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People wonder why gold is not already
say $5000 (it certainly could be) right now, given the fact that the US Fed
alone and the US treasury have either given directly or bought (or
guaranteed) up to $20 trillion USD worth of world bad
debt/bonds/CDS/derivatives, you name it. That money went to US and European
and other world banks and financial institutions into a literal rat’s
nest of opaque levered multilayered contracts and leverage…
Jumping ahead
It would seem that the gold price should
simply reflect all that money that was thrown out there, no? Answer at this
stage? No.
Ok if all that incredible amount of
money (and we are only talking the Fed at the moment, not the Chinese, the
Japanese, nor the ECB all with say at least another close to ten $trillion
USD worth, meaning in their own currency but we just use the USD to compare
the amount here) they all threw into the flames….
Flames is a good analogy. What happened is
this…They are attempting to keep alive a world awash in debt and all
that money is merely being used to cover huge losses at financial
institutions…which are basically like zombie banks now…and all
the while the public funds are being depleted at a rapid rate.
Ultimately at the end of the day, all
those trillions, which would have been far better spent say, paying off the
total of US mortgage debt, like Iceland did, which would have caused a total
resurgence of the US economy.
But they threw this money where it would
not reach the general population. And since the general population is who
accounts for the 70% of US GDP – i.e. consumption, and not only a few
millionaires and billionaires, all that money was
wasted…. Thus, clearly that money was literally burned, but with the
cost of levering all the public governments and ultimately will cause
interest rates to rise drastically. Ultimately. But the US has some time
yet….
Phase Two
Phase one is debt deflation and money destruction.
Gold is representing this situation perfectly, merely reflecting the inflated
price of gold since (I am picking a date here) of about a 3 to one price hike
in all goods and services (or make it 4 now) since 1980 when gold peaked at
say $870 then dropped after Volcker raised US interest rates briefly to
roughly 20 pct. which slammed US inflation which started in earnest after the
oil shock…We have already discussed what phase one of a debt crisis
does above. Let’s discuss Phase Two…I know these paragraphs are a
bit dense but I like to write short concise stuff at times.
In Phase Two, after the central banks
have realized that they have attempted to monetize the entire book value of
the world markets (Probably Greenspan’s Gambit which is not well understood,
where he stated he wanted to fight the next Great Depression, and probably
thought he could simply monetize the markets in total and do a restart
without an economic collapse) they will then have to start simply massively
increasing public assistance and or direct aid to the rebelling and suffering
populations. At this point, inflation starts up again and interest rates
start rising, rapidly. In this scenario the UST rate could jump from say 2
pct. on the US ten year, to 5 in a matter of months or one year. Gold at that
point will double.
Inflation will start to appear in all
things, particularly oil and food. A sort of downward spiral which is self reinforcing will further contract the economy, the
attempts to maintain all debts of all kinds will fall by the wayside, and
people will focus on shelter and such only. The same will go for the public
sector debts.
How close we are to phase
two, and gold spiking to first say a jump from $2000 to $4000 is hard to say.
But gold is headed there. In the meantime, the world is caught in an economic
debt deflationary cycle, and until phase two is reached will meander between
$1500 and $2000 for 2012, with the exception that a Mid-East war would
probably spike oil, and possibly gold over $2000. But gold has a few problems
there because oil price hikes cause economic
contraction so that is a bit complicated.
Anyway, we forecast gold to range from
$1500 to $2000 for 2012 back in Winter 2011, and have been right. We also
caught the last gold price collapse from near $1800 this year by two days
warning subscribers. We also predicted the USD rally last year April 25, 2011
by about one or two weeks’ notice, and no one
I know of did that.
You can stop by our site and have a look
at
PrudentSquirrel.com
Chris Laird
Prudent Squirrel
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