world
financial system in comparison to interest rates, interest rate derivatives
are about 1300 times greater than gold derivatives. We have a lot of me-too
parrot websites talking about manipulation and conspiracies but logic tells
us Central Banks worry about interest rates and could care less about the
price of gold.
Central Banks didn't care when gold was $252 in 1999 and
they didn't care when someone suppressed gold all the way to $1923 in September
of 2011. It's way too small a market.
There is something Central Banks do worry about and
that's the U.S. Treasury Bond market. The U.S. T-Bond market looks as if it
has made a blow-off top in early July. In our zombie financial system, last
week Greek bonds were paying a lower interest rate then U.S. bonds. That's
insane but no more insane than something that has never happened in world
history. We have $13 trillion in bonds worldwide with a negative
interest rate. In 5,000 years such a thing has never taken place. If it was
such a great idea, you would think that it would have occurred to someone
somewhere before. It hadn't.
I read something last week that made me realize how important the $500
trillion in derivatives is today. There are nearly 5,000 ETFs. That's totally
nuts. I asked one of the most sophisticated investors I know how many ETFs he
thought there were in the world. He said, maybe 100. That's not even close.
By now even the BIS is beginning to figure out that the counterparty risk
of derivatives is uncontrollable. Basically when the system starts to come
apart as we all know it will, counterparty risk is going to go through the
roof and we will have a series of cascading defaults. All of the ETFs are
going to fail. All 5,000 of them. There are too many to save.
Here's what that means for ordinary investors. Perhaps you are listening
to George Soros talk about shorting the S&P and going long gold. Or you would
follow Lord Rothschild into gold and out of ordinary shares. For months Stanley
Druckenmiller has been telling people to get out of shares and into gold. So you go buy an ETF
that is betting on being short the S&P and you buy a pro-gold ETF. The
S&P goes down 1000 points in a week as gold goes up $800.
You sit back smoking a big fat stogie and sipping on a dry martini with
just a twist of lemon and think about how rich you are. But when you contact
your broker, you find that you are penniless. You have lost every cent you
invested. With 5,000 ETFs and $500 trillion in derivatives, when the system
blows and it will very soon, the risk is no longer market risk. It's
counterparty risk.
The counterparties to your S&P short and gold long can't pay up. Your
money goes to money heaven and your wife runs off with the tennis instructor.
Even your dog hates you. You forgot about the real risk of ETFs and
derivatives.
If you can remember back to the dog days of 1997 when we had the Asian Financial Crisis, commodities were going limit up
and limit down daily. Market risk morphed into counterparty risk. Even though
investors were legally responsible for their margins, the prices were moving
so rapidly that the back office of Refco/Lind Waldock couldn't keep up. The
guy running Refco
fudged the books for eight years until an auditor picked up on the $430
million in losses dating back to 1997 and 1998. When the counterparty can't
pay up, the clearing house is on the hook.
I don't even want to get into the insanity of the U.S. presidential
election. We have a choice between full-blown corruption and a fool. The FBI
just announced there were another 14,900 emails that Hillary forgot to turn
over. And Donald Trump is learning that maybe you should keep your mouth shut
about illegal immigrants when it appears your wife was working on a tourist
visa when she first came to America. And for the few Americans who still trust the news media, their
constant unbridled attacks on Donald Trump will soon show just how much the
mainstream media can be trusted to be "fair and unbiased."
When empires are about to fail, war looks like a great alternative to fool
the masses as to what is really going on. Obama and the
Congressional/Military/Industrial complex have been pushing both Russia and
China closer to war for years. One day soon someone is going to feel as if
they have been pushed too far.
We just thought the Pentagon was corrupt back in 2001
when on September 10, 2001 it was revealed that the Pentagon couldn't account
for $2.3 trillion that they had spent. But recently it came out that in
fiscal 2015 the Pentagon couldn't account for $6.5
trillion. In the same way that 9/11 made a great
cover up for the missing $2.3 trillion, what will the Pentagon invent to hide
the missing $6.5 trillion? War is one alternative.
And while that may sound goofy, it sounds goofy to me and
I wrote it, the German government is discussing how to tell
their citizens to stock 10 days food and 5 days water in case of an attack or catastrophe. Perhaps someone knows
something that we don't.
We are in for interesting times between now and the
election. The Chinese think interesting times is a curse. They are probably
right.
Bob
and Barb Moriarty brought 321gold.com to the
Internet almost 14 years ago. They later added 321energy.com to cover
oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites
feature articles, editorial opinions, pricing figures and updates on current
events affecting both sectors. Previously, Moriarty was a Marine F-4B and O-1
pilot with more than 820 missions in Vietnam. He holds 14 international
aviation records.
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